International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . .3. . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . .1 Goods and Services Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . .4 Adjusting for Trend . . . . . . . . . . .3. . . . . . . . . . . . .4 Determining the Project Schedule . . . . 4. . . . . . . . . . . . . . . .1 The Project Manager . . . . . . . . . . . . . . . . . . . . .3. . . . . .4 4 Project Management 4. .6 Variability in Activity Times . . . . . . . . . . . . . . .1 Types of Forecasts . . .3. . . . . . . . . . . . . .3. 4. . . . . 5. . . . . . .3 Dynamics . . . . . . . . . . . . . . 4.5 Seasonal Variations in Data .1 Adaptive Smooting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . .1. . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . 5. .3 3. . .1. . . . . . . . . . . 4. . . . . . . . . . . . . 4. . .2 Network Diagrams . 6. . . . . . . . . .1 Identify Critical Success Factors . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . 5. . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . 4. . .4. . . . . . 5. . .4. . . . . . . . . . . . . . 3. .2. .1 Product Life Cycles . . . . . . . . . 6. . . . . .2 Preconditions . . . . . . . . . . . . . . . . . . . . .1 Project Planning . . . . . . . 3. . . .8 A Critique of PERT and CPM . . . . . . 6 Design of Goods and Services 6. . . .3 Forecasting Approaches . .2 Focus Forecasting . Strategy Development and Implementation . . . . . . . . . . . . . . . .1 Qualitative Forecasting Methods .3. . . . . . . . . . . .1 What is Forecasting? . . . . . . . 5. . . . . . 4. . . . . . . . . . 5. . . 5. .1. . .3 Measuring Forecast Error . .2 Life Cycle and Strategy . . . . . . . .3 Product-by-Value Analysis . . . . 5. 4. . . . . . . . 5. . . . .1. . . . . . . . . . . . 4. . . . . . . . . .3. . . . .1 Probability of Project Completion . . . . . . . . . .2 A Seven Step Forecasting System . . . . . . . . .6. . . . .1 Research . . . . . . .3. . . . . . . . . .2 The Work Breakdown Structure . . .3. . 3. . . CONTENTS . 5. . . . . . . 6. .5 Slack Time and Identifying the Critical Path . . 4. 3. . . . . .1. . . 3. . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . .1 PERT and CPM . . . . . . . . . .1. . . .3. . . . . . . .2 Project Scheduling . . .4 3. . . . . . . . . . . . . . .2 Quantitative Forecasting Methods .2 Build and Staff the Organization . . . . .1. . . . . . . . . . . . . . .2. . . . . 5. . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . . . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . 4. . . . . .

. . . . . . . . . . . . . . . . .2. . . 99 9 Defining Your Market 101 9. . . . . . . . . . . . . 111 10.2 Are You Ready? . . . . .2 Quality Function Deployment (QFD) . . .1 Characteristics of the Successful Entrepreneur . . . .1. . . . . . . . . . . 12. . . . . . . . . . . 6. . . .1 Product Development System . . .2. . . . . . . . . . . . . . . 12. . . . . . . .3 Generating New Products . . . . . . . .2 Look and Feel .1 Importance of New Products . . . . . . . . . . . . . .2 Know Your Outline Thoroughly .3 Be Familiar With All Equipment to be Used 12. . .2. . . . . . . .3 Organizing for Product Development . . . .2. . . . . . . . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche . . . . . . . . . . . .4 The First Minute is the Most Important .3 The Mission Statement . . 92 7. . . . . . . . 11. . . . . . . . . 94 7. . . . . . . . Exactly? . .5 Take Notes . . . . . . . . . . .3 After the Presentation . . 12. . . . . . . .2. . .1 What Am I Researching. . . . . .CONTENTS 6. . . . 110 10. .2. . Now What? . . . . . . . . .1. . . . . . . . . .2 The Plan Contents . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . .1 Your Audience . . . . . 12. . . . . . . . . . . . .3. . . . . . 12. . . . . . . . . . . . 12 Presenting the Plan 12. . . . . . . . . . . . . . . . .2 Some Suggestions . . . Product Development . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 111 11 The Business Plan 11. . . .1 Sources of Secondary Research .2. . . . . . . . . . . 6. . . . . 6. . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . . . . . . . .1 You’ve Got an Idea. . . . . . . .1. 104 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . 6. . . .2 Research Methods . . . . .1 The Presentation . . . .3. . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Setting Goals . . .3. . . . . .1 Finding Your Niche . . . . . . . . .3 Some Style Points 11. . . . . . 12. . . 101 9. . . . . . . . . . .1 Do It Until You Get It Right . . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . . . .6 So What? . . . . . . . . . .2 6. . . .1 Preparing to Put the Plan 11. . . . . . . . .

. . . . . . . . . . . . . . . . . . .1 Dealing with Suppliers . . . . . . . . 14. . . . . . . 13. . . . 14 Hiring Employees 14. . . . . . . .5 Suppliers . . . . . . . . . .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Inventory Turnover . . . . . . 14. . . .1. . . . . . . . .2 Payment Plans . . . . . . .5.1 Buying Inventory . . . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . .1. . . . . 13. . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 How to Hire . . . . . . . . . . . . . 13. . 13. . . . . . . . . . . . .3 Advertising the Job 14.4. . . . . . . . . . .1 Job Analysis . .4 Finding People . . . . . . . . . . .5. . . . . .4 Inventory Accounting . . . . 13. . . . . . . . . . . . .1. . . . . . . . . . 13. . . . . . 13. . . 14. . . . . . . .3 Computerized Inventory Control 13. . . . . . . . . . . .1 Inventory and Cash Flow . . . . .2 Tracking Inventory . . . .2 Job Description . . . . .

Part I International Business Management 7 .

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

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. For example.2. Note that during the industrialization of the U.S. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways.A. Which brings us to the subject of this lecture: Ethics. 1. • Because guanxi is less important in the West.2 Corporate Corruption Side Note 1. This is something Chinese business people should be aware of. Why is corruption an important business issue? • See sidenote 1. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi.A. 3. . Easterners tend to trust people after observing a pattern of consistent behavior. and Europe but a commonly accepted practice throughout the developing world.. Prison labor is also considered improper in the U. • Because of this.2. 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.A. 2. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.S.S. Westerners rely more on contracts.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. Western business people may not initially trust their Chinese counterparts. 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. Definition 1.1. which are more strictly enforced in the West. • In general. child labor was widely used.2.1 (Ethics) The study of morality and standards of conduct. • However. there is a perception in the West that Chinese are hard-working and smart.10 CHAPTER 1.

CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different.2 (Corruption) Corruption is of concern for business people because • It increases risk. gift. these are all generalizations and individuals may differ significantly from their cultural affiliations. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. WorldCom. witness.”[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.2. reward.2 Though things are improving. Side Note 1.1 (Bribe) A price. Source: texttthttp://www. and Tyco. 2 Source: http://www. . 2006. Scandinavians are typically highly trustworthy1 but Italians are less so. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. In the words of a Beijing correspondent for “The Economist” magazine. which requires strict monitoring and verification of financial information. – 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). or other person in a position of trust. September 20. . 2006.org/policy research/surveys indices/cpi.dict. • It increases the cost of doing business. investors in the United States had to reevaluate the risk associated with owning stock.2. – A bribe is a business expense that goes to no productive purpose and decreases profits. . Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.transparency.2. there are few if any issues which affect and infuriate so many in China as corruption. • On a macroeconomic level. China continues a battle against corruption. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way.1. it is simply inefficient. – In the wake of Enron. voter. Definition 1.org. For example. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. they must factor additional uncertainty into their calculations. • Of course. “. September 20.

the SarbanesOxley Act (SOX) was passed in the U..3 The United States The United States has recently been rocked by a number of scandals in the business community.htm.1.12 CHAPTER 1.4 – Bernard Ebbers. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. Dennis Kozlowski. and Tyco make it clear that even western developed economies have significant ethical shortcomings. • WorldCom – Following the Enron scandal.S. March 17.S. 2007. In Scandinavia. Side Note 1. • Tyco – The CEO of Tyco. March 17.S.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Parmalat.2.htm. the former CEO of WorldCom. • Enron – In December 2001. succeeding Enron as the largest bankruptcy in U. See sidebar 1. Side Note 1.com/Research/15 Largest. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. Qwest. 3 Source: 4 Source: http://www.bankruptcydata.3. scandals such as Enron. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.3. history. was convicted of fraud and conspiracy and sentenced to 25 years in jail.bankruptcydata. There is currently debate as to the effectiveness of the regulations relative to the costs. including a $2 million birthday party for his wife.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. http://www.com/Research/15 Largest. 2007. WorldCom declared bankruptcy in July 2002.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. . a high value is placed on honesty and personal integrity. Worldcom. was accused of looting the company to fund a lavish lifestyle.2 (Cultural Heritage in the U. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.S. While western developed economies often cite a high ethical standard. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.

This resulted in several banks being technically bankrupt [5.4. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.2 Women in the Workplace Sexual harassment has also become an issue in Japan. and as a result made high risk investments in the late 1980s and early 1990s. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Savings and loan institutions. 5 1.S.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.S.fdic.1 (The U. . Side Note 1. • Many men do not understand why sexual harassment constitutes a problem. women have a difficult time being taken seriously.4 1.4. the political scandals do not appear to have been fully acknowledged and addressed. Moreover. 58].1.4.pdf. with many men of the opinion that women were just biding their time until they marry and have children.4. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. also known as thrifts and which function like banks. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Side Note 1. p.gov/bank/analytical/banking/2000dec/brv13n2 2.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. Hodgetts et al..4. 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. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. Better known is the case of Japanese banks. The government was compelled to provide public money to bail out the institutions. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. JAPAN 13 1. with many women finding their employment opportunities constrained. were not as highly regulated as banks. Likewise.

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

.5. men are disproportionately represented in management positions. at 40. than any other. Hodgetts et al.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. there seems to be a glass ceiling due to social factors. EUROPE 15 1. particularly in upper management.4.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. 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. to try to influence decision-makers in any circumstance.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.4.org. politicians.S. Side Note 1.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.7 Note that lobbyists do not have any formal power. with the purpose to influence their votes.5. is the notable exception).dict. with most in the top 20 among over 150 countries included in the survey.5 1. Side Note 1. 7 Source: http://www. 1.S. Although women have entered the workforce in large numbers in recent decades.4. their attitudes towards bribery when working in foreign markets differs from that of the U. Definition 1.1. They only have the power of persuasion. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. in an extended sense.. yes or no.S.5.3 Lobbying by Japan Japan spends more money lobbying in the U.5.

For those students who think so..6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. 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 (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.5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 1. Side Note 1.htm.about.5. . Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.com/library/glossary/bldef-glassceiling.5.16 CHAPTER 1. though compensation is limited relative to lawsuits filed in the U. • Discrimination lawsuits are more commonplace in Great Britian.S. 8 Side Note 1. • More British companies have actively sought to recruit and promote women into management. 8 Source: http://careerplanning. yes or no.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. but there is a perception that there are risks and ethical considerations.

