International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Variability in Activity Times . . . . .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . .2 Preconditions . . . . . . . . . . 5. . . . . . . .8 A Critique of PERT and CPM . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . . 3. . .4 Determining the Project Schedule . . . . . . . . 5.1 Project Planning . . .3. . . . . 5. .2. . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . .1. 4.1 Adaptive Smooting . . .1 Goods and Services Selection . 4. . . . . . . .3 3. . . .4 Adjusting for Trend . . . . .2 Quantitative Forecasting Methods . . . . .1 Probability of Project Completion . . . . . . . . . 6. . . . . . . . . . . . . . . .2. . . . .2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4. . . 4.2 Build and Staff the Organization . . 4. . . . . . 5. . . . . . . . . . 4. . . . . . . . . . . . . . .1. . . .1 The Project Manager . . . . . . .5 Slack Time and Identifying the Critical Path . 3. . . .3 Integrate OM With Other Activities Global Operations Strategy Options . 5. . . . . . . 5. . . . .3 Dynamics . . . .2 A Seven Step Forecasting System . . . . . 4. . . . . . .3 Product-by-Value Analysis . .3. . . . . . . . . . . . . . .6. . . . . . . . . .1 Identify Critical Success Factors . . 5. . .1. . . . . . . . . . . . . . . . . . . . . . . . . . .1 What is Forecasting? . . . . . . . . . . . . . . .3 Forecasting Approaches . . 4.2 Project Scheduling . . . . . . .2 The Work Breakdown Structure . . . . . . . . . . . . . . .3. . . . . . . 4. . .2. . . . . . . . 3. . . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . 3. . . . . . . . . . . . . . . . . . .1 Types of Forecasts . . . . . . 3. . . 5. . . . . . . 6. . . Strategy Development and Implementation . . . . . . . . . . .1.3. . . . . . .3. . . . . .1 Research . . . . . . . . . . . . . . . . 4. . CONTENTS . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . . . . . . .3 Project Controlling . . . . . . . . 6 Design of Goods and Services 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models .1 Product Life Cycles . . . . . . .3. . . . . . . . . . . . . . . . . . . . . .4. . . . . . . . . . .2 Network Diagrams . . . .5 Seasonal Variations in Data . . . . . . . . .2 Focus Forecasting . . . . . . . . . . . . 4. . . . . . 4. . . . . . . . . .4 4 Project Management 4. . . . . . . . .1. . . .3. . .3. . .3. . . .1 PERT and CPM . . . . . . 5. . . .1. . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . 5. . .3. . .1 Qualitative Forecasting Methods . . . . . . . . . . . . . .3 Measuring Forecast Error . 5. . . . . . . . . . . .4 3. . . . . . 4. . .

. . . . . . . . 12. . . . . . . . . . . 11. . . .2. . 6. . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . .2 6. . . . 6. . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 So What? . . . . . . . . . . .2 Redefining and Expanding Your Niche .5 Take Notes . . . . . . . . . 12. . . . . .3. . . . . . .2 Know Your Outline Thoroughly . . . . . . . . 101 9. . . .2. . .3 Generating New Products . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Look and Feel . . . Now What? . . .2 Research Methods . . . . . . . . . . . . . . . . . . . 6. 111 10. . . . . . . . . . . . . . . . . . . . . . . .3.1 Finding Your Niche . . . . 12 Presenting the Plan 12. Product Development . . . 104 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . 110 10.1 The Presentation .1 Sources of Secondary Research . 94 7. . . . . . . . . . . 95 8 Finding an Idea 97 8. . . . 99 9 Defining Your Market 101 9. . . . .2 The Plan Contents . .2. . . . . . 12. . . . . .2 Are You Ready? . . . . . . . . . 11. . . . . . . . . . . . . . . . . . . . . .CONTENTS 6. . . . . . . . . . . . . Exactly? . . . . . . . . . . . . . .1 Product Development System . . . .3 Setting Goals . . . . . .1 Importance of New Products . . . . . . . . . . . . . . 12. .1. . . . . . .1 What Am I Researching. . . . . . . . . . . . . . .3 Organizing for Product Development . . .1 Your Audience . . . . . . . . . . . . . 12. . . . . . . . . . . . . . . . . .3 The Mission Statement . . . . . . 104 10 Market Research 109 10. . .2. . . . . . . . . . . . . .1. . . . . . . . . . . . . . . 12. . 92 7. . . . . . . . . . . . . . . . . . . . .2 Some Suggestions .1 Preparing to Put the Plan 11.1 Characteristics of the Successful Entrepreneur . . . . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . .3 After the Presentation . . . . . . . .4 The First Minute is the Most Important . . . . 6. . 6.1 You’ve Got an Idea. . . . .3 Some Style Points 11. . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . .2. . . . . . . .1 Do It Until You Get It Right . . . . . . .3 Be Familiar With All Equipment to be Used 12. .4 Manufacturability and Value Engineering . . .2. . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . .3.

. . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. . . . . 13. . . . . 13. . . . . . .1 How to Hire .1 Dealing with Suppliers . . . . . . . . . . . 13. . . . .6 13 Inventory Control 13.1. . . . . . . . . . . . . .5 Suppliers . . . . . . . . . .3 Computerized Inventory Control 13. . . . . . . . .5. . . . . . . 14. . . . .1 Buying Inventory . . . . . . . . . . . . 13. . . . . . . . .2 Tracking Inventory . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . .5. . . . . . . .1. 14. . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . .2 Payment Plans . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . .1 Inventory Turnover . . . .3 Advertising the Job 14. . . . . . . . . . . . . . . . . . . . . . .1 Job Analysis . . . . . . . . . . . . . . . . 13.4 Finding People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Hiring Employees 14. . . . . . . . . . . . .2 Job Description . . . . 13. . .4 Inventory Accounting . . . . .1 Inventory and Cash Flow . . . . . . . . . . . .

Part I International Business Management 7 .

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

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. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. Note that during the industrialization of the U.A. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. Prison labor is also considered improper in the U.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. child labor was widely used. • However. For example. . 3. Why is corruption an important business issue? • See sidenote 1. which are more strictly enforced in the West..10 CHAPTER 1.2. • Because of this.2.1. Western business people may not initially trust their Chinese counterparts. Which brings us to the subject of this lecture: Ethics.2. and Europe but a commonly accepted practice throughout the developing world. 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. This is something Chinese business people should be aware of. Definition 1. • Because guanxi is less important in the West.1 (Ethics) The study of morality and standards of conduct.A. there is a perception in the West that Chinese are hard-working and smart.S. Westerners rely more on contracts. 1.2 Corporate Corruption Side Note 1. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. 2. 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. • In general.S. Easterners tend to trust people after observing a pattern of consistent behavior.S.A.

