International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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. . . . . . .2 Focus Forecasting . . . . . . . . . . . . . . . 3. . . . . . .4 3.4. . . . . . . . . . . 4. 4. . . . . . . . . . . . . . . . . . . . . . . . . . .3 3. . . . . . . . . . 3. . . . . . . . .1 Goods and Services Selection . . . .3. . . . . .3. . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . 4. .1 Probability of Project Completion . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . .3 Measuring Forecast Error . . . . . . . . . . . . . 5. . Strategy Development and Implementation . . . . . . . . . . 6 Design of Goods and Services 6. . . . . . .1. . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Qualitative Forecasting Methods . . . . . . . . . .3. . . . . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . .3. . . . . . . .3. . . . . . . .2 The Work Breakdown Structure . . . . 5. . . . . . . . . . . . .1 PERT and CPM . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . .1. . . . . . . . . . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. .5 Seasonal Variations in Data .1 The Project Manager . . .1. . . . . . . . . 6. . . . . . . . .3 Product-by-Value Analysis . . .6. . .8 A Critique of PERT and CPM . . .2 The Strategic Importance of Forecasting 5.1 Project Planning . . . . . . . . .1 What is Forecasting? . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . 4. . . . 5. . . . . . . . . .4 4 Project Management 4. . . . . . . . . . . 4. . .2 Life Cycle and Strategy . . . 5. . . . . . . . . . . . . . . . . . . . . . . . .1 Types of Forecasts . . . .1 Adaptive Smooting . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models . . . . . . . . .2. . . . . . 5. . . . . . . 6. . . . .2 Preconditions . . .1 Identify Critical Success Factors . . . . 5. . . . . . . . . .1.3 Forecasting Approaches .2. .4 Monitoring and Controlling Forecasts . . . . CONTENTS . . . . 4.2 Quantitative Forecasting Methods . . . . 5. . . 4. . . . . . . . . . . .2. . . . . .2 A Seven Step Forecasting System . . . . . . .4 Determining the Project Schedule . . . . . . . . . . . . . . . . 5. . . .3. .4. 3. . . . . 5. . . . . . . . . 5. . 4. .1. . . . . . . . . . . . . . . .1. 4. . . . . . . .2 Build and Staff the Organization . . . . .1. . . . . . . . . . . . . 6.3. 3. . . . . . .4 Adjusting for Trend .6 Variability in Activity Times . . .1 Research . . . . . 4. . . . 5. .3. . . . . . . . .3.3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Network Diagrams . . . . . . .

. . . . . . . . .2 The Plan Contents . . . . . . . . . . .4 Manufacturability and Value Engineering . . 104 9. . . . . . . . . . . . . . . . . .2. . . . .1 Product Development System . . . . . . . .2 Are You Ready? . .1 Sources of Secondary Research . . . . . 101 9. . . . . . . . . . . .1.1 Do It Until You Get It Right . . . . . . . . . . . . . . .3 Generating New Products . . . 12. . . . . . .1 Your Audience . 12. . . . . .1 Preparing to Put the Plan 11. . . . . 6. . . . . . 12. . . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . .3. .CONTENTS 6. . . . . . . . . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . .1 What Am I Researching. . . . . . 12. . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . 99 9 Defining Your Market 101 9. . .1 Finding Your Niche . . . . . . . . . . . . . . . .1 Importance of New Products . . . . . . . . . . .3 After the Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . 6. . . . . . . . . . . . . . . . . . . . . . . . . 11. . . . . . .2 Know Your Outline Thoroughly . . . . . . . . . . . 12. . . . . . . . . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . . Exactly? . . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . . . . . . . . 94 7. . . . . . 110 10. . . . . . . . . . . . . . . . . . . .3 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche .2 6. . . . . .6 So What? . . . . . . . .2. . . . . . . . . . . . . .1. . . . . . . . . . . .1. .3 Some Style Points 11. 92 7.3. .2 Research Methods . .2. 111 10. .1 Characteristics of the Successful Entrepreneur .3 The Mission Statement . . . . . . . . . . . . . . . . .2. 11. . . . . . . . 6. . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . .2.2 Look and Feel . . . . . . . . .2. . . 12 Presenting the Plan 12. 6. . . . Now What? . . . . . . . .4 The First Minute is the Most Important . . . .1 The Presentation . . . . . . .3 Organizing for Product Development . . . . . . . . . . . . . . . . . . Product Development . . . . . . . . . . 6. . . . . 111 11 The Business Plan 11. . .3 Be Familiar With All Equipment to be Used 12. . . . . . .2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . .2. . . . . . .5 Take Notes . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . 12. . . . .3. . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . .4 Finding People . . . . . . . . .1 Inventory Turnover . . . . . . 13. . . . . . . . . . . . . . . . . . . .3 Advertising the Job 14. 14. 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Suppliers . . . . .5. . . . . . 13.3. . . .1 Job Analysis . . . . .1 Inventory and Cash Flow . . . . .3 Computerized Inventory Control 13. . . . . . . . . . 14. . . . . . . . . . 13. . . . . . . . . . . . 14 Hiring Employees 14. . . . . . . . .2 Job Description . . .4. . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . 14. .2 Tracking Inventory . . . . . . . . . . . . . .1 Buying Inventory . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . 13. . . .5. . . . . . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . . . . . . .1. . . . . . .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Payment Plans . . . . . . . . 13. . .1 Dealing with Suppliers . . . . . . . . 13. . . . . . . . . .1 How to Hire . . . . . . . . . . . . .1. . . . . . . . .1. . . . . . . . . . . . . .

Part I International Business Management 7 .


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

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

and Tyco. • Of course. voter. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. Source: texttthttp://www. 2006. Side Note 1. – A bribe is a business expense that goes to no productive purpose and decreases profits. which requires strict monitoring and verification of financial information. September 20. Scandinavians are typically highly trustworthy1 but Italians are less so. “. gift. In the words of a Beijing correspondent for “The Economist” magazine. investors in the United States had to reevaluate the risk associated with owning stock. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. reward. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge.transparency. there are few if any issues which affect and infuriate so many in China as corruption.dict. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. witness.2. or other person in a position of trust.2.2 (Corruption) Corruption is of concern for business people because • It increases risk.1.1 (Bribe) A . • It increases the cost of doing business. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. WorldCom. these are all generalizations and individuals may differ significantly from their cultural research/surveys indices/cpi. For example. Definition 1. • On a macroeconomic level. – In the wake of Enron. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. China continues a battle against corruption.2. .”[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. it is simply inefficient. they must factor additional uncertainty into their calculations. September 20. 2 Source: http://www. 2006. – 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 Though things are improving. . Largest. • Tyco – The CEO of Tyco. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. http://www. a high value is placed on honesty and personal integrity.3. • WorldCom – Following the Enron scandal. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.2. In Scandinavia. 2007. WorldCom declared bankruptcy in July 2002. There is currently debate as to the effectiveness of the regulations relative to the costs. March 17. Dennis Kozlowski. 2007. and Tyco make it clear that even western developed economies have significant ethical shortcomings. See sidebar 1.3.12 CHAPTER 1.htm.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. was convicted of fraud and conspiracy and sentenced to 25 years in jail. Parmalat. Side Note 1. March 17.S. including a $2 million birthday party for his wife. . specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. 3 Source: 4 Source: http://www. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. history.2 (Cultural Heritage in the U. the former CEO of WorldCom. • Enron – In December 2001.bankruptcydata. – 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. succeeding Enron as the largest bankruptcy in U.1. Qwest. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.bankruptcydata. scandals such as Enron.S. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. Worldcom. the SarbanesOxley Act (SOX) was passed in the U. Side Note 1.3 The United States The United States has recently been rocked by a number of scandals in the business community.. While western developed economies often cite a high ethical standard.S.4 – Bernard Ebbers. was accused of looting the company to fund a lavish Largest.

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

psu. hostile or offensive work environment. gender. requests for sexual favors. It is considered a very serious issue. The victim does not have to be of the opposite sex. yes or no. Definition 1. and for most public institutions and many large corporations.g. or a non-employee.14 CHAPTER 1.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. unreasonably interferes with an individual’s work performance or creates an intimidating.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. or other issues. • The harasser can be the victim’s supervisor. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. Side Note 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. 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 including but not limited to the following: • The victim as well as the harasser may be a woman or a man. a co-worker. . 6 Source: http://www. sexual harassment lawsuits result in significant penalties (e. Hodgetts et al.S. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. a supervisor in another area. in the millions of dollars) to those who are successfully prosecuted. • The harasser’s conduct must be unwelcome. an agent of the employer. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. Furthermore. Are women with equal qualifications as men given equal pay and position? Take a show of hands. cite two cases in which foreign firms operating in the U.4. have paid substantial penalties as a result of sexual harassment or discrimination based on race.

dict.5.3 Lobbying by Japan Japan spends more money lobbying in the U. particularly in upper management. at 40. with most in the top 20 among over 150 countries included in the survey.4. Side Note 1. there seems to be a glass ceiling due to social factors. Side Note 1. than any other.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. men are disproportionately represented in management positions. with the purpose to influence their votes.1. .5.7 Note that lobbyists do not have any formal power. 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.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.S..5.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.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. Hodgetts et al.5 1.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.S.4. 7 Source: Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. in an extended sense.4. 1. is the notable exception).5. They only have the power of persuasion. to try to influence decision-makers in any circumstance. their attitudes towards bribery when working in foreign markets differs from that of the U. EUROPE 15 1. Definition 1. yes or no. politicians.

com/library/glossary/bldef-glassceiling.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation.S. .5.16 CHAPTER 1. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. For those students who think so. though compensation is limited relative to lawsuits filed in the U.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.htm.about. but there is a perception that there are risks and ethical considerations.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. Side Note 1. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.5. • More British companies have actively sought to recruit and promote women into management. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. 8 Side Note 1. • Discrimination lawsuits are more commonplace in Great Britian.. yes or no.5. 8 Source: http://careerplanning. 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. 1.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization.

Prison labor. Ethical considerations include 1. . 5. 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. there are undoubtedly many others that get away with it. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U.S. [5.3 (Corporate Spying) Hodgetts et al. p. • Note that for every corporate spy that is caught. Side Note 1.6.6. 7. 2. 3. An opaque legal system. 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. executives. An increase in crime and illegal business activities. Child labor. 6.5 billion in sales annually.S. and • A recent history of rapid economic development. ETHICAL CONCERNS IN CHINA 17 Side Note 1. pp. company in Boulder was stolen and sold to a Chinese company. 4. • A relatively stable government. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Side Note 1.6. Piracy and counterfeiting (see sidenote below).6. International corporate spying problems. • Yet another case in which software from a U. 64]. Often.1. Bribery and other forms of corruption. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.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.2 (Piracy and Counterfeiting) Present sidenote at [5.