Often. 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. International corporate spying problems. ETHICAL CONCERNS IN CHINA 17 Side Note 1.6. p. and • A recent history of rapid economic development. • Note that for every corporate spy that is caught. • Yet another case in which software from a U.S. 4. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Side Note 1. Bribery and other forms of corruption. 64]. company in Boulder was stolen and sold to a Chinese company.5 billion in sales annually. • A relatively stable government. executives. 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. Side Note 1. 3.S. [5.2 (Piracy and Counterfeiting) Present sidenote at [5. Ethical considerations include 1. pp.1. Child labor. there are undoubtedly many others that get away with it. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 6. An opaque legal system.3 (Corporate Spying) Hodgetts et al.6. 5. Piracy and counterfeiting (see sidenote below). Prison labor. 2. 7. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. An increase in crime and illegal business activities.6.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets.6. .

7 Corporate Social Responsibility Definition 1. Definition 1. such as education and health care. social justice. . • Oxfam (a confederation of charitable organizations that support the alleviation of poverty.7. In the words of a Beijing correspondent for “The Economist” magazine. education.18 CHAPTER 1. social justice. and the environment. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. and the environment. China continues a battle against corruption. education. • CARE (promotes community development. . health. provide relief in the event of humanitarian disasters. political..7.6.com/our company/our mission/index.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.2 (Nongovernmental Organizations (NGOs)) Private. political. and economic issues such as poverty.S. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. Other companies. and promotion of social equity). not-for-profit organizations that seek to serve society’s interest by focusing on social. Side Note 1.”[6] See also sidenote 1. See http://www. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. such as Whole Foods.7.3 (Nongovernmental Organizations (NGOs)) Private.7. and emergency relief in the event of humanitarian disasters).benjerry. health. and economic issues such as poverty. not-for-profit organizations that seek to serve society’s interest by focusing on social. there are few if any issues which affect and infuriate so many in China as corruption. 1. . “.2.2. a grocery chain.4 (Corruption) Though things are improving.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. Definition 1.cfm for more detail. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers.

• Conservation International (promotes environmental conservation).7. Side Note 1.S. • To prevent a boycott or other consumer defections.000 and $125.S. In 2005. as executives of publicly traded companies are ultimately responsible to their shareholders. .1 Corruption and the FCPA Revisited Hodgetts et al. note that while U.2.7. Both political groups and businesses are influenced by NGOs. 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. MNCs do not appear to have been significantly impacted.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. firms a reason to refuse to pay bribes. many feel that it has had a net benefit.S. as it gives the U.9 U. In fact.7. China ranked 78 out of 158.7. firms are constrained by the FCPA with regards to bribery and other corrupt practices. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. – Even socially responsible executives would consider the “bottom line” when making decisions. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. For example. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. and • Rainforest Action Network (RAN). but does not outlaw payments to political party leaders. too.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). with a score of 3. Side Note 1. 1. last but note least.1. executives may actually feel that it is the right thing to do. • And. Executives are people.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.

3. I think corruption will diminish as China economically develops for several reasons: 1. WorldCom. but most important first step is to recognize that there is a problem.7. Support and respect the protection of international human rights.3. . and Parmalat resulting in investors losing billions of dollars. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.4 (Some Opinions) Personally. Scandinavian countries are at the top of the list. July 1.S. Side Note 1. Global Compact specifies 10 principles which MNCs should abide by: 1. With more disciplined corporate governance.infoplease. With greater financial transparency. 2006.0 is considered to be the borderline at which countries are considered to have a problem. Moreover. the United States and Europe have recently been rocked by corporate corruption. more Chinese will own stock in companies. 5.N. 2. societies. such as the U.4.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. 1. 4. It is a difficult problem to solve. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. It cannot be considered to be based on a scientific survey. Side Note 1. The government is actively addressing the issue of corruption.5 (Table 3-1: Principles of the Global Compact) The U. better than the U. Hong Kong is number 15.N. Important: Although it is widely cited.2 respectively. The government recognizes that it is an issue and is taking action.10 Corruption is certainly not endemic to Asia.com/ipa/A0781359.6 and 8. malfeasance and diversion of corporate funds becomes increasingly difficult. and the environment.20 CHAPTER 1. Tyco. slightly better than Sweden. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.7. and not based on hard data. Singapore is number 5 with a score of 9.7. and Germany at 7. specify standards and codes of conduct in domestic and global operations. with a score of 8. As more state-owned businesses become privatized and the size of the middle class increases. Global Compact. 10 http://www.html. with scandals such as Enron. Commitments that many MNCs have signed on to.

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

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

scheduling. and 4. pp. and maintenance. process design. layout design.S. 2. Side Note 2. 1. operations managers make decisions. 7]. Planning. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. Definition 2. inventory. p. business community as “org charts.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. human resources and job design.2. WHAT OPERATIONS MANAGERS DO 25 4.2. • They are often sources of conflict among management. known commonly in the U. 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. OM is one of the most costly aspects of an organization.2. Organizing. 6–7].1. p. Controlling. Staffing.2. . 2. quality.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. supply-chain management. particularly when job titles are not clear. 3.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. as the org chart determines executives’ authority and.” • Every organization with more than a few employees has an organization chart. Side Note 2. place in the heirarchy. location selection. more generally. OM decisions have been divided into ten categories by Heizer [1. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. To accomplish these functions. 5].

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

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

Side Note 2. and other essentials for its citizens.2. such as the legal profession or computer services in the financial industry. Bureau of Labor Statistics defines services to include [1. services become increasingly important. Definition 2.28 CHAPTER 2. for others professional occupations. The U. Manufacturing was dominant until about 1950 or so. In the U. the wages are considerably above average.S. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.3. • In most western economies. Definition 2. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. services account for over 70% of U.S.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. • Transportation. 9] • Repair and maintenance.5 [1.1 (Services) Those economic activities that typically produce an intangible product. Today. • Insurance.. shelter. . • Recently. the services sector is by far the largest employer.S. 2 The average national private industry wage. • Government. such as retail. p.1 (Development of the Service Economy) Present Heizer figure 1. • In some service industries. major contributions have come from the field of information sciences. 11].. • Food and lodging.3. • Trade. economic output. p. 2. average wages are below average2 in the U.3 (Information Sciences) The systematic processing of data to yield information. the economy transitioned from agriculture to manufacturing around 1900.S. However.

Legal advice is rarely identical for two clients. • Medical. used in your treatment. • Services are often produced and consumed simultaneously. • Services are more often unique.2. such as pharmaceuticals or medical supplies. Customers seek services through local intermediaries.3. a support contract in case you have problems or training to familiarize you with the features of the computer. Hospital care includes both health services and goods. when going to a restaurant. • Entertainment. • Legal. • Education. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you.3.2.2 (Pure Service) A service that does not include a tangible product. • Services are often dispersed.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. • Real estate.3 That is.3. Definition 2. the purchase price may include installation services. • Services are often knowledge-based. Therefore it is difficult to automate. When buying a computer. . • Services are typically intangible. • Services have a high consumer interaction. Consumers interact with those providing the service. See definition 2. • Services have inconsistent product definition. 3 Services that do not include a good as a component are called pure services. This is important insofar as there is no inventory. Note that many goods include services and many services include goods. • Other professional occupations. 29 Side Note 2. THE SERVICE SECTOR • Financial.3.

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. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. or recyclable products or to minimize packaging and other wasteful production steps. Trends that Heizer and Render identify [1. . Globalization has been having a dramatic impact on operations management and in the future.2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. parts.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. reusable. the next step in product development involves customizing products according to the customer’s preferences. operations managers are increasingly responsible for innovations that move ideas. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. or management). brought about in part by the internet. Definition 2. Operations managers are being challenged to produce biodegradable. p. operations managers are responding by moving decision making to the individual employee. it will continue to strongly impact the field. OPERATIONS AND PRODUCTIVITY 2. and finished goods rapidly. • Rapid product development – The life span of products is decreasing and the need to rapidly develop and bring to market new products is consequently increasing. wherever and whenever needed. 2. capital. • Mass customization – With increases in technical capabilities and customerlevel information management. • Empowered employees – With the rise of services and knowledge products.30 CHAPTER 2.5.2.

In order to improve productivity.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). . Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.4 (Total Factor Productivity) See definition 2.5. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.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.5. p.4375 titles per labor-hour = 0.2. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Side Note 2. 15]. Also known as total factor productivity. Definition 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.3. but overhead is no $800/day.5. Side Note 2. Definition 2.0077 titles per labor-hour = 0.5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5.25 titles per labor-hour = 0. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5. Consider today’s computers versus those from the 1970s.

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

) Present Heizer figure 1. “About Half of 17-Year-Olds in the U. and 4. .2. 2. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. writing. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. and 33 3. Diet of the labor force.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.8 [1. In developed nations. Social overhead that makes labor available. THE PRODUCTIVITY CHALLENGE • Better-nourished.S. draw the rectangle on the blackboard.” In the U. Which of the following is true about 84% of 100? 4 When presenting this question.S. maintaining and enhancing the skills of labor.S.5.3 (The State of Education in the U.. The primary variables for improving labor productivity include 1. Basic education appropraite for an effective labor force. there is considerable concern over teaching of basic skills such as mathematics to grade school children. such as transportation and sanitation. Cannot Correctly Answer Questions of This Type. Side Note 2.5. What is the area of a 4 × 6 meter rectangle. 16]. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. p. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. and • Healthier workers as well as • A shorter work week. and math.

S.5. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. are utilized effectively.5% after allowances for depreciation. educated.34 CHAPTER 2. however. U.5. in the U. Developed economies (also known as post-industrial economies) require trained. 17]. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.2 Capital Capital investment in the U. Note that there is a trade-off between capital and labor in most industries. education.. and because the author of the textbook is writing about operations management.S. 2.5.4 (Management as an Input) Because this is a course in business management. and knowledgeable employees and operations managers are responsible for ensuring that technology.5. management is considered as a separate input. management is not always identified separately from labor as an input. Difficulties arise because service-sector work is . Definition 2.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.4 Productivity and the Service Sector Historically.5. 2. has increased at about an average of 1. and knowledge. p. According to Heizer [1.S. 2. and the cost of capital depends on interest rates.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. Note that in classic economic analysis and other areas of business. productivity in the service sector has not increased as rapidly as with the production of goods. Side Note 2. graduate programs and the students they produce remain the best in the world. as well as capital.