– The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. there are few if any issues which affect and infuriate so many in China as corruption.2. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. September 20. 2006. Scandinavians are typically highly trustworthy1 but Italians are less so. WorldCom. reward. China continues a battle against corruption.2.1.1 (Bribe) A price. or other person in a position of trust. Side Note 1.”[6] 1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived as least corrupt in the 2005 Transparency International Corruptions Perception Index.2 Though things are improving. Source: texttthttp://www. . Definition 1. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. these are all generalizations and individuals may differ significantly from their cultural affiliations. investors in the United States had to reevaluate the risk associated with owning stock. they must factor additional uncertainty into their calculations. 2 Source: http://www. September 20. – A bribe is a business expense that goes to no productive purpose and decreases profits. “.org/policy research/surveys indices/cpi. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders).2 (Corruption) Corruption is of concern for business people because • It increases risk. In the words of a Beijing correspondent for “The Economist” magazine. . which requires strict monitoring and verification of financial information.dict.org. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way.2. witness. • On a macroeconomic level. voter. and Tyco. – In the wake of Enron. • It increases the cost of doing business. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. 2006. For example. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. . it is simply inefficient. gift. • Of course.transparency.

2.bankruptcydata. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.com/Research/15 Largest.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Parmalat. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.3. Worldcom. In Scandinavia. See sidebar 1.12 CHAPTER 1. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements.com/Research/15 Largest. • Tyco – The CEO of Tyco.S. Side Note 1.3. including a $2 million birthday party for his wife. • Enron – In December 2001. . 2007. WorldCom declared bankruptcy in July 2002.bankruptcydata. a high value is placed on honesty and personal integrity.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. the former CEO of WorldCom. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.3 The United States The United States has recently been rocked by a number of scandals in the business community. history.htm.S. March 17.2 (Cultural Heritage in the U. succeeding Enron as the largest bankruptcy in U.S. • WorldCom – Following the Enron scandal. and Tyco make it clear that even western developed economies have significant ethical shortcomings. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. Qwest. Dennis Kozlowski. Side Note 1. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.1. scandals such as Enron.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. was convicted of fraud and conspiracy and sentenced to 25 years in jail. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.. There is currently debate as to the effectiveness of the regulations relative to the costs.htm. the SarbanesOxley Act (SOX) was passed in the U. 3 Source: 4 Source: http://www. 2007.S.4 – Bernard Ebbers. was accused of looting the company to fund a lavish lifestyle. While western developed economies often cite a high ethical standard. http://www. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. March 17.

Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.4. 58]. This resulted in several banks being technically bankrupt [5. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. women have a difficult time being taken seriously.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. 5 1.fdic. the political scandals do not appear to have been fully acknowledged and addressed. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Likewise. • Many men do not understand why sexual harassment constitutes a problem.S. JAPAN 13 1. . Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. Side Note 1.1. Savings and loan institutions. Better known is the case of Japanese banks. Side Note 1.4. and as a result made high risk investments in the late 1980s and early 1990s. also known as thrifts and which function like banks.gov/bank/analytical/banking/2000dec/brv13n2 2. with many men of the opinion that women were just biding their time until they marry and have children. p. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Hodgetts et al. with many women finding their employment opportunities constrained.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www.4 1..4.2 Women in the Workplace Sexual harassment has also become an issue in Japan.4. were not as highly regulated as banks. 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. The government was compelled to provide public money to bail out the institutions.4.S. Moreover.1 (The U.pdf.

Side Note 1. yes or no.de2.edu/harassment/legal. • The harasser’s conduct must be unwelcome. or a non-employee. Hodgetts et al.14 CHAPTER 1.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. gender.psu. The victim does not have to be of the opposite sex. a co-worker.. . 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. have paid substantial penalties as a result of sexual harassment or discrimination based on race. and for most public institutions and many large corporations. and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. or other issues. requests for sexual favors. an agent of the employer. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. cite two cases in which foreign firms operating in the U.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. Are women with equal qualifications as men given equal pay and position? Take a show of hands.4.4.S. unreasonably interferes with an individual’s work performance or creates an intimidating. Definition 1.g. a supervisor in another area. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. It is considered a very serious issue. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. Furthermore. hostile or offensive work environment. 6 Source: http://www. • The harasser can be the victim’s supervisor. sexual harassment lawsuits result in significant penalties (e.

. Definition 1.5.1.org. 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. Although women have entered the workforce in large numbers in recent decades. with most in the top 20 among over 150 countries included in the survey. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.5.5.1 (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. their attitudes towards bribery when working in foreign markets differs from that of the U.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. 1.3 Lobbying by Japan Japan spends more money lobbying in the U. particularly in upper management.5 1.S. than any other. politicians. Hodgetts et al. Side Note 1. They only have the power of persuasion. Side Note 1. is the notable exception). to try to influence decision-makers in any circumstance. at 40.4.S.4..dict. with the purpose to influence their votes. men are disproportionately represented in management positions. in an extended sense.7 Note that lobbyists do not have any formal power. EUROPE 15 1. there seems to be a glass ceiling due to social factors.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany. 7 Source: http://www.S.5.4.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. yes or no.

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. For those students who think so. though compensation is limited relative to lawsuits filed in the U.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization.5. • Discrimination lawsuits are more commonplace in Great Britian.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.. • More British companies have actively sought to recruit and promote women into management. but there is a perception that there are risks and ethical considerations. 8 Source: http://careerplanning.16 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. yes or no.S.5.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 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. . Side Note 1. 1.com/library/glossary/bldef-glassceiling. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.5.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. 8 Side Note 1.htm.about.

7. • Note that for every corporate spy that is caught. Bribery and other forms of corruption. 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. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 2.5 billion in sales annually. Side Note 1. there are undoubtedly many others that get away with it. 6. • A relatively stable government. Piracy and counterfeiting (see sidenote below). 5. Often. Child labor. pp.1. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. ETHICAL CONCERNS IN CHINA 17 Side Note 1.2 (Piracy and Counterfeiting) Present sidenote at [5.3 (Corporate Spying) Hodgetts et al. . 64]. Prison labor. Side Note 1. 4. executives. An increase in crime and illegal business activities. and • A recent history of rapid economic development. • Yet another case in which software from a U.6. p. 3.S. International corporate spying problems. 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. An opaque legal system.6.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets. Ethical considerations include 1.S. company in Boulder was stolen and sold to a Chinese company.6. [5. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute.6.