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. such as education and health care.2. health.2. Other companies.benjerry.18 CHAPTER 1.4 (Corruption) Though things are improving.7. and promotion of social equity).S.3 (Nongovernmental Organizations (NGOs)) Private. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. not-for-profit organizations that seek to serve society’s interest by focusing on social.7. . education. Side Note 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. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. there are few if any issues which affect and infuriate so many in China as corruption. education.6. • CARE (promotes community development. “. Definition 1.2 (Nongovernmental Organizations (NGOs)) Private.7. Definition 1.7 Corporate Social Responsibility Definition company/our mission/index. 1. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. China continues a battle against corruption. a grocery chain. social justice. See http://www. and economic issues such as poverty. health. social justice.cfm for more detail. such as Whole Foods. political.7. . political. In the words of a Beijing correspondent for “The Economist” magazine.”[6] See also sidenote 1. provide relief in the event of humanitarian disasters. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. and the environment.. .1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. and the environment. and economic issues such as poverty. not-for-profit organizations that seek to serve society’s interest by focusing on social. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). and emergency relief in the event of humanitarian disasters).

Executives are people. – Even socially responsible executives would consider the “bottom line” when making decisions.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. but does not outlaw payments to political party leaders. Side Note 1. Side Note 1.7. with a score of 3.9 U. • To prevent a boycott or other consumer defections. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. In 2005.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. Both political groups and businesses are influenced by NGOs.S. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. executives may actually feel that it is the right thing to do.1. last but note least. MNCs do not appear to have been significantly impacted. • Conservation International (promotes environmental conservation). and • Rainforest Action Network (RAN). firms are constrained by the FCPA with regards to bribery and other corrupt practices.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. as executives of publicly traded companies are ultimately responsible to their shareholders.1 Corruption and the FCPA Revisited Hodgetts et al.7. For example. too.2. .7. firms a reason to refuse to pay bribes. 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. 1.S. as it gives the U. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). • And.S.000 and $125. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. China ranked 78 out of 158. many feel that it has had a net benefit.7. In fact. note that while U.

7. with a score of 8. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.0 is considered to be the borderline at which countries are considered to have a problem. Singapore is number 5 with a score of 9. and Germany at 7. but most important first step is to recognize that there is a problem.N. better than the Side Note 1.infoplease. 2006. Tyco.7.4 (Some Opinions) Personally. With greater financial transparency. Moreover. with scandals such as Enron. WorldCom. 3. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. slightly better than Sweden. 4.4. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. It is a difficult problem to solve. and not based on hard data. and Parmalat resulting in investors losing billions of dollars. . 5. Side Note 1. Support and respect the protection of international human rights. Global Compact. and the environment. the United States and Europe have recently been rocked by corporate corruption. societies. Commitments that many MNCs have signed on to.7.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. As more state-owned businesses become privatized and the size of the middle class increases. Global Compact specifies 10 principles which MNCs should abide by: 1.10 Corruption is certainly not endemic to Asia. specify standards and codes of conduct in domestic and global operations. Important: Although it is widely cited. malfeasance and diversion of corporate funds becomes increasingly difficult. Scandinavian countries are at the top of the list.5 (Table 3-1: Principles of the Global Compact) The U. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. The government recognizes that it is an issue and is taking action. 1. 10 http://www. The government is actively addressing the issue of corruption.3. I think corruption will diminish as China economically develops for several reasons: 1. Hong Kong is number 15. 2. With more disciplined corporate governance.S.2 respectively.6 and 8.N. It cannot be considered to be based on a scientific survey. more Chinese will own stock in companies. July 1.20 CHAPTER 1. such as the U.

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


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

2. in the U. 3. 3. – 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. Production/operations – Creates the product. We will study how goods and services are produced. and I was disappointed in the experience. 1. – However. The prices were high. it is now so widespread that it is no longer considered edgy and so corporate that any attitude it may have no longer derives from the “rock and roll” world that was its origins. Our study of operations management will have four focus areas. Marketing – Generates the demand. 2. or at least takes the order for a product or service. – Most Americans are familiar with the Hard Rock Caf´ and among the e younger generation. Heizer states that “we look not only at how Hard Rock’s managers create value. pays the bills. We will try to understand what operations managers do so that we can potentially become better operations managers ourselves. OM is one of the three major functions of an organization and is related to all other functions.” The Hard Rock Caf´ will be discussed further throughout the course. but also how a variety of managers in other industries do so. So we focus on how people organize themselves for productive activity. e Functions within organizations are typically divided between three categories: 1. – The Hard Rock Caf´ was once considered “edgy” in the United States e and built a reputation on unique atmosphere and attitude. ..24 CHAPTER 2. • In the profile.S. but I did not consider the menu to be much more than standard “sports bar” fare. e ∗ I have eaten there. OPERATIONS AND PRODUCTIVITY • Based on my limited and personal observations. the food is considered by many to be mediocre and overpriced. Finance/accounting – Tracks how well the organization is doing. a significant percentage have eaten in a Hard Rock Caf´ at least once. People generally go for the atmosphere. and collects the money.

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

and price. 8. Location – Where should we put the facility? • Location decisions are crucial. technology’s location decisions and Matt McAdams a posteriori assessment of the choices. personnel levels. 7.26 CHAPTER 2. 6. 4. OPERATIONS AND PRODUCTIVITY 2. • Personnel costs are a significant part of most production or service processes. personnel use. innovation. and maintenance and determine much of the cost of a product or service. 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. 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. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. 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. . and human resource planning. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. • Mutual trust between buyers and suppliers is crucial. • Discuss Active. production scheduling. 9. 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. 3. Poor location decisions may overwhelm other efficiencies. 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. Inventory. and inventory requirements. capacity needs. 5. quality. material requirements planning.

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

• Government. services account for over 70% of U.28 CHAPTER 2. the services sector is by far the largest employer. • Recently. p. • In some service industries. services become increasingly important. Manufacturing was dominant until about 1950 or so.S. Definition 2. the economy transitioned from agriculture to manufacturing around 1900.3 (Information Sciences) The systematic processing of data to yield information. Bureau of Labor Statistics defines services to include [1. 9] • Repair and maintenance. In the U. Today..5 [1. such as the legal profession or computer services in the financial industry.2.1 (Services) Those economic activities that typically produce an intangible product.3.S. • Transportation.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. economic output. for others professional occupations. and other essentials for its citizens. However. • Insurance. The U.. 2 The average national private industry wage. shelter. the wages are considerably above average.S. Side Note 2. Definition 2. • Food and lodging. such as retail. average wages are below average2 in the U.1 (Development of the Service Economy) Present Heizer figure 1. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.S. • In most western economies. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.3. • Trade. 11]. . p. major contributions have come from the field of information sciences. 2.

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

capital. brought about in part by the internet. • 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.2. .30 CHAPTER 2. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. it will continue to strongly impact the field. p. 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. reusable. parts. Trends that Heizer and Render identify [1. • 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.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. 2. Operations managers are being challenged to produce biodegradable. operations managers are increasingly responsible for innovations that move ideas. Globalization has been having a dramatic impact on operations management and in the future.5.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. operations managers are responding by moving decision making to the individual employee.2. Definition 2. and finished goods rapidly. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. wherever and whenever needed. OPERATIONS AND PRODUCTIVITY 2. the next step in product development involves customizing products according to the customer’s preferences. • Empowered employees – With the rise of services and knowledge products. or recyclable products or to minimize packaging and other wasteful production steps. or management).

5.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Consider today’s computers versus those from the 1970s. Definition 2. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.5. Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Also known as total factor productivity. Side Note 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. p.4375 titles per labor-hour = 0. Definition 2. . 15].2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).0077 titles per labor-hour = 0.5. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. THE PRODUCTIVITY CHALLENGE 31 Definition 2.25 titles per labor-hour = 0.4 (Total Factor Productivity) See definition 2.5.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs).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. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. but overhead is no $800/day.5.2. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.5.3. In order to improve productivity.

• 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. If the public electricity provision increases in quality. about 10% of the annual improvement in productivity is due to increases in labor productivity. you had to write a program from scratch. – This can be a particular problem in the service industry. capital. and the arts and science of management. it may improve productivity.5 (Productivity Variables) In operations management.S. If you wanted the computer to do something. Labor productivity has increased due to • Better-educated. green. . in Cambodia. no word processors. The electricity often goes out in the middle of the day and the current may vary in strength. 2.5.5. • Units of measure – There may not be appropriate units of measure. Labor In the U. (It used audio tapes for memory storage.32 CHAPTER 2.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. A Toyota Corolla is a much different car than a Porsche 911 Turbo. such as convenience or safety.) The screen had only one color. the three factors critical to productivity improvement – labor. 2. Management. or other commercial software available. the public provision of electricity is highly variable. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. and was about the size of my hand. – Not all cars are the same. 3. – For example. of course.. where quality and other factors vary widely or the level of service provision includes items difficult to measure. spreadsheets. Capital. There were. Definition 2. Labor.

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

2. 17]. and because the author of the textbook is writing about operations management. and knowledgeable employees and operations managers are responsible for ensuring that technology.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.2 Capital Capital investment in the U.4 (Management as an Input) Because this is a course in business management. p. graduate programs and the students they produce remain the best in the world. in the U. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.S. Developed economies (also known as post-industrial economies) require trained. and the cost of capital depends on interest rates.. Definition 2. 2. and knowledge.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.5% after allowances for depreciation. are utilized effectively. U.5. however.5. Note that there is a trade-off between capital and labor in most industries.S.S.5. management is not always identified separately from labor as an input. Difficulties arise because service-sector work is . management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. According to Heizer [1. 2. educated. management is considered as a separate input. education.5. as well as capital. has increased at about an average of 1.34 CHAPTER 2.5. productivity in the service sector has not increased as rapidly as with the production of goods.4 Productivity and the Service Sector Historically. Note that in classic economic analysis and other areas of business. Side Note 2.

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


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

FedEx is committed to our People-Service-Profit philosophy. 3. competitively superior. • Perfumers tend to concentrate in Grasse.1 Mission Whether large or small. positive control of each package will be maintained utilizing real time electronic tracking and tracing . I recommend that all companies draft a mission statement. time-certain delivery. France.1 (Mission Statements for Three Organizations) Review Heizer figure 2. p. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou.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. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. FedEx. Equally important.2 [1.38CHAPTER 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. an understanding of cultural differences in preferences is needed to best meet customer needs. 3. We will produce outstanding financial returns by providing totally reliable.1. 5. Missions state the rationale for an organization’s existence. and • Increase sales. Side Note 3. Provide Better Goods and Services – For companies doing business in an international setting. • Provide additional insights and opportunities. 3. global organizations can attract and retain better employees.1. global air-ground transportation of high-priority goods and documents that require rapid.1. Attract and Retain Global Talent – By offering more employment opportunities. 6. Definition 3. 28] which includes mission statements for three multinational companies: 1. 4.1 (Mission) The purpose or rationale for an organization’s existence.

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

cfm for more detail.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. more responsive products or services. . • Training. Side Note 3.1. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Definition 3. 3. • Interoperability with other products. and Major Departments in an Operations Function.benjerry. • The “look and feel” of the product.” Note that mission statements are used not only at the company-wide level. 2. • Availability of complementary products. be it • Product features.3 (Competitive Advantage) In operations management. See http://www.2 (Strategy) How an organization expects to achieve its missions and goals.40CHAPTER 3. company/our mission/index.1.1. Cost leadership – Providing cheaper products.3: “Sample Missions for a Company. the Operations Function. Definition 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. but can be used at the department level and even at the project level.3 (Sample Mission Statements) Present Heizer’s figure 2. the creation of a unique advantage over competitors. Differentiation can arise from anything that the customer may value about a product or a services. Responsiveness – By providing timelier.1. Differentiation – They make their product better.