Low-productivity activities. Typically labor-intensive (e.S.g.6.5 • The U. and other stakeholders. and child care.6 Social Responsibility As discussed in chapter 1. banking system is about 33% more productive than Germany’s. investment advice). These challenges include such issues as • Maintaining a clean environment. in both overall and service productivity. We will discuss this challenge in more detail throughout the course. is twice as productive as in Japan. 5 In Japan.. • Keeping the workplace safe.2. legislation protects shopkeepers from discount retailers. 2. government agencies.. 2.. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. Often an intellectual task performed by professionals (e.g. 35 3. laundry service.S.S. and 5. medical diagnosis). Difficult to evaluate for quality (e. the performance of a law firm).5 (Service Productivity in the U.5. 18] • Retailing in the U.. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. food preparation. Side Note 2. Often difficult to automate (e. teaching). watchdog groups such as NGOs. such as cleaning.S. and • The U. a haircut). but from customers.g. .g.. These demands come not only from the manager’s personal ethic. Heizer notes [1. 4.g.S. Frequently individually processed (e. • General ethical behavior concerning issues such as child labor and corruption. p. SOCIAL RESPONSIBILITY 1. telephone industry is twice as productive as Germany’s.) Productivity is highest in the U.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

FedEx is committed to our People-Service-Profit philosophy.38CHAPTER 3. 4. • Provide additional insights and opportunities. 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. 28] which includes mission statements for three multinational companies: 1. Definition 3. global organizations can attract and retain better employees. p.2 [1. global air-ground transportation of high-priority goods and documents that require rapid. and • Increase sales. Provide Better Goods and Services – For companies doing business in an international setting. positive control of each package will be maintained utilizing real time electronic tracking and tracing . 6.1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. 3. Side Note 3. Equally important.1 Mission Whether large or small. 3. 3. We will produce outstanding financial returns by providing totally reliable. FedEx. Attract and Retain Global Talent – By offering more employment opportunities. France. 5.1 (Mission Statements for Three Organizations) Review Heizer figure 2. an understanding of cultural differences in preferences is needed to best meet customer needs. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.1. time-certain delivery.1 (Mission) The purpose or rationale for an organization’s existence.1. competitively superior. I recommend that all companies draft a mission statement. • Perfumers tend to concentrate in Grasse. Missions state the rationale for an organization’s existence.

and professional to each other and the public. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . DEVELOPING MISSIONS AND STRATEGIES systems. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome.. We will be helpful. Our mission consists of 3 interrelated parts: • Product Mission – To make.S. such as Whole Foods. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. and nurturing work environment while ensuring our long-term success. 39 Side Note 3.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. courteous. and The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. 3. A complete record of each shipment and delivery will be presented with our request for payment. • 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 will strive to have a completely satisfied customer at the end of each transaction. a grocery chain. 2.1. contributing member of our community and offering the Hard Rock family a fun. healthy. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Other companies. natural ingredients and promoting business practices that respect the Earth and the Environment.3.1. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. The Hard Rock Caf´. nationally & internationally. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. Merck.

benjerry. . and Major Departments in an Operations Function. Side Note 3.com/our company/our mission/index.1.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.1. • Availability of complementary products. Cost leadership – Providing cheaper products.40CHAPTER 3. but can be used at the department level and even at the project level.1. Differentiation can arise from anything that the customer may value about a product or a services. 3.1. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. 3. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Responsiveness – By providing timelier. Definition 3.3: “Sample Missions for a Company. • Interoperability with other products. more responsive products or services. • The “look and feel” of the product. the Operations Function. • Training.3 (Competitive Advantage) In operations management.” Note that mission statements are used not only at the company-wide level.3 (Sample Mission Statements) Present Heizer’s figure 2. 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. 2. be it • Product features.2 (Strategy) How an organization expects to achieve its missions and goals.cfm for more detail. the creation of a unique advantage over competitors. Differentiation – They make their product better. Definition 3. See http://www.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

Provide competitive advantage. and 3. Definition 3. if the firm has a competitive advantage in these things) and where failures are most likely. in particular.3. • Determine Corporate Mission. These critical success factors are used to develop a competitive advantage.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. “Strategy Development Process. then determine whether the organization does these things well (and.” The process of developing a strategy involves the following steps: • Environmental Analysis. then • Form a Strategy. and 3.44CHAPTER 3. Group the necessary activities into an organizational structure. p. Staff the organization with personnel that will get the job done.2 (Critical Success Factors) In operations management. 2.3. Increase productivity. those activities or factors that are key to achieving competitive advantage. .1 (Strategy Development Process) Present Heizer figure 2.1 (SWOT Analysis) In operations management. The operations manager’s job is a three-step process: 1. Implement an OM strategy.3. Identify a strategy and critical success factors. 2. Weakness. The purpose of this process is to 1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Side Note 3.3. 37]. 3. Definition 3. and Threats) analysis to develop strategies. Opportunities.6 [1.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. determining internal strengths and weaknesses and external opportunities and threats.

p.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3.3 Integrate OM With Other Activities In order to achieve its strategy. Definition 3. .2 as examples of how firms organize their activities.4. Recall the “org charts” in sidenote 2. 39]. Once CSFs are determined.3 (Activity Map) In operations management. finance. 3.3. a graphical link of competitive advantage. CSFs. 5 Management 6 Human Information Systems Resources. • Red arrows – critical success factors • Blue arrows – support activities 3. MIS.3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.5 and HR.3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.2.6 3. and supporting activities. OM activities are most productive when they are integrated with other activities such as marketing.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.3.1. Side Note 3. an activity map can be used to link an organization’s competitive advantage to the CSFs.3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.1 as a checklist to determine critical success factors. Southwest Airlines has a competitive advantage in providing low-cost airfares.

wine in France. Definition 3. Only 10% of its work force is Swiss.4.4. Definition 3.6. Although e it is legally Swiss. In the semiconductor industry.4. 2. Also one of the least profitable due to transport costs and little local responsiveness. See definition 3. a strategy that uses exports and licenses to penetrate the global arena.5 (Global Strategy) In operations management.3.4 (Multidomestic Strategy) In operations management. Typically characterized by subsidiaries.5.46CHAPTER 3. 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. See definition 3. [1.4. 42] Definition 3. See definition 3. owning or controlling facilities in more than one country.4. 4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business.4.4. . and hamburgers without beef in India. with beer on the menu in Germany.4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. or joint ventures with substantial independence. • Texas Instruments is an example of a country with a global strategy. products do not need to be localized. 95% of its assets and 98% of its sales are made outside Switzerland. franchises.4. See definition 3. Definition 3. Usually does not confer a cost advantage.4. • McDonald’s is an example of a country with a multidomestic strategy. but a good strategy for cost reduction when products do not need to be adapted locally. Definition 3. Its menu reflects the country in which it operates. 3. as exports require little change in operations and licenses often leave risk with the licensee.1 (International Business) A firm that engages in cross-border transactions. • Nestl´ is an example of a country with a transnational strategy. Global strategy – Not characterized by local responsiveness.3 (International Strategy) In operations management. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. p. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. International strategy – Often the easiest strategy.

1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.4.6 (Transnational Strategy) In operations management. Side Note 3.S. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.4.3. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. 6]..4. p. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

2. p. Controlling – Monitoring of resources. the largest software company in the world. and budgets.Chapter 4 Project Management Side Note 4. Scheduling – People. quality. 49 . Planning – Goal setting. and Controlling) Present Heizer figure 3.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. Side Note 4. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. 3. and team organization. Scheduling. 46–47].0. pp. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. and supplies are tasked to specific activities and activities are related to each other.0. Project management involves three phases: 1. The profile highlights the importance of project management in achieving competitive advantage. 49]. Side Note 4. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.3 (Project Planning. Even Microsoft. costs. money.1 [1. defining the project. Plans are also revised to meet changes in time and cost demands.0.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1.

1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. and/or 5. If you become a project manager on projects of significant complexity. Side Note 4. The work contains complex interrelated tasks requiring specialized skills.0.0. 69]. People will not come through with what they promised. The project cuts across organizational lines. PROJECT MANAGEMENT However. Moreover.5 (Personal Advice on Project Management) Project management is a tricky profession. if things go wrong. and you will be forced to improvise.1.1 Project Planning While many projects are run within an existing organization. often times. Definition 4. The responsibilities of project managers are to make sure that . 4. The job is unique or somewhat unfamiliar to the existing organization. 2. you are doing your job well if noone notices the project management. Project organizations work best when [1.1.” [1. Work can be defined with a specific goal and deadline. 48] 1. 4. project managers are highly visible in a firm and have significant responsibilities.1 The Project Manager As alluded to in sidenote 4. a temporary project organization is formed to address a specific project. 3. you will be confronted with a daunting task. it is also an area in which there will continue to be high demand for qualified people. p. In a sense. p. you should always expect the unexpected. 4. See also Heizer sidenote “Project Management and Software Development. Your job is to make things go smoothly and according to plan. things you thought were certain turn out not to be.50 CHAPTER 4.5. The project is temporary but critical to the organization. However. it is very obvious and can be very costly. You may be managing resources far in excess of your individual salary.

• Build the user account input web page is a much better task division than 1.4. In a project that includes allowing a user to enter personal information on a web page. 3. All projects come in on time. you have divided the tasks too finely. PROJECT PLANNING 1.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. Side Note 4. 2.1.1. The project is on or under budget. Review graphic design for user account input web page 3. dividing a project into more and more detailed components. Definition 4. The project meets its quality goals. People receive motivation and information necessary to do their jobs. Complete software architecture for user account input web page functionality 5. For example. 51 4. Complete graphic design for user account input web page 2. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no. a web page takes about a day to build for an experienced team. Approve software architecture for user account input web page functionality . a task that should only take a day or so.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). in a software engineering project.1.1.2 (Work Breakdown Structure (WBS)) In operations management. Review software architecture for user account input web page functionality 6. Approve graphic design for user account input web page 4. When dividing a project into tasks. and 4.

Activities (also known as “work packages”) to be completed Side Note 4. Show the relationship between each activity to others and to the whole project 2. Subtasks in major tasks 4. the work breakdown structure is not something you go to your office to do in isolation. At the time you are creating the work breakdown structure. 4.3 (Reality Check: WBS) In reality. Scheduling serves to 1. you should also take note of time and cost estimates given by your technical staff. Side Note 4. Encourage realistic time and cost estimates for each activity . 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.52 CHAPTER 4. 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. fill hundreds if not thousands of pages.2. Identify precedence relationships among activities 3. Write software for user account input web page functionality 8. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. of course.3 [1. Major tasks in the project 3. p.2 (Work Breakdown Structure) Present Heizer figure 3.1.1. Write software for user account input confirmation page functionality 9. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. They will be useful for project scheduling. The actual WBS for Windows XP would. Project 2. which we will discuss next in section 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). PROJECT MANAGEMENT 7.

as. PROJECT SCHEDULING 53 4. For smaller projects. 2. Gantt charts are perhaps the most widely used tool for ensuring that 1.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded.2 (Using Gantt. PERT and other formal documents. Perhaps they imagine that they are not doing their jobs professionally if they are not. Activity time estimates are recorded. PERT. Overall project time is developed. MS Project’s Gantt chart functions demand you assign employees. which becomes narrower as one approaches the neck of the bottle. 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 .2. right by the bridge. and other values to each activity.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.4 [1. 3. PERT and CPM help answer questions such as • When will the entire project be completed? . All activities are planned for. moeny. It can actually be quite time consuming to create and maintain Gantt charts. 51]. Derives from the typical shape of a bottle.” This will give the class an idea of the look and feel of a typical Gantt chart. cost estimates. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. PERT.4. p. Definition 4. The order of performance is accounted for. Make better use of people. Side Note 4. these should be considered merely tools to be used when they are useful by saving time or energy.2.2.2. and CPM) Inexperienced project managers often feel the need to use Gantt.1 (Gantt Charts) Planning charts used to schedule resources and allocate time.2. and material resources by identifying critical bottlenecks in the project Side Note 4. the road bottlenecks. and 4. and CPM tools for every project management activity. However. – said of roads. Definition 4.

