International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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. . . . . . . . . . . . .3 3. . . . . . . .6 Associative Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . .1. . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . 3. . . . . . . . CONTENTS . . . . . . . . . . . . . . . . .3 Project Controlling . . . . . 4. . . 6. 5. . . . . . Strategy Development and Implementation . . . . . . . . . . . . . . . . . . . . . . .1 What is Forecasting? . 4. . . . . . . . . . . . . . . 3. . . . .4 Determining the Project Schedule . . . . . . . . .4. . . . . . . . . .3. . . . . . . . . . . 5. . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . .2. . . . . . . .1 Probability of Project Completion .1 Identify Critical Success Factors . . . . . . . .8 A Critique of PERT and CPM . . .1. . 4. . . .1 Adaptive Smooting . . . . .5 Seasonal Variations in Data . . .2 A Seven Step Forecasting System . 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. .3.2 The Work Breakdown Structure . . .4 Monitoring and Controlling Forecasts . . . . . . . . . 4. 5. . . . . . . . . . . . . . .2 Focus Forecasting . . . . . . . . . . . . . . . .2 Preconditions . . . 5. . . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . . . . .3. . . . . 5. . . . . . . . .3. . . . . . 5. . .2 The Strategic Importance of Forecasting 5. .3. .4 3. . .2 Life Cycle and Strategy .3. . 4. . . . . . 5. . . . . . .3. . . . . . . . . . . . .4 Adjusting for Trend . . . . . 5. .6 Variability in Activity Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . .3. 6. . . . . . . . . . . . . . . . . . . . . . . . . .1 Research . . . . . . . . . . 5. . . 5.1. . . .4 4 Project Management 4. . . . . 5. . . .3. . 4. . . . . .3 Measuring Forecast Error . . . . . . . . . . . . . . . . .3 Forecasting Approaches . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options .2 Build and Staff the Organization . . . . . . . . . . . . . . 4. . . .2 Network Diagrams . . . 4. . .1 PERT and CPM . . . . . . . . . . 6. .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . .1 Types of Forecasts . . . .3 Product-by-Value Analysis . 4.1 The Project Manager . . 5. . . . . . . .1 Qualitative Forecasting Methods . . . . . . . . . 3. . . . . . . . . . . . 3. . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . . 6 Design of Goods and Services 6. . . . . . . . . . . . . . .3. . .3. . . . . . . . . . . . . 3. . . . . . . . .1 Goods and Services Selection .6. . . . . 4. . . . . . . . .2 Project Scheduling . . . . . . . . . . . . . . . . . . . .1. . . . . 4. . . . . . . . . . . . . .1. . . . . .1. . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . .3 Dynamics . . . . . . . . . . . . .1 Project Planning . . . . . . . . . . . . . . .

. . . . . . 110 10. . . . .1 Characteristics of the Successful Entrepreneur . . . . 101 9. . . . . . . . . . . . . . . . . . . 92 7. . . . . . . . . 6. 11. . .3.1 Preparing to Put the Plan 11.1 What Am I Researching. . .1. . . . .2. . . . . Exactly? . . . . . . . . 6. . . . . . . . 94 7. . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . . . . . . . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . .2 Some Suggestions . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . 111 10. . . . . . . . . 95 8 Finding an Idea 97 8. . .2. . . . 6. . . 12. . . . . . . . . . . . . .3 Setting Goals . . . . . . . . . . . . . . . . 12 Presenting the Plan 12. . . . . . . . . 11. . . .2. . . . . . . . .3 After the Presentation . . . . . . . . . .2. . . . . . .3 Organizing for Product Development . . . . . 104 10 Market Research 109 10. . . . . . . . . . . . . . . . . . . . . . . . .2 Research Methods . . . . . . . 12. . . . . . .2 Redefining and Expanding Your Niche . . . . . . . . . . . .3 The Mission Statement . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . .2 Know Your Outline Thoroughly . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . .3 Generating New Products . . . . . . . . . . . . . . . 6. .6 So What? . . . . .3. . . . . . 12. . . . .3 Be Familiar With All Equipment to be Used 12. .2 Look and Feel . .1 Your Audience . .1. . . . . . . . . . . . . . . .1 Sources of Secondary Research . . . . .1 Product Development System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . .5 Take Notes . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. .1 Importance of New Products . .1 Finding Your Niche . . . . . . Now What? . . . . . . . . . .3 Some Style Points 11. . . . .1 You’ve Got an Idea. . . .2.2. . . . . . . . . . .4 Manufacturability and Value Engineering . . . . Product Development . . . . . .3. . . . . . . . . . . . . .2 The Plan Contents .1 The Presentation . . .1. . .1 Do It Until You Get It Right . . . . . . . .4 The First Minute is the Most Important . . . . . .2 6. . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . .CONTENTS 6. . . . . . .2 Are You Ready? . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . . . . . . 104 9. . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . .

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

Part I International Business Management 7 .


but as leaders in the community. such as Saudia Arabia. they become increasingly important not only as a business entity. small business owners are leaders in their community whether they intend to be or not. Furthermore. • Homosexuality is acceptable in Scandinavia but offensive in many other parts of the world. in some Islamic nations. they are not allowed to drive or go out in public without covering their hair or face.1 Culture and Ethics Side Note 1.1.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 becomes more problematic as multinationals cross cultural boundaries. 1. 9 . As multinational corporations become more prominent. What may be perfectly acceptable to one culture may be abhorrent to another. • Married women are considered to be acting against the teachings of the Koran if they work outside the home. Likewise. whether they are a small business owner who runs a restaurant or a multinational corporation like Microsoft or Lenovo.1 (Conflicting Cultural Values) Ask the class whether they can think of cultural values that are perfectly acceptable in one part of the world but not in another. For multinationals.

Westerners rely more on contracts. child labor was widely used. 3. 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. Prison labor is also considered improper in the U. Which brings us to the subject of this lecture: Ethics. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi.2.S. Easterners tend to trust people after observing a pattern of consistent behavior. Definition 1. • In general.A.S.10 CHAPTER 1.2. • Because guanxi is less important in the West.A. .2. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. there is a perception in the West that Chinese are hard-working and smart.1 (Ethics) The study of morality and standards of conduct. • However. 2.A. Why is corruption an important business issue? • See sidenote 1. For example. Note that during the industrialization of the U.2 Corporate Corruption Side Note 1.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. which are more strictly enforced in the West. and Europe but a commonly accepted practice throughout the developing world. Western business people may not initially trust their Chinese counterparts. • Because of this..1. business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like. It is much harder for a Westerner to know when to trust a Chinese person than for a Chinese person to know when to trust another Chinese person. 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.S. This is something Chinese business people should be aware of.

Scandinavians are typically highly trustworthy1 but Italians are less so. WorldCom. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite investors in the United States had to reevaluate the risk associated with owning stock. reward. September 20. “. • It increases the cost of doing research/surveys indices/cpi. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. . – In the wake of Enron.”[6] 1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived as least corrupt in the 2005 Transparency International Corruptions Perception Index. it is simply inefficient. China continues a battle against corruption.2 Though things are improving. For example. • Of course. there are few if any issues which affect and infuriate so many in China as corruption. Source: texttthttp://www. they must factor additional uncertainty into their calculations. Side Note 1.2.2. gift. September 20.1 (Bribe) A price.transparency. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. these are all generalizations and individuals may differ significantly from their cultural affiliations. and Tyco. 2 Source: http://www. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. or other person in a position of trust. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way.1. . 2006.2. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). voter.2 (Corruption) Corruption is of concern for business people because • It increases risk. In the words of a Beijing correspondent for “The Economist” magazine. Definition 1. – A bribe is a business expense that goes to no productive purpose and decreases profits. witness. which requires strict monitoring and verification of financial information. . • On a macroeconomic level. 2006.

• Tyco – The CEO of Tyco. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. http://www. Parmalat.1. In Scandinavia.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.S. Worldcom.2. See sidebar 1.S.3. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. WorldCom declared bankruptcy in July 2002.bankruptcydata. the former CEO of WorldCom. Dennis Largest. scandals such as Enron. a high value is placed on honesty and personal integrity. • WorldCom – Following the Enron scandal.htm. was accused of looting the company to fund a lavish lifestyle. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. 2007. and Tyco make it clear that even western developed economies have significant ethical shortcomings. 3 Source: 4 Source: http://www. There is currently debate as to the effectiveness of the regulations relative to the costs. Side Note 1.2 (Cultural Heritage in the U. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.htm. • Enron – In December Largest.12 CHAPTER 1. was convicted of fraud and conspiracy and sentenced to 25 years in jail. the SarbanesOxley Act (SOX) was passed in the U.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. including a $2 million birthday party for his wife.4 – Bernard Ebbers.S. March 17. March 17. While western developed economies often cite a high ethical standard. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. succeeding Enron as the largest bankruptcy in U.bankruptcydata. 2007. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.S.3 The United States The United States has recently been rocked by a number of scandals in the business community.3.. history. Qwest. . Side Note 1.

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

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

1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.S.dict.5. than any other.5. 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. in an extended sense. particularly in upper management. 1.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.5 1. Although women have entered the workforce in large numbers in recent decades.4. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. with most in the top 20 among over 150 countries included in the survey.5. is the notable exception).org.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. to try to influence decision-makers in any circumstance. Hodgetts et al. their attitudes towards bribery when working in foreign markets differs from that of the U. at 40.5. with the purpose to influence their votes. 7 Source: http://www.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. . Side Note 1.1. yes or no. Definition 1.S. there seems to be a glass ceiling due to social factors.4. They only have the power of persuasion.4. Side Note 1.3 Lobbying by Japan Japan spends more money lobbying in the U.7 Note that lobbyists do not have any formal power.S. politicians..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. EUROPE 15 1. men are disproportionately represented in management positions.

16 CHAPTER 1.S.5.5.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation. 8 Side Note 1.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.htm. 8 Source: http://careerplanning. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. yes or no. . 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. • More British companies have actively sought to recruit and promote women into management. 1. For those students who think so. though compensation is limited relative to lawsuits filed in the U. 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.about.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. Side Note 1. but there is a perception that there are risks and ethical considerations. • Discrimination lawsuits are more commonplace in Great (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.5.