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


Definition 3.1.4 (Differentiation) In operations management, distinguishing the offerings of an organization in any way that the customer perceives as adding value. Many service providers focus on experience differentiation, such as Disney with its theme parks and the Hard Rock Caf´ and other theme restaurants. In China, KTV e tries to differentiate itself from competitors by providing a more exciting karaoke experience with more advanced equipment and flashier karaoke rooms. Definition 3.1.5 (Experience Differentiation) In operations management, engaging the customer with the product through imaginative use of the five senses, so the customer “experiences” the product. See also definition 3.1.4.

Competing on Cost For producers of “commoditized” products or services, price is perhaps the most important competitive dimension. Definition 3.1.6 (Low-Cost Leadership) In operations management, achieving maximum value (expressed in terms of quality and price) as perceived by the customer. Low-cost leadership does not imply low value or low quality. Often providers of low-cost products achieve their competitive advantage by taking advantage of facilities, management techniques, or technologies to reduce costs. Wal-Mart has been very successful in competing by driving down overhead and distribution costs.

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

42CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Reliable – Being able to provide consistent products or services with minimal risk to the customer. – FedEx’s motto is an example of a company who is trying to compete on the basis of reliability: “Absolutely, positively on time.” • Quickness – Quickness can refer to speed in design, production, or delivery. – In the U.S., Domino’s Pizza specializes in pizza delivery and at one time guaranteed that your pizza would be delivered to your home in 30 minutes or less. – Pizza Hut also provided a guarantee that if you came to the restaurant for lunch and ordered a “Personal Pan Pizza,” you would get your pizza in 5 minutes or less. Definition 3.1.7 (Response) In operations management, the set of values related to rapid, flexible, and reliable performance. Side Note 3.1.4 (Operation Management’s Contribution to Strategy) Present Heizer figure 2.4 [1, p. 32]. This figure provides examples of strategic decisions and how they relate to the ten operations decisions discussed in sidenote 2.2.1. Side Note 3.1.5 (Example: Starting a Restaurant) Present Heizer example 1 [1, p. 34]. • The example relates to the process design decision based on the mission statement, “To provide outstanding French fine dining for the people of Chicago.” • Several alternative options are presented.


Issues in Operations Strategy

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





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



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



Strategy may need to be changed due to changes in an organization, including personnel, finance, technology, and product life cycle changes, and changes in the environment, such as the competitive environment, advances in technology, etc.. Side Note 3.2.1 (Strategy and Issues During a Product’s Life) Present Heizer figure 2.5 [1, p. 36]. Four phases of the typical product life cycle are given as well as where some current products lie on the life cycle.
1 Relative 2 The

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

3. Definition 3. Definition 3. The operations manager’s job is a three-step process: 1. The purpose of this process is to 1. those activities or factors that are key to achieving competitive advantage. Side Note 3. and Threats) analysis to develop strategies.3. 2. Group the necessary activities into an organizational structure. then determine whether the organization does these things well (and.6 [1. Weakness. These critical success factors are used to develop a competitive advantage. Provide competitive advantage. and 3.” The process of developing a strategy involves the following steps: • Environmental Analysis. determining internal strengths and weaknesses and external opportunities and threats.3. 37]. in particular. then • Form a Strategy.1 (SWOT Analysis) In operations management. . Increase productivity. “Strategy Development Process. 2.44CHAPTER 3.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. p.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. and 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Implement an OM strategy.3. Staff the organization with personnel that will get the job done. Identify a strategy and critical success factors. Opportunities.1 (Strategy Development Process) Present Heizer figure 2. • Determine Corporate Mission.3. if the firm has a competitive advantage in these things) and where failures are most likely.2 (Critical Success Factors) In operations management.

3.2. p. Once CSFs are determined. Recall the “org charts” in sidenote 2.1.3 (Activity Map) In operations management. 3.3. Southwest Airlines has a competitive advantage in providing low-cost airfares.5 and HR. a graphical link of competitive advantage.3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3 Integrate OM With Other Activities In order to achieve its strategy.3.2 as examples of how firms organize their activities.3. 39]. . GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. 5 Management 6 Human Information Systems Resources.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.1 as a checklist to determine critical success factors. OM activities are most productive when they are integrated with other activities such as marketing. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. finance. MIS.6 3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. • Red arrows – critical success factors • Blue arrows – support activities 3. Definition 3.4. and supporting activities. CSFs.3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Side Note 3.

4. 3.5 (Global Strategy) In operations management. Its menu reflects the country in which it operates. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. • McDonald’s is an example of a country with a multidomestic strategy.4. or joint ventures with substantial independence.4. In the semiconductor industry. See definition 3. p. products do not need to be localized.4. Global strategy – Not characterized by local responsiveness.5. 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. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4. Definition 3. Typically characterized by subsidiaries. See definition 3. Also one of the least profitable due to transport costs and little local responsiveness.4.6.4 (Multidomestic Strategy) In operations management. Definition 3. Although e it is legally Swiss. as exports require little change in operations and licenses often leave risk with the licensee. with beer on the menu in Germany. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. 2. Only 10% of its work force is Swiss.1 (International Business) A firm that engages in cross-border transactions. • Nestl´ is an example of a country with a transnational strategy. • Texas Instruments is an example of a country with a global strategy. a strategy that uses exports and licenses to penetrate the global arena.4. 95% of its assets and 98% of its sales are made outside Switzerland. See definition 3. [1.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. owning or controlling facilities in more than one country. Definition 3. 4.4.3. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.3 (International Strategy) In operations management. International strategy – Often the easiest strategy. and hamburgers without beef in India. franchises.4. but a good strategy for cost reduction when products do not need to be adapted locally. wine in France.4. See definition 3.46CHAPTER 3. . Definition 3. Usually does not confer a cost advantage. 42] Definition 3.

Note that many companies that are well-known American brands are now making more money overseas than they do in the U. 6]. p.4.3. Side Note 3. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .4. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.4.S.. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.6 (Transnational Strategy) In operations management.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.


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

5. 3. Definition 4. often times. things you thought were certain turn out not to be. The job is unique or somewhat unfamiliar to the existing organization. if things go wrong. a temporary project organization is formed to address a specific project. See also Heizer sidenote “Project Management and Software Development. However. The project cuts across organizational lines. The project is temporary but critical to the organization. and you will be forced to improvise. it is also an area in which there will continue to be high demand for qualified people. Moreover. People will not come through with what they promised. it is very obvious and can be very costly.1. If you become a project manager on projects of significant complexity.0. You may be managing resources far in excess of your individual salary. 69].5 (Personal Advice on Project Management) Project management is a tricky profession. Project organizations work best when [1. you will be confronted with a daunting task. p. Work can be defined with a specific goal and deadline. Side Note 4. you are doing your job well if noone notices the project management. you should always expect the unexpected.1.50 CHAPTER 4. Your job is to make things go smoothly and according to plan.0. The work contains complex interrelated tasks requiring specialized skills. 2.1 Project Planning While many projects are run within an existing organization.1 The Project Manager As alluded to in sidenote 4.” [1. p.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. and/or 5. 4. The responsibilities of project managers are to make sure that . PROJECT MANAGEMENT However. In a sense. 48] 1. project managers are highly visible in a firm and have significant responsibilities. 4. 4.

Complete software architecture for user account input web page functionality 5. Review graphic design for user account input web page 3. 51 4. Complete graphic design for user account input web page 2.1. Side Note 4.1. In a project that includes allowing a user to enter personal information on a web page. All projects come in on time.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. For example. you have divided the tasks too finely. dividing a project into more and more detailed components.4. The project is on or under budget. The project meets its quality goals. When dividing a project into tasks. People receive motivation and information necessary to do their jobs. in a software engineering project. • Build the user account input web page is a much better task division than 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. and 4.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). a task that should only take a day or so.1.1.2 (Work Breakdown Structure (WBS)) In operations management. Approve graphic design for user account input web page 4. 2. 3. Definition 4. Approve software architecture for user account input web page functionality . Review software architecture for user account input web page functionality 6. a web page takes about a day to build for an experienced team. PROJECT PLANNING 1.

Major tasks in the project 3. p. of course. Activities (also known as “work packages”) to be completed Side Note 4.3 (Reality Check: WBS) In reality. Subtasks in major tasks 4.1. Side Note 4. PROJECT MANAGEMENT 7. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Show the relationship between each activity to others and to the whole project 2. the work breakdown structure is not something you go to your office to do in isolation.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Write software for user account input confirmation page functionality 9. it is time to assign people and materials and estimate the time and perhaps the cost of various activities.52 CHAPTER 4. Project 2. you should also take note of time and cost estimates given by your technical staff.2 (Work Breakdown Structure) Present Heizer figure 3. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. Write software for user account input web page functionality 8. They will be useful for project scheduling.2.1. 4.3 [1. Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1. The actual WBS for Windows XP would. Encourage realistic time and cost estimates for each activity . At the time you are creating the work breakdown structure. Identify precedence relationships among activities 3. Scheduling serves to 1. which we will discuss next in section 4. fill hundreds if not thousands of pages.

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

which activities will delay the entire project if they are late? • Which are the noncritical activities – the ones that can run late without delaying the whole project’s completion? • What is the probability that the project will be completed by a specific date? • At any particular date. . is the project on schedule. 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. Total program labor curves. Work status reports.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. is the money spent equal to.1 PERT and CPM Two methods. Cost breakdowns for each task. 2. 7. 5. Cost distribution tables. behind schedule. 4. were developed in the 1950s for project control. PERT and CPM. or ahead of schedule? • On any given date. and budgets of projects. 6. Variance reports. Functional cost and hour summaries. Control programs typically produce reports detailing 1. less than. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.54 CHAPTER 4.3. 3. Definition 4. costs. Time analysis reports.3. 4. what is the best way to accomplish this goal at the least cost? 4. quality. Raw material and expenditure forecasts. and 8.3 Project Controlling Project control involves monitoring resources.

4.2. Side Note 4. AON associates the activity with the node whereas AOA associates the activity with the arrow. Moreover.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. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.5 [1. . Define the project and prepare the WBS. 6. As the names describe. and ontrol the project. Side Note 4.3. p. Activity on Node (AON) and 2. Assign time and/or cost estimates to each activity.3.2 (Example: AON and AOA) Present Heizer’s figure 3. through the network. Develop the relationships among activities. 53].3.3. monitor. Definition 4. Use the network to help plan. Personally.3.3. Activity on Arrow (AOA).3 (Critical Path) The computed longest time path through a network. or the critical path. They both follow six steps: 1.3. See also definition 4. 3. See also definition 4. Gantt charts are the “go to” visualization method for even very complex projects.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3. in my experience.2 Network Diagrams There are two approaches to visualizing activity networks: 1. 5. Compute the longest time path. Draw the network connecting all of the activities. it will do for you automatically much of what we will go through manually in this class.3. Also. 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. 2. 4.4. PROJECT CONTROLLING 55 Definition 4. schedule.