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. Definition 4. 4. Time analysis reports. PERT and CPM. Control programs typically produce reports detailing 1.54 CHAPTER 4. Raw material and expenditure forecasts.3. 7. quality. 2. and 8.3 Project Controlling Project control involves monitoring resources. were developed in the 1950s for project control. 5. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. or ahead of schedule? • On any given date. 3. what is the best way to accomplish this goal at the least cost? 4. behind schedule. Total program labor curves. is the money spent equal to. Variance reports. Work status reports. 6. costs. less than. 4. Cost distribution tables.1 PERT and CPM Two methods. Functional cost and hour summaries. Cost breakdowns for each task. and budgets of projects. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. is the project on schedule. .3.

5 [1. 6. Develop the relationships among activities.2 Network Diagrams There are two approaches to visualizing activity networks: 1. Moreover. They both follow six steps: 1. or the critical path. Also. it will do for you automatically much of what we will go through manually in this class.3. Definition 4.3. Gantt charts are the “go to” visualization method for even very complex projects. through the network. Assign time and/or cost estimates to each activity. Personally. and ontrol the project. schedule.3. AON associates the activity with the node whereas AOA associates the activity with the arrow. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. See also definition 4. Compute the longest time path. Define the project and prepare the WBS. 3.2 (Example: AON and AOA) Present Heizer’s figure 3.4.3. Side Note 4. in my experience.3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts.3. PROJECT CONTROLLING 55 Definition 4.3 (Critical Path) The computed longest time path through a network. 5.3. 53]. p.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Side Note 4.3. 4. Activity on Node (AON) and 2. Draw the network connecting all of the activities.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.3. As the names describe. See also definition 4.2. Use the network to help plan. 4. . Activity on Arrow (AOA). 2. monitor.

• Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 54–55].8 [1. 4. we must use time estimates of each activity to determine the overall schedule for the project.3. EF = ES + Activity time.1 (Critical Path Analysis) In project management. – If an activity is an immediate predecessor to more than one activity.9 [1. its ES is the maximum of all EF values of its predecessors.4.3. • Table 3. pp.3. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. its LF is the minimum of all LS values of all activities that immediately follow it. . 2. See also definition 4. its LF equals its LS of the activity that immediately follows it. that is.1 gives sufficient information to describe the network. that is. their dependencies. p. 1. In other words. ES = max{EF of all immediate predecessors}. Definition 4.56 CHAPTER 4. 56]. 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. PROJECT MANAGEMENT Side Note 4. LS = LF − Activity time. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. We do this with a critical path analysis with involves a 2-step procedure.4 Determining the Project Schedule Once we have identified all of our activities. • 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. LF = min{LS of all immediate following activities}. analysis used to determine the project schedule. • 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. – If an activity has multiple immediate predecessors.6–3.

p. activity F in sidenote 4. 60]. Also notable is that if the total time of the project needs to be reduced. 61] based on table 3. E. Definition 4. . the free time for an activity.4. and • Includes only critical activities (see sidenote 4. G. and H have no slack time and cannot be delayed without delaying the entire project. p.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. or the amount of time an activity can be delayed without delaying the entire project.5. it is said to have free slack. The critical path is one that • Begins at the first activity in the project.5.3 (Free Slack) In project scheduling. in the example in sidenote 4.13 [1. the time devoted to one of these activities must also be reduced.2 (Forward Pass) In project management scheduling.3 and Heizer figure 3. C.4.4. 57].3. • Terminates at the last. Definition 4.1 (Slack Time) In project scheduling. the time shared among more than one activity.5. p. If an activity2 does not impact the slack time of any other activity. Note also that if we delay each activity by the amount of slack that activity has. the step that identifies all the earliest times that activities can be completed. we may delay the project as a whole.10 [1. 2 For example.3 [1.5. if we delay activities B and D by one week each. Side Note 4.” Then complete Heizer example 7 figure 3.4.2 (Total Slack) In project scheduling.4.1. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. These are called critical activities. 1 For example. “Notation Used in Nodes for Forward and Backward Pass.1. they share total slack. 4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. the time associated with a single activity.1). Definition 4.1 When several noncritical activities appear successively in a path. Slack time is just Slack = LS − ES or Slack = LF − EF .4. we cannot complete the project in 15 weeks. Note that activities A.

6.6.6. Most likely time – The most realistic estimate of the time required to complete an activity.3 (Most Likely Time) In project scheduling. In reality.1 and 4. Side Note 4. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.3.2 and 4. Beta distributions have two free parameters. Definition 4. we do not.1 (Optimistic Time) In project scheduling.6.6. See also definitions 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. the “best” activity completion time that could be obtained in a PERT network.6. and the other uses β = β − 1 and α = α − 1 . The usual definition calls these alpha and beta.58 CHAPTER 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. unexpected complexities. Definition 4. technical considerations that were unknown at the time the project schedule was drawn up. See also definitions 4. The beta distribution is used as a prior distribution for binomial proportions in .2 (Pessimistic Time) In project scheduling. See also definitions 4. Effectively. which are labeled according to one of two notational conventions. However. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. the most probable activity completion time that could be obtained in a PERT network. PROJECT MANAGEMENT 4. the “worst” activity completion time that could be obtained in a PERT network.1 and 4.6.3. the time required to complete an activity is often uncertain due to supply problems.6. Definition 4.6. etc. three time estimates are used: 1.. in most cases. In PERT.2. Definition 4.6. the project manager pulls the number “out of the air” based on their experience managing related activities.6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.

6.00 week. 2007.6.com/BetaFunction. 2. 4.78 6 6 36 7 4 weeks. February 21.6.wolfram. p. most likely.78 weeks. Side Note 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. The above plots are for various values of (α. most likely. p. and .4.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. 4 See definition 4. The expected activity time for activity F is 3 weeks5 and the variance is 1.1 Probability of Project Completion If we assume that 1.25 to 3. 4.β) with α = 1 and β ranging from 0. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.00. β) Γ(α)Γ(β) P (x) = (4. 63] for activity F based on optimistic. The variance of the activity time is Variance = [(b − a)/6]2 .2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.3 The domain is [0. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.html. and 9 weeks.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [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.wolfram. q) = (4. and pessimistic times of 1.1].4. 8 1.1) where B(p.com/BetaDistribution. and 7. Total project completion times follow a normal probability distribution and 2.html http://mathworld. and pessimistic times of 1. Activity times are statistically independent 3 Source: http://mathworld.6. 62].

10 Determining Project Completion Time for a Given Confidence Interval A common question is.3) Definition 4. Side Note 4. see http://mathworld.7% of the time. 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.5. See definition 4.6 (Standard Deviation) The standard deviation is the square root of the variance. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. 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) (4.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. Definition 4. commonly also N written σ 2 . and within 3 standard deviations approximately 99.6.6.6.6. 64]. pp.com/StandardDeviation.60 CHAPTER 4.4 (Using the Normal Table) Pass out Heizer Appendix I [1. p. definition 4. the population variance var(X). Side Note 4. Note that the standard deviation of 1. two standard deviations approximately 95% of the time. 9 For 10 See more information.76 weeks implies that the project will exceed the expected completion time by more than 1.html.76 weeks approximately 16% of the time.wolfram.6.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6.16.3 (Example: Project Variance) Review Heizer example 9 [1.” Review Heizer example 10 [1. .6. A2– A3] “Normal Curve Areas.6. See also 4. 65] and figure 3.6.1. p.

7. and if you become a project manager. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. crash cost is the cost required to complete an activity in the shortest time possible. Crashing a project involves a four step process: 1. When crashing a project.1. Definition 4. Project crashing is the name given to the process of rushing a project to completion. Definition 4.1 (Crashing) In project management.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.3 (Crash Cost) In project management. Assuming linear costs. • The shortened durations will actually enable us to finish the project on time. the crash cost is typically higher than the normal cost. we want to do so in the least cost mannger possible.7. 4.4) 11 Since crashing a project often involves adding additional resources to activities.7. See definition 4.1. and • The total cost of crashing is as small as possible. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. if certain activities off the critical path take the pessimistic time estimate or more to complete. it may result in the project being delayed. Step 1 – Compute the crash cost per week. See definition 4.11 Definition 4. crash time is the shortest duration of an activity. .2 (Crash Time) In project management. you will doubtless experience one or both of these eventualities many times in your career.7. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.7. we need to ensure • The amount by which an activity is crashed is. in fact. permissible and realistic.4.7. Since activity completion times are typically shortened by adding resources.

• Advantages – Especially useful for large projects . 4.5 and figures 3.2 (Example: Crashing a Project) Present Heizer example 12 [1. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.62 CHAPTER 4. At times this may be politically infeasible. 4. Side Note 4. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. PROJECT MANAGEMENT 2.19.18–3. If there is more than one critical path.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If you accept the challenge and try to rush the project to please upper management. you should be very wary of such pressure. As a project manager. pp. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. the advice given in this section should be helpful. Step 3 – If there is only one critical path. select one activity from each such that • Each selected activity can still be crashed and • The total crash cost per period of all selected activities is smallest. Step 4 – Update all activity times.7. 67–69] including table 3. 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. go to step 2. Note that one activity may be on several critical paths.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. If you find yourself needing to rush a project. If the due date has been reached. Step 2 – Find the critical path(s) in the project network. If not. 3. stop. Crash this activity by one period. Side Note 4.7. Then crash each activity by one period.

org/Planner.to mediumsized projects. Starkweather about his impression of various alternatives.1–3.wikipedia. independent. Information on dotProject can be found at http://www. There are a variety of alternatives. 12 Recall sidenote 4.org/wiki/List of project management software for a list of project management software or ask Dr.4. It is perhaps the most widely known and featureful project management software available.1. 70–74] with figures demonstrating MS Project functionality. it is relatively expensive and the features are so numerous and complex. However. Note that most project management textbooks refer to MS Project as the software of choice for project management. they are often overkill for small.net. including open source software that is free. Information on Achievo can be found at http://www.7 [1. Noncritical paths should be closely monitored as well.9 Using Microsoft Project for Managing Projects Present programs 3.gnome. Information on Planner can be found at http://live. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths.achievo.org. . 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. pp. 4.9. You may also refer to http://en.7.dotproject.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

money supply.66 – – – – Sales forecasting. planning indicators valuable in helping organizations prepare medium. Generally deals with more comprehensive issues than short-range forecasts. . and Analyzing various operating plans. and Research and development. 2.to long-range forecasts. which impacts purchases of new plant and equipment as well as development of new products. 5.1. Introduction. and 4.1. Growth.4. These may include inflation rates. Definition 5.1. Capital expenditures. CHAPTER 5. Useful for – – – – Planning for new products. long-term forecasts concerned with the rates of technological progress. Cash budgeting. Facility locations or expansion. Production planning and budgeting.3 and 5.1 Types of Forecasts Organizations typically use • Economic forecasts.4. These concern rates of technological progress. • Technological forecasts. See also definitions 5. housing starts. 3.1.1. Decline. Maturity. In the first two stages.2 (Economic Forecasts) In operations management.2 and 5. FORECASTING • Long-range forecasts – Generally more than 3 years.1.3 (Technological Forecasts) In operations management. and other economic indicators. and • Demand forecasts. Definition 5.1. Product life cycles tend to follow four stages: 1. See also definitions 5. longer forecasts are needed.