. • CARE (promotes community development. 1. social justice. In the words of a Beijing correspondent for “The Economist” magazine. See http://www. social justice.4 (Corruption) Though things are improving. and promotion of social equity). and the environment.6. China continues a battle against corruption. “. education. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).2.1 (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.18 CHAPTER 1. political.7. such as education and health care. and economic issues such as poverty. health.7. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. .S. Definition 1.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. .7. and economic issues such as poverty.cfm for more detail. such as Whole Foods. political. health.7.2. and the environment. .7 Corporate Social Responsibility Definition 1. Other companies. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.com/our company/our mission/index. Side Note 1. education.2 (Nongovernmental Organizations (NGOs)) Private.”[6] See also sidenote 1. not-for-profit organizations that seek to serve society’s interest by focusing on social.3 (Nongovernmental Organizations (NGOs)) Private. there are few if any issues which affect and infuriate so many in China as corruption. provide relief in the event of humanitarian disasters. and emergency relief in the event of humanitarian disasters). Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.benjerry. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. Definition 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. not-for-profit organizations that seek to serve society’s interest by focusing on social. a grocery chain.

Side Note 1.7. last but note least. • And. many feel that it has had a net benefit.7.7.9 U. Both political groups and businesses are influenced by NGOs.S. • Conservation International (promotes environmental conservation). 1. In fact. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.2. firms a reason to refuse to pay bribes. note that while U. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.S. MNCs do not appear to have been significantly impacted. – Even socially responsible executives would consider the “bottom line” when making decisions. Executives are people.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. .000 and $125. Side Note 1. 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. China ranked 78 out of 158. For example.7.S. • To prevent a boycott or other consumer defections. 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. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. and • Rainforest Action Network (RAN). firms are constrained by the FCPA with regards to bribery and other corrupt practices.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. too.1 Corruption and the FCPA Revisited Hodgetts et al. In 2005. as executives of publicly traded companies are ultimately responsible to their shareholders. as it gives the U. executives may actually feel that it is the right thing to do.1. with a score of 3.

With more disciplined corporate governance. I think corruption will diminish as China economically develops for several reasons: 1.3. .20 CHAPTER 1. Moreover.com/ipa/A0781359. Commitments that many MNCs have signed on to. Side Note 1. more Chinese will own stock in companies.N. With greater financial transparency. 10 http://www.7. Tyco. but most important first step is to recognize that there is a problem.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. Important: Although it is widely cited.0 is considered to be the borderline at which countries are considered to have a problem. The government is actively addressing the issue of corruption. the United States and Europe have recently been rocked by corporate corruption. specify standards and codes of conduct in domestic and global operations. 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.6 and 8. and not based on hard data. slightly better than Sweden. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. such as the U. and Parmalat resulting in investors losing billions of dollars. WorldCom. Scandinavian countries are at the top of the list. July 1.5 (Table 3-1: Principles of the Global Compact) The U. 3. Side Note 1.infoplease. malfeasance and diversion of corporate funds becomes increasingly difficult. with scandals such as Enron. 4. 5.2 respectively.S. 2.7. Hong Kong is number 15.7.10 Corruption is certainly not endemic to Asia. The government recognizes that it is an issue and is taking action.4 (Some Opinions) Personally. 2006. better than the U.html. societies. and Germany at 7. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Global Compact specifies 10 principles which MNCs should abide by: 1.4. Global Compact. with a score of 8. Singapore is number 5 with a score of 9. and the environment. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.N. As more state-owned businesses become privatized and the size of the middle class increases. It cannot be considered to be based on a scientific survey. Support and respect the protection of international human rights. It is a difficult problem to solve.

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

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

process design. business community as “org charts. 1. pp. 6–7].2. 2.S. operations managers make decisions. location selection. 2. • They are often sources of conflict among management. layout design. quality. 3.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. .” • Every organization with more than a few employees has an organization chart.2. place in the heirarchy. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. OM decisions have been divided into ten categories by Heizer [1.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. inventory. scheduling. and maintenance. Staffing. 5]. Side Note 2. Controlling. and 4. WHAT OPERATIONS MANAGERS DO 25 4. as the org chart determines executives’ authority and. human resources and job design. Side Note 2. OM is one of the most costly aspects of an organization. particularly when job titles are not clear. 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. supply-chain management. To accomplish these functions. more generally. p. p.2.2. 7]. Definition 2.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design.1. known commonly in the U. Organizing. Planning.

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

This saves warehouse space and costs. February 14. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. which relied upon standardization and quality control. or Kanban. such as the presence or absence of a part on a shelf. and 1 Source: http://en.2. Definition 2. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. 2007. – Providing the proper training. Kanban are usually simple visual signals. He also believed that management is responsible for – Matching employees to the right job. p. – Providing proper work methods and tools. • Reliability and stability of systems depends on well-planned maintenance schedules.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. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. • Frederick W.wikipedia. quality. . the firm could deplete inventory and cause customer service issues. 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. New stock is ordered when stock reaches the re-order level. p. However. If demand rises above the historical average planning duration demand. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.2.1 Side Note 2. and efficiency. one drawback of the JIT system is that the re-order level is determined by historical demand. that tell production processes to make the next part. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment.2. WHAT OPERATIONS MANAGERS DO 27 10.2 (A Little History) Review Heizer figure 1. • Eli Whitney (1800) is credited for popularizing interchangeable parts.2. 8]. The process is driven by a series of signals.org/wiki/Just In Time %28business%29.3 “Significant Events in Operations Management” [1. 9]. When implemented correctly. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester.

1 (Development of the Service Economy) Present Heizer figure 1.S.3 (Information Sciences) The systematic processing of data to yield information.5 [1. • Food and lodging. Today. 11]. Manufacturing was dominant until about 1950 or so.S.S. In the U. • Transportation. major contributions have come from the field of information sciences. Side Note 2. . • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control..2.3.. shelter. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. Bureau of Labor Statistics defines services to include [1.3. • Government.28 CHAPTER 2. for others professional occupations. p. 2 The average national private industry wage.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. The U. 2. services become increasingly important. economic output. • In most western economies. 9] • Repair and maintenance. Definition 2. • Insurance. services account for over 70% of U. such as the legal profession or computer services in the financial industry. Definition 2.S. • Recently. • In some service industries. such as retail. average wages are below average2 in the U. However. p. and other essentials for its citizens. the economy transitioned from agriculture to manufacturing around 1900. the services sector is by far the largest employer. the wages are considerably above average. • Trade.1 (Services) Those economic activities that typically produce an intangible product.