4. PROJECT MANAGEMENT Side Note 4.4 Determining the Project Schedule Once we have identified all of our activities. In other words.9 [1.3.1 (Critical Path Analysis) In project management.3. Definition 4. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. EF = ES + Activity time.3.4. ES = max{EF of all immediate predecessors}.6–3. 56]. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. Follow with example 3 and figure 3. analysis used to determine the project schedule. LS = LF − Activity time. See also definition 4. – If an activity has multiple immediate predecessors. 1. We do this with a critical path analysis with involves a 2-step procedure. we must use time estimates of each activity to determine the overall schedule for the project. 2.56 CHAPTER 4. 54–55]. • Table 3. LF = min{LS of all immediate following activities}. – If an activity is an immediate predecessor to more than one activity. its LF equals its LS of the activity that immediately follows it. .8 [1. that is. their dependencies. its LF is the minimum of all LS values of all activities that immediately follow it. that is. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. pp. p. its ES is the maximum of all EF values of its predecessors.1 gives sufficient information to describe the network. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 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. that is.

Note that activities A. activity F in sidenote 4.” Then complete Heizer example 7 figure 3. the step that identifies all the earliest times that activities can be completed.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. the time associated with a single activity. and • Includes only critical activities (see sidenote 4. The critical path is one that • Begins at the first activity in the project.4.4.1. we cannot complete the project in 15 weeks. Also notable is that if the total time of the project needs to be reduced. p. or the amount of time an activity can be delayed without delaying the entire project. Definition 4. “Notation Used in Nodes for Forward and Backward Pass.3 and Heizer figure 3. we may delay the project as a whole. Definition 4. If an activity2 does not impact the slack time of any other activity. 61] based on table 3.1 When several noncritical activities appear successively in a path. . E.4. 1 For example.3 (Free Slack) In project scheduling.3.5. the time shared among more than one activity.4. These are called critical activities. Slack time is just Slack = LS − ES or Slack = LF − EF .5.4.1 (Slack Time) In project scheduling.5.1). and H have no slack time and cannot be delayed without delaying the entire project. if we delay activities B and D by one week each.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.4. G. the time devoted to one of these activities must also be reduced. Definition 4. 57]. Note also that if we delay each activity by the amount of slack that activity has. 4. 2 For example. it is said to have free slack. p.13 [1.2 (Forward Pass) In project management scheduling. C.1.3 [1. • Terminates at the last. in the example in sidenote 4. p.2 (Total Slack) In project scheduling. they share total slack. the free time for an activity. Side Note 4. 60].5.10 [1. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.

6. Beta distributions have two free parameters. the time required to complete an activity is often uncertain due to supply problems.2 and 4. Definition 4.6. in most cases.6.3. Most likely time – The most realistic estimate of the time required to complete an activity. In PERT. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. Definition 4. See also definitions 4.1 and 4. which are labeled according to one of two notational conventions.2 (Pessimistic Time) In project scheduling.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. the “worst” activity completion time that could be obtained in a PERT network. The beta distribution is used as a prior distribution for binomial proportions in .6. Side Note 4. Definition 4.6. the most probable activity completion time that could be obtained in a PERT network.58 CHAPTER 4. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.6.6. However. See also definitions 4. In reality. the “best” activity completion time that could be obtained in a PERT network. See also definitions 4. unexpected complexities. The usual definition calls these alpha and beta.6. PROJECT MANAGEMENT 4.1 and 4. three time estimates are used: 1.6. Effectively. Definition 4..3. the project manager pulls the number “out of the air” based on their experience managing related activities.3 (Most Likely Time) In project scheduling.6. etc. and the other uses β = β − 1 and α = α − 1 .6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.2. technical considerations that were unknown at the time the project schedule was drawn up.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.6.1 (Optimistic Time) In project scheduling. we do not.

62].com/BetaDistribution. 4. 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.4. 2007. The variance of the activity time is Variance = [(b − a)/6]2 . 4. The above plots are for various values of (α. and .78 weeks. and pessimistic times of 1.html http://mathworld.78 6 6 36 7 4 weeks. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.00 week.6.html. p. 2. Total project completion times follow a normal probability distribution and 2.6.wolfram. p.3 The domain is [0.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.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. Activity times are statistically independent 3 Source: http://mathworld. The expected activity time for activity F is 3 weeks5 and the variance is and 7. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.wolfram.6. most likely. 4 See definition 4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. β) Γ(α)Γ(β) P (x) = (4.00. and 9 weeks. 8 1. 63] for activity F based on optimistic.1) where B(p. February 21. most likely.1 Probability of Project Completion If we assume that 1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.6. and pessimistic times of 1. q) = (4.25 to 3. Side Note 4.β) with α = 1 and β ranging from 0.

the population variance var(X). definition 4.3 (Example: Project Variance) Review Heizer example 9 [1.” Review Heizer example 10 [1.1. See also 4. Note that the standard deviation of 1.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. 9 For 10 See more information.10 Determining Project Completion Time for a Given Confidence Interval A common question is.76 weeks implies that the project will exceed the expected completion time by more than 1. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. Definition 4.5. Side Note 4.wolfram. Side Note 4.6.6. see http://mathworld. 64]. 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. p. and within 3 standard deviations approximately 99.6. A2– A3] “Normal Curve Areas.6 (Standard Deviation) The standard deviation is the square root of the variance.6. pp.4 (Using the Normal Table) Pass out Heizer Appendix I [1. 65] and figure 3.html.60 CHAPTER 4.76 weeks approximately 16% of the time. See definition 4. commonly also N written σ 2 .3) Definition 4. . p.7% of the time.16. “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 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. two standard deviations approximately 95% of the

Step 1 – Compute the crash cost per week. we need to ensure • The amount by which an activity is crashed is.7. 4. and if you become a project manager.2 (Crash Time) In project management.7. . Definition 4.7.4. Assuming linear costs. See definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. Project crashing is the name given to the process of rushing a project to completion. if certain activities off the critical path take the pessimistic time estimate or more to complete. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.1 (Crashing) In project management. you will doubtless experience one or both of these eventualities many times in your career. Crashing a project involves a four step process: 1. crash time is the shortest duration of an activity. • The shortened durations will actually enable us to finish the project on time. See definition 4. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. we want to do so in the least cost mannger possible.7.11 Definition 4. and • The total cost of crashing is as small as possible. Definition 4.4) 11 Since crashing a project often involves adding additional resources to activities. it may result in the project being delayed. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. (Crash Cost) In project management. When crashing a project. permissible and realistic. crash cost is the cost required to complete an activity in the shortest time possible. Since activity completion times are typically shortened by adding resources. the crash cost is typically higher than the normal cost. in fact.

pp. If the due date has been reached. 67–69] including table 3. As a project manager. go to step 2. If you find yourself needing to rush a project. 3.19. If not. stop.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. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. 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. • Advantages – Especially useful for large projects . If there is more than one critical path. Step 3 – If there is only one critical path.5 and figures 3.62 CHAPTER 4. Then crash each activity by one period. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. you should be very wary of such pressure. 4.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.7. Side Note 4. At times this may be politically infeasible.18–3. Step 2 – Find the critical path(s) in the project network. Side Note 4. Note that one activity may be on several critical paths.7. Crash this activity by one period. Step 4 – Update all activity times. 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.2 (Example: Crashing a Project) Present Heizer example 12 [1. If you accept the challenge and try to rush the project to please upper management. PROJECT MANAGEMENT 2. the advice given in this section should be helpful. 4.

70–74] with figures demonstrating MS Project Noncritical paths should be closely monitored as well.gnome. including open source software that is free. Information on Achievo can be found at http://www. Starkweather about his impression of various alternatives.4.wikipedia. 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. It is perhaps the most widely known and featureful project management software available. However. pp.1–3. independent.9 Using Microsoft Project for Managing Projects Present programs 3.9. There are a variety of alternatives. Information on Planner can be found at http://live. Note that most project management textbooks refer to MS Project as the software of choice for project of project management software for a list of project management software or ask it is relatively expensive and the features are so numerous and complex. Information on dotProject can be found at http://www. . You may also refer to http://en. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths.7 [1. they are often overkill for 12 Recall sidenote mediumsized projects. 4.


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

Definition 5. Growth. and other economic indicators.66 – – – – Sales forecasting.1.1 Types of Forecasts Organizations typically use • Economic long-range forecasts.4. Production planning and budgeting.2 and 5.3 (Technological Forecasts) In operations management. money supply. 2. long-term forecasts concerned with the rates of technological progress. Generally deals with more comprehensive issues than short-range forecasts.1.1. 3. These concern rates of technological progress.1. 5. Capital expenditures.1.2 (Economic Forecasts) In operations management.1. and Analyzing various operating plans. and • Demand forecasts. See also definitions 5. Facility locations or expansion.3 and 5. longer forecasts are needed. CHAPTER 5.4. Definition 5. . Decline. housing starts. • Technological forecasts. Maturity. Product life cycles tend to follow four stages: 1. These may include inflation rates. planning indicators valuable in helping organizations prepare medium. Introduction. In the first two stages. See also definitions 5. Useful for – – – – Planning for new products. which impacts purchases of new plant and equipment as well as development of new products. and Research and development. and 4. Cash budgeting.1. FORECASTING • Long-range forecasts – Generally more than 3 years.

Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Human resources – Anticipated demand is needed to estimate the need for • Hiring. projections of a company’s sales for each time period in the planning horizon.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Determine the time horizon of the forecast.1. Determine the use of the forecast. 2.5. 2. 3. Capacity – Underestimating demand can result in • Undependable delivery.4 (Demand Forecasts) In operations management. See also definitions 5. 6. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. these drive a company’s production. 4. and personnel planning. 3. marketing. Select the forecasting models. and scheduling decisions and serve as inputs to financial. 7. Make the forecast. Select the items to be forecasted. and • Layoffs. 5. • Loss of customers.1. . and • Loss of market share. capacity. Also called sales forecasts. and 5. Validate and implement the results. • Training. Gather the data needed to make the forecast. 5. 5.2.

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

for example. useful method if we can assume that market demands will stay fairly steady over time. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. · See definition 5. ∗ Moving averages · Simple. · There are three problems with moving averages 1. and if they perceive there is an incentive to exaggerate. be sure that the sales force is clear that their incentive is to be as accurate as possible.8.5. ∗ The more independent your decision makers are from economic. and · Respondents.3. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. · Useful as a starting point or sanity check for more sophisticated methods. ∗ However. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. Moving averages require more past data to work with than. political. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period.9. 3. · See definition 5. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. · The simplest and easiest way to estimate demand. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. · Requires less past data than moving averages. · Staff personnel. say. the naive approach. the more likely it is your results will be accurate. . Sales people typically respond to incentives.3. 2. or other incentives to over or understate demand. Moving averages cannot pick out trends very well.3. – Sales force composite ∗ You would be surprised how accurate your sales force can be. they will do so. See also definition (Delphi Method) In operations management.3.5 (Sales Force Composite) In operations management. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. and 5. See also definition (Consumer Market Survey) In operations management.1 Qualitative Forecasting Methods Definition 5.3. Definition 5.6. 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. See also definitions 5.3.70 CHAPTER 5. See also definitions 5. and value system.5. a forecasting technique using a group process that allows experts to make forecasts.3.3.3. Definition 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.4. See also definitions 5. 5. See also definitions 5.3 (Jury of Executive Opinion) In operations management.3.6. a forecasting technique based on salespersons estimates of expected sales.3. personal experiences. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. and 5.3.3. .3.1.3. Definition 5. 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.2. 5.3.3. Definition 5.3. and 5. · See definition 5. emotions.5.5. and 5. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.