2. 3. 3. 7. marketing. Validate and implement the results. Capacity – Underestimating demand can result in • Undependable delivery. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.2 and 5. 5.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. See also definitions 5.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.1. .4 (Demand Forecasts) In operations management.5.1. Also called sales forecasts. capacity. 5. 2. projections of a company’s sales for each time period in the planning horizon. • Training.2. these drive a company’s production. and • Layoffs. Determine the time horizon of the forecast. 4.1. Human resources – Anticipated demand is needed to estimate the need for • Hiring. and • Loss of market share. and personnel planning. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Make the forecast. Determine the use of the forecast. 6. Select the items to be forecasted. Select the forecasting models. 5.1. Gather the data needed to make the forecast. • Loss of customers. and scheduling decisions and serve as inputs to financial.3.

– On a number of occasions. 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. to inherently nonlinear systems. it is a bit of an art that mixes both. based on a linear model.68 CHAPTER 5. • Lack of support for the forecasts. – You should be able to explain how and why you arrived at each and every number that you forecast. – After making a forecast. – If they do not match. I have seen otherwise competent people (including Ph. track the actual outcomes and compare them to the forecasts. ask yourself if they make sense.1 (The Most Common Errors in Forecasting Methodology) In my experience. • Lack of follow-up. use something simpler.D.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. 5. figure out whether an improvement to the forecasting methodology can be made. – Before you show your numbers to others. In practice. • Lack of sanity checking. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. – Many people try to apply ordinary least squares (OLS) regression techniques.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. – In one case. . – If you do not truly understand the mathematics. you will be unable to defend your numbers. Any quantitative approach should be complemented with a qualitative “reality check. FORECASTING Side Note 5.2. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. – If someone challenges your forecast and you do not have supporting logic or documentation. • Using models that are more sophisticated than the user’s understanding.

. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. · Useful as a starting point or sanity check for more sophisticated methods. say. be sure that the sales force is clear that their incentive is to be as accurate as possible. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers.9.8.3. · See definition 5. the naive approach. the more likely it is your results will be accurate. or other incentives to over or understate demand.3. 3. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. – Sales force composite ∗ You would be surprised how accurate your sales force can be. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. · The simplest and easiest way to estimate demand. political. Moving averages require more past data to work with than. and · Respondents. 2. ∗ However. ∗ Moving averages · Simple. · Staff personnel. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.3. and if they perceive there is an incentive to exaggerate. useful method if we can assume that market demands will stay fairly steady over time. Sales people typically respond to incentives. ∗ The more independent your decision makers are from economic. for example. Moving averages cannot pick out trends very well.5. · Requires less past data than moving averages. they will do so. · There are three problems with moving averages 1. · See definition 5.

and value system.3. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.1. a forecasting technique using a group process that allows experts to make forecasts.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.6.3.3.5.70 CHAPTER 5.3. Definition 5. See also definitions 5.3. Definition 5. Definition 5. See also definition 5.3. and 5.3 (Jury of Executive Opinion) In operations management. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.10. See also definitions 5.4 (Delphi Method) In operations management.6. 5.3.3.3.3.1 Qualitative Forecasting Methods Definition 5. personal experiences.6.4.5.3. 5.3.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.5 (Sales Force Composite) In operations management. and 5.6 (Consumer Market Survey) In operations management. and 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.4.3.2. a forecasting technique based on salespersons estimates of expected sales. See also definition 5. 5.3.5.4.3. and 5.3. Definition 5.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3. 5. . 5.3.3.3. emotions. See also definitions 5.3. · See definition 5. See also definitions 5.

9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. and 5.3. Definition 5.3. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. FORECASTING APPROACHES 71 5.2) See also definition 5.3. Definition 5.3.9.3.05 to 0. See also definitions 5. and are appropriate to use when the underlying average . a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. 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 (5.3. Higher values give more weight to recent data. 5.5. • Simple Moving Average – Mathematically. That is.7. α. See also definition 5. Mathematically.3. Moving averages can be either simple or weighted.3.7.3) The smoothing constant. a simple moving average is given by demand in previous n periods Moving average = (5.3.10.3.11.2 Quantitative Forecasting Methods Definition 5.3.3.5.1) n • Weighted Moving Average – Mathematically.8. Definition 5. generally ranges from 0.

12). Mean absolute deviation (MAD).3.3.72 CHAPTER 5. Mean absolute percent error (MAPE).0. Definition 5.14. When α = 1. Definition 5. . such as the mean absolute deviation (see definition 5. See also definition 5.3.7.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.3. and are appropriate to use when the underlying average is relatively stable.12.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 1 See |actual − forecast| n (5. exponential smoothing is equivalent to naive forecasting.3.4) definition 5. See also definition 5.3.3.3.7. FORECASTING is likely to change. 5.3.13). while lower values give more weight to past data.3.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. it is good practice to compare the estimated value with the actual value as actual values become available.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. and 5.13.3. 2. Mean squared error (MSE).15.3.8. Three popular measures are 1. 3. 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. 5. Definition 5.3 Measuring Forecast Error Once a forecast is made.3.

Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.3.7) or F ITt = Ft + Tt (5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.8) With smoothing constants α for the average and β for the trend.3.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.3. MSE is given by MSE = See also definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.11) . 100 n i=1 (forecast errors)2 n (5.6) 5.12.3.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.12. MAPE is given by MAPE = See also definition 5.5) |actuali − forecasti |/actuali n (5. Mathematically.5. Mathematically.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5. expressed as a percent of actual values. FORECASTING APPROACHES 73 Definition 5. Definition 5.

Tt with equation 5. 1. F ITt .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. It is also commonly called linear regression analysis. 2. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. by the formula F ITt = Ft + Tt .10. time) (5. Calculate the forecast including trend.14) . the emponentially smoothed forecast for period t using equation 5. 3.74 or CHAPTER 5. Ordinary Least Squares Regression analysis is also useful for predicting trends. 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. Compute Ft .12. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Compute the smoothed trend.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.

This provides the seasonal forecast.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Compute the average demand over all months. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. Definition 5. 4.13 assumes a linear relationship. 2. Although there are many methods to accomodate seasonal demand. consumers often make fewer purchases of durable goods.. during the summer months when it is common to take a vacation. 2. Recall that the equation 5. Estimate next year’s total annual demand. we will examine one model.3. ¯ x The least squares method has several drawbacks. . The first step is to calculate the seasonal forecast. then multiply it by the seasonal index for that month. to account for seasonal changes in demand in our forecasting. In the U.5 Seasonal Variations in Data In most businesses. 1. such as cars and washing machines. Most businesses experience a surge in sales around Christmas. We do that with a 5-step process. demand is seasonal. Compute a seasonal index for each season by dividing the historical demand by average demand.S. the multiplicative seasonal model.5. 5. Find the average historical demand for each season. 3. 1. 5. the more uncertain it is.3. 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. Deviations around the least squares line are assumed to be random.3. 3.

.76 CHAPTER 5. We will use the same technique.15) Side Note 5..g. but x will be something other than time. Note that making predictions of future demand involves also making predictions about the independent variable x.3. However. 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. mathematically. 106– 107].4.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.g. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.1 (Example: Using OLS) Present Heizer example 12 [1.16 is y2 − a y − b n−2 xy Sy.x = (5. If there are published estimates you can cite (e.3. whatever uncertainties you may have transfer to your predicition of y. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. It is also called the standard deviation of the regression and. if you are uncertain about predictions of x.g.x = (5.17) . is given by (y − yc )2 n−2 Sy.3. pp.. average local salary) (5. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5. FORECASTING 5.

time. or National Football League. the average length of a woman’s skirt and stock market prices in the U. 2007.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. has risen. have been correlated.html?xid=sitecnn-partner.1594488.S.4 (Causation vs.S. Historically. 108]. nor does it imply that they will continue to be related.9 [1.5. Other interesting correlations that have been identified over the years include banana prices and U. It does not imply causation one way or the other.3.10 [1. is monopolized by the NFL. Certainly.S.S. changes in skirt lengths don’t cause stock market prices to rise and vice versa.18) .2 with stock prices generally rising as skirts rise. February 28. Correlation Coefficients for Regression Lines Definition 5. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.3 and the U. leading stock indexes.com/time/business/article/0.00. in all but one Year of the Pig.3.S.2 (Distribution About the Point Estimate) Present Heizer figure 4. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. but the relationship is coincidental. Even the Year of the Pig correlates strongly with the U.18. The correlation coefficient of variables x and y is given by r= See also definition 5. football in the U. the note in the margin accompanying Heizer example 14 [1. Dow Jones Industrial Average and Standard and Poor 500.3.3. stock market. Side Note 5.8599. a football game played between two football conferences in the U.” Note that the regression assumes a standard normal distribution about the estimate.” Side Note 5.3 (Examples of Correlation Coefficients) Present Heizer figure 4. p.3.S. which is divided into two “conferences. stock markets.3. stock market prices as well as the winner of the Super Bowl. 109].3. Definition 5. “Four Values of the Correlation Coefficient. p. Correlation) Correlation merely means that the values of two variables are historically related. pp. Since 1935. “Distribution about the Point Estimate of $600 Million Payroll. 4 Source: http://www. FORECASTING APPROACHES 77 Side Note 5.” the AFL (American Football Conference) and the NFC (National Football Conference). 107]. the U.S.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.4 .

we discussed a means by which we can attempt to predict the value of one variable using the value of another. b2 .) It measures the percent of variation in the dependent variable (y) explained by the regression equation. In practice. p. = the dependent variable (e. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.” For example. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. Side Note 5.3. . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. 110]. etc. It is commonly simply called “R squared..6. often the most difficult part of building a multiple regression model is to pick the independent variables.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. . 110]. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.3. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .19) Determining the values of a.3. The multiple regression equivalent of equation 5. b1 . you would use statistics software to calculate these values.3. . (See definition 5. “What was the R squared of your regression?” Multiple Regression Analysis In section 5.g. b 2 . results in additional predictive accuracy as measured by r2 .17. . Adding additional independent variables as predictors. b1 .5 Definition 5. . 5 See definition 5.19 (Multiple Regression) A causal forecasting method with more than one independent variable. . if they are indeed related to the dependent variable. x2 . .3.” As the sidebar points out.78 CHAPTER 5. . . The same technique can be applied to use several independent variables to predict the value of a dependent variable.15 is given by y = a + b1 x1 + b2 x2 + . p.18 and Heizer example 15 [1.