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

1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor.2. and finished goods rapidly. Operations managers are being challenged to produce biodegradable. Trends that Heizer and Render identify [1. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers.5. 2.30 CHAPTER 2. parts. . 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. • Empowered employees – With the rise of services and knowledge products. reusable. or recyclable products or to minimize packaging and other wasteful production steps. OPERATIONS AND PRODUCTIVITY 2. • Mass customization – With increases in technical capabilities and customerlevel information management. 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. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. the next step in product development involves customizing products according to the customer’s preferences. or management). Globalization has been having a dramatic impact on operations management and in the future. operations managers are increasingly responsible for innovations that move ideas. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. operations managers are responding by moving decision making to the individual employee. capital. • Rapid product development – The life span of products is decreasing and the need to rapidly develop and bring to market new products is consequently increasing. wherever and whenever needed.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. brought about in part by the internet. it will continue to strongly impact the field. Definition 2. p.2.

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.4375 titles per labor-hour = 0. THE PRODUCTIVITY CHALLENGE 31 Definition 2.5.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.4 (Total Factor Productivity) See definition 2. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs).5.5. Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Side Note 2. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Side Note 2.2.5. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.3. . In order to improve productivity. Consider today’s computers versus those from the 1970s. Also known as total factor productivity. p.25 titles per labor-hour = 0. but overhead is no $800/day.5.5. 15].5. Definition 2. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.0077 titles per labor-hour = 0.

There were. no word processors. the public provision of electricity is highly variable. Capital. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. • Units of measure – There may not be appropriate units of measure. capital.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. you had to write a program from scratch. The electricity often goes out in the middle of the day and the current may vary in strength.32 CHAPTER 2.5. of course. Definition 2. and the arts and science of management. or other commercial software available. 3.5 (Productivity Variables) In operations management.S..) The screen had only one color. • Exogeneous factors – External elements may cause changes in productivity which the operations manager or other factors in the system under study is not responsible for. If the public electricity provision increases in quality.5. (It used audio tapes for memory storage. and was about the size of my hand. Labor In the U. . Management. Labor. in Cambodia. A Toyota Corolla is a much different car than a Porsche 911 Turbo. – Not all cars are the same. – For example. 2. green. If you wanted the computer to do something. the three factors critical to productivity improvement – labor. spreadsheets. where quality and other factors vary widely or the level of service provision includes items difficult to measure. 2. such as convenience or safety. it may improve productivity. – This can be a particular problem in the service industry. Labor productivity has increased due to • Better-educated. about 10% of the annual improvement in productivity is due to increases in labor productivity.

About half of 17-year-olds cannot answer the following multiple-choice questions: 1. Cannot Correctly Answer Questions of This Type.5.. writing. and math.2. and 33 3.3 (The State of Education in the U. . If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.S.) Present Heizer figure 1. Side Note 2. and • Healthier workers as well as • A shorter work week. such as transportation and sanitation. p. Which of the following is true about 84% of 100? 4 When presenting this question. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. “About Half of 17-Year-Olds in the U. 2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. The primary variables for improving labor productivity include 1.8 [1. and 4.S. draw the rectangle on the blackboard.S. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. In developed nations. there is considerable concern over teaching of basic skills such as mathematics to grade school children. Diet of the labor force. Basic education appropraite for an effective labor force.5. 16]. THE PRODUCTIVITY CHALLENGE • Better-nourished. What is the area of a 4 × 6 meter rectangle. Social overhead that makes labor available. maintaining and enhancing the skills of labor.” In the U.

5. has increased at about an average of 1. management is not always identified separately from labor as an input.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. management is considered as a separate input. Side Note 2.5. however. and knowledge. productivity in the service sector has not increased as rapidly as with the production of goods.5. Developed economies (also known as post-industrial economies) require trained. 2. Note that in classic economic analysis and other areas of business. 2.S.5. According to Heizer [1. 2. and because the author of the textbook is writing about operations management. and the cost of capital depends on interest rates.S. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. 17].4 Productivity and the Service Sector Historically.34 CHAPTER 2. graduate programs and the students they produce remain the best in the world. Note that there is a trade-off between capital and labor in most industries.S.5% after allowances for depreciation.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.2 Capital Capital investment in the U. U. education. p. educated. Definition 2. are utilized effectively.5. Difficulties arise because service-sector work is . as well as capital. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level..4 (Management as an Input) Because this is a course in business management. in the U. and knowledgeable employees and operations managers are responsible for ensuring that technology.

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

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. Definition 3. competitively superior. p. global organizations can attract and retain better employees. an understanding of cultural differences in preferences is needed to best meet customer needs. 4.1 Mission Whether large or small. We will produce outstanding financial returns by providing totally reliable. France. 6. and • Increase sales. 3. Provide Better Goods and Services – For companies doing business in an international setting. 3. time-certain delivery. positive control of each package will be maintained utilizing real time electronic tracking and tracing .2 [1. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. Attract and Retain Global Talent – By offering more employment opportunities. FedEx is committed to our People-Service-Profit philosophy. 28] which includes mission statements for three multinational companies: 1.1. Equally important. Missions state the rationale for an organization’s existence. Side Note 3.1 (Mission) The purpose or rationale for an organization’s existence.1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. 3. 5.1. • Provide additional insights and opportunities.1 (Mission Statements for Three Organizations) Review Heizer figure 2. global air-ground transportation of high-priority goods and documents that require rapid. FedEx. I recommend that all companies draft a mission statement. • Perfumers tend to concentrate in Grasse.38CHAPTER 3.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there.

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

2 (Strategy) How an organization expects to achieve its missions and goals. 3. 2. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. and Major Departments in an Operations Function.” Note that mission statements are used not only at the company-wide level.3: “Sample Missions for a Company. but can be used at the department level and even at the project level. more responsive products or services.benjerry. Responsiveness – By providing timelier. • Training.1.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. the Operations Function. Cost leadership – Providing cheaper products. • Availability of complementary products. • The “look and feel” of the product.40CHAPTER 3. Definition 3. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.cfm for more detail.3 (Competitive Advantage) In operations management. See http://www. the creation of a unique advantage over competitors. Definition 3. Differentiation can arise from anything that the customer may value about a product or a services. Differentiation – They make their product better. • Interoperability with other products. 3.1. .com/our company/our mission/index.1.3 (Sample Mission Statements) Present Heizer’s figure 2. Side Note 3.1. be it • Product features.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

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

2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.1.2.3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. 39]. . 3. finance. and supporting activities.3 Integrate OM With Other Activities In order to achieve its strategy. 5 Management 6 Human Information Systems Resources. Definition 3. CSFs. Side Note 3.3 (Activity Map) In operations management.6 3.3. p.3. Once CSFs are determined. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. OM activities are most productive when they are integrated with other activities such as marketing. Southwest Airlines has a competitive advantage in providing low-cost airfares.2 as examples of how firms organize their activities.3.3. MIS.5 and HR.4. Recall the “org charts” in sidenote 2.3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.1 as a checklist to determine critical success factors.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. a graphical link of competitive advantage. an activity map can be used to link an organization’s competitive advantage to the CSFs.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. • Red arrows – critical success factors • Blue arrows – support activities 3.