[5.1 (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. Bribery and other forms of corruption. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 5. Prison labor. 4. . • Yet another case in which software from a U.3 (Corporate Spying) Hodgetts et al.6. pp. 3.5 billion in sales annually. 6.1. 64]. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. and • A recent history of rapid economic development. Often. International corporate spying problems. An opaque legal system. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. executives. An increase in crime and illegal business activities. company in Boulder was stolen and sold to a Chinese company. • Note that for every corporate spy that is caught. Side Note 1. Side Note 1. • A relatively stable government.6.S. 7. there are undoubtedly many others that get away with it.6. Child labor. Piracy and counterfeiting (see sidenote below). it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. 2. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. Ethical considerations include 1.2 (Piracy and Counterfeiting) Present sidenote at [5. p. 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.S.6.

In the words of a Beijing correspondent for “The Economist” magazine. Definition 1. “. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. political.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. and the environment. . • CARE (promotes community development. and the environment. Other companies.2. social justice. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. not-for-profit organizations that seek to serve society’s interest by focusing on social.benjerry. .3 (Nongovernmental Organizations (NGOs)) Private. education. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. Definition 1.7. provide relief in the event of humanitarian disasters. health. and promotion of social equity).6. 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. political. not-for-profit organizations that seek to serve society’s interest by focusing on social. 1.4 (Corruption) Though things are company/our mission/index. such as education and health care.”[6] See also sidenote 1. China continues a battle against corruption.7.7. .. and emergency relief in the event of humanitarian disasters). such as Whole Foods.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. health. and economic issues such as poverty. a grocery chain. social justice. education. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.cfm for more detail. Side Note 1.18 CHAPTER 1.2 (Nongovernmental Organizations (NGOs)) Private.7 Corporate Social Responsibility Definition 1. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). there are few if any issues which affect and infuriate so many in China as corruption. See http://www.7.S. and economic issues such as poverty.

S. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. as it gives the U. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.9 U. For example. last but note least. In 2005. – Even socially responsible executives would consider the “bottom line” when making decisions. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. many feel that it has had a net benefit. Side Note 1.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.1 Corruption and the FCPA Revisited Hodgetts et al.7.7. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). but does not outlaw payments to political party leaders. with a score of 3. Executives are people. too. • Conservation International (promotes environmental conservation). 1. • To prevent a boycott or other consumer defections.7. • And. Side Note 1. and • Rainforest Action Network (RAN). note that while U. as executives of publicly traded companies are ultimately responsible to their shareholders.S. firms a reason to refuse to pay bribes.7.000 and $125. executives may actually feel that it is the right thing to do. firms are constrained by the FCPA with regards to bribery and other corrupt practices.S. China ranked 78 out of 158. MNCs do not appear to have been significantly impacted. Both political groups and businesses are influenced by NGOs.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. In fact. . 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.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.1.2.

Side Note 1. and Germany at 7.6 and 8. malfeasance and diversion of corporate funds becomes increasingly difficult. Hong Kong is number 15. Global Compact. but most important first step is to recognize that there is a problem. Tyco.3. Global Compact specifies 10 principles which MNCs should abide by: 1. With greater financial transparency. . and Parmalat resulting in investors losing billions of dollars. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. Support and respect the protection of international human rights.N.0 is considered to be the borderline at which countries are considered to have a problem. Scandinavian countries are at the top of the list.7.7.4 (Some Opinions) Personally. Singapore is number 5 with a score of 9. slightly better than Sweden.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. 4. more Chinese will own stock in companies. such as the U. Commitments that many MNCs have signed on to. 2006. and the environment.N.2 respectively. and not based on hard data. better than the U. societies. 3.html. The government recognizes that it is an issue and is taking action. The government is actively addressing the issue of corruption. with scandals such as Enron. 5.20 CHAPTER 1. with a score of 8. I think corruption will diminish as China economically develops for several reasons: 1. It is a difficult problem to solve. Moreover.infoplease. July 1. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ the United States and Europe have recently been rocked by corporate corruption. 2.5 (Table 3-1: Principles of the Global Compact) The U. Important: Although it is widely cited. 1. 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. specify standards and codes of conduct in domestic and global operations. Side Note 1. As more state-owned businesses become privatized and the size of the middle class increases. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. With more disciplined corporate governance. 10 http://www. WorldCom.S.10 Corruption is certainly not endemic to Asia.4.

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


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

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

Side Note 2. 2.1. 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. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. OM is one of the most costly aspects of an organization. pp.2. known commonly in the U. 3. 1.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design.2. p. supply-chain management.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. quality. inventory.S. OM decisions have been divided into ten categories by Heizer [1. Definition 2. • They are often sources of conflict among management. 6–7]. Planning.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1.2. scheduling. and 4. Organizing.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. Side Note 2. Controlling. . and maintenance. human resources and job design. 5]. more generally. layout design. To accomplish these functions. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. particularly when job titles are not clear. as the org chart determines executives’ authority and. 2. place in the heirarchy.2. business community as “org charts. operations managers make decisions. process design. Staffing.” • Every organization with more than a few employees has an organization chart. location selection. p. 7]. WHAT OPERATIONS MANAGERS DO 25 4.

. 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. capacity needs. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. personnel levels.26 CHAPTER 2. 9. Poor location decisions may overwhelm other’s location decisions and Matt McAdams a posteriori assessment of the choices. 5. and human resource planning. 8. delivery. Location – Where should we put the facility? • Location decisions are crucial. Inventory. 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. • Mutual trust between buyers and suppliers is crucial. production scheduling. innovation. and JIT (just-in-time) – How much inventory of each item should we have? When do we reorder? • Inventory decisions must follow from customer and supplier considerations. and price. technology decisions. and maintenance and determine much of the cost of a product or service. 6. personnel use. • Discuss Active. and inventory requirements. 3. 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. material requirements planning. 7. • Personnel costs are a significant part of most production or service processes. OPERATIONS AND PRODUCTIVITY 2. quality. 4. Intermediate and short-term scheduling – Are we better off keeping people on the payroll during slowdowns? Which job do we perform next? • Feasible and efficient production schedules must be determined. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies.

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

Bureau of Labor Statistics defines services to include [1. • Government. • Food and lodging.5 [1. • Insurance. p. the wages are considerably above average. such as retail. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.S.S. Definition 2. economic output. the services sector is by far the largest employer. • In some service industries.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food.S. and other essentials for its citizens. 2 The average national private industry wage.3. Side Note 2.. major contributions have come from the field of information sciences. for others professional occupations. Today.1 (Development of the Service Economy) Present Heizer figure 1. 9] • Repair and maintenance. such as the legal profession or computer services in the financial industry. • Recently.1 (Services) Those economic activities that typically produce an intangible product.28 CHAPTER 2. • Transportation.3.2. Definition 2.3 (Information Sciences) The systematic processing of data to yield information. the economy transitioned from agriculture to manufacturing around 1900. p. The U.. In the U. • In most western economies. average wages are below average2 in the U. However. services become increasingly important. Manufacturing was dominant until about 1950 or so.S. • Trade. services account for over 70% of U. shelter. 11]. . 2. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.

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

13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. the next step in product development involves customizing products according to the customer’s preferences. Definition 2.30 CHAPTER 2. 2. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. brought about in part by the internet. or management).5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. p. . it will continue to strongly impact the field.2. operations managers are responding by moving decision making to the individual employee. • 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. • Empowered employees – With the rise of services and knowledge products. and finished goods rapidly. parts. reusable.5.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. wherever and whenever needed. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. OPERATIONS AND PRODUCTIVITY 2. Trends that Heizer and Render identify [1. or recyclable products or to minimize packaging and other wasteful production steps. operations managers are increasingly responsible for innovations that move ideas. capital. Operations managers are being challenged to produce biodegradable. • Mass customization – With increases in technical capabilities and customerlevel information management. Globalization has been having a dramatic impact on operations management and in the future.2. • 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. 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.

Side Note 2. .25 titles per labor-hour = 0. p.5. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Definition 2. Definition 2. 15].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.2 (Example: Calculating Productivity) Present Heizer’s example 2 [ (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) 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. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. Also known as total factor productivity.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Side Note 2.5.0077 titles per labor-hour = 0. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.4375 titles per labor-hour = (Total Factor Productivity) See definition 2. THE PRODUCTIVITY CHALLENGE 31 Definition 2. but overhead is no $800/day. Consider today’s computers versus those from the 1970s.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5. In order to improve productivity. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.

A Toyota Corolla is a much different car than a Porsche 911 Turbo. and was about the size of my hand. Labor productivity has increased due to • Better-educated. . (It used audio tapes for memory storage.5 (Productivity Variables) In operations management. no word processors. spreadsheets. • Exogeneous factors – External elements may cause changes in productivity which the operations manager or other factors in the system under study is not responsible for. and the arts and science of management. where quality and other factors vary widely or the level of service provision includes items difficult to measure. Capital. the three factors critical to productivity improvement – labor. you had to write a program from scratch.32 CHAPTER 2. in Cambodia. If the public electricity provision increases in quality. – This can be a particular problem in the service industry. – Not all cars are the same. – For example.) The screen had only one color.S.5. If you wanted the computer to do something. the public provision of electricity is highly variable. Labor In the U. of course.5.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. about 10% of the annual improvement in productivity is due to increases in labor productivity. • Units of measure – There may not be appropriate units of measure. 3. Management.. 2. There were. Labor. or other commercial software available. such as convenience or safety. Definition 2. capital. it may improve productivity. 2. The electricity often goes out in the middle of the day and the current may vary in strength. green.

Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. Social overhead that makes labor available. .3 (The State of Education in the U.8 [1. and 4.5. p. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. THE PRODUCTIVITY CHALLENGE • Better-nourished. Basic education appropraite for an effective labor force. Which of the following is true about 84% of 100? 4 When presenting this question. 16]. Cannot Correctly Answer Questions of This Type. draw the rectangle on the blackboard. The primary variables for improving labor productivity include 1.2.5. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. 2. and math. and • Healthier workers as well as • A shorter work week. Side Note 2. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. Diet of the labor force.. such as transportation and sanitation. writing.) Present Heizer figure 1. there is considerable concern over teaching of basic skills such as mathematics to grade school children.S. and 33 3. “About Half of 17-Year-Olds in the U. What is the area of a 4 × 6 meter rectangle. maintaining and enhancing the skills of labor.” In the U.S.S. In developed nations.

5% after allowances for depreciation. graduate programs and the students they produce remain the best in the world.5.5. Side Note 2. Developed economies (also known as post-industrial economies) require trained. management is not always identified separately from labor as an input..5. and because the author of the textbook is writing about operations management. Note that there is a trade-off between capital and labor in most industries.2 Capital Capital investment in the U. management is considered as a separate input.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Note that in classic economic analysis and other areas of business. as well as capital.5. however. education. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Definition 2. are utilized effectively. 2. 17].S. educated. has increased at about an average of 1. p.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. According to Heizer [1. Difficulties arise because service-sector work is . 2. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. and the cost of capital depends on interest rates.4 (Management as an Input) Because this is a course in business management. productivity in the service sector has not increased as rapidly as with the production of goods. U.S. 2. and knowledge.5. and knowledgeable employees and operations managers are responsible for ensuring that technology. in the U.4 Productivity and the Service Sector Historically.S.34 CHAPTER 2.