Definition 5. which correspond roughly to standard deviations. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). If the tracking signals violate upper or lower limits.8 standard deviations.4. and within 4 M ADs about 99. Definition 5.6 One M AD is equivalent to 0.6. and 4 M ADs to 3. 6 Recall definition 4. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. .4.4.2. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. two M ADs to 1.1.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series.forecast| n where M AD = (5. These limits are typically based on M ADs.6 standard deviations.1 (A Plot of Tracking Signals) Review Heizer figure 4. p. In other words. three M ADs about 98% of the time.5. the forecasting methodology needs to be modified. MONITORING AND CONTROLLING FORECASTS 79 5.11 [1. three M ADs to 2. The tracking signals should also be compared as they are generated against limits. one of the most common problems with forecasting is a lack of follow-up. 111]. Side Note 5. This means that the observed value should be within 2 M ADs abut 89% of the time. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . Tracking signals are typically used monitor forecasts.20) A good tracking signal has about as much positive as negative error.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. though large errors may be a problem as well even if the positive and negative errors balance.4.4 standard deviations.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.2 standard deviations.9% of the time.6.

Definition 5. α in definition 5.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. Side Note 5. p.2 Focus Forecasting Focus forecasting. is based on two principles: 1.4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. 5. changes need to be check with human eyeballs to ensure that the adjustments make sense.4.g.3. 114]. Definition 5. there has been much criticism of the approach to using models based on thier fit to the data.4. Note that even with computer monitoring. 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. FORECASTING 5. There is no single technique that should be used for all products or services.. you should be aware of the criticism of focus forecasting. “Summary of Forecasting Formulas. 2.4. Sophisticated forecasting models are not always better than simple ones.80 CHAPTER 5.4.10) is automatically changed to keep errors to a minimum.4.2 [1.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. However.” . In your career. which selects a model based on goodness-of-fit to a data set. you must make your own decision as to how you select the forecasting models that you use. Side Note 5.

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

and 4. • Growth phase – Effective capacity forecasting is necessary. Product strategy involves determining the best strategy for each product based on its position in the life cycle.1. 6. DESIGN OF GOODS AND SERVICES 6.2 Life Cycle and Strategy Strategies change as products move through their life cycle.1. • Introductory phase – In the introductory phase. Maturity.1 Product Life Cycles Product life cycles can be divided into four phases: 1. and – Supplier development.g. YouTube videos). often ruthlessly. Decline. products expenses are often high for – Research and development. clothing fashions).. . Growth. restaurants or nightclubs). 2.1 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.82 CHAPTER 6. or even decades. Introduction.g. • Maturity phase – Competitors have entered or are entering the market. years (e. low-cost. 3. – Process modification and enhancement. Life cycles can be in the days or weeks (e.g. so high volume. months (e.. and innovative production is appropriate..

a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted.1.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1. 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.2 Generating New Products Most products have a limited life cycle. such as consumer incomes. Definition 6.1 (Example: Brainstorming) Lead the class in a brainstorming session. are tied to product demand. • Economic factors.4 Side Note 6. GENERATING NEW PRODUCTS 83 6. the development of cellular telephone technology or the internet. as well as the total annual dollar contribution of the product.2.000 yuan.6. Ideas are not reviewed until after the brainstorming session. example. 6. and if a company is to survive.500 or 100. • Sociological and demographic change is also tied to product demand.2. 6. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. 4 For 3 For . Definition 6.2.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.3 • Political and legal change can also bring about business opportunities. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. example.2. it must regularly redesign existing products or bring new products to market.3 Product-by-Value Analysis For firms with many products.

Side Note 6. 6.3. Side Note 6. the product life cycle. DuPont estimates that it takes 250 ideas to yield one marketable product [1.2.84 CHAPTER 6. .2 [1. Each stage should have an accompanying review to determine whether to progress or not.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. and the organization’s capabilities. Determines what will satisfy the customer and 2.1 (Product Development Stages) Present Heizer figure 5. p. market dynamics.3 6. Definition 6. p. Many successful companies rely on sales from products introduced within the past five years. DESIGN OF GOODS AND SERVICES For example.3. p. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. 128]. Translates customer desires into a product design. 129].3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. 6.3 [1.3. The house of quality is a graphic technique for defining the relationship between customer desires and a product.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Definition 6. 128].3.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.

3. An organization is divided into departments. 130]. 2.3. 2.3. and production departments. 6.3. there are three popular methods by which organizations undertake product development. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.7 4.10 Side Note 6. 8 These are given on the roof of the house in sidenote 6.6.” 6 For example. Note that it is not free or open source.com for more information.9.2.qfdcapture.2. design engineering.2 (Example: House of Quality) Present Heizer example 1 [1. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. Building the house of quality involves six steps: 1. Identify relationships between the firm’s hows. p. • Effective communication and coordination between separate departments can be problematic.3. e. create the columns of the house in sidenote 6. bureaucratic companies and organizations..S. 3. Develop importance ratings. manufacturing engineering.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. PRODUCT DEVELOPMENT 85 Side Note 6. Relate customer wants to product hows.3.2. identify the rows of the house in sidenote 6. 1.6 3. Identify customer wants. a research & development. Evaluate competing products. as was the software described in section 4.3.3. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.2.2.g. 10 The right-hand columns of the house in sidenote 6. In other words. • Perhaps the most popular approach in the U. Identify how the good or service satisfies customer wants. • More common in large. See http://www..3 Organizing for Product Development In the West. . 7 In other words.8 5. • Fixed duties exist.9 6. Product development is done by teams.3. with product features. which can be an advantage.

because their fate is tied to a product. However. maintainability. it can also be problematic because teams. production.3. development. Some teams even include representatives from vendors.S. Definition 6. Definition 6. design.3. My experience may not be indicative of management practices in general in the U.. . etc. engineering. and production stages of product development. 6. Side Note 6. engineering.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.4 (Concurrent Engineering) In project development.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. production.S. manufacturing.3. and field service personnel. but my personal impression is that formal QFD practices are not widespread in practice. and use. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. organizations are less structured and typically not divided into research and development.86 CHAPTER 6.3.3.4.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.11 In Japan. use of participating teams in design and engineering activities. purchasing. The goals of manufacturability and value engineering are 11 See definition 6. These teams often include representatives from marketing. Side Note 6. will often advocate for continuation of their project past the point that it is profitable for the company. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.3.. Definition 6.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. quality assurance.3..1) was implicitly included in the product specification phase of operations management at the companies I have worked for.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.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.

5. Improved maintainability (serviceability) of the product. Improvement of functional aspects of the product. 87 . Robust design. 2. Standardization of components. 4. Reduced complexity of the product. 3.3. Improved job design and job safety. 6. and 7. Cost reduction.6. PRODUCT DEVELOPMENT 1.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

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

the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. Venture capital financing is common in the United States but is not yet a common means of financing in China.7.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. You may lose friends because you do not have the time to maintain the friendship. Often. – Additionally. or angel investors. “When are you coming home for dinner?” or criticizing you for ignoring them. month after month. you may not be prepared to start a company. Side Note 7. friends. • Among the means by which you can to raise money.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active.1. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7. we will discuss venture capital.com.1. Putting in long hours is not something that is done once in a while. 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. we suffered a database corruption that resulted in my practically living at work for three weeks .com management and Jerry’s difficulty balancing work and family life.1. – For now. If you are not prepared to redefine relationships relative to your business life. take note of this information. at Active.com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. for example. the use of venture capital will probably increase over time in China. It may be useful later in your career. Discuss the impact of the demands of a startup on the marriages of Active. week after week. The discussion of entrepreneurship and starting and managing a business will contain some information that may not be relevant to you as a student at this point. • Some of the information is intended for those who have an established career and real-world experience to draw upon. If after many long hours at work your family will be asking you. For many people. but something you may need to do day after day. – However. possibly even years at a time. friends and family are the most important concerns in their life. it may be difficult to keep the necessary focus on the business.

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

“Raise 100. When setting goals. ask other entrepreneurs. try to figure out why they were not successful. – Long-term goals are those that may take 5. When setting goals. it is common to exchange “war stories” about the difficult times and sacrifices.3. Like parents. advertising. ask yourself the following questions: • Income – How much do you want to earn. Consider at least a five-year time horizon. Side Note 7. .” • Be optimistic. When I talk to those who I know who have started businesses. Learning from failure is as important. If you talk to an entrepreneur who has not been successful. If your goal is to raise 1.000 yuan by July 1” is a much better goal than “raise money.7. 7.000. although the successful ones generally view their experiences as positive on the whole.” you may not want to start a business that focuses on customer relationships.000 yuan and you’ve never had a job before. or 20 years to accomplish. your goal may not be realistic.3 Setting Goals With any major endeavor. marketing.3. “Achieve financial independence” is much better than “pay the bills. even the successful ones will probably focus on the negative. if not more important. 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. SETTING GOALS 95 If you are not a “people person. than learning from success. • Analyze Your Professional Attributes – Be aware of where you need help. 10. and administration. Move on to larger goals once the small goals have been met. – Start with small goals. • Set both short-term goals and long-term goals. it helps to set goals. • Be specific.” • Be realistic. such as sales.1 (What’s It Really Like?) If you wonder what running a business is really like. – Short-term goals are those that can be accomplished within a year.

• Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely.3. . 21]. Many people want to start their own business for ego gratification. 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. – Hours of work. The reasons given for adding or subtracting points are as interesting as the ultimate score. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Have the class write down their answers and evaluate their own EQ. How much is your ego worth? Side Note 7.3. 18–20]. Eliminate question 1 and substract one point from the scoring given on p.96 CHAPTER 7. – Geographic location. pp.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. pp. Side Note 7. and – Investment of personal assets. Acknowledge this fact and factor it into your decisionmaking. 20.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.

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

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

Have students fill out the form on their own time. 8. 33]. His sales are now in the millions of dollars per year and the business is very profitable. He ran the business as a one-man operation for years.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.” Side Note 8.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.1.imdb. Now What? The number one trait needed by successful entrepreneurs is perseverance. 2007. computer-controlled security cameras. you will be spending years of your life trying to make the idea work. 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. Warnings about risk are perhaps the criticism you should consider most carefully. in the wake of 9/11. used as the title of at least 12 movies and television shows. And you should not risk anything you can’t afford to lose. However.1. or are otherwise discouraged. you should have “thick skin.” That is. You should be realistic about risks. Have students come up with examples of products that meet various criteria on the checklist. or health. you should not let it dissuade you. he would never succeed. Entrepreneurs are often told their idea is flawed. the business took off. p.2 is. Side Note 8. thinking that if he did not succeed after a couple of years. to be truly self-motivated and persistent in the way you need to succeed. . YOU’VE GOT AN IDEA. p. After all. February 17.1. A well-known phrase in English. making just enough to get by but not much more. 35].1 You’ve Got an Idea.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. “Never say die. Side Note 8. People thought he was going nowhere and generally dimissed his business. it is too risky.com/find?s=all&q=never+say+die. Finally. 2 http://www. 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. that they will never make it. such as your family.1. home.8. while you should listen to criticism that others give.

FINDING AN IDEA .100 CHAPTER 8.