11.3. 5.2) See also definition 5. See also definition 5.3.05 to 0. and are appropriate to use when the underlying average . Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.9.3.8. 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. Definition 5. That is.3.3. • Simple Moving Average – Mathematically. Mathematically.3. 5.7. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. See also definitions a simple moving average is given by demand in previous n periods Moving average = (5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Moving averages can be either simple or weighted.10.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.2 Quantitative Forecasting Methods Definition 5.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.1) n • Weighted Moving Average – Mathematically. α. FORECASTING APPROACHES 71 5.3. Definition 5.3. and 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. Higher values give more weight to recent data. Definition 5. generally ranges from 0.5.3) The smoothing constant.

See also definition 5. FORECASTING is likely to change. Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. . 5. Definition 5. See also definition 5. Mean absolute deviation (MAD). Definition 5.14. Definition 5. 3.3 Measuring Forecast Error Once a forecast is made. and are appropriate to use when the underlying average is relatively stable.3. such as the mean absolute deviation (see definition 5.3. When α = 1.12).3.13.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 2.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.4) definition 5.72 CHAPTER 5. Three popular measures are 1. exponential smoothing is equivalent to naive forecasting. and 5. 1 See |actual − forecast| n (5.0. while lower values give more weight to past data. Mean absolute percent error (MAPE). The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. Mean squared error (MSE).

6) 5. Mathematically.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3.3. FORECASTING APPROACHES 73 Definition 5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3.8) With smoothing constants α for the average and β for the trend.3. 100 n i=1 (forecast errors)2 n (5. Definition 5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.5.3.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.7) or F ITt = Ft + Tt (5. MAPE is given by MAPE = See also definition 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. expressed as a percent of actual values.5) |actuali − forecasti |/actuali n (5.12.3. MSE is given by MSE = See also definition 5.12. Mathematically.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.11) .3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.

by the formula F ITt = Ft + Tt . time) (5.14) . The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Compute the smoothed trend. the emponentially smoothed forecast for period t using equation 5. Tt with equation 5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. It is also commonly called linear regression analysis. 1. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.74 or CHAPTER 5. Ordinary Least Squares Regression analysis is also useful for predicting trends. F ITt .12. 3. 2.10.12) = 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.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Calculate the forecast including trend. Compute Ft .

Compute the average demand over all months. 1. 1. then multiply it by the seasonal index for that month. 3.3. to account for seasonal changes in demand in our forecasting.5 Seasonal Variations in Data In most businesses.13 assumes a linear relationship. 5. 2. we will examine one model. The first step is to calculate the seasonal forecast. 3.S. This provides the seasonal forecast. 2.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Estimate next year’s total annual demand. Compute a seasonal index for each season by dividing the historical demand by average demand. such as cars and washing machines. consumers often make fewer purchases of durable goods. In the U. 4.3.3. Although there are many methods to accomodate seasonal demand. the multiplicative seasonal model. ¯ x The least squares method has several drawbacks. . Most businesses experience a surge in sales around Christmas.5. 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¯. Divide this estimate of total annual demand by the number of seasons. 5. Recall that the equation 5. We do that with a 5-step process. Deviations around the least squares line are assumed to be random.. the more uncertain it is. Find the average historical demand for each season. demand is seasonal. during the summer months when it is common to take a vacation. Definition 5. It cannot be used to predict too many periods into the future as the further into the future the prediction is made.

g.3.76 CHAPTER 5.4. If there are published estimates you can cite (e. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.. but x will be something other than time.. 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. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. We will use the same technique.3. It is also called the standard deviation of the regression and. Note that making predictions of future demand involves also making predictions about the independent variable x.g. pp.16 is y2 − a y − b n−2 xy Sy. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. if you are uncertain about predictions of x.15) Side Note 5. mathematically.. is given by (y − yc )2 n−2 Sy. average local salary) (5.g. whatever uncertainties you may have transfer to your predicition of y. FORECASTING 5. 106– 107].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.x = (5. However.3.17) .x = (5.1 (Example: Using OLS) Present Heizer example 12 [1.

3 (Examples of Correlation Coefficients) Present Heizer figure 4. 2007. p. Definition 5.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.5.html?xid=sitecnn-partner. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. 107]. FORECASTING APPROACHES 77 Side Note 5.3. 109].9 [1. has risen. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.” Side Note 5.2 with stock prices generally rising as skirts rise.S. “Distribution about the Point Estimate of $600 Million Payroll.3. the U.3. the note in the margin accompanying Heizer example 14 [1.3.4 . 4 Source: http://www. leading stock indexes. but the relationship is coincidental.1594488. Other interesting correlations that have been identified over the years include banana prices and U. Even the Year of the Pig correlates strongly with the U. The correlation coefficient of variables x and y is given by r= See also definition 5. a football game played between two football conferences in the U. or National Football League.3. Correlation Coefficients for Regression Lines Definition 5. is monopolized by the NFL. have been correlated. Side Note 5.18. Dow Jones Industrial Average and Standard and Poor 500. stock market prices as well as the winner of the Super Bowl. 108].S. Historically.S.3.00.3 and the U.S. Correlation) Correlation merely means that the values of two variables are historically related.S. p. football in the U.” the AFL (American Football Conference) and the NFC (National Football Conference).com/time/business/article/0.18) . Certainly.S.4 (Causation vs.S.2 (Distribution About the Point Estimate) Present Heizer figure 4.10 [1. the average length of a woman’s skirt and stock market prices in the U.” Note that the regression assumes a standard normal distribution about the estimate. Since 1935. pp. in all but one Year of the Pig. “Four Values of the Correlation Coefficient.8599. which is divided into two “conferences.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. stock market. It does not imply causation one way or the other.3. stock markets. nor does it imply that they will continue to be related. February 28.time. changes in skirt lengths don’t cause stock market prices to rise and vice versa.

78 CHAPTER 5. etc. you would use statistics software to calculate these values. . .3.. .18 and Heizer example 15 [1. we discussed a means by which we can attempt to predict the value of one variable using the value of another. b 2 . 110]. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3.3.17. 5 See definition 5.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. b1 . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. It is commonly simply called “R squared.5 Definition 5. p. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. 110]. = the dependent variable (e. results in additional predictive accuracy as measured by r2 . .3. In practice. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. often the most difficult part of building a multiple regression model is to pick the independent variables.g.19 (Multiple Regression) A causal forecasting method with more than one independent variable. x2 . .15 is given by y = a + b1 x1 + b2 x2 + . The same technique can be applied to use several independent variables to predict the value of a dependent variable.19) Determining the values of a. . b2 . The multiple regression equivalent of equation 5. .” For example. p.” As the sidebar points out. b1 . (See definition 5.3.6. if they are indeed related to the dependent variable. “What was the R squared of your regression?” Multiple Regression Analysis In section 5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. . Adding additional independent variables as predictors. . Side Note 5.

the forecasting methodology needs to be modified.6.8 standard deviations. though large errors may be a problem as well even if the positive and negative errors balance. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.4 standard deviations. If the tracking signals violate upper or lower limits. which correspond roughly to standard deviations. and 4 M ADs to 3.4. Tracking signals are typically used monitor forecasts.4.5.1 (A Plot of Tracking Signals) Review Heizer figure 4. This means that the observed value should be within 2 M ADs abut 89% of the time. three M ADs to 2. The tracking signals should also be compared as they are generated against limits. Side Note 5.11 [1. and within 4 M ADs about 99. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). In other words.6. 6 Recall definition 4. Definition 5. MONITORING AND CONTROLLING FORECASTS 79 5. Definition 5.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. .6 standard deviations.20) A good tracking signal has about as much positive as negative error.9% of the time.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.1. These limits are typically based on M ADs. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .6 One M AD is equivalent to standard deviations. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. three M ADs about 98% of the time. two M ADs to 1. 111]. p.forecast| n where M AD = (5. one of the most common problems with forecasting is a lack of follow-up.

3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.4. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally flawed in its approach. There is no single technique that should be used for all products or services.3.4.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. you should be aware of the criticism of focus forecasting.4. 2. Definition 5. 5. Sophisticated forecasting models are not always better than simple ones. However. p.g.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.” ..10) is automatically changed to keep errors to a minimum. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. 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.2 Focus Forecasting Focus forecasting. In your career.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Side Note 5. FORECASTING 5.4. which selects a model based on goodness-of-fit to a data set. changes need to be check with human eyeballs to ensure that the adjustments make sense.4. Definition 5. is based on two principles: 1.4. Side Note 5.80 CHAPTER 5.2 [1. α in definition 5. 114]. Note that even with computer monitoring.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. “Summary of Forecasting Formulas.

2. 124. and design of products. Product strategy2 defines the breadth of the product line and links product decisions to [1. • Product life cycle.5 (Product Decision) The selection. the word “product” will refer to both goods and services. which. and • The organization’s capabilities. 2 Recall sidenote 2.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. 81 .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. time permitting. Definition 6. They also use just-in-time production techniques. pp. pp. which will be discussed in detail later in the semester. 122–123]. Referring to services as products is common in the service industry. is a service. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. definition.128] • Investment and cash flow.0. • Market share and dynamics. For example. as products. 1 In this chapter.1 . as an intangible.0. insurance companies often refer to their policies.1 Side Note 6.

DESIGN OF GOODS AND SERVICES 6. 6.82 CHAPTER 6.1. clothing fashions). .. Decline. YouTube videos).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. • Decline phase – Investment needs to be minimized and resources need to be redeployed.1 Product Life Cycles Product life cycles can be divided into four phases: 1. low-cost. Product strategy involves determining the best strategy for each product based on its position in the life cycle.g... Introduction. Life cycles can be in the days or weeks (e. – Process modification and enhancement. • Maturity phase – Competitors have entered or are entering the market. products expenses are often high for – Research and development. or even decades.1.g.g. years (e. Growth. often ruthlessly.2 Life Cycle and Strategy Strategies change as products move through their life cycle. and – Supplier development. so high volume. • Introductory phase – In the introductory phase. and innovative production is appropriate. restaurants or nightclubs). Maturity. months (e. 3. and 4. • Growth phase – Effective capacity forecasting is necessary. 2.

1 (Brainstorming) A team technique to generate creative ideas on a particular subject. 6. example. Definition 6.4 Side Note 6.3 Product-by-Value Analysis For firms with many products.2 Generating New Products Most products have a limited life cycle.2. 6. Ideas are not reviewed until after the brainstorming session.000 yuan. are tied to product demand. 4 For 3 For .1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. as well as the total annual dollar contribution of the product. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. 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. and if a company is to survive.3 • Political and legal change can also bring about business opportunities. the development of cellular telephone technology or the internet. example. GENERATING NEW PRODUCTS 83 6. • Sociological and demographic change is also tied to product demand.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.1. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.2.2. • Economic factors.2. it must regularly redesign existing products or bring new products to market. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.6.1.1 (Example: Brainstorming) Lead the class in a brainstorming session. such as consumer incomes. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. • Technological change often drives product innovation. Definition 6.500 or 100.