Also one of the least profitable due to transport costs and little local responsiveness.3 (International Strategy) In operations management. Its menu reflects the country in which it operates. Typically characterized by subsidiaries. or joint ventures with substantial independence.6. 95% of its assets and 98% of its sales are made outside Switzerland. Definition 3. 3. See definition 3. See definition 3. 42] Definition 3. .4. 2. with beer on the menu in Germany.5 (Global Strategy) In operations management. Although e it is legally Swiss. Definition 3. wine in France. franchises. [1. In the semiconductor industry. as exports require little change in operations and licenses often leave risk with the licensee. but a good strategy for cost reduction when products do not need to be adapted locally. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. International strategy – Often the easiest strategy. Global strategy – Not characterized by local responsiveness. Definition 3. and hamburgers without beef in India.5. Only 10% of its work force is Swiss.4. products do not need to be localized. • Texas Instruments is an example of a country with a global strategy.4.1 (International Business) A firm that engages in cross-border transactions. • Nestl´ is an example of a country with a transnational strategy. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. a strategy that uses exports and licenses to penetrate the global arena.46CHAPTER 3.3. Definition 3. owning or controlling facilities in more than one country. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. 4. See definition 3.4.4.4. p.4.4. Usually does not confer a cost advantage. • McDonald’s is an example of a country with a multidomestic strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. See definition 3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business.4.4 (Multidomestic Strategy) In operations management.4.

1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.4.3. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. 6]. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.6 (Transnational Strategy) In operations management.S.4.. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.4. Side Note 3. p. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

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

and/or 5.1. project managers are highly visible in a firm and have significant responsibilities. if things go wrong. Side Note 4. Work can be defined with a specific goal and deadline. People will not come through with what they promised.1 Project Planning While many projects are run within an existing organization. often times. things you thought were certain turn out not to be. Project organizations work best when [1. You may be managing resources far in excess of your individual salary. The responsibilities of project managers are to make sure that . you will be confronted with a daunting task. However. The job is unique or somewhat unfamiliar to the existing organization. The work contains complex interrelated tasks requiring specialized skills. See also Heizer sidenote “Project Management and Software Development. 4. In a sense. 2. a temporary project organization is formed to address a specific project. 48] 1. The project is temporary but critical to the organization. p. 69].5 (Personal Advice on Project Management) Project management is a tricky profession.1. Definition 4.5. it is very obvious and can be very costly. p.50 CHAPTER 4. 3. it is also an area in which there will continue to be high demand for qualified people.1 The Project Manager As alluded to in sidenote 4.0. and you will be forced to improvise. If you become a project manager on projects of significant complexity. Moreover. 4. 4. Your job is to make things go smoothly and according to plan.0.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. PROJECT MANAGEMENT However. you are doing your job well if noone notices the project management. you should always expect the unexpected. The project cuts across organizational lines.” [1.

When dividing a project into tasks.2 (Work Breakdown Structure (WBS)) In operations management. a task that should only take a day or so. in a software engineering project. Review graphic design for user account input web page 3. Review software architecture for user account input web page functionality 6. 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. PROJECT PLANNING 1. People receive motivation and information necessary to do their jobs.1.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. All projects come in on time. 51 4.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS).4.1. Side Note 4. Definition 4. • Build the user account input web page is a much better task division than 1. Complete software architecture for user account input web page functionality 5.1. 2. The project meets its quality goals. you have divided the tasks too finely. dividing a project into more and more detailed components. Complete graphic design for user account input web page 2. In a project that includes allowing a user to enter personal information on a web page. Approve graphic design for user account input web page 4.1. 3. and 4. The project is on or under budget. a web page takes about a day to build for an experienced team. Approve software architecture for user account input web page functionality . For example.

Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Project 2. fill hundreds if not thousands of pages. Subtasks in major tasks 4. Major tasks in the project 3.2.1. PROJECT MANAGEMENT 7. Scheduling serves to 1. At the time you are creating the work breakdown structure. 4.2 (Work Breakdown Structure) Present Heizer figure 3. The actual WBS for Windows XP would. Write software for user account input confirmation page functionality 9. Activities (also known as “work packages”) to be completed Side Note 4.52 CHAPTER 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Show the relationship between each activity to others and to the whole project 2.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). you should also take note of time and cost estimates given by your technical staff. which we will discuss next in section 4. Identify precedence relationships among activities 3.1. the work breakdown structure is not something you go to your office to do in isolation. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. of course. Side Note 4. Encourage realistic time and cost estimates for each activity . Write software for user account input web page functionality 8.3 [1.3 (Reality Check: WBS) In reality. p. They will be useful for project scheduling.

right by the bridge.2 (Using Gantt. It can actually be quite time consuming to create and maintain Gantt charts. Derives from the typical shape of a bottle. the road bottlenecks. Definition 4. Overall project time is developed. MS Project’s Gantt chart functions demand you assign employees. and 4. For smaller projects. However. Make better use of people.2. PERT. Side Note 4. and other values to each activity. cost estimates.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. All activities are planned for. p.2.” This will give the class an idea of the look and feel of a typical Gantt chart. and CPM) Inexperienced project managers often feel the need to use Gantt. which becomes narrower as one approaches the neck of the bottle.2. 51]. Gantt charts are perhaps the most widely used tool for ensuring that 1.4. The order of performance is accounted for. and CPM tools for every project management activity. Perhaps they imagine that they are not doing their jobs professionally if they are not. Activity time estimates are recorded. 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 . as. – said of roads.2.2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. PERT. Definition 4. 3. 2. PERT and other formal documents.4 [1. PERT and CPM help answer questions such as • When will the entire project be completed? .2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. and material resources by identifying critical bottlenecks in the project Side Note 4. these should be considered merely tools to be used when they are useful by saving time or energy. moeny. PROJECT SCHEDULING 53 4.