101 . See also 9.1.0. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. There are two broad categories of markets: 1. go through the following 7 steps: 1. Definition 9. Consumers and 2.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.0. your next step is to do some market research.” or business-to-business ventures. but you should try to target your market as specifically as possible.0.” or business-to-consumer ventures.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.Chapter 9 Defining Your Market After coming up with your idea.2.0. 9. Definition 9. Not only do you need to decide whether you are marketing to businesses or consumers. Businesses. See also 9. When trying to identify your niche market.

She started by making a few samples and giving them to friends with dogs. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. Test – Offer samples. earnings. the longer it will be until you make your first profit. 75] 4.. discard the idea and move on to the next one.000 per year. If it does not sufficiently meet the criteria. etc. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. Donna. Falkenstein. there is not already alot of competition. • A friend in Chicago. . p. That is. give a seminar. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. It should confirm to your long-term vision. Focus – Be specific. • If your initial test does not go well. By someone else.” 2. the longer you wait to go into business in earnest. (d) It’s one-of-a-kind. (c) It’s carefully planned. Synthesize – Coalesce your ideas. (e) It evolves. After all. then asked them about customer reactions. (b) Somebody else wants it. But do test your product before you go ahead full speed. A good niche has five qualities (a) It takes you where you want to go. it allows you to branch off into other niches as the business grows. I mean customers. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. That is.” To focus your search for a niche. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50. “Selling maternity clothes to executive women” is much better than “selling clothes. 5. • Don’t spend alot of money. • 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. and other important demographics.” [4. 6. Evaluation – Evaluate your niche against the criteria in step 4.102 CHAPTER 9. 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. Lynda C. decided to start a business selling unique winter clothes for dogs.

are similar in age to those who came of age in World War II.S. economic.1.1 (Generational Marketing) Marketing to consumers based on age as well as social.1. for example. It is better to do just one thing well than to do many things poorly. Korean.2.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. when the country was immersed in a war effort. the World War II cohort. many Eastern companies make the mistake of lumping together American and European customers.1. you should be able to enter your niche market with confidence. or retiring. As older people are more active than before. For example. and 9. such as having children.3. many entrepreneurs make the mistake of being “all over the map. etc. (See definitions 9.1. in the U. 9. FINDING YOUR NICHE 103 7. when many people were suffering from extreme poverty. and cohort marketing. and other Asian customers together. demographic. they try to satisfy all possible customers and end up trying to do too many things well. Chinese.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1. This marketing technique has been widely used since the early 1980s in the U.1.9. This can be offensive and serve to alienate rather than appeal to your customer. .1.S.1 (Smaller is Bigger) When starting a business.1. New marketing techniques include generational. Marketing to demographic groups has become much more refined in the last few decades. buying a home. Side Note 9. 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. life stage. Go for it! – Implement your idea. If you did your homework. but their behavior differs significantly due to the different influences in their youth.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. Likewise. Side Note 9. the Depression-era cohort.. Many Western companies make the mistake of lumping together Japanese. Definition 9. you should practice extra caution to avoid stereotypes or other insensitive approaches. and the narrower your focus on your target. the more likely you are to score a hit. many are choosing to start families later in life or even have children ten years or more apart.1. young adults in the Depression. Definition 9. Definition 9.1..) Using these new marketing techniques can allow you to narrow your market. and psychological factors.” That is..

you should. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business.” [4. Every six months or so. p.3. Falkenstein states.2 Redefining and Expanding Your Niche Lynda C.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Side Note 9.3 The Mission Statement Once you have a niche. 28] which includes mission statements for three multinational companies: 1 See section 9. DEFINING YOUR MARKET 9. .1. a few sentences at most. “Creating a niche is the difference between being in business and not being in business.104 CHAPTER 9. p. Falkenstein1 advises that you regularly reevaluate your niche. • Convey the essence of your business’s goals and philosophies. 79] 9. The mission statement should • Be succinct. 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 [1. create a mission statement.

3. Equally important. and professional to each other and the public. time-certain delivery. THE MISSION STATEMENT 1. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Our mission consists of 3 interrelated parts: • Product Mission – To make. healthy. contributing member of our community and offering the Hard Rock family a fun. . We will be helpful. We will produce outstanding financial returns by providing totally reliable. competitively superior. 105 Side Note 9. courteous. 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.3. We will strive to have a completely satisfied customer at the end of each transaction. A complete record of each shipment and delivery will be presented with our request for payment.9.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. Merck The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. We are committed to being an important. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. FedEx FedEx is committed to our People-Service-Profit philosophy. global air-ground transportation of high-priority goods and documents that require rapid. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. 3. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. 2. and nurturing work environment while ensuring our long-term success.

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

10.2. RESEARCH METHODS 113 Side Note 10. pp. .” [4.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.2.

MARKET RESEARCH .114 CHAPTER 10.

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

• The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. Failing in business is very costly. you will likely be giving your plan to read many business plans per day. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. 11. • Management. • The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. it will help you maximize your venture’s chances for success. CHAPTER 11.116 • The project. loan proposals. • Financing. • The business plan quantifies objectives. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. THE BUSINESS PLAN A business plan is also known as a venture plan. • Critical risks. or investment prospectus. It provides a variety of other benefits. They may spend no more than five . allowing the entrepreneur to track results by measurable benchmarks. and • Milestones or a timetable. • Marketing. and while a business plan will not guarantee success.1. • Manufacturing.1 11. • Research and development. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is.

bear in mind that once the plan is advanced to the next stage of financing. Establish the unique details of this venture. Read the plan over casually. p. 6. They will want to see something that reflects that you are neat.. 1. 301]: • Appearance – It should look good. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. Determine the characteristics of the venture and its industry.2 5. 2.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person.11. thorough and careful. 300]. i. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Determine the quality of the entrepreneurs. but not too good. . you will not even get your foot in the door and be invited to present your plan to investors. not ostentatious. including debt or equity financing required. or spendthrift. Note that less than a minute on average is devoted to each step. 4. 11. the trash can. other financing professionals may spend more time analyzing the details of the plan.e. but should not be too lavish.1.1. If you cannot impress the financier with these three steps. 3.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. While the initial read-through might be only a five-minute perusal. Read the latest balance sheet. p. PREPARING TO PUT THE PLAN TOGETHER 117 minutes with your business plan before deciding to give you an audience or place you in the “circular file. Determine the financial structure of the plan. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. pretentious. 2 Do not underestimate the importance of this step. – Binding and printing should not be sloppy. Kuratko suggests the following [3.

You should use this to keep track of who has which copy. 3. – It is worth repeating: Keep it down to at most two or three pages. and/or web site. The company’s current status. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 5 I suggest the lower-right corner. If you write to much.3 • The Cover and Title Page – The cover should have the name of the company. THE BUSINESS PLAN – It should be no more than 50 pages. 11. and How investors will benefit.118 CHAPTER 11. 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. – Inside the front cover should be a title page repeating the cover information. The financial forecasts. a number should be in a corner5 indicating the copy number. the date of the plan. – On the title page. . and full contact information4 for the company. e-mail address. 3 Note that for this class. The amount of financing needed. The venture’s objectives in 3 to 5 years. though you should not put it in the same corner as page numbers appear.1. 7. Its products or services. The benefits to customers. 5.3 Some Style Points Kuratko also recommends that you [3. they will not read it. p. – 40 pages is ideal. 6. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 4. – It should explain 1. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. 4 Phone number. address. 2. • The Executive Summary – Two or three pages immediately following the title page.

copyrights.11. Use the spell checker on your word processor to check for spelling mistakes. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. or other special market advantages you have. Executive Summary – This should be the last thing you write. 305]. which describes the 10 sections of a typical business plan.2.1 (10 Sections of a Business Plan) Present Kuratko Table 10.2 [3. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. use “he.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. 2.” or “us. • If there are patents.” “they. so be sure the writing is finely crafted. The executive summary gives readers their first impression.” Instead.g. is it based on a family name? Does it include technical terms you need to identify? . Include any pictures or designs that would be helpful. trademarks. Business Description – Name the business. be sure to include them in the business description.6 Note any industry developments and describe the business thoroughly. 11. but it is the first thing that your audience will read. • Keep the Plan Written in the Third Person – Do not use “I. Your credibility is established in part by the credibility of your plan. • Orient the Plant Toward the Future – Create an air of excitement. • Do Not Overdiversify – Don’t try to be all things to all people. 6 E. Some details on each section of the business plan: 1.2 The Plan Contents Side Note 11.” or “them. and tell why it is named what it is. p.” “we.. • Identify the Target Market – Market research should support a focused customer niche. Present a focused plan.2.

such as equipment. radio. Research. (e) Advertising Plan – Discuss any promotional campaign. should be described. • Features of the product to be emphasized in your sales efforts. and project status should be discussed. their job descriptions and responsibilities. 7. Design. • The Kinds of customer groups to be targeted as the business matures. Marketing Segment – You must convince investors that a market exists. or internet. etc. (a) Market Niche – Define your market niche. Financial Segment – The financial segment should include 7 For example. Justify any price increases over competitors based on newness. • Local taxes and zoning requirements. how and when expenses will be incurred. etc. if the promotional campaign will be a significant portion of expenses. Operations Segment – First. television. facilities requirements. if you are going to market leases on equipment where previously only sales were allowed. Any risks should also be detailed. 4. In addition. service. THE BUSINESS PLAN 3. and • Possible support of local banks. 8 Such as magazines. In addition. storage. This should be an honest assessment. Gross profit margin should be discussed. pay and ownership (such e e as stock agreements) should be described. 6.7 (d) Pricing Policy – Compare your pricing policy with competitors. warranty.. including the type of media8 and. (c) Marketing Strategy – Your marketing strategy should be described based on research. Costs should be detailed for all major expenses. that your sales estimates are reasonable. and Development – If R&D9 is to be performed. quality. Management Segment – Key personnel. offices. supplier. and r´sum´s should be given. testing. cost. • Any innovative sales or marketing concepts that will enhance customer acceptance. describe the location of the new segment. 5.120 CHAPTER 11. and that you can beat the competition. and customer availability and proximity. • Methods of identifying and contacting customers. including • The kinds of customer groups to be initially targeted. 9 Research and Development . time. (b) Competitive Analysis – Assess the strengths and weaknesses of the competition. Important aspects of location include • Labor.

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

122 CHAPTER 11. THE BUSINESS PLAN .

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

• Bring paper copies3 of your presentation in case all else fails. 12. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. they may have another version of PowerPoint. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. is. • Bring a backup thumb drive with your presentation on it. the lawyer joke. Guy Kawasaki likes to tell a different version of an old joke.2.124 CHAPTER 12. 2 This originally comes from an American classic. “How can you tell when a lawyer is lying?” The answer.D. 44] Side Note 12. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. Adobe Reader.D. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. p.1 (The Job Talk) Every Ph. Lexecon. 12. By the time I gave my job talk to my eventual employer. 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.2.2 Know Your Outline Thoroughly It often helps to include key words in the outline that will help you recall examples and other details during the presentation.2. I don’t think it was quite right until somewhere between the 8th and 10th time. of course. Post a copy of your presentation in a secure location on your homepage just in case. Most graduates get between 5 and 15 interviews when they graduate. I had given it over a dozen times. Most Ph. In retrospect. Bring at least twice as many as you expect there to be people in the room.” 3 Color copies! . There will always be glitches. PRESENTING THE PLAN times. • Test the equipment the day before. and you don’t want something as silly as a burned-out light bulb to cost you an investor.”2 [2.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. • Bring your own laptop. You don’t want to try to figure out other people’s equipment. “His lips are moving. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. and even if you can figure it out. The original joke goes.