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. Translates customer desires into a product design. Definition 6.3 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.3.3 [1.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. DESIGN OF GOODS AND SERVICES For example. .3. 128].2. market dynamics. p. the product life cycle.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. 6. Many successful companies rely on sales from products introduced within the past five years. 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.3. 128]. 129].1 (Product Development Stages) Present Heizer figure 5. Each stage should have an accompanying review to determine whether to progress or not.84 CHAPTER 6. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. Side Note 6. Determines what will satisfy the customer and 2. The house of quality is a graphic technique for defining the relationship between customer desires and a product. p. DuPont estimates that it takes 250 ideas to yield one marketable product [1.3. Side Note 6.2 [1.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. Definition 6. and the organization’s capabilities. p.3.

An organization is divided into departments.6 3. • Effective communication and coordination between separate departments can be problematic. 10 The right-hand columns of the house in sidenote 6. Identify customer wants. identify the rows of the house in sidenote 6. which can be an advantage.2 (Example: House of Quality) Present Heizer example 1 [1.” 6 For example.2. PRODUCT DEVELOPMENT 85 Side Note 6.3. create the columns of the house in sidenote 6. In other words... 7 In other words. as was the software described in section 4.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.10 Side Note for more information.2. Relate customer wants to product hows. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.7 4.S. 2.3. manufacturing engineering. • Fixed duties exist. p. 130]. 6.3. e. and production departments.6. design engineering.qfdcapture. Product development is done by teams. 8 These are given on the roof of the house in sidenote 6. 1.2.3. with product features. 2.9 6. a research & development.8 5. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.g.2. .3.3. 3. bureaucratic companies and organizations. Note that it is not free or open source.3. Building the house of quality involves six steps: 1. Identify how the good or service satisfies customer wants. See http://www. Develop importance ratings.3 Organizing for Product Development In the West.2. • More common in large. Identify relationships between the firm’s hows. there are three popular methods by which organizations undertake product development.3. Evaluate competing products. • Perhaps the most popular approach in the U.

.3.3. manufacturing. These teams often include representatives from marketing. engineering. but my personal impression is that formal QFD practices are not widespread in practice.S.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. and use. Definition 6. development. production. Side Note 6..86 CHAPTER 6. will often advocate for continuation of their project past the point that it is profitable for the company. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.3.3. and production stages of product development.4 (Concurrent Engineering) In project development. Side Note 6.1) was implicitly included in the product specification phase of operations management at the companies I have worked for.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.3. 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.3. use of participating teams in design and engineering activities.3. maintainability. However.4.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. design. Definition 6. Definition 6. engineering. Some teams even include representatives from vendors. 6. purchasing. quality assurance.S. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. organizations are less structured and typically not divided into research and development. etc.3.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. My experience may not be indicative of management practices in general in the U.. production. .11 In Japan. and field service personnel. because their fate is tied to a product. it can also be problematic because teams. The goals of manufacturability and value engineering are 11 See definition 6.

Reduced complexity of the product. Cost reduction. 4.3.6. 6. Improvement of functional aspects of the product. 5. Standardization of components. Improved job design and job safety. Robust design. and 7. 3. 87 . Improved maintainability (serviceability) of the product. 2. PRODUCT DEVELOPMENT 1.


Part II Entrepreneurship 89 .


Matt McAdams.7. people who can tolerate a high degree of risk. starting a business simply involves taking the first step.” He was joking. “Every journey . “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. . The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge. you will have to decide that you have done as much as you can do and simply take action. Side Note 7. Most businesses fail within the first 18 months. fear of failure and other insecurities dissuade most people from ever starting a business. doing it is simple. difficult undertaking.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. While it is important to be realistic about risks when starting a business.” At its core.” However. taking that first step can be extremely daunting. then another.6 (Business Failures) A friend and former colleague. then taking another step. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . However. but also realistic. ultimately. Side Note 7. you should be confident. . that is. Realism) Most people perceive those who start businesses as risk-takers. If you start a small business.7 (Confidence vs. but the humor in the statement lay in the fact that there is some truth to it.0. must begin with a single step. As a Chinese philosopher once said. See also sidenote 7.0. who has started two businesses and been CEO of three startups once told me.0. In fact.

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

we will discuss venture capital. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7. it may be difficult to keep the necessary focus on the business. at Active. 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. possibly even years at a time. friends and family are the most important concerns in their life. If after many long hours at work your family will be asking you. or angel investors.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. friends. Venture capital financing is common in the United States but is not yet a common means of financing in China. Putting in long hours is not something that is done once in a while. week after week. It may be useful later in your and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. Often. Discuss the impact of the demands of a startup on the marriages of Active. – However. month after month. – For now. 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. Side Note 7.1. for example. • Some of the information is intended for those who have an established career and real-world experience to draw upon. but something you may need to do day after day. • Among the means by which you can to raise money. If you are not prepared to redefine relationships relative to your business life. the use of venture capital will probably increase over time in management and Jerry’s difficulty balancing work and family life. you may not be prepared to start a company. You may lose friends because you do not have the time to maintain the friendship. take note of this information.1.1.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active. For many people.7. we suffered a database corruption that resulted in my practically living at work for three weeks . “When are you coming home for dinner?” or criticizing you for ignoring them. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. – Additionally.

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

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

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

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

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

you will be spending years of your life trying to make the idea work. Have students come up with examples of products that meet various criteria on the checklist. You should be realistic about risks.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.1. 2007.1.1 You’ve Got an Idea. However.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. home. His sales are now in the millions of dollars per year and the business is very profitable. that they will never make it. 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. in the wake of 9/11. 35]. making just enough to get by but not much more. it is too such as your family. Warnings about risk are perhaps the criticism you should consider most carefully.2 is. Now What? The number one trait needed by successful entrepreneurs is perseverance. February 17.1. 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. 33]. p.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. People thought he was going nowhere and generally dimissed his business. thinking that if he did not succeed after a couple of years. p. computer-controlled security cameras.1. Finally. you should not let it dissuade you.8. “Never say die.” Side Note he would never succeed. 8. used as the title of at least 12 movies and television shows. He ran the business as a one-man operation for years. Side Note 8.” That is. . you should have “thick skin. Entrepreneurs are often told their idea is flawed. 2 http://www. to be truly self-motivated and persistent in the way you need to succeed. A well-known phrase in English. After all. Side Note 8. Have students fill out the form on their own time. or health. the business took off. YOU’VE GOT AN IDEA. And you should not risk anything you can’t afford to lose. or are otherwise discouraged. while you should listen to criticism that others give.


Definition 9.0.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. 101 . Consumers and 2. go through the following 7 steps: 1.Chapter 9 Defining Your Market After coming up with your idea. There are two broad categories of markets: 1. Not only do you need to decide whether you are marketing to businesses or consumers. See also 9.” or business-to-business ventures.0. Definition 9.” or business-to-consumer ventures.1. See also 9. but you should try to target your market as specifically as possible.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. 9. Businesses. When trying to identify your niche market.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.2. your next step is to do some market research.0.

give a seminar. It should confirm to your long-term vision. • Don’t spend alot of money. Focus – Be specific. But do test your product before you go ahead full speed. (c) It’s carefully planned. discard the idea and move on to the next one.” [4. • If your initial test does not go well. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves. you need to stop and seriously reevaluate your plan. “Selling maternity clothes to executive women” is much better than “selling clothes. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. • 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. A good niche has five qualities (a) It takes you where you want to go. earnings.” To focus your search for a niche. p. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. Falkenstein. Donna. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. (e) It evolves. there is not already alot of competition.102 CHAPTER 9.” 2. the longer you wait to go into business in earnest. and other important demographics. Test – Offer samples. • A friend in Chicago. Synthesize – Coalesce your ideas. Lynda C. 6. 75] 4. If it does not sufficiently meet the criteria.000 per year. then asked them about customer reactions. Evaluation – Evaluate your niche against the criteria in step 4. I mean customers. That is. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50. . After all. decided to start a business selling unique winter clothes for dogs. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. it allows you to branch off into other niches as the business grows. the longer it will be until you make your first profit. 5. (b) Somebody else wants it.. That is. etc. (d) It’s one-of-a-kind. She started by making a few samples and giving them to friends with dogs. By someone else.

This marketing technique has been widely used since the early 1980s in the U.1 (Smaller is Bigger) When starting a business. many entrepreneurs make the mistake of being “all over the map. buying a home. Go for it! – Implement your idea.. 9. or retiring. . when many people were suffering from extreme poverty.1.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. and 9. It is better to do just one thing well than to do many things poorly. New marketing techniques include generational. and the narrower your focus on your target.1. the World War II cohort. Marketing to demographic groups has become much more refined in the last few decades. Definition 9. (See definitions 9.) Using these new marketing techniques can allow you to narrow your market. For example. when the country was immersed in a war effort. the Depression-era cohort.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. Definition 9. Many Western companies make the mistake of lumping together Japanese.. Korean. many are choosing to start families later in life or even have children ten years or more apart.. you should practice extra caution to avoid stereotypes or other insensitive approaches. for example.1. This can be offensive and serve to alienate rather than appeal to your customer. and psychological factors. many Eastern companies make the mistake of lumping together American and European customers. you should be able to enter your niche market with confidence. life stage. Side Note 9.1. the more likely you are to score a hit. FINDING YOUR NICHE 103 7. Side Note 9. they try to satisfy all possible customers and end up trying to do too many things well.2.1. and cohort marketing. etc.1. in the U. Likewise.1. such as having children.1 (Generational Marketing) Marketing to consumers based on age as well as social. are similar in age to those who came of age in World War II. Definition 9.1.3.S. As older people are more active than before. but their behavior differs significantly due to the different influences in their youth.” That is.1. Chinese.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. If you did your homework. and other Asian customers together.S. demographic. economic.9.1. 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. young adults in the Depression.

p. • 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. you should. Falkenstein1 advises that you regularly reevaluate your niche. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.2 Redefining and Expanding Your Niche Lynda C. p. DEFINING YOUR MARKET 9. .” [4. “Creating a niche is the difference between being in business and not being in business.3 The Mission Statement Once you have a niche. The mission statement should • Be succinct.1 (Mission Statements for Three Organizations) Review Heizer figure 2.1. Falkenstein states.2 [1.3. a few sentences at most. 28] which includes mission statements for three multinational companies: 1 See section 9. create a mission statement. • Convey the essence of your business’s goals and philosophies. Every six months or so. Side Note 9. 79] 9.104 CHAPTER 9.

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

so do your partners. company/our mission/index. nationally & internationally. capital. and recognizes outstanding employees. 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.1.106 CHAPTER 9. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. such as Whole Foods. See http://www. . challenges. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. a grocery chain..cfm for more detail. Answering the following questions can provide you with a clear picture of what your mission statement should include: • Who are your customers?2 • What image of your business do you want to convey? • What is the nature of your products and services? – What determines pricing and quantity? – What is your competitive edge? Price? Features? – Will this change over time? • What level of service do you provide? • What roles do you and your employees play? – You should develop a leadership that organizes.S. 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.benjerry. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. Other companies.