• Keeping the workplace safe. Low-productivity activities.5 (Service Productivity in the U. watchdog groups such as NGOs.S..5 • The U.. These demands come not only from the manager’s personal ethic. SOCIAL RESPONSIBILITY 1. Difficult to evaluate for quality (e.g.. government agencies. such as cleaning. 35 3.g. and child care. . 2. p. 18] • Retailing in the U. Frequently individually processed (e.g. the performance of a law firm).) Productivity is highest in the U.. 2.S. Side Note 2. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. Heizer notes [1. teaching). Often difficult to automate (e. 5 In Japan. We will discuss this challenge in more detail throughout the course. Often an intellectual task performed by professionals (e.g.S.S. Typically labor-intensive (e. and • The U.. 4.5. a haircut). and other stakeholders. investment advice). is twice as productive as in Japan. food preparation. but from customers.6 Social Responsibility As discussed in chapter 1. laundry service. These challenges include such issues as • Maintaining a clean environment. legislation protects shopkeepers from discount retailers. medical diagnosis). in both overall and service productivity.S.2. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.g. • General ethical behavior concerning issues such as child labor and corruption.6. banking system is about 33% more productive than Germany’s. telephone industry is twice as productive as Germany’s. and 5.


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

Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. We will produce outstanding financial returns by providing totally reliable. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.1. Side Note 3. competitively superior.38CHAPTER 3. 5. Provide Better Goods and Services – For companies doing business in an international setting. and • Increase sales.1 (Mission Statements for Three Organizations) Review Heizer figure 2. global air-ground transportation of high-priority goods and documents that require rapid. Equally important. 3. Definition 3. p.1. time-certain delivery. I recommend that all companies draft a mission statement.2 [1. 3. France.1 (Mission) The purpose or rationale for an organization’s existence. FedEx is committed to our People-Service-Profit philosophy. an understanding of cultural differences in preferences is needed to best meet customer needs. FedEx. Attract and Retain Global Talent – By offering more employment opportunities. 4. Missions state the rationale for an organization’s existence.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. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1 Mission Whether large or small. global organizations can attract and retain better employees. 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. • Provide additional insights and opportunities. 6. • Perfumers tend to concentrate in Grasse.1. 28] which includes mission statements for three multinational companies: 1.

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

• Interoperability with other products. 3.3 (Sample Mission Statements) Present Heizer’s figure 2.1. the creation of a unique advantage over competitors. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. Definition 3.1. . Differentiation can arise from anything that the customer may value about a product or a services. 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. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.40CHAPTER 3.3: “Sample Missions for a company/our mission/index.1. • The “look and feel” of the product. 2. • Training. Responsiveness – By providing timelier.” Note that mission statements are used not only at the company-wide level. Side Note 3.1. Definition 3. Differentiation – They make their product better. and Major Departments in an Operations Function.benjerry.2 (Strategy) How an organization expects to achieve its missions and goals. Cost leadership – Providing cheaper products. but can be used at the department level and even at the project level. See http://www. • Availability of complementary products. more responsive products or services.3 (Competitive Advantage) In operations management.cfm for more detail. 3. the Operations Function. be it • Product features.

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


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

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

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

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


Issues in Operations Strategy

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





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



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



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

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

. and Threats) analysis to develop strategies. These critical success factors are used to develop a competitive advantage.2 (Critical Success Factors) In operations management. if the firm has a competitive advantage in these things) and where failures are most likely. and 3. determining internal strengths and weaknesses and external opportunities and threats. Group the necessary activities into an organizational structure. 37]. Definition 3. then • Form a Strategy.3. • Determine Corporate Mission.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. in particular. “Strategy Development Process. The operations manager’s job is a three-step process: 1. p.3. The purpose of this process is to 1. Opportunities. 3.3. and 3. Provide competitive advantage.44CHAPTER 3. Definition 3. Weakness.” The process of developing a strategy involves the following steps: • Environmental Analysis. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. then determine whether the organization does these things well (and. those activities or factors that are key to achieving competitive advantage. 2. Identify a strategy and critical success factors. Side Note 3. Staff the organization with personnel that will get the job done.1 (Strategy Development Process) Present Heizer figure 2. 2. Increase productivity.6 [1. Implement an OM strategy.1 (SWOT Analysis) In operations management.3.

3 Integrate OM With Other Activities In order to achieve its strategy. Side Note 3. • Red arrows – critical success factors • Blue arrows – support activities 3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. a graphical link of competitive advantage. Definition 3.1. an activity map can be used to link an organization’s competitive advantage to the CSFs. p. OM activities are most productive when they are integrated with other activities such as marketing. 39].1 as a checklist to determine critical success factors.4.3.3 (Activity Map) In operations management. 3.3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. MIS. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.3. Once CSFs are determined. finance. 5 Management 6 Human Information Systems Resources.5 and HR. Southwest Airlines has a competitive advantage in providing low-cost airfares.2.3.2 as examples of how firms organize their activities. CSFs.3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy. and supporting activities. Recall the “org charts” in sidenote 2.6 3. .

Definition 3.4.5 (Global Strategy) In operations management. • McDonald’s is an example of a country with a multidomestic strategy. International strategy – Often the easiest strategy. 4. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.4. Definition 3. Definition 3. 95% of its assets and 98% of its sales are made outside Switzerland. p.4 (Multidomestic Strategy) In operations management. Also one of the least profitable due to transport costs and little local responsiveness.6.3 (International Strategy) In operations management.5. • Nestl´ is an example of a country with a transnational strategy. 2.3.4. products do not need to be localized. Typically characterized by subsidiaries.46CHAPTER 3. wine in France. In the semiconductor industry. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4. and hamburgers without beef in India. See definition 3. owning or controlling facilities in more than one country.4. a strategy that uses exports and licenses to penetrate the global arena. [1. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. as exports require little change in operations and licenses often leave risk with the licensee. Global strategy – Not characterized by local responsiveness. with beer on the menu in Germany. Usually does not confer a cost advantage. Its menu reflects the country in which it operates. • Texas Instruments is an example of a country with a global strategy.4. See definition 3. but a good strategy for cost reduction when products do not need to be adapted locally. See definition 3. franchises. Although e it is legally Swiss.4.4. Definition 3.4. See definition 3. or joint ventures with substantial independence. .1 (International Business) A firm that engages in cross-border transactions. 3. 42] Definition 3.4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Only 10% of its work force is Swiss. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1.

a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.3. Side Note 3..4. 6].6 (Transnational Strategy) In operations management. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. p.4. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .4.S.


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

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

1. 2. The project is on or under budget. 3. Approve software architecture for user account input web page functionality . ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.1.4. Complete software architecture for user account input web page functionality 5. and 4. Review graphic design for user account input web page 3. a web page takes about a day to build for an experienced team. In a project that includes allowing a user to enter personal information on a web page. Definition 4. dividing a project into more and more detailed components.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). Approve graphic design for user account input web page 4. a task that should only take a day or so. PROJECT PLANNING 1.1. When dividing a project into tasks.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. • Build the user account input web page is a much better task division than 1. Complete graphic design for user account input web page 2. Review software architecture for user account input web page functionality 6. For example. 51 4. in a software engineering project. you have divided the tasks too finely. The project meets its quality goals. Side Note 4.1. People receive motivation and information necessary to do their jobs. All projects come in on time.2 (Work Breakdown Structure (WBS)) In operations management.

At the time you are creating the work breakdown structure.3 [1.2.52 CHAPTER 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Major tasks in the project 3. Side Note 4. fill hundreds if not thousands of pages. Project 2. Scheduling serves to 1. Identify precedence relationships among activities 3. 4. Encourage realistic time and cost estimates for each activity .2 (Work Breakdown Structure) Present Heizer figure 3. Show the relationship between each activity to others and to the whole project 2. Write software for user account input web page functionality 8. Activities (also known as “work packages”) to be completed Side Note 4. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. the work breakdown structure is not something you go to your office to do in isolation. Subtasks in major tasks 4. p. They will be useful for project scheduling. The actual WBS for Windows XP would.1. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. PROJECT MANAGEMENT 7.1. you should also take note of time and cost estimates given by your technical staff.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). which we will discuss next in section 4. of course. Write software for user account input confirmation page functionality 9. 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: 1.3 (Reality Check: WBS) In reality.

Make better use of people. Side Note 4. and 4. Perhaps they imagine that they are not doing their jobs professionally if they are not. as.2. cost estimates. PERT.” This will give the class an idea of the look and feel of a typical Gantt chart. 3. For smaller projects. MS Project’s Gantt chart functions demand you assign employees.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. – said of roads.4.2 (Using Gantt. 51]. Definition 4. The order of performance is accounted for. 2. right by the bridge. and CPM tools for every project management activity. and other values to each activity.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. Gantt charts are perhaps the most widely used tool for ensuring that 1. It can actually be quite time consuming to create and maintain Gantt charts. Overall project time is developed. which becomes narrower as one approaches the neck of the bottle. Derives from the typical shape of a 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. Definition 4. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. moeny. PROJECT SCHEDULING 53 4. p.4 [1.2. All activities are planned for.2. PERT and CPM help answer questions such as • When will the entire project be completed? . the road bottlenecks. and material resources by identifying critical bottlenecks in the project Side Note 4.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. PERT and other formal documents. Activity time estimates are recorded. and CPM) Inexperienced project managers often feel the need to use Gantt. However.2. these should be considered merely tools to be used when they are useful by saving time or energy. PERT.

or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. 5. Work status reports. Raw material and expenditure forecasts.1 PERT and CPM Two methods. is the money spent equal to. Cost breakdowns for each task. is the project on schedule. 7. Variance reports.3. and 8. 4. Cost distribution tables. Control programs typically produce reports detailing 1. behind schedule. what is the best way to accomplish this goal at the least cost? 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. 3. 2. . quality. costs. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Total program labor curves. Functional cost and hour summaries.54 CHAPTER 4. Time analysis reports.3 Project Controlling Project control involves monitoring resources. less than. or ahead of schedule? • On any given date.3. PERT and CPM. 6. 4. and budgets of projects. Definition 4. were developed in the 1950s for project control.