They may ask you something that makes you want to change your presentation. so write things down to make sure you don’t forget. At my company in Chicago. It is easy for things to get lost in the heat of the moment. 45]. • Taking notes also makes you look conscientious.2.6 So What? When you are planning your presentation. it is quite the opposite.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. p.12. 12. If they cannot explain it clearly. and although you go into each presentation .2. 12.2. you need to change or eliminate the statement. 12. Much of the material required use of the internet. Many people feel as if taking notes makes them look stupid.2. You should be prepared for the unexpected. you are not presenting it well.3. • Your audience may ask you several questions at once. Give your presentation to friends or family. Stop when it goes off. but in reality. “So what?” If you cannot answer this question simply and easily. 12. They may ask you something you want to respond to in an e-mail later. everyone brought a pen and paper. and each investor will respond differently. Guy Kawasaki recommends you set a timer [2.5 Take Notes Have a pen and paper ready and take notes during the pitch.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. I always bring a pen and paper to meetings. ask yourself after every statement you make. AFTER THE PRESENTATION 125 Side Note 12.3 After the Presentation Each presentation will be different. Ask them what your company will do. where some of the smartest people in the world worked. 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. In general. Everyone.

5 [3. you should also realize that most most comments will be negative and most presentations are rejected. 321]: “What to do when a venture capitalist turns you down: Ten questions.1 (What to Do When You’re Turned Down) Present Kuratko table 10.126 CHAPTER 12. PRESENTING THE PLAN with only success on your mind. Remember that persistence is the most important character trait of entrepreneurs. Side Note 12. Be prepared for rejection and do not consider it the end of the road. p. Each time your are rejected improves your future opportunities.” . Each negative comment gives you an opportunity to change an investor’s opinion.3.

Chapter 13

Inventory Control
Most entrepreneurs do not know how to set up effective inventory control systems. Even more problematic, startup businesses don’t have a past sales figures or experience with which to project demand and inventory requirements. Side Note 13.0.2 (Insufficient Inventory) Insufficient inventory can mean • Lost sales, • Costly back-orders, • High prices for emergency inventory. Side Note 13.0.3 (Excess Inventory) However, excess inventory costs money for • Extra overhead, • Debt service on loans that you purchased the inventory with, • Additional personal property tax on unsold inventory, and • Additional insurance costs. You may also find yourself wanting to lower your prices to get rid of excess inventory. By some estimates [4, p. 287] excess inventory costs 20% to 30% of the original purchase price of the merchandise to store and maintain. 127

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

2 (Order Cycle) In inventory management.3 (Count Cycle) In inventory management. such as for volume discounts for preferred customers.3. • Updating product information – At the time a sale is entered. these systems should automatically update inventory and accounting records. Definition 13. if you perform an inventory count four times a year. work with suppliers to improve delivery times and count inventory more often. you have “turned over” your inventory.3. the count cycle is the amount of time between counting inventory.4 (Delivery Cycle) In inventory management. • 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. the delivery cycle is the amount of time between placing an order and receiving it. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons.3. Definition 13.1 Inventory Turnover Typically.130 • Maintain a sales history. To improve efficiency of inventory control. 13. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item.3. CHAPTER 13. the order cycle is the amount of time it takes to process paperwork and place orders. INVENTORY CONTROL When considering the purchase of a POS. For example. • Security – To prevent theft. and • Improve pricing accuracy. a high inventory turnover is a mark of a well-managed inventory system.3. Definition 13. be sure it’s not easy to “hack” the system. your count cycle is 12 weeks.1 (Turnover) When you have replaced 100% of your original inventory. Definition 13. .

4. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.4. 13. which may result in higher taxes. The author is unfamiliar with Chinese tax codes.2. you must estimate your inventory value when you file your taxes. In other words. First Out)) FIFO (first in. and delivery cycle. Calculate your sales per square meter once per month.3. In deciding which to use.4. 13.4.1 (LIFO (Last In.4. follow the recommendation of your accountant. first out) assumes that you sell the least recently purchased inventory first.3.2. In the U. See definitions 13. You should know how many sales per square meter per year you need to survive.2 See also 13. If there is inflation. 2 At 3 At least this is true in the U. Many businesses also measure turnover by measuring sales per square foot (or square meter). INVENTORY ACCOUNTING 131 Definition 13.3.S.3.S. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. it values your remaining inventory based on the prices of the most recently purchased items. LIFO and FIFO are two accounting methods used to do this. which allows you to pay less taxes on your inventory. order cycle.2 (FIFO (First In.5 (Needs Period) In inventory management.13. Definition 13.3 See also 13. it values your remaining inventory based on the prices of the least recently purchased items. ..1 Buying Inventory In the process of putting together your business plan. first out) assumes that you sell the most recently purchased inventory first.3. 13. least this is true in the U.4.S. After you have been in business your inventory control system should give you a better idea of stocking levels. If there is inflation. Definition 13. First Out)) LIFO (last in. but you should at least know about LIFO and FIFO.4.1. and 13. the needs period is the sum of the count cycle. The author is unfamiliar with Chinese tax codes.4 Inventory Accounting Your accountant will typically handle inventory accounting.

3. says. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . INVENTORY CONTROL Definition 13. three or four months.4.5. Rieva Lesonsky.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Distributors – Also known as wholesalers.” . courteous and firm with your suppliers. 13. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. usually one. – The minimum may be higher for first orders to cover the cost of setting up a new account. 2. Manufacturers – Note that some manufacturers refuse to fill small orders. Independent craftspeople 4. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Import sources – They operate like domestic wholesalers. 13.actual inventory .1 Dealing with Suppliers The most important thing about a supplier is reliability. brokers or jobbers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. “Be open. Their prices are higher than a manufacturers. • Some suppliers demand a minimum number of items per order. author of Start Your Own Business.132 CHAPTER 13.5 Suppliers Suppliers can be divided into four categories: 1.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.

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

o. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. May 19. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment. This differs from a forward order where stock is available but delivery is postponed for other reasons.6 See also definition 13.5.wikipedia.5.2.5.3 (FOB Destination (or f. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.com/jargon.o.4 Colloquially. Destination)) Free on board destination. 2007.abcsmallbiz.roadway. people often say something like “f. Specify a cancellation date on your order forms. 2007.epoi. INVENTORY CONTROL • Depending on whether the supplier pays frieght. 2007.134 CHAPTER 13. May 19.)) Free on board.b. As opposed to FOB.3. .7 4 Source: 5 Source: http://www. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. Under this arrangement. May 19. Definition 13. See also definition 13. The FOB term requires the seller to clear the goods for export.b. 5. 3.5.org/wiki/Backorder.o. Definition 13. 6 Source: http://www. Be aware of your supplier’s priorities.html. 7 Source: http://en. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.b.com/reference/glossary/glossary efg. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.2 (FOB (or f.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. Definition 13.com/shippers/glossary. 2007.html.html. Seattle” to indicate that an item being shipped from Seattle is free on board. http://www. May 19. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.5. 5 FOB Destination changes the location where title and risk pass.

• Part-time employees. p. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. besides being bad for business. 135 .2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. 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. 337]. a bad hire. Side Note 14. they are often emotionally draining for the manager as well as the employee involved.0.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. and • Independent contractors. On the other hand. • Temporary employees (temps). The benefits of finding the right person for a job cannot be overstated. Side Note 14.0.

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

HOW TO HIRE 137 • There is little room for advancement. • The position of that employee in the corporate heirarchy.1. it includes • The job title. • Who the person reports to. Definition 14.1 (Job Description) Job descriptions should include • A job title. Side Note 14. 338]. Like a job description.1. • A salary range. It also includes • Any educational requirements. you hire someone as Director who is not qualified to be a director.1) and should include the personal requirements expected of an employee [4. and • A summary description of the position. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career.1. • If you give someone an inflated job title but do not offer a salary commensurate with the title. If you hire someone at the highest level of their competency.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. p. you may find it difficult to give them a promotion later.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. If.1. then they go on to a Director position at another company. for example. • Physical or other special requirements associated with the job. p. and • Job summary with major and minor duties. 339]. . Definition 14. and • Any occupational hazards. You may actually be doing your employee a disservice by inflating their job title. • Benefits. • Specialized skills or knowledge.14. Part of retaining quality employees is the prospect of advancement. you may find they are tempted to leverage that job title to seek employment elsewhere.1. • Desired experience.

138 CHAPTER 14. HIRING EMPLOYEES 14. such as “outgoing” or “detailoriented. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.3 Advertising the Job When you write an advertisement. 14. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. – For professional positions.4 (Using an E-mail Address) For professional positions.1. • Be sure to list appropriate contact information. With e-mail. • 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. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.” or people who may not have them will just try to fake those personality traits in the interview. – For other positions. • Do not ask for specific personality traits.1.. It also makes it easy to receive and process a large number of applications with a minimum of effort. • List the top 4 or 5 skills that are most essential to the job.1.1. due to the number of applicants for competitive positions. if you are looking for an accountant.S. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. particularly those that advertise on web sites. • Do not list requirements other than educational or experience-related ones. . e-mail addresses have become perhaps the most popular way to get applicant information at U.5. 2 See sidenote 14.2 Side Note 14. companies. For example.4 Finding People There are many possible sources of applicants.S. Many American companies are no longer providing phone numbers.

• Industry Publications – Most trade publications take ads for job openings. • Online – In the U.000 hits searching just the “Information Technology” search category. particularly in the high-tech industry. • Focus on the skills that a person can bring to your company. the hiring process proceeds as follows: 1.S. but when looking at a resume.3 Generally. You narrow the number of resumes down to about 10. You can evaluate their personality during the interview. 2007 turned up more than 5. Try to perform a search on a job sites such as http://www. 4. 3 Java is a programming language. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. 3. Screening People Reviewing resumes and applications is an art. You conduct a second round of interviews with the remaining 3 candidates.” . about 10 or so.” And 921 in “Engineering. You interview the candidates. If you are lucky. not a science. 159 in “Financial Services. 2. be sure that a candidate can provide what you are looking for.monster..” 665 in “Internet/E-Commerce. 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.dice.com with the keyword Java on May 19. many positions are being filled online. You check references..S.com or http://www.com with the keyword “java” will demonstrate just how widely used online tools are. You narrow down the 10 candidates to 3.1. For any job. 6. There were 4.314 listings in the “Computers. for professional positions. 5.14. most professional associations’ job banks are now online. Software” category. You hire the preferred candidate. In the U. To “weed out” candidates. Searching on Monster. you will get several candidates for any job you are offering.

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

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

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

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

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

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

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