• Plan a date to meet with people. Other people can help you with creative ideas and identify weaknesses you might miss. • Brainstorm. Colorful. spicy language conveys your excitement and conviction in your idea. THE MISSION STATEMENT When crafting your mission statement. • Set aside a full day to work on your statement. no matter how silly. 107 • Involve others. Write down your thoughts so you can lead people logically through your ideas. Do not discard any ideas.3.9. Bring paper and pens and some refreshments for your guests. • Use “radiant” words. • Be prepared. .


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




What Am I Researching, Exactly?

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




Research Methods

Research can be either primary or secondary. Definition 10.2.1 (Primary Research) In market research, primary research is information that comes directly from the source; that is, customers. This can come from a variety of sources: 1. Surveys, 2. Focus groups, 3. Other sources. See also 10.2.3. Definition 10.2.2 (Focus Group) A type of primary market research1 where a group of potential customers (typically 5 to 12) come together in an informal environment, under the guidance of a moderator, to discuss a product or a service. Side Note 10.2.1 (Grease the Squeeky Wheel) When you conduct primary market research, the customers you should pay the most attention to are the ones who complain the most or give the most negative feedback. Definition 10.2.3 (Secondary Research) In market research, secondary research is information that comes from organizations, government agencies, trade associations, or other groups that gater statistics, reports, and studies. See also 10.2.1.


Sources of Secondary Research

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

definition 10.2.1.


CHAPTER 10. MARKET RESEARCH • Trade associations often compile information about the industry the association represents. – Most trade associations provide their information for free. • The government is a valuable source of information. – Most of the information is provided for free. – In the U.S., a census is conducted every ten years which provides information about income and demographics in specific areas. – In the U.S., most government information is now freely available over the internet. • Buy a map. – Highlight the geographic area where you think your customers will come from. – Walk around. What are your impressions of the area? • Local universities can often be a valuable source of information. – Business students who want to gain some “real world” experience can be an excellent and low-cost source of labor for research. – Business professors are often excellent sources of information.

Side Note 10.2.2 (Sample Market Research Competition Questionnaire) Pass out Lesonsky’s “Sample Market Research Competition Questionnaire.” [4, pp. 92– 93] The questionnaire supposes that someone is going to open a bar and wants to research other bars in the area. The class should put together a sample research questionnaire for a visit to a competitor’s location. Side Note 10.2.3 (Web Site Survey) The web site conducts market research for other e-commerce sites. Even if you do not want to spend money on such a service, you can get ideas about what kind of questions you need to ask if you are starting an online business. Side Note 10.2.4 (Export Oriented Businesses) If you are thinking of starting a business that would involve exporting to the United States, the U.S. Department of Commerce’s International Trade Administration (ITA) publishes a variety of reports, surveys, and books about imports and exports to the United States. You can find the U.S. ITA at Side Note 10.2.5 (Sample Focus Group Questionnaire) Pass out Lesonsky’s “Sample Focus Group Questionnaire.” [4, p. 101] The questionnaire supposes that someone is going to become a chocolatier.

2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.2.10. RESEARCH METHODS 113 Side Note 10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. .” [4. pp.


In terms of sanity checking.4 (Business Plan) A business plan is a written document that details a proposed venture. 4. Set up a timetable with specific steps to be accomplished in a specific period. expected needs. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. 1. 5.0. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. 2. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture.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. Every aspect of the venture should be covered. Definition 11. It must describe current status. Your business plan should list obstacles that may arise and what will be done to address them. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. including 115 . 3. Those who provide financing are aware of these pitfalls. and projected results of the new business. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. 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. and so should you be.

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

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.. 11. pretentious.1. 4. Kuratko suggests the following [3. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. 300]. Read the latest balance sheet. Establish the unique details of this venture. While the initial read-through might be only a five-minute perusal.2 5.11. not ostentatious. including debt or equity financing required. p.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. . They will want to see something that reflects that you are neat. – Binding and printing should not be sloppy. 1. the trash can. i. thorough and careful. Note that less than a minute on average is devoted to each step. you will not even get your foot in the door and be invited to present your plan to investors. 301]: • Appearance – It should look good. Read the plan over casually. 2 Do not underestimate the importance of this step. Determine the characteristics of the venture and its industry. p. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. 6. or spendthrift.e. If you cannot impress the financier with these three steps. 2. Determine the financial structure of the plan. but should not be too lavish. Determine the quality of the entrepreneurs. 3. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. but not too good.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. other financing professionals may spend more time analyzing the details of the plan. bear in mind that once the plan is advanced to the next stage of financing.1.

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

• Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. Your credibility is established in part by the credibility of your plan. so be sure the writing is finely crafted. • Identify the Target Market – Market research should support a focused customer niche.” or “them. Use the spell checker on your word processor to check for spelling mistakes. • If there are patents.2. p. copyrights.2 The Plan Contents Side Note 11.g. • Keep the Plan Written in the Third Person – Do not use “I. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. • Do Not Overdiversify – Don’t try to be all things to all people. but it is the first thing that your audience will read.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly.6 Note any industry developments and describe the business thoroughly.” or “us.. Some details on each section of the business plan: 1. 6 E. which describes the 10 sections of a typical business plan. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. 305]. and tell why it is named what it is. be sure to include them in the business description. Business Description – Name the business.2.1 (10 Sections of a Business Plan) Present Kuratko Table 10.” “we.” Instead. 11. The executive summary gives readers their first impression. trademarks. is it based on a family name? Does it include technical terms you need to identify? . 2. • Orient the Plant Toward the Future – Create an air of excitement. Include any pictures or designs that would be helpful. Executive Summary – This should be the last thing you write. use “he. or other special market advantages you have. Present a focused plan. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar.2 [3.” “they.11.

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

THE PLAN CONTENTS 121 (a) A pro forma balance sheet. Signing up distributors and dealers. 9. First sales and first deliveries. Completion of prototypes.2 (The Growth of Active. detailing projected inflows and outflows. (c) A cash-flow statement. Appendix – If there are documents. (b) An income statement. as opposed to actual. . a balance sheet containing projected balances is called a pro forma balance sheet. 8. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Difficulty purchasing parts or materials.2.2. Costs exceeding estimates. Critical-Risks Segment – Discuss business risks and the ways you might address them. Design or research difficulties. and Payment of first accounts receivable. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. etc. Side Note 11. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. These might include • • • • • • • • • • Incorporation of the new venture.1 (Pro Forma) A latin term that means projected. or more aware.11.. Try to be honest and realistic. Ordering production quantities of materials. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Unexpected competitions. Product display at trade shows. Risks might include • • • • • Negative industry trends. Your investors are probably as aware. detailing projected profits and losses. of the risks than you Discuss the growth of Active. Definition 11. 11. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. For example. Hiring of sales representatives. Receipt of first orders. which investors will use to estimate debt/equity ratios.2. include an appendix. working capital. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. inventory turnover. current ratios. Completion of design and development.


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

of course. p. You don’t want to try to figure out other people’s equipment.D. • Bring your own laptop. they may have another version of PowerPoint.D. • Bring a backup thumb drive with your presentation on it. By the time I gave my job talk to my eventual employer. is. PRESENTING THE PLAN times. and even if you can figure it out. Bring at least twice as many as you expect there to be people in the room. Guy Kawasaki likes to tell a different version of an old joke. the lawyer joke. “How can you tell when a lawyer is lying?” The answer. and you don’t want something as silly as a burned-out light bulb to cost you an investor. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. Adobe Reader.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. “His lips are moving.” 3 Color copies! . or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents.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.”2 [2. • Test the equipment the day before. Most Ph. Lexecon. • Bring paper copies3 of your presentation in case all else fails. 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. Post a copy of your presentation in a secure location on your homepage just in case.2.2. I don’t think it was quite right until somewhere between the 8th and 10th time. I had given it over a dozen times. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. The original joke goes. 12.1 (The Job Talk) Every Ph. In retrospect. There will always be glitches. Most graduates get between 5 and 15 interviews when they graduate. 2 This originally comes from an American classic. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation.124 CHAPTER 12.2. 12. 44] Side Note 12. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.

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. “So what?” If you cannot answer this question simply and easily. • Taking notes also makes you look conscientious. If they cannot explain it clearly. everyone brought a pen and paper.6 So What? When you are planning your presentation. They may ask you something that makes you want to change your presentation.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. it is quite the opposite.2.2. It is easy for things to get lost in the heat of the moment. 12. 12. and although you go into each presentation .5 Take Notes Have a pen and paper ready and take notes during the pitch. 12.2. and each investor will respond differently. 45]. Give your presentation to friends or family. At my company in Chicago. you need to change or eliminate the statement.3. Ask them what your company will do.12. Everyone. so write things down to make sure you don’t forget. In general. p. You should be prepared for the unexpected. you are not presenting it well. but in reality.2.3 After the Presentation Each presentation will be different. I always bring a pen and paper to meetings. Many people feel as if taking notes makes them look stupid. ask yourself after every statement you make. where some of the smartest people in the world worked.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 12. • Your audience may ask you several questions at once. AFTER THE PRESENTATION 125 Side Note 12. Much of the material required use of the internet. They may ask you something you want to respond to in an e-mail later. Guy Kawasaki recommends you set a timer [2. Stop when it goes off.

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




Inventory and Cash Flow

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


Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems


– “Dollar control systems” show the cost and gross profit margin on individual inventory items. Most computerized inventory tracking systems1 provide this type of information. • Unit-control Systems – “Unit-control systems” use methods ranging from “eyeballing” shelves to bin tickets. Definition 13.2.1 (Bin Tickets) In unit-control inventory systems, bin tickets are tiny cards kept with each type of product that list a stock number, a description, maximum and minimum quantities stocked, cost (in code), selling price and any other information you want to include. [4, p. 291] Bin tickets will have corresponding office file cards that list a stock number, selling price, cost, number of items to a case, supply source and alternative source, order dates, quantities, and delivery time. Whatever inventory control system is used, retailers should make inventory checks as often as is practical: Daily, weekly, or at a minimum, yearly.


Computerized Inventory Control

Most businesses in the U.S. use some sort of computerized inventory control these days. They provide more information with much less effort than manual systems and should let you • Track usage, • Monitor changes in unit costs, • Calculate when you need to reorder, and • Analyze inventory levels on an item-by-item basis. Side Note 13.3.1 (POS (Point-of-Sale) Systems) Computerized inventory control systems called “POS,” or point-of-sale, systems, involves the exchange of information collected at the cash register with the business’ computerized inventory control system to help you • Analyze sales data in great detail,
1 See

section 13.3 below.

2 (Order Cycle) In inventory management. a high inventory turnover is a mark of a well-managed inventory system.3.1 (Turnover) When you have replaced 100% of your original inventory. the count cycle is the amount of time between counting inventory.3. if you perform an inventory count four times a year. • 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. 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. your count cycle is 12 weeks. the delivery cycle is the amount of time between placing an order and receiving it. INVENTORY CONTROL When considering the purchase of a POS. and • Improve pricing accuracy.130 • Maintain a sales history. such as for volume discounts for preferred customers.1 Inventory Turnover Typically. Definition 13.4 (Delivery Cycle) In inventory management. 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. you have “turned over” your inventory. • Security – To prevent theft. CHAPTER 13.3. work with suppliers to improve delivery times and count inventory more often. • Updating product information – At the time a sale is entered. For example. the order cycle is the amount of time it takes to process paperwork and place orders. 13. Definition 13.3.3. Definition 13. To improve efficiency of inventory control. . Definition 13. be sure it’s not easy to “hack” the system. these systems should automatically update inventory and accounting records.3 (Count Cycle) In inventory management.