Functional cost and hour summaries. is the project on schedule. less than. Cost breakdowns for each task.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Raw material and expenditure forecasts. behind schedule.3. 2. and 8. 5.3. or ahead of schedule? • On any given date. Control programs typically produce reports detailing 1. 4.54 CHAPTER 4. 7. Variance reports. were developed in the 1950s for project control. costs.1 PERT and CPM Two methods. and budgets of projects. Time analysis reports. what is the best way to accomplish this goal at the least cost? 4.3 Project Controlling Project control involves monitoring resources. 4. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. 6. 3. Definition 4. which activities will delay the entire project if they are late? • Which are the noncritical activities – the ones that can run late without delaying the whole project’s completion? • What is the probability that the project will be completed by a specific date? • At any particular date. Work status reports. is the money spent equal to. 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. quality. . PERT and CPM. Cost distribution tables. Total program labor curves.

or the critical path. Also. Draw the network connecting all of the activities. Moreover. 5. monitor. 3.2. Activity on Arrow (AOA). Define the project and prepare the WBS.3.3. Side Note 4.3. in my experience. Definition 4. Side Note 4. 2. Compute the longest time path. See also definition 4.3. Personally.5 [1.3. 4. They both follow six steps: 1.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.2 (Example: AON and AOA) Present Heizer’s figure 3.3. See also definition 4. Gantt charts are the “go to” visualization method for even very complex projects. Develop the relationships among activities.4. .3. PROJECT CONTROLLING 55 Definition 4. 6. Use the network to help plan. 4. p.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. through the network.3 (Critical Path) The computed longest time path through a network. it will do for you automatically much of what we will go through manually in this class. As the names describe.3. Activity on Node (AON) and 2.3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. Assign time and/or cost estimates to each activity.2 Network Diagrams There are two approaches to visualizing activity networks: 1. and ontrol the project. schedule. AON associates the activity with the node whereas AOA associates the activity with the arrow. 53].

its LF is the minimum of all LS values of all activities that immediately follow it. their dependencies. • Table 3. PROJECT MANAGEMENT Side Note 4. pp. EF = ES + Activity time. See also definition 4.4 Determining the Project Schedule Once we have identified all of our activities. 1.56 CHAPTER 4. analysis used to determine the project schedule.3. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. LS = LF − Activity time. Follow with example 3 and figure 3.4.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. p.1 (Critical Path Analysis) In project management.6–3. that is. – If an activity has multiple immediate predecessors. that is.9 [1. we must use time estimates of each activity to determine the overall schedule for the project. 56]. its ES is the maximum of all EF values of its predecessors. 4. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. We do this with a critical path analysis with involves a 2-step procedure. 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. 2. In other words. that is. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. ES = max{EF of all immediate predecessors}.3.1 gives sufficient information to describe the network.8 [1.3. – If an activity is an immediate predecessor to more than one activity. its LF equals its LS of the activity that immediately follows it. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. LF = min{LS of all immediate following activities}. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. Definition 4. . 54–55].

3.4. p. it is said to have free slack.2 (Total Slack) In project scheduling. • Terminates at the last. and • Includes only critical activities (see sidenote 4.3 and Heizer figure 3. p. Definition 4.1 When several noncritical activities appear successively in a path. 61] based on table 3. 2 For example.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. If an activity2 does not impact the slack time of any other activity.5. Definition 4. E. the free time for an activity. G. Definition 4.13 [1.10 [1. The critical path is one that • Begins at the first activity in the project.1.2 (Forward Pass) In project management scheduling.1 (Slack Time) In project scheduling. the step that identifies all the earliest times that activities can be completed. and H have no slack time and cannot be delayed without delaying the entire project. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. or the amount of time an activity can be delayed without delaying the entire project. .4. C. 4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.1). the time associated with a single activity. Side Note 4. p. activity F in sidenote 4.1. Note also that if we delay each activity by the amount of slack that activity has.4. 60]. we may delay the project as a whole. if we delay activities B and D by one week each. they share total slack. we cannot complete the project in 15 weeks. “Notation Used in Nodes for Forward and Backward Pass.4.5. Also notable is that if the total time of the project needs to be reduced. Note that activities A. in the example in sidenote 4.4. the time devoted to one of these activities must also be reduced. These are called critical activities. 1 For example. 57].4.” Then complete Heizer example 7 figure 3. Slack time is just Slack = LS − ES or Slack = LF − EF .5.3 [1.3 (Free Slack) In project scheduling. the time shared among more than one activity.5.

in most cases.6.6. the most probable activity completion time that could be obtained in a PERT network. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.6. and the other uses β = β − 1 and α = α − 1 . Beta distributions have two free parameters.6.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.3 (Most Likely Time) In project scheduling.6. However. See also definitions 4. Most likely time – The most realistic estimate of the time required to complete an activity. Definition 4.2. Side Note 4. See also definitions 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.6. In reality. Effectively. In PERT.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. unexpected complexities. Definition 4.2 (Pessimistic Time) In project scheduling.3.1 (Optimistic Time) In project scheduling.1 and 4. the project manager pulls the number “out of the air” based on their experience managing related activities. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.58 CHAPTER 4. the “best” activity completion time that could be obtained in a PERT network. we do not.. PROJECT MANAGEMENT 4.6.6.6. The usual definition calls these alpha and beta.2 and 4. See also definitions 4. Definition 4.6. Definition 4. the “worst” activity completion time that could be obtained in a PERT network. etc. The beta distribution is used as a prior distribution for binomial proportions in .1 and 4. three time estimates are used: 1.3.6. which are labeled according to one of two notational conventions. the time required to complete an activity is often uncertain due to supply problems.

β) with α = 1 and β ranging from 0.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.wolfram. Side Note 4.6. 63] for activity F based on optimistic. 8 1.1) where B(p.wolfram. The expected activity time for activity F is 3 weeks5 and the variance is 1.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.78 6 6 36 7 4 weeks. and pessimistic times of 1. 4 See definition 4. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. 2007. most likely.html http://mathworld.25 to 3. and 9 weeks. and 7.6.com/BetaFunction. and . and pessimistic times of 1.html. The variance of the activity time is Variance = [(b − a)/6]2 . β) Γ(α)Γ(β) P (x) = (4. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α. 4. 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 = 1.6.com/BetaDistribution. 2. q) = (4.1 Probability of Project Completion If we assume that 1. Total project completion times follow a normal probability distribution and 2.3 The domain is [0.1].00 week. Activity times are statistically independent 3 Source: http://mathworld.4. p.00. February 21.78 weeks. The above plots are for various values of (α. p. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. most likely. 4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.6. 62].4.