2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3. Side Note 4. As the names describe.5 [1. it will do for you automatically much of what we will go through manually in this class. 53]. 4. . Also.3. Side Note 4. Assign time and/or cost estimates to each activity.4. See also definition 4. p. They both follow six steps: 1.3.2. AON associates the activity with the node whereas AOA associates the activity with the arrow. Develop the relationships among activities. PROJECT CONTROLLING 55 Definition 4. 2. and ontrol the project. Definition 4.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set.3. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.3.3. Define the project and prepare the WBS.2 Network Diagrams There are two approaches to visualizing activity networks: 1. monitor. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts.3 (Critical Path) The computed longest time path through a network. in my experience. See also definition 4.3. Gantt charts are the “go to” visualization method for even very complex projects. Activity on Node (AON) and 2. or the critical path. Personally. Activity on Arrow (AOA). Compute the longest time path.3. schedule. Moreover. 4. Draw the network connecting all of the activities. Use the network to help plan. 3. 5. 6.3. through the network.2 (Example: AON and AOA) Present Heizer’s figure 3.

3. 54–55]. ES = max{EF of all immediate predecessors}. LS = LF − Activity time. pp. that is. LF = min{LS of all immediate following activities}. Follow with example 3 and figure 3.1 (Critical Path Analysis) In project management.1 gives sufficient information to describe the network.9 [1. PROJECT MANAGEMENT Side Note 4. In other words. – If an activity has multiple immediate predecessors. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. EF = ES + Activity time. We do this with a critical path analysis with involves a 2-step procedure. See also definition 4. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. Definition 4. its LF equals its LS of the activity that immediately follows it. 2. their dependencies.4 Determining the Project Schedule Once we have identified all of our activities. . 4.6–3. that is.3. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. 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. – If an activity is an immediate predecessor to more than one activity. analysis used to determine the project schedule. p.4. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. we must use time estimates of each activity to determine the overall schedule for the project. • Table 3. 56].3. its ES is the maximum of all EF values of its predecessors. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 1.8 [1. its LF is the minimum of all LS values of all activities that immediately follow it. that is.56 CHAPTER 4.

activity F in sidenote 4.3 and Heizer figure 3. we may delay the project as a whole. they share total slack. E. and • Includes only critical activities (see sidenote 4. the free time for an activity.10 [1.1 (Slack Time) In project scheduling.4.1 When several noncritical activities appear successively in a path.5. 57]. p.3.1. p.5. we cannot complete the project in 15 weeks.5.4. These are called critical activities. the step that identifies all the earliest times that activities can be completed. 4. Definition 4. Definition 4.1.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. C.” Then complete Heizer example 7 figure 3.1).4. G. . the time shared among more than one activity.3 [1.4. The critical path is one that • Begins at the first activity in the project. the time devoted to one of these activities must also be reduced.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. the time associated with a single activity. or the amount of time an activity can be delayed without delaying the entire project. Note that activities A. Side Note 4. Slack time is just Slack = LS − ES or Slack = LF − EF .13 [1. 60].2 (Total Slack) In project scheduling. 2 For example. if we delay activities B and D by one week each.3 (Free Slack) In project scheduling.5. 61] based on table 3. Also notable is that if the total time of the project needs to be reduced. 1 For example. in the example in sidenote 4. • Terminates at the last. “Notation Used in Nodes for Forward and Backward Pass. Definition 4. If an activity2 does not impact the slack time of any other activity. and H have no slack time and cannot be delayed without delaying the entire project.4.2 (Forward Pass) In project management scheduling. Note also that if we delay each activity by the amount of slack that activity has. p. it is said to have free slack.4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.

etc. However. The beta distribution is used as a prior distribution for binomial proportions in .3. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. In PERT.2 and 4. Effectively.6. The usual definition calls these alpha and beta.6. Definition 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.6. we do not.6. unexpected complexities. See also definitions 4.1 and 4. Side Note 4. and the other uses β = β − 1 and α = α − 1 .3 (Most Likely Time) In project scheduling. Definition 4. which are labeled according to one of two notational conventions.1 and 4. PROJECT MANAGEMENT 4. See also definitions 4. the time required to complete an activity is often uncertain due to supply problems.6. three time estimates are used: 1. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Most likely time – The most realistic estimate of the time required to complete an activity.2 (Pessimistic Time) In project scheduling. In reality. Definition 4.1 (Optimistic Time) In project scheduling. Beta distributions have two free parameters.6.6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. technical considerations that were unknown at the time the project schedule was drawn up.2.6. in most cases. the project manager pulls the number “out of the air” based on their experience managing related activities.3.. the most probable activity completion time that could be obtained in a PERT network.6. See also definitions 4. the “best” activity completion time that could be obtained in a PERT network. the “worst” activity completion time that could be obtained in a PERT network.6. Definition 4.58 CHAPTER 4.

3 The domain is [0. Activity times are statistically independent 3 Source: http://mathworld.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.25 to 3. 2007. Total project completion times follow a normal probability distribution and 2.wolfram. q) = ( Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. February 21.wolfram. 2. and 7. p. and pessimistic times of 1. The expected activity time for activity F is 3 weeks5 and the variance is 1.html http://mathworld.6.00 week.1 Probability of Project Completion If we assume that 1. 63] for activity F based on optimistic. 4 See definition 4.6. 8 1. p. Side Note 4. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. 4. most likely.78 weeks. and .2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.1) where B(p.6.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.β) with α = 1 and β ranging from 0.00. 4. most likely.4. The above plots are for various values of (α.com/BetaDistribution. and 9 weeks.1].4.78 6 6 36 7 4 weeks. 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. β) Γ(α)Γ(β) P (x) = (4. The variance of the activity time is Variance = [(b − a)/6]2 . and pessimistic times of 1.html. 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. 62].6.

65] and figure 3. and within 3 standard deviations approximately 99. 9 For 10 See more information.html.6. Side Note 4. Side Note 4.6 (Standard Deviation) The standard deviation is the square root of the variance. see http://mathworld.6. p.3) Definition 4.1.4 (Using the Normal Table) Pass out Heizer Appendix I [1. See also 4. definition An observation will fall within 1 standard deviation of the mean approximately 68% of the time.” Review Heizer example 10 [1.60 CHAPTER 4.6. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. p. 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. commonly also N written σ 2 . two standard deviations approximately 95% of the time.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. 64].76 weeks implies that the project will exceed the expected completion time by more than 1. Note that the standard deviation of 1.76 weeks approximately 16% of the time.6. the population variance var(X).6.3 (Example: Project Variance) Review Heizer example 9 [1.7% of the time. Definition 4.16. .6.6. See definition 4.10 Determining Project Completion Time for a Given Confidence Interval A common question is.5. 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. A2– A3] “Normal Curve Areas.6. pp.6.wolfram.

See definition 4.11 Definition 4. we want to do so in the least cost mannger possible. When crashing a project.7. crash cost is the cost required to complete an activity in the shortest time possible. • The shortened durations will actually enable us to finish the project on time.7.1. Definition 4. the crash cost is typically higher than the normal cost. you will doubtless experience one or both of these eventualities many times in your career.7.1 (Crashing) In project management.7. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. permissible and realistic. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. . Assuming linear costs.1. 4. and if you become a project manager. Project crashing is the name given to the process of rushing a project to completion.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.4) 11 Since crashing a project often involves adding additional resources to activities. Since activity completion times are typically shortened by adding resources. in fact.7. Crashing a project involves a four step process: 1. we need to ensure • The amount by which an activity is crashed is. See definition 4.7. and • The total cost of crashing is as small as possible. it may result in the project being delayed.4. crash time is the shortest duration of an activity. Definition 4. if certain activities off the critical path take the pessimistic time estimate or more to complete.2 (Crash Time) In project management. Step 1 – Compute the crash cost per week.3 (Crash Cost) In project management.

67–69] including table 3. At times this may be politically infeasible. Step 4 – Update all activity times. Step 3 – If there is only one critical path. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.2 (Example: Crashing a Project) Present Heizer example 12 [1. 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.7. 3. 4.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. If there is more than one critical path. Side Note 4.19. Then crash each activity by one period. stop. you should be very wary of such pressure. the advice given in this section should be helpful. If you find yourself needing to rush a project. As a project manager. pp.18–3. Crash this activity by one period. If you accept the challenge and try to rush the project to please upper management. Side Note 4. If the due date has been reached.7. select one activity from each such that • Each selected activity can still be crashed and • The total crash cost per period of all selected activities is smallest. Note that one activity may be on several critical paths.62 CHAPTER 4. • Advantages – Especially useful for large projects . If not. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.5 and figures 3.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Step 2 – Find the critical path(s) in the project network. PROJECT MANAGEMENT 2. 4. go to step 2.

However. Note that most project management textbooks refer to MS Project as the software of choice for project 70–74] with figures demonstrating MS Project of project management software for a list of project management software or ask Dr. Starkweather about his impression of various alternatives. 12 Recall sidenote 4. they are often overkill for small. it is relatively expensive and the features are so numerous and complex. Information on dotProject can be found at http://www.9 Using Microsoft Project for Managing Projects Present programs 3. Information on Planner can be found at http://live.wikipedia. There are a variety of alternatives. 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. It is perhaps the most widely known and featureful project management software available. Information on Achievo can be found at http://www. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined.1. independent.gnome. You may also refer to . including open source software that is free.1–3.4.dotproject.9. Noncritical paths should be closely monitored as well.7 [1. mediumsized projects. 4.


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

Facility locations or expansion. • Technological forecasts. Production planning and budgeting.1.3 (Technological Forecasts) In operations management. Maturity. and • Demand forecasts. planning indicators valuable in helping organizations prepare long-range forecasts. 3.1. Capital expenditures.66 – – – – Sales forecasting. See also definitions 5. Cash budgeting. Useful for – – – – Planning for new products.1 Types of Forecasts Organizations typically use • Economic forecasts. and 4. money supply. Definition 5. and other economic indicators. See also definitions 5.2 and 5. Definition 5. In the first two stages. Introduction.1.4. and Research and development. These may include inflation rates. FORECASTING • Long-range forecasts – Generally more than 3 years.4.1. and Analyzing various operating plans. Product life cycles tend to follow four stages: 1. long-term forecasts concerned with the rates of technological progress.2 (Economic Forecasts) In operations management. 5. housing starts.1. These concern rates of technological progress. . CHAPTER 5. longer forecasts are needed.1. Decline. Growth. Generally deals with more comprehensive issues than short-range forecasts. which impacts purchases of new plant and equipment as well as development of new products.3 and 5. 2.