3. but you should at least know about LIFO and FIFO.4. If there is inflation.4. First Out)) LIFO (last in. First Out)) FIFO (first in. 13.3. order cycle.1 Buying Inventory In the process of putting together your business plan.4. INVENTORY ACCOUNTING 131 Definition 13.3. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.4 Inventory Accounting Your accountant will typically handle inventory accounting. which allows you to pay less taxes on your inventory.. 2 At 3 At least this is true in the U. .2.2 See also 13.4. The author is unfamiliar with Chinese tax codes. After you have been in business your inventory control system should give you a better idea of stocking levels. LIFO and FIFO are two accounting methods used to do this. the needs period is the sum of the count cycle. Many businesses also measure turnover by measuring sales per square foot (or square meter). and delivery cycle.S.S.2 (FIFO (First In.4. In the U.S. which may result in higher taxes. In other words. and 13.3 See also 13. If there is inflation.2. See definitions 13.1 (LIFO (Last In.13. it values your remaining inventory based on the prices of the most recently purchased items. first out) assumes that you sell the least recently purchased inventory first. You should know how many sales per square meter per year you need to survive. you must estimate your inventory value when you file your taxes. 13. Definition 13. Calculate your sales per square meter once per month. 13. Definition 13.1. least this is true in the U.3. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. first out) assumes that you sell the most recently purchased inventory first.4. In deciding which to use.4.3. The author is unfamiliar with Chinese tax codes. follow the recommendation of your accountant.5 (Needs Period) In inventory management. it values your remaining inventory based on the prices of the least recently purchased items.

13.5 Suppliers Suppliers can be divided into four categories: 1.” . courteous and firm with your suppliers. author of Start Your Own Business. Independent craftspeople 4. Import sources – They operate like domestic wholesalers.5. Manufacturers – Note that some manufacturers refuse to fill small orders. Their prices are higher than a manufacturers. Rieva Lesonsky. 2.4. Distributors – Also known as wholesalers.actual inventory . says. three or four months. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . • Some suppliers demand a minimum number of items per order. “Be open.1 Dealing with Suppliers The most important thing about a supplier is reliability. usually one. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. brokers or jobbers. INVENTORY CONTROL Definition 13. – The minimum may be higher for first orders to cover the cost of setting up a new account. 3.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. and they will respond in kind. 13.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.132 CHAPTER 13.

S. I regularly had to deal with food vendors.5. and • Allowances before you make a decision. do not falsify or misrepresent your financial statements. Ask about the freight policy before ordering. If a supplier does not extend credit. 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. Tips for dealing with suppliers: 1.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. you should know who is liable for damage to goods in transit. Suppliers sometimes try to complicate pricing to their advantage. it is considered a felony.13. • Discounts. Whatever you do.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. they will put you on a c. basis until you have proven yourself reliable.d.. . 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. Definition 13. the supplier will pay for freight. personal interaction can work wonders.d.1 (COD (or c. Discuss • Their negotiating technique when discussing pricing. 2.o. • For items being shipped. Side Note 13. and • The need to be firm but fair.5.)) Cash on delivery.5. Be sure to add up • Costs. At least in the U. SUPPLIERS 133 13. You can also present your financial statements and prospects for success. customers may be required to pay upon receipt of goods.5. If you are dealing with a reticent large supplier. If a supplier is uncertain about you. • Sometimes if an order is large enough.o.

2007.b. .abcsmallbiz. Be aware of your supplier’s priorities.3. http://www. May 19. 2007. 5 FOB Destination changes the location where title and risk pass. The FOB term requires the seller to clear the goods for export. Under this arrangement. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. As opposed to FOB.o.3 (FOB Destination (or f.5. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.o.134 CHAPTER 13. 2007.4 (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.6 See also definition May 19. Definition 13. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.epoi.html.5. 2007. 3.7 4 Source: 5 Source: http://www. Specify a cancellation date on your order forms.)) Free on board.wikipedia. This differs from a forward order where stock is available but delivery is postponed for other reasons. 5. Seattle” to indicate that an item being shipped from Seattle is free on board.2. 7 Source: http://en.5.html. See also definition title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.o. people often say something like “f.roadway. Destination)) Free on board destination. 6 Source: http://www. INVENTORY CONTROL • Depending on whether the supplier pays frieght. May 19.5.b.4 Colloquially.5. May 19.html. 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. Definition 13.2 (FOB (or f. Definition

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

. an employee with an inflated job title may expect an inflated severance package.1 Job Analysis Before creating a job description. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. 14. but personality traits.1. 14. then want to hire someone else later at a position above them in the company. Cleaning. they will soon expect compensation commensurate with their job title. If you call someone a Vice President but don’t compensate them as such. writing reports. Side Note 14. Not only education and skills.1.2 (Tip: Job Title Inflation) Inexperienced employers are often tempted to inflate the job title of the position they are trying to hire in an attempt to lure candidates.1 How to Hire Hiring involves analyzing the job requirements. • You may not leave enough buffer above the employee. creating a job description. you will likely find that they will come to you at some point to demand a vice president’s salary. • How the job will be done.1.1 (Formalities) While it may seem when you hire your first employee an unnecessary burden to write a job description and create all the other formalities. you need to consider • The physical or mental tasks involved. • If you have do terminate the employee.136 CHAPTER 14. However.1.2 Job Description Side Note 14. by the time you hire your 40th employee. you’ll be grateful to have spent the time to go through a more formal process. selling. lifting. 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. HIRING EMPLOYEES 14. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. and recruiting. etc. If you give someone a job as Vice President.. programming. you have nothing to offer.

1. • Physical or other special requirements associated with the job.1) and should include the personal requirements expected of an employee [4.1. for example.14. If you hire someone at the highest level of their competency. You may actually be doing your employee a disservice by inflating their job title. Side Note 14. p.1 (Job Description) Job descriptions should include • A job title. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. Like a job description. HOW TO HIRE 137 • There is little room for advancement.1.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. • Benefits.1. It also includes • Any educational requirements. and • A summary description of the position. • Specialized skills or knowledge. . and • Job summary with major and minor duties. If. Part of retaining quality employees is the prospect of advancement. you hire someone as Director who is not qualified to be a director. p. 338]. 339]. • A salary range. Definition 14. then they go on to a Director position at another company. Definition 14. • If you give someone an inflated job title but do not offer a salary commensurate with the title. and • Any occupational hazards. • The position of that employee in the corporate heirarchy. • Who the person reports to. you may find it difficult to give them a promotion later.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. • Desired experience. you may find they are tempted to leverage that job title to seek employment elsewhere.1. it includes • The job title.

1.. • List the top 4 or 5 skills that are most essential to the job.1. companies. due to the number of applicants for competitive positions. 14. • Be sure to list appropriate contact information.” or people who may not have them will just try to fake those personality traits in the interview.S. It also makes it easy to receive and process a large number of applications with a minimum of effort. 2 See sidenote 14. • Do not ask for specific personality traits. e-mail addresses have become perhaps the most popular way to get applicant information at U. • 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. – For professional positions. For example.3 Advertising the Job When you write an advertisement.4 (Using an E-mail Address) For professional positions.2 Side Note 14.S.5. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. HIRING EMPLOYEES 14.4 Finding People There are many possible sources of applicants. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.138 CHAPTER 14. • Do not list requirements other than educational or experience-related ones. if you are looking for an accountant. With e-mail.1. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. particularly those that advertise on web sites. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. such as “outgoing” or “detailoriented. Many American companies are no longer providing phone numbers.1. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. – For other positions. .

S. You conduct a second round of interviews with the remaining 3 candidates. You can evaluate their personality during the interview. about 10 or so. you need to narrow down the number of applicants to those you can interview in a reasonable time with the keyword “java” will demonstrate just how widely used online tools are. You check references. Software” category.dice.314 listings in the “Computers. Searching on Monster. There were 4. 5. not a science.000 hits searching just the “Information Technology” search category.” 665 in “Internet/E-Commerce. You hire the preferred candidate.” And 921 in “Engineering. you will get several candidates for any job you are offering. Screening People Reviewing resumes and applications is an art. • Focus on the skills that a person can bring to your company. In the U. but when looking at a resume.14. the hiring process proceeds as follows: or http://www. To “weed out” candidates. For any job. 2. 3 Java is a programming language. If you are lucky. most professional associations’ job banks are now online. You narrow down the 10 candidates to 3.3 Generally. 6.” . Try to perform a search on a job sites such as http://www. • Industry Publications – Most trade publications take ads for job openings.S. 2007 turned up more than 5.. You narrow the number of resumes down to about 10. be sure that a candidate can provide what you are looking for. for professional positions. • Online – In the U. 159 in “Financial Services. You interview the candidates. 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. many positions are being filled with the keyword Java on May 19. particularly in the high-tech industry.. 4.

1. • Special skills. address. listed expertise in too many subject areas. phone number. did not match our requirements closely enough. this indicated to us that the applicant was not being She simply passed along resumes that contained certain keywords that we were looking for. • Educational background. • On the other hand. Due to In the hiring process at Active. • Don’t necessarily discard resumes with some gaps. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. Of those we looked at. and e-mail address.4 were not experienced enough. • Rely on your intuition. • Work experience – As for salary information when asking about work experience • Availability. I have some personal recommendations: • Always check references.140 • Look for patterns in their career.1. . so many resumes came in that an administrative assistant was asked to perform the first screening. CHAPTER if a person survives downsizing or other major changes at their former employers.5 (Job Application) Present Lesonsky’s sample job application [4. Applications should ask for things such as • Name.6 (Hiring at Active. 344–345]. I learned that people lie on their resumes all the time. Side Note 14. If an applicant indicated they were an expert with too many technologies. including when an applicant can work and the hours they can work. Side Note 14. that is a very good sign that they are a survivor. or were too experienced. and • References. From the hiring process at Active. pp. That typically indicates that someone cannot supply enough positive references. 4 It takes time to become an expert with any sufficiently compex technology. we tossed those that had spelling or grammatical mistakes.

14. • Sex. include • Whether the applicant has children.. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. in the U. then go home and play on computers in their spare time. employers may not ask about anything not related to the job. such as through a “Green Card. • Whether the applicant has every been treated by a psychologist or psychiatrist. including [4. • Ask people questions about their resume during the interview. Not also that many of the best people we hired were not the best on paper. Get clarification on anything that you think may be suspect. creed. or national origin. • Maiden name (for female applicants). 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.1.” . • Whether the applicant has every been treated for drug or alcohol addiction.1.. They were the type of people who would write software all day. but which can get employers in legal trouble. 6 Employers can. Though laws undoubtedly differ in China.6 Questions that are not explicitly prohibited.7 (No-nos) In the U. However. • How many days the applicant was sick in the previous year. 347] • Age or date of birth. however. or • If a person is a citizen. • Marital status. 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.S. Several of the engineers I hired did not finish their undergraduate degree. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. • Disabilities of any kind. color. • Do not hire people who are discovered to be lying on their resume. religion.5 Side Note 14. p. Ever. race. • Whether the applicant has every been arrested.S.

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

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

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

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

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