60 CHAPTER 4. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4.6.10 Determining Project Completion Time for a Given Confidence Interval A common question is. Side Note 4.wolfram.html. 64]. See definition 4.6.com/StandardDeviation. two standard deviations approximately 95% of the time. A2– A3] “Normal Curve Areas.6.6. 9 For 10 See more information.6 (Standard Deviation) The standard deviation is the square root of the variance. Definition 4.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.3 (Example: Project Variance) Review Heizer example 9 [1. commonly also N written σ 2 .6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. p. Side Note 4.76 weeks implies that the project will exceed the expected completion time by more than 1.” Review Heizer example 10 [1.6. the population variance var(X). .6.1. pp.7% of the time.3) Definition 4. 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. Note that the standard deviation of 1. 65] and figure 3.6. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4.76 weeks approximately 16% of the time.5.6.6. See also 4. and within 3 standard deviations approximately 99.16. p. definition 4. see http://mathworld.4 (Using the Normal Table) Pass out Heizer Appendix I [1.

3 (Crash Cost) In project management. in fact.7. we want to do so in the least cost mannger possible.7. • The shortened durations will actually enable us to finish the project on time. and if you become a project manager. Project crashing is the name given to the process of rushing a project to completion.1 (Crashing) In project management. permissible and realistic. Since activity completion times are typically shortened by adding resources. Definition 4.7. . Definition 4.7. the crash cost is typically higher than the normal cost. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. See definition 4. we need to ensure • The amount by which an activity is crashed is.11 Definition 4. it may result in the project being delayed. and • The total cost of crashing is as small as possible.1. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.4) 11 Since crashing a project often involves adding additional resources to activities.7.1. Crashing a project involves a four step process: 1. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. Step 1 – Compute the crash cost per week. crash cost is the cost required to complete an activity in the shortest time possible. See definition 4.2 (Crash Time) In project management. 4. When crashing a project. if certain activities off the critical path take the pessimistic time estimate or more to complete. Assuming linear costs.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon.4. you will doubtless experience one or both of these eventualities many times in your career. crash time is the shortest duration of an activity.7.

pp.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. stop.7. At times this may be politically infeasible. Crash this activity by one period. you should be very wary of such pressure. 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. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. Side Note 4. Side Note 4. Step 2 – Find the critical path(s) in the project network.7.18–3. 67–69] including table 3. go to step 2.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Step 3 – If there is only one critical path. If you accept the challenge and try to rush the project to please upper management. the advice given in this section should be helpful.5 and figures 3. Note that one activity may be on several critical paths. Step 4 – Update all activity times. If the due date has been reached.2 (Example: Crashing a Project) Present Heizer example 12 [1. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. As a project manager. If there is more than one critical path.19. 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. 4. PROJECT MANAGEMENT 2. If you find yourself needing to rush a project. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. • Advantages – Especially useful for large projects . 4.62 CHAPTER 4. Then crash each activity by one period. If not. 3.

independent.org/wiki/List of project management software for a list of project management software or ask Dr.7. You may also refer to http://en.wikipedia. Noncritical paths should be closely monitored as well. including open source software that is free.9 Using Microsoft Project for Managing Projects Present programs 3. However.7 [1. Note that most project management textbooks refer to MS Project as the software of choice for project management.4.org.9. Information on Achievo can be found at http://www.dotproject.to mediumsized projects.net. they are often overkill for small. Information on Planner can be found at http://live. pp. 12 Recall sidenote 4. 4.1–3.org/Planner.1.achievo. it is relatively expensive and the features are so numerous and complex. It is perhaps the most widely known and featureful project management software available. There are a variety of alternatives. 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. . Information on dotProject can be found at http://www. Starkweather about his impression of various alternatives. 70–74] with figures demonstrating MS Project functionality.gnome. 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.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

See also definitions 5. Introduction. Generally deals with more comprehensive issues than short-range forecasts. Decline.1. These concern rates of technological progress.1. 2.66 – – – – Sales forecasting. CHAPTER 5.3 (Technological Forecasts) In operations management. Definition 5. longer forecasts are needed. Production planning and budgeting. and other economic indicators.1 Types of Forecasts Organizations typically use • Economic forecasts. housing starts. FORECASTING • Long-range forecasts – Generally more than 3 years. which impacts purchases of new plant and equipment as well as development of new products. 5.3 and 5.2 (Economic Forecasts) In operations management. Maturity.1. Cash budgeting.4. Useful for – – – – Planning for new products. money supply.2 and 5. and • Demand forecasts. • Technological forecasts. long-term forecasts concerned with the rates of technological progress. planning indicators valuable in helping organizations prepare medium. and 4. . In the first two stages. Definition 5.to long-range forecasts. Product life cycles tend to follow four stages: 1. See also definitions 5.1. Growth.1. Facility locations or expansion.1. and Analyzing various operating plans. and Research and development. Capital expenditures.4. 3.1. These may include inflation rates.

these drive a company’s production. 6. Validate and implement the results. and • Loss of market share. and • Layoffs. Select the items to be forecasted. Determine the use of the forecast.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Make the forecast. 3. • Loss of customers.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. and scheduling decisions and serve as inputs to financial.2 and 5. Gather the data needed to make the forecast. 7.5.4 (Demand Forecasts) In operations management.1. Capacity – Underestimating demand can result in • Undependable delivery. Also called sales forecasts. 4. 5. . 5. projections of a company’s sales for each time period in the planning horizon. capacity. • Training. 3.3. 2. Determine the time horizon of the forecast. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.1. marketing. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.2.1.1. 2. 5. Select the forecasting models. See also definitions 5. and personnel planning. Human resources – Anticipated demand is needed to estimate the need for • Hiring.

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

· There are three problems with moving averages 1. 3. · Requires less past data than moving averages. · See definition 5. 2. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers.3. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. ∗ However. Moving averages require more past data to work with than. Sales people typically respond to incentives. the more likely it is your results will be accurate. · See definition 5. ∗ Moving averages · Simple. say. Moving averages cannot pick out trends very well.5. · Staff personnel. political.3. for example. · The simplest and easiest way to estimate demand.3. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. useful method if we can assume that market demands will stay fairly steady over time. · Useful as a starting point or sanity check for more sophisticated methods.9. the naive approach. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. . they may want you to think that they will be doing more business with you in the future to obtain price concessions today. or other incentives to over or understate demand. ∗ The more independent your decision makers are from economic. – Sales force composite ∗ You would be surprised how accurate your sales force can be. and · Respondents.8. and if they perceive there is an incentive to exaggerate. be sure that the sales force is clear that their incentive is to be as accurate as possible. they will do so.