2. Capacity – Underestimating demand can result in • Undependable delivery. 3.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. 5. Determine the use of the forecast. marketing.4 (Demand Forecasts) In operations management. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Select the items to be forecasted. and • Loss of market share. and • Layoffs. 2.1. 7. 2.1. 3. Also called sales forecasts. • Loss of customers. Gather the data needed to make the forecast. • Training. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. 4. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. 6. Select the forecasting models. capacity.5. these drive a company’s production. .3. and personnel planning. Determine the time horizon of the forecast.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. 5. See also definitions 5. Validate and implement the results. 5. Make the forecast.1.2 and 5. projections of a company’s sales for each time period in the planning horizon. and scheduling decisions and serve as inputs to financial.

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

∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. · The simplest and easiest way to estimate demand. be sure that the sales force is clear that their incentive is to be as accurate as possible. and · Respondents. for example. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ Moving averages · Simple. and if they perceive there is an incentive to exaggerate. · Useful as a starting point or sanity check for more sophisticated methods. or other incentives to over or understate demand. . · See definition 5. ∗ However. · Staff personnel. 3. · See definition 5. Sales people typically respond to incentives. · There are three problems with moving averages 1. 2. the more likely it is your results will be accurate.3. – Sales force composite ∗ You would be surprised how accurate your sales force can be. they will do so. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. Moving averages require more past data to work with than. ∗ The more independent your decision makers are from economic. political. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. say. · Requires less past data than moving averages. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data.8. useful method if we can assume that market demands will stay fairly steady over time. Moving averages cannot pick out trends very well. the naive approach.

See also definition 5.3. 5.5 (Sales Force Composite) In operations management. and 5.3.4. See also definitions 5. and (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. emotions.6 (Consumer Market Survey) In operations management.3.6. .4. See also definitions 5. Definition 5. 5. 5. 5.1 Qualitative Forecasting Methods Definition 5. Definition and 5.1. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. Definition 5.3.70 CHAPTER 5.3. a forecasting technique using a group process that allows experts to make forecasts. 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. personal experiences. Definition 5. and (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3 (Jury of Executive Opinion) In operations management.4.10. · See definition 5.6. See also definitions 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3. See also definition 5.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3.4 (Delphi Method) In operations management. See also definitions and value system. a forecasting technique based on salespersons estimates of expected sales.

3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.9.3.5. Definition 5.3. That is.3.1) n • Weighted Moving Average – Mathematically.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. Higher values give more weight to recent data. (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.3. Definition 5.7.05 to 0.8 (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. See also definition 5.11. 5.2) See also definition 5. and 5.3.3. Definition 5. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5. α. Moving averages can be either simple or weighted.3. See also definitions 5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.7.2 Quantitative Forecasting Methods Definition 5. Mathematically.3) The smoothing constant. generally ranges from 0. • Simple Moving Average – Mathematically. and are appropriate to use when the underlying average . a simple moving average is given by demand in previous n periods Moving average = (5.

7. while lower values give more weight to past data.72 CHAPTER 5. FORECASTING is likely to change. and 5. exponential smoothing is equivalent to naive forecasting. such as the mean absolute deviation (see definition 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. 5.3.11 (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. Three popular measures are 1. See also definition 5. Mean squared error (MSE).13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3. Definition 5. 3.15. 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.3. Definition 5.3 Measuring Forecast Error Once a forecast is made.3. and are appropriate to use when the underlying average is relatively stable. When α = 1. 2. Definition (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions Mean absolute percent error (MAPE).3. See also definition 5.4) definition 5.3. 1 See |actual − forecast| n ( it is good practice to compare the estimated value with the actual value as actual values become available.7.3. .13). Mean absolute deviation (MAD).0.

5) |actuali − forecasti |/actuali n (5.8) With smoothing constants α for the average and β for the trend.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5. Definition 5.12. Mathematically.3.3. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. FORECASTING APPROACHES 73 Definition 5.6) 5. Mathematically.3. MAPE is given by MAPE = See also definition 5. 100 n i=1 (forecast errors)2 n (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.11) .4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.7) or F ITt = Ft + Tt (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3.12.3. expressed as a percent of actual values. MSE is given by MSE = See also definition 5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3.

1. 2. Ordinary Least Squares Regression analysis is also useful for predicting trends.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 3.12.14) . It is also commonly called linear regression analysis. F ITt . Tt with equation 5.10. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. the emponentially smoothed forecast for period t using equation 5. by the formula F ITt = Ft + Tt . Compute the smoothed trend. 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. time) (5. Compute Ft .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.74 or CHAPTER 5. Calculate the forecast including trend.

. consumers often make fewer purchases of durable goods.3. then multiply it by the seasonal index for that month.5 Seasonal Variations in Data In most businesses.3. Definition 5.13 assumes a linear relationship. 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¯. In the U.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. 2. Although there are many methods to accomodate seasonal demand. ¯ x The least squares method has several drawbacks. Find the average historical demand for each season. Recall that the equation 5. Compute a seasonal index for each season by dividing the historical demand by average demand. the more uncertain it is. such as cars and washing machines.3. we will examine one model. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. during the summer months when it is common to take a vacation. The first step is to calculate the seasonal forecast. to account for seasonal changes in demand in our forecasting.5. 1. 3. demand is seasonal. We do that with a 5-step process.S. the multiplicative seasonal model. Deviations around the least squares line are assumed to be random. 2.. Estimate next year’s total annual demand. Most businesses experience a surge in sales around Christmas. 4. Compute the average demand over all months. 5. 5. This provides the seasonal forecast. 3. Divide this estimate of total annual demand by the number of seasons. 1.

y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. If there are published estimates you can cite (e.17) . Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model.3. FORECASTING 5. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.4. We will use the same technique.3.1 (Example: Using OLS) Present Heizer example 12 [1. average local salary) (5.15) Side Note 5.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5. but x will be something other than time.x = (5.. It is also called the standard deviation of the regression and. 106– 107]. whatever uncertainties you may have transfer to your predicition of y..x = (5. However. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. Note that making predictions of future demand involves also making predictions about the independent variable x..16 is y2 − a y − b n−2 xy Sy.g.76 CHAPTER 5.3. is given by (y − yc )2 n−2 Sy.g.g. if you are uncertain about predictions of x. pp.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. mathematically.

2 (Distribution About the Point Estimate) Present Heizer figure 4. p. The correlation coefficient of variables x and y is given by r= See also definition 5.5. the U. pp. which is divided into two “conferences. have been 107].3. Historically.4 .” Side Note 5.S.8599.S.html?xid=sitecnn-partner. Since 1935.1594488. Side Note 5. February 28. p. stock markets. Definition 5. has risen. It does not imply causation one way or the other. 4 Source: http://www. stock market prices as well as the winner of the Super Bowl. Certainly. football in the U. 109].S.4 (Causation vs. changes in skirt lengths don’t cause stock market prices to rise and vice versa.3.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. Other interesting correlations that have been identified over the years include banana prices and U.3 and the U.” the AFL (American Football Conference) and the NFC (National Football Conference). “Four Values of the Correlation Coefficient. but the relationship is coincidental. leading stock indexes.S. “Distribution about the Point Estimate of $600 Million Payroll.9 [1. Dow Jones Industrial Average and Standard and Poor 500.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation. Correlation) Correlation merely means that the values of two variables are historically related.time.3. or National Football League.S.18) .00. the average length of a woman’s skirt and stock market prices in the U.18.2 with stock prices generally rising as skirts rise. Even the Year of the Pig correlates strongly with the U.3.” Note that the regression assumes a standard normal distribution about the estimate.3 (Examples of Correlation Coefficients) Present Heizer figure 4. the note in the margin accompanying Heizer example 14 [1. 108]. FORECASTING APPROACHES 77 Side Note 5.S. 2007.3. stock market. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. nor does it imply that they will continue to be related. Correlation Coefficients for Regression Lines Definition 5. a football game played between two football conferences in the U.10 [1. in all but one Year of the Pig. is monopolized by the NFL.S. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5.3.

we discussed a means by which we can attempt to predict the value of one variable using the value of another.78 CHAPTER 5.3. The same technique can be applied to use several independent variables to predict the value of a dependent variable. p.3. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. often the most difficult part of building a multiple regression model is to pick the independent variables. 110].. b 2 . (See definition 5. . The multiple regression equivalent of equation 5. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.6. .” For example. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. In practice.19 (Multiple Regression) A causal forecasting method with more than one independent variable.15 is given by y = a + b1 x1 + b2 x2 + .3. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.” As the sidebar points out. b1 .19) Determining the values of a. x2 . Adding additional independent variables as predictors. Side Note 5. It is commonly simply called “R squared. = the dependent variable (e. . b2 .17.18 and Heizer example 15 [1. 110].3.3. . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.g. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . b1 . . . results in additional predictive accuracy as measured by r2 . p. . . 5 See definition 5.5 Definition 5. . if they are indeed related to the dependent variable. etc. you would use statistics software to calculate these values.

4.forecast| n where M AD = (5. These limits are typically based on M ADs. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6. 6 Recall definition 4.4. three M ADs about 98% of the time.9% of the time.4. Side Note 5. though large errors may be a problem as well even if the positive and negative errors balance. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . p. Definition 5.2 standard deviations.6 standard deviations.1 (A Plot of Tracking Signals) Review Heizer figure 4.4.6 One M AD is equivalent to 0. .8 standard deviations. In other words.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. 111]. which correspond roughly to standard deviations. two M ADs to 1. and within 4 M ADs about 99. This means that the observed value should be within 2 M ADs abut 89% of the time.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. three M ADs to 2. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). Tracking signals are typically used monitor forecasts. one of the most common problems with forecasting is a lack of follow-up. 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 Monitoring and Controlling Forecasts As mentioned in sidenote 5.11 [1. Definition 5.5. and 4 M ADs to 3. The tracking signals should also be compared as they are generated against limits.20) A good tracking signal has about as much positive as negative error.2.1. If the tracking signals violate upper or lower limits.6. the forecasting methodology needs to be modified.4 standard deviations. MONITORING AND CONTROLLING FORECASTS 79 5.

5.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Definition 5.2 [1.4. Side Note 5. FORECASTING 5.4. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally flawed in its approach.3.2 Focus Forecasting Focus forecasting. There is no single technique that should be used for all products or services.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. you should be aware of the criticism of focus forecasting. α in definition 5. p.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. there has been much criticism of the approach to using models based on thier fit to the data. 2.4. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.” . However. changes need to be check with human eyeballs to ensure that the adjustments make sense. is based on two principles: 1.4.80 CHAPTER 5. Note that even with computer monitoring. Side Note 5. which selects a model based on goodness-of-fit to a data set. In your career.g. Sophisticated forecasting models are not always better than simple ones.4. Definition 5.4. 114].10) is automatically changed to keep errors to a minimum..3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. “Summary of Forecasting Formulas. you must make your own decision as to how you select the forecasting models that you use.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.

definition. which. as products. 124.0. Definition 6. 2 Recall sidenote 2.5 (Product Decision) The selection. pp. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. 81 . Product strategy2 defines the breadth of the product line and links product decisions to [1. Referring to services as products is common in the service industry. is a service. and design of products. • Product life cycle. They also use just-in-time production techniques. and • The organization’s capabilities.0. • Market share and dynamics. the word “product” will refer to both goods and services. insurance companies often refer to their policies. 1 In this chapter.1 . time permitting. For example.1 Side Note 6. 122–123]. which will be discussed in detail later in the semester. pp.128] • Investment and cash flow. as an intangible.Chapter 6 Design of Goods and Services Many companies derive a competitive advantage by using product strategies to efficiently produce a variety of products and/or services to meet changing customer demand or target specific consumer niches.2.

. Life cycles can be in the days or weeks (e. and 4. 2.1. Decline. and – Supplier development. • Maturity phase – Competitors have entered or are entering the market. . • Decline phase – Investment needs to be minimized and resources need to be redeployed. Introduction. Growth.. DESIGN OF GOODS AND SERVICES 6.g. 6. products expenses are often high for – Research and development. – Process modification and enhancement. often ruthlessly. YouTube videos).2 Life Cycle and Strategy Strategies change as products move through their life cycle. months (e.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. Product strategy involves determining the best strategy for each product based on its position in the life cycle. or even decades. 3. • Growth phase – Effective capacity forecasting is necessary.g. low-cost.1. clothing fashions). so high volume.1 Product Life Cycles Product life cycles can be divided into four phases: 1. restaurants or nightclubs). years (e. and innovative production is appropriate.. Maturity.g. • Introductory phase – In the introductory phase.82 CHAPTER 6.

1.2. such as consumer incomes.000 yuan. and if a company is to survive. 6.2 Generating New Products Most products have a limited life cycle.1. • Sociological and demographic change is also tied to product demand. 4 For 3 For . GENERATING NEW PRODUCTS 83 6. example.3 • Political and legal change can also bring about business opportunities. example. Definition 6. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. • Economic factors.2.2. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.4 Side Note 6. 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. the development of cellular telephone technology or the internet.3 Product-by-Value Analysis For firms with many products.2.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. Definition 6.500 or 100.6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. • Technological change often drives product innovation. Ideas are not reviewed until after the brainstorming session. are tied to product demand.1 (Example: Brainstorming) Lead the class in a brainstorming session. it must regularly redesign existing products or bring new products to market. 6. as well as the total annual dollar contribution of the product.

2. DESIGN OF GOODS AND SERVICES For example.3.3.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. the product life cycle.2 [1.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. p. Definition 6. 129]. 6. Determines what will satisfy the customer and 2. 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. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Each stage should have an accompanying review to determine whether to progress or not.3.3. Side Note 6.3 [1. DuPont estimates that it takes 250 ideas to yield one marketable product [1.3 6. 128]. market dynamics. Many successful companies rely on sales from products introduced within the past five years.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on. 6. Side Note 6. p. Definition 6.1 (Product Development Stages) Present Heizer figure 5.3. Translates customer desires into a product design. p. and the organization’s capabilities. 128].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.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.84 CHAPTER 6. .

with product features.2.3.3. Product development is done by teams.g. which can be an advantage..3.3. bureaucratic companies and organizations.2.8 5. • Effective communication and coordination between separate departments can be problematic. 6.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. Identify how the good or service satisfies customer wants. p.10 Side Note 6. 1.2 (Example: House of Quality) Present Heizer example 1 [1.6 3.” 6 For example. 2. and production departments.3.6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. 10 The right-hand columns of the house in sidenote 6. Relate customer wants to product hows. create the columns of the house in sidenote 6. An organization is divided into departments. as was the software described in section 4. • Perhaps the most popular approach in the U. 2.7 4. e.qfdcapture. there are three popular methods by which organizations undertake product development. Identify customer wants. • Fixed duties exist. See http://www. 7 In other words. In other words. Evaluate competing products. 3. 130]. Develop importance ratings. Note that it is not free or open source.3. a research & development.S. Building the house of quality involves six steps: 6.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.. 8 These are given on the roof of the house in sidenote for more information. • More common in large. manufacturing engineering.3 Organizing for Product Development In the West.2. Identify relationships between the firm’s hows. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. identify the rows of the house in sidenote design engineering. PRODUCT DEVELOPMENT 85 Side Note 6. .

development. and production stages of product development. production.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. engineering.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. My experience may not be indicative of management practices in general in the U.1) was implicitly included in the product specification phase of operations management at the companies I have worked for.3. Side Note 6. Definition 6.11 In Japan.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.. it can also be problematic because teams.3.3. organizations are less structured and typically not divided into research and development.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.4. design.3. However.S. production. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product. . Definition 6. will often advocate for continuation of their project past the point that it is profitable for the company.3.4 (Concurrent Engineering) In project development. and use. engineering. 6..3. Side Note 6.S. and field service personnel. Some teams even include representatives from vendors. These teams often include representatives from marketing. maintainability.. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. but my personal impression is that formal QFD practices are not widespread in practice. because their fate is tied to a product.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.86 CHAPTER 6. purchasing. The goals of manufacturability and value engineering are 11 See definition 6. quality assurance. etc. manufacturing.3. use of participating teams in design and engineering activities. Definition 6.

and 7. 4. Robust design. Reduced complexity of the product. 2. 87 .3. Improvement of functional aspects of the product. 3. Standardization of components. PRODUCT DEVELOPMENT 1. 6. Cost reduction. Improved job design and job safety. 5. Improved maintainability (serviceability) of the product.6.


Part II Entrepreneurship 89 .


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

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

Often. friends. • Some of the information is intended for those who have an established career and real-world experience to draw upon. we will discuss venture capital. It may be useful later in your career. you may not be prepared to start a company. the use of venture capital will probably increase over time in China. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7. or angel investors. • Among the means by which you can to raise money. at Active. Side Note and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. possibly even years at a time. friends and family are the most important concerns in their life. 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.1.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active. Venture capital financing is common in the United States but is not yet a common means of financing in China.1. for example. If you are not prepared to redefine relationships relative to your business life. take note of this information. week after week. Putting in long hours is not something that is done once in a while. – For management and Jerry’s difficulty balancing work and family life.7. it may be difficult to keep the necessary focus on the business. If after many long hours at work your family will be asking you. For many people. You may lose friends because you do not have the time to maintain the friendship. we suffered a database corruption that resulted in my practically living at work for three weeks . but something you may need to do day after day.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. Discuss the impact of the demands of a startup on the marriages of Active. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing month after month. “When are you coming home for dinner?” or criticizing you for ignoring them. – Additionally. 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. – However.

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

If your goal is to raise 1.000 yuan and you’ve never had a job before. • Set both short-term goals and long-term goals. it is common to exchange “war stories” about the difficult times and sacrifices. . • Analyze Your Professional Attributes – Be aware of where you need help. than learning from success.000 yuan by July 1” is a much better goal than “raise money. When I talk to those who I know who have started businesses. When setting goals.” • Be realistic.7.” • Be optimistic. even the successful ones will probably focus on the negative.3. – Short-term goals are those that can be accomplished within a year. Side Note 7.1 (What’s It Really Like?) If you wonder what running a business is really like. If you talk to an entrepreneur who has not been successful. ask yourself the following questions: • Income – How much do you want to earn. • Be specific. although the successful ones generally view their experiences as positive on the whole. advertising.000.” you may not want to start a business that focuses on customer relationships. 10. 7. ask other entrepreneurs. Learning from failure is as important. try to figure out why they were not successful. Move on to larger goals once the small goals have been met. SETTING GOALS 95 If you are not a “people person.3. marketing. it helps to set goals. – Long-term goals are those that may take 5. Consider at least a five-year time horizon.3 Setting Goals With any major endeavor. if not more important. – Start with small goals. your goal may not be realistic. When setting goals. and administration. “Raise 100. or 20 years to accomplish. “Achieve financial independence” is much better than “pay the bills. such as sales. Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. Like parents.

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

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

Those with nose piercings would not need to remove the piercing and risk it closing.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. Often times. • They require expertise that the entrepreneur does not have. business ideas come at a rapid rate. . 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. but it is a major complaint for female rock climbers. • The business would involve too much risk. It sounds silly. hollow tube. etc.0. • A nose piercing that consists of a small.. • They require more financing than the entrepreneur has access to. pp. I continue to generate business ideas as a matter of habit. However. 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].0. • Etc. Side Note 8. however. • 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. people have to remove nose piercings for work or social occasions. often one or more a day. The tube could be made unobtrusive enough that it would not need to be removed for work.98 CHAPTER 8. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. • The ideas are easily copied and would be quickly appropriated by more able competitors. • They require business relationships that the entrepreneur does not have.. Side Note 8. most ideas are not feasible because • They would not be profitable enough. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online.

8. to be truly self-motivated and persistent in the way you need to succeed. p. You should be realistic about risks. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a His sales are now in the millions of dollars per year and the business is very profitable. while you should listen to criticism that others give. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your idea. or are otherwise discouraged. you should have “thick skin. After all. However.1 You’ve Got an Idea. Side Note 8. February 17. Side Note 8.2 is.” That is. Have students come up with examples of products that meet various criteria on the checklist. 33]. Finally. Entrepreneurs are often told their idea is flawed. thinking that if he did not succeed after a couple of years. 2007.8. in the wake of 9/11. “Never say die. the business took off. 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. Have students fill out the form on their own time.1. And you should not risk anything you can’t afford to lose. computer-controlled security cameras. .com/find?s=all&q=never+say+die. He ran the business as a one-man operation for years. such as your family. used as the title of at least 12 movies and television shows.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. p.1. that they will never make it. 35]. home.1. People thought he was going nowhere and generally dimissed his business. A well-known phrase in English. you will be spending years of your life trying to make the idea work.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.1. making just enough to get by but not much more. or health. YOU’VE GOT AN IDEA. it is too risky. Warnings about risk are perhaps the criticism you should consider most carefully.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. 2 http://www.” Side Note 8. you should not let it dissuade you. Now What? The number one trait needed by successful entrepreneurs is perseverance. he would never succeed.


Chapter 9 Defining Your Market After coming up with your idea. Businesses.” or business-to-consumer ventures.2.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Definition 9. Not only do you need to decide whether you are marketing to businesses or consumers. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. There are two broad categories of markets: 1. 101 .1 Finding Your Niche Finding a niche can be a more daunting task than you might think. your next step is to do some market research. go through the following 7 steps: 1. Definition 9.” or business-to-business ventures.0. See also 9. 9.0.1. Consumers and 2. When trying to identify your niche market.0.0. See also 9. but you should try to target your market as specifically as possible.

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

they try to satisfy all possible customers and end up trying to do too many things well. It is better to do just one thing well than to do many things poorly. demographic. (See definitions 9. Marketing to demographic groups has become much more refined in the last few decades. the Depression-era cohort. buying a home. 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.1. you should practice extra caution to avoid stereotypes or other insensitive approaches.1. For example. Definition 9.3. life stage. Korean. but their behavior differs significantly due to the different influences in their youth. Chinese. are similar in age to those who came of age in World War II. Side Note 9.. and psychological factors. when the country was immersed in a war effort.1. many Eastern companies make the mistake of lumping together American and European customers.2. Likewise. Many Western companies make the mistake of lumping together Japanese. This can be offensive and serve to alienate rather than appeal to your customer. in the U.S. young adults in the Depression. As older people are more active than before.1. If you did your homework.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.) Using these new marketing techniques can allow you to narrow your market. etc. economic. .1. and 9. Go for it! – Implement your idea. New marketing techniques include generational. many entrepreneurs make the mistake of being “all over the map.1. This marketing technique has been widely used since the early 1980s in the U.S.1.1 (Generational Marketing) Marketing to consumers based on age as well as social. and other Asian customers together. Definition 9.9. the more likely you are to score a hit.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.” That is..1 (Smaller is Bigger) When starting a business. FINDING YOUR NICHE 103 7. many are choosing to start families later in life or even have children ten years or more apart. and cohort marketing. or retiring. Definition 9.1.1. such as having children.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.1. Side Note 9.. and the narrower your focus on your target. when many people were suffering from extreme poverty. the World War II cohort. for example. you should be able to enter your niche market with confidence.

104 CHAPTER 9. p. a few sentences at most.1. The mission statement should • Be succinct. p. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business. 79] 9. Side Note 9. Falkenstein1 advises that you regularly reevaluate your niche.3. • Convey the essence of your business’s goals and philosophies. Every six months or so. you should. Falkenstein states. “Creating a niche is the difference between being in business and not being in business.1 (Mission Statements for Three Organizations) Review Heizer figure 2.3 The Mission Statement Once you have a niche. DEFINING YOUR MARKET 9.2 [1. create a mission statement.” [4.2 Redefining and Expanding Your Niche Lynda C. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. 28] which includes mission statements for three multinational companies: 1 See section 9. .

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

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

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


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




What Am I Researching, Exactly?

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




Research Methods

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


Sources of Secondary Research

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

definition 10.2.1.


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

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

10. RESEARCH METHODS 113 Side Note 10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. pp.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.” [4.2. .


No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. It must describe current status. Definition 11. 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. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. 3.4 (Business Plan) A business plan is a written document that details a proposed venture. including 115 . No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. In terms of sanity checking. 4.0. expected needs. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. Those who provide financing are aware of these pitfalls. 5. and projected results of the new business. Lack of demonstrated experience – Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. Every aspect of the venture should be covered. 1. 2. Set up a timetable with specific steps to be accomplished in a specific period. Your business plan should list obstacles that may arise and what will be done to address them.

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

including debt or equity financing required. 4. If you cannot impress the financier with these three steps. but not too good. the trash can. you will not even get your foot in the door and be invited to present your plan to investors. pretentious.11. 1.”1 Many venture capitalists use the following six step process to evaluate a business plan [3.1. 6. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. Read the latest balance sheet. but should not be too lavish.. 2 Do not underestimate the importance of this step. Determine the characteristics of the venture and its industry. other financing professionals may spend more time analyzing the details of the plan. Kuratko suggests the following [3. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. p. While the initial read-through might be only a five-minute perusal. 2. Determine the financial structure of the plan.2 5.e. Determine the quality of the entrepreneurs. bear in mind that once the plan is advanced to the next stage of financing. 11.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. Note that less than a minute on average is devoted to each step. Establish the unique details of this venture. 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. . or spendthrift. p. not ostentatious. 3. 300]. They will want to see something that reflects that you are neat. thorough and careful. i. 301]: • Appearance – It should look good. Read the plan over casually. – Binding and printing should not be sloppy.1.

THE BUSINESS PLAN – It should be no more than 50 pages. e-mail address. though you should not put it in the same corner as page numbers appear. 3 Note that for this class. 4 Phone number. and How investors will benefit. The venture’s objectives in 3 to 5 years.118 CHAPTER 11. address. 2. The benefits to customers. – Inside the front cover should be a title page repeating the cover information. – On the title page. The amount of financing needed. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. • The Executive Summary – Two or three pages immediately following the title page. 7.3 Some Style Points Kuratko also recommends that you [3. Its products or services. 11. p. they will not read it. 3. – It should explain 1. the date of the plan. 4. – 40 pages is ideal. and full contact information4 for the company. You should use this to keep track of who has which copy. – It is worth repeating: Keep it down to at most two or three pages. The financial forecasts.1. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. and/or web site. 6. a number should be in a corner5 indicating the copy number. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 5 I suggest the lower-right corner. .3 • The Cover and Title Page – The cover should have the name of the company. The company’s current status. If you write to much. 5.

so be sure the writing is finely crafted.2. be sure to include them in the business description. Business Description – Name the business..2.2 [3. Present a focused plan.” or “us. Executive Summary – This should be the last thing you write.g.1 (10 Sections of a Business Plan) Present Kuratko Table 10. p.” or “them. • Keep the Plan Written in the Third Person – Do not use “I. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. Include any pictures or designs that would be helpful. or other special market advantages you have. • Orient the Plant Toward the Future – Create an air of excitement. • Do Not Overdiversify – Don’t try to be all things to all people. 2. is it based on a family name? Does it include technical terms you need to identify? .” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. • Identify the Target Market – Market research should support a focused customer niche.” “they. 305]. use “he. 11. which describes the 10 sections of a typical business plan. copyrights.11. Some details on each section of the business plan: 1. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. The executive summary gives readers their first impression. 6 E.6 Note any industry developments and describe the business thoroughly.” “we. Your credibility is established in part by the credibility of your plan. Use the spell checker on your word processor to check for spelling mistakes. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.2 The Plan Contents Side Note 11.” Instead. and tell why it is named what it is. trademarks. but it is the first thing that your audience will read. • If there are patents.

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

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


The presentation of your plan is an ongoing process. p.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. 51–56]. your family. 123 .1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. Present it many 1 Guy Kawasaki. and Potential Partner Pitch [2.Chapter 12 Presenting the Plan 12.1 The Presentation Side Note 12. 62].1. your dog. anyone who will listen. you will probably not do a good job. recommends twenty-five times [2. pp. your business class.2.1 Do It Until You Get It Right This is perhaps the most important piece of advice. 12.1 You will have to pitch to many medium-size fish before you are ready for the big fish. Sales Prospect Pitch. You will probably have to present it at least ten times before it is ready for the medium-sized fish. Your presentation should evolve over time as you listen to your audience and receive feedback. Do not be dismayed. author of The Art of the Start. 12. not a one-time event. local business associations. This means that you should not count on presenting your plan to your most critical investor for the first time. The first time you present your plan. Present it to your friends.

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

12. Give your presentation to friends or family.2. and each investor will respond differently. it is quite the opposite. ask yourself after every statement you make. They may ask you something you want to respond to in an e-mail later.3.2. Everyone.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. • Taking notes also makes you look conscientious. It is easy for things to get lost in the heat of the moment. Guy Kawasaki recommends you set a timer [2.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. At my company in Chicago. AFTER THE PRESENTATION 125 Side Note 12. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access. They may ask you something that makes you want to change your presentation. “So what?” If you cannot answer this question simply and easily. you are not presenting it well. everyone brought a pen and paper. 12. In general.6 So What? When you are planning your presentation.5 Take Notes Have a pen and paper ready and take notes during the pitch. 45]. Ask them what your company will do. Many people feel as if taking notes makes them look stupid. I always bring a pen and paper to meetings. You should be prepared for the unexpected. 12. • Your audience may ask you several questions at once. where some of the smartest people in the world worked. so write things down to make sure you don’t forget. you need to change or eliminate the statement. 12. but in reality.12. Much of the material required use of the internet. p. If they cannot explain it clearly.3 After the Presentation Each presentation will be different.2. Stop when it goes off.2. and although you go into each presentation .

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

Chapter 13

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




Inventory and Cash Flow

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


Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems


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


Computerized Inventory Control

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

section 13.3 below.

3. • Security – To prevent theft.1 Inventory Turnover Typically. To improve efficiency of inventory control. INVENTORY CONTROL When considering the purchase of a POS.3. • Updating product information – At the time a sale is entered.3 (Count Cycle) In inventory management. the count cycle is the amount of time between counting inventory. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item. Definition 13.3. these systems should automatically update inventory and accounting records. and • Improve pricing accuracy. a high inventory turnover is a mark of a well-managed inventory system. .1 (Turnover) When you have replaced 100% of your original inventory. • 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.130 • Maintain a sales history. be sure it’s not easy to “hack” the system. Definition 13.3. Definition 13. CHAPTER 13. you have “turned over” your inventory. your count cycle is 12 weeks.2 (Order Cycle) In inventory management. if you perform an inventory count four times a year. such as for volume discounts for preferred customers. 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.4 (Delivery Cycle) In inventory management. the delivery cycle is the amount of time between placing an order and receiving it. the order cycle is the amount of time it takes to process paperwork and place orders. For example. work with suppliers to improve delivery times and count inventory more often. Definition 13. 13.3.

5 (Needs Period) In inventory management. If there is inflation. In the U. See definitions 13. If there is inflation. it values your remaining inventory based on the prices of the least recently purchased items. which may result in higher taxes.S. order cycle. 13.2. LIFO and FIFO are two accounting methods used to do this. first out) assumes that you sell the most recently purchased inventory first.3. it values your remaining inventory based on the prices of the most recently purchased items.4.4.3 See also 13.. You should know how many sales per square meter per year you need to survive. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. First Out)) FIFO (first in.4. .4. and 13.2 See also 13. In deciding which to use.1 (LIFO (Last In. After you have been in business your inventory control system should give you a better idea of stocking levels.4.3. the needs period is the sum of the count cycle. Definition 13. and delivery cycle. The author is unfamiliar with Chinese tax codes. Definition 13. first out) assumes that you sell the least recently purchased inventory first.4 Inventory Accounting Your accountant will typically handle inventory accounting.1 Buying Inventory In the process of putting together your business plan. you must estimate your inventory value when you file your taxes. but you should at least know about LIFO and FIFO. 13.2. Calculate your sales per square meter once per month. follow the recommendation of your accountant. The author is unfamiliar with Chinese tax codes.4. INVENTORY ACCOUNTING 131 Definition 13. Many businesses also measure turnover by measuring sales per square foot (or square meter).13. 2 At 3 At least this is true in the U.S.2 (FIFO (First In. least this is true in the U.3. which allows you to pay less taxes on your inventory.S. First Out)) LIFO (last in.1. In other words. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.3.3.4. 13.

3.5 Suppliers Suppliers can be divided into four categories: 1. INVENTORY CONTROL Definition 13. Distributors – Also known as wholesalers. courteous and firm with your suppliers.” . Their prices are higher than a manufacturers. 13. says. “Be open. Independent craftspeople 4.4. – The minimum may be higher for first orders to cover the cost of setting up a new account. three or four months. Manufacturers – Note that some manufacturers refuse to fill small orders. 13. author of Start Your Own Business. and they will respond in kind. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. brokers or jobbers. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Rieva Lesonsky.132 CHAPTER 13. 2.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. • Some suppliers demand a minimum number of items per order. Import sources – They operate like domestic wholesalers.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period.5.1 Dealing with Suppliers The most important thing about a supplier is reliability. usually one.actual inventory .

• Sometimes if an order is large enough.. customers may be required to pay upon receipt of goods. Be sure to add up • Costs.5.1 (COD (or c. Whatever you do. Discuss • Their negotiating technique when discussing pricing. basis until you have proven yourself reliable. and • The need to be firm but fair.)) Cash on delivery. they will put you on a c. • For items being shipped. 2.13. SUPPLIERS 133 13. You can also present your financial statements and prospects for success. If you are dealing with a reticent large supplier. • Discounts. 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. and • Allowances before you make a decision. Definition 13. Tips for dealing with suppliers: 1.d.5. Suppliers sometimes try to complicate pricing to their advantage. I regularly had to deal with food vendors. Ask about the freight policy before ordering.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. At least in the U. it is considered a felony.o.5. 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.S. you should know who is liable for damage to goods in transit.d.o.5. .2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. If a supplier is uncertain about you. personal interaction can work wonders. If a supplier does not extend credit. the supplier will pay for freight. Side Note 13. do not falsify or misrepresent your financial statements.

4 Colloquially. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.b.wikipedia.b. . The FOB term requires the seller to clear the goods for export. 7 Source: http://en. Seattle” to indicate that an item being shipped from Seattle is free on board. 6 Source: http://www.7 4 Source: 5 Source: http://www. 5 FOB Destination changes the location where title and risk efg.abcsmallbiz. Definition 13.html.5. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. May (FOB (or f. Specify a cancellation date on your order forms. 5.b. May 19.o. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.3 (FOB Destination (or f. May Definition 13. Under this arrangement. 3.4 (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. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.epoi. 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. http://www. Definition 13. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.roadway. people often say something like “f. 2007. As opposed to FOB.o.3. Destination)) Free on board destination. Be aware of your supplier’s priorities. INVENTORY CONTROL • Depending on whether the supplier pays frieght.2. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.)) Free on board.6 See also definition 13.5. 2007.html.5. This differs from a forward order where stock is available but delivery is postponed for other reasons.html. 2007. See also definition 13.134 CHAPTER 13.

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. and • Independent contractors. • Temporary employees (temps). 135 .3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. • Part-time employees. they are often emotionally draining for the manager as well as the employee involved. On the other hand.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.0. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. The benefits of finding the right person for a job cannot be overstated. 337].2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. a bad hire. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). besides being bad for business. p. Side Note 14. Side Note 14.0.

but personality traits.1 How to Hire Hiring involves analyzing the job requirements.136 CHAPTER 14. creating a job description. • If you have do terminate the employee. HIRING EMPLOYEES 14. • You may not leave enough buffer above the employee. you’ll be grateful to have spent the time to go through a more formal process. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed..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. then want to hire someone else later at a position above them in the company. • How the job will be done. they will soon expect compensation commensurate with their job title. However.1. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. 14. an employee with an inflated job title may expect an inflated severance package. etc. If you call someone a Vice President but don’t compensate them as such. you have nothing to offer.1 Job Analysis Before creating a job description.2 (Tip: Job Title Inflation) Inexperienced employers are often tempted to inflate the job title of the position they are trying to hire in an attempt to lure candidates. lifting. . Cleaning. and recruiting.1.1.2 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. by the time you hire your 40th employee. Not only education and skills. 14. you need to consider • The physical or mental tasks involved. selling. Side Note 14.1. you will likely find that they will come to you at some point to demand a vice president’s salary. programming. If you give someone a job as Vice President. writing reports.

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

4 (Using an E-mail Address) For professional positions.S.. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.1.5.2 Side Note 14. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. – For professional positions. • List the top 4 or 5 skills that are most essential to 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. • Be sure to list appropriate contact information. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. • 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. such as “outgoing” or “detailoriented.1.138 CHAPTER 14. e-mail addresses have become perhaps the most popular way to get applicant information at U. • Do not list requirements other than educational or experience-related ones. 14.1. It also makes it easy to receive and process a large number of applications with a minimum of effort. particularly those that advertise on web sites.3 Advertising the Job When you write an advertisement. companies. • Do not ask for specific personality traits. With e-mail. 2 See sidenote 14. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.” or people who may not have them will just try to fake those personality traits in the interview. due to the number of applicants for competitive positions. . Many American companies are no longer providing phone numbers. HIRING EMPLOYEES 14.4 Finding People There are many possible sources of applicants. – For other positions.1.S. For example. if you are looking for an accountant.

For any job. • Online – In the U. the hiring process proceeds as follows: 1.S. particularly in the high-tech industry. but when looking at a resume. Try to perform a search on a job sites such as http://www. 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 with the keyword “java” will demonstrate just how widely used online tools are. You narrow down the 10 candidates to 3.S. 159 in “Financial Services. You check references. 3. If you are lucky.1. • Focus on the skills that a person can bring to your company. many positions are being filled online.314 listings in the “Computers.. Searching on Monster.” 665 in “Internet/E-Commerce. be sure that a candidate can provide what you are looking for. about 10 or so. 2007 turned up more than or http://www. 3 Java is a programming language. In the with the keyword Java on May 19. 2.. • Industry Publications – Most trade publications take ads for job openings. You conduct a second round of interviews with the remaining 3 candidates.” . you will get several candidates for any job you are offering. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. Screening People Reviewing resumes and applications is an art.dice. You can evaluate their personality during the interview.000 hits searching just the “Information Technology” search category. You hire the preferred candidate.14. There were 4. for professional positions. Software” category. To “weed out” candidates. 4. You narrow the number of resumes down to about 10.3 Generally.” And 921 in “Engineering. not a science. You interview the candidates. 6. most professional associations’ job banks are now online.

• Don’t necessarily discard resumes with some gaps. did not match our requirements closely enough. I learned that people lie on their resumes all the time. that is a very good sign that they are a survivor. if a person survives downsizing or other major changes at their former employers. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. • On the other hand. 344–345].com. • Rely on your intuition. If an applicant indicated they were an expert with too many technologies. or were too experienced. • Educational background. Of those we looked at. I have some personal recommendations: • Always check references. Side Note 14.4 were not experienced enough. pp.140 • Look for patterns in their career.6 (Hiring at Active. . • Special skills. this indicated to us that the applicant was not being truthful. That typically indicates that someone cannot supply enough positive references. Applications should ask for things such as • Name. so many resumes came in that an administrative assistant was asked to perform the first screening. CHAPTER 14. phone number. and e-mail address. From the hiring process at In the hiring process at Active. She simply passed along resumes that contained certain keywords that we were looking for. 4 It takes time to become an expert with any sufficiently compex technology. listed expertise in too many subject areas. including when an applicant can work and the hours they can work. we tossed those that had spelling or grammatical mistakes. • Work experience – As for salary information when asking about work experience • Availability. Side Note (Job Application) Present Lesonsky’s sample job application [4. Due to this. address. and • References.

• Whether the applicant has every been treated for drug or alcohol addiction. • Maiden name (for female applicants). and 5 I don’t mean play in the sense that they were playing video games – they were networking their house or setting up interesting web sites or doing other productive activities.14. creed. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. 6 Employers can. • Whether the applicant has every been treated by a psychologist or psychiatrist. color.7 (No-nos) In the U. Get clarification on anything that you think may be suspect.5 Side Note 14.1. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. in the U. • Disabilities of any kind. however. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. race. such as through a “Green Card. but which can get employers in legal trouble.. religion. Not also that many of the best people we hired were not the best on paper. Ever. employers may not ask about anything not related to the job.6 Questions that are not explicitly prohibited. then go home and play on computers in their spare time.S. p. or • If a person is a citizen. • How many days the applicant was sick in the previous year.S. Several of the engineers I hired did not finish their undergraduate degree. • Whether the applicant has every been arrested. • Marital status. 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. However. Though laws undoubtedly differ in China. • Ask people questions about their resume during the interview. including [4. • Do not hire people who are discovered to be lying on their resume.” . include • Whether the applicant has children.. They were the type of people who would write software all day. 347] • Age or date of birth.1. or national origin. • Sex.

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

Side Note 14.14. test to see how employees solved problems. what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer. Lesonsky tells of one supervisor who was asked about . but there references were poor. after you finish the at least in the U. • 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. they will have questions about the company and the position. This has become popular recently in the U. take a few minutes to write down your impressions.1. give them time to ask you questions. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized.9 (The I. Finally. If the candidate is really interested in the position. the CTO liked to ask questions like you would find on an I. such as their posture.1. Most supervisors.Q. • Have you hired people before? If so. gave a strong interview. with many companies like Google incorporating these kinds of questions into their standard interview process. do not give bad references to avoid potential lawsuits. Test) At Active.. They were not hired. and general tidiness in their appearance. I have interviewed people who looked great on paper. 143 • The candidate’s general demeanor.S. After your questions. • Things the candidate seems reluctant to talk about.. • Whether the candidate can think on their feet.S. Be wary of answers that subtly indicate that there may have been a problem with the candidate. 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. attentiveness. how many handshakes are there? Checking References One thing that far too few employers do is check references.

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

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

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