Definition 5. 5.3.3.5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. 5. See also definition 5.3. and 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. a forecasting technique using a group process that allows experts to make forecasts.4.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.5 (Sales Force Composite) In operations management.3.70 CHAPTER 5. Definition 5.6.2.3.3.5.10.3.6.1. See also definition 5.3.3.3. See also definitions 5. See also definitions 5.3. 5. Definition 5. and 5.5.4. and 5. · See definition 5.3. and 5. and value system.6.3.4 (Delphi Method) In operations management.3.3. a forecasting technique based on salespersons estimates of expected sales.3.3.3.3 (Jury of Executive Opinion) In operations management.1 Qualitative Forecasting Methods Definition 5.3. emotions. 5. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.6 (Consumer Market Survey) In operations management.3. See also definitions 5. .3. personal experiences. Definition 5. 5.4.3. See also definitions 5.3.

10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.8.9.05 to 0. and 5.3. See also definitions 5.10.3.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Definition 5.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. 5. a simple moving average is given by demand in previous n periods Moving average = (5.3.3. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. α. See also definition 5. • Simple Moving Average – Mathematically.5.3.1) n • Weighted Moving Average – Mathematically.3.2) See also definition 5. generally ranges from 0.2 Quantitative Forecasting Methods Definition 5. Higher values give more weight to recent data. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.5.3.11.3) The smoothing constant. Moving averages can be either simple or weighted. 5. That is.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. Definition 5.3. and are appropriate to use when the underlying average .3. Mathematically. Definition 5.7. FORECASTING APPROACHES 71 5.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.7.

and 5.13.3. Definition 5.3 Measuring Forecast Error Once a forecast is made.4) definition 5. FORECASTING is likely to change.14.3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. while lower values give more weight to past data.13). 5. Mean absolute percent error (MAPE). such as the mean absolute deviation (see definition 5.3.3.72 CHAPTER 5. Mean absolute deviation (MAD).3.3. 2.11 (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.12.15. Definition 5. See also definition 5.3. it is good practice to compare the estimated value with the actual value as actual values become available. exponential smoothing is equivalent to naive forecasting.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3. See also definition 5. Definition 5.3.3. Mean squared error (MSE).7.0.8. 5.3.3. When α = 1. 3.7.12). Three popular measures are 1. and are appropriate to use when the underlying average is relatively stable. 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. 1 See |actual − forecast| n (5. .12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.

10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. Mathematically.7) or F ITt = Ft + Tt (5.3. Mathematically. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.8) With smoothing constants α for the average and β for the trend.11) .3.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. MAPE is given by MAPE = See also definition 5.3.5.5) |actuali − forecasti |/actuali n (5.12.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values. Definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3. expressed as a percent of actual values.3.3.6) 5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5. MSE is given by MSE = See also definition 5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.12. FORECASTING APPROACHES 73 Definition 5.3. 100 n i=1 (forecast errors)2 n (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.

1.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. It is also commonly called linear regression analysis. 2. Ordinary Least Squares Regression analysis is also useful for predicting trends. Calculate the forecast including trend. the emponentially smoothed forecast for period t using equation 5. by the formula F ITt = Ft + Tt .74 or CHAPTER 5. 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. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.10. Tt with equation 5.14) .13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Compute Ft . 3. F ITt .12. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. time) (5.

1. demand is seasonal. 3. . Compute a seasonal index for each season by dividing the historical demand by average demand. the more uncertain it is. 2. to account for seasonal changes in demand in our forecasting.5 Seasonal Variations in Data In most businesses. Most businesses experience a surge in sales around Christmas.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. then multiply it by the seasonal index for that month. Definition 5. during the summer months when it is common to take a vacation. In the U. ¯ x The least squares method has several drawbacks. 4. 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¯. the multiplicative seasonal model. Although there are many methods to accomodate seasonal demand.3.3. such as cars and washing machines.. The first step is to calculate the seasonal forecast.3.5.13 assumes a linear relationship. This provides the seasonal forecast. Divide this estimate of total annual demand by the number of seasons. Compute the average demand over all months. 1. Deviations around the least squares line are assumed to be random. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 3. consumers often make fewer purchases of durable goods. Recall that the equation 5. 5. 5. 2. Estimate next year’s total annual demand.S. Find the average historical demand for each season. we will examine one model. We do that with a 5-step process.

We will use the same technique.g. Note that making predictions of future demand involves also making predictions about the independent variable x.76 CHAPTER 5.3. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.17) .3. If there are published estimates you can cite (e.x = (5. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.3. 106– 107].15) Side Note 5.x = (5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e..g. mathematically.4. It is also called the standard deviation of the regression and. whatever uncertainties you may have transfer to your predicition of y. pp.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.. 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.g. FORECASTING 5.1 (Example: Using OLS) Present Heizer example 12 [1. if you are uncertain about predictions of x. average local salary) (5.16 is y2 − a y − b n−2 xy Sy. but x will be something other than time. However.. is given by (y − yc )2 n−2 Sy.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.

3.18) . Correlation Coefficients for Regression Lines Definition 5.2 with stock prices generally rising as skirts rise.time.S. in all but one Year of the Pig.3.com/time/business/article/0.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation. have been correlated. or National Football League. football in the U. Side Note 5. a football game played between two football conferences in the U. Since 1935.4 .2 (Distribution About the Point Estimate) Present Heizer figure 4.html?xid=sitecnn-partner.” Note that the regression assumes a standard normal distribution about the estimate. 4 Source: http://www.3.5. which is divided into two “conferences. but the relationship is coincidental. Even the Year of the Pig correlates strongly with the U.1594488. stock market.S. Certainly.S. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. pp. 2007.18. “Four Values of the Correlation Coefficient.3 and the U.4 (Causation vs.3. FORECASTING APPROACHES 77 Side Note 5. has risen. Other interesting correlations that have been identified over the years include banana prices and U.3 (Examples of Correlation Coefficients) Present Heizer figure 4.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. Historically.3. is monopolized by the NFL.9 [1. p. Definition 5. Dow Jones Industrial Average and Standard and Poor 500. p. the average length of a woman’s skirt and stock market prices in the U. leading stock indexes. 107].S. “Distribution about the Point Estimate of $600 Million Payroll.8599.10 [1.00.3. the note in the margin accompanying Heizer example 14 [1.S.3.S. February 28. 108]. The correlation coefficient of variables x and y is given by r= See also definition 5. stock market prices as well as the winner of the Super Bowl. It does not imply causation one way or the other. nor does it imply that they will continue to be related. Correlation) Correlation merely means that the values of two variables are historically related. stock markets.S.” the AFL (American Football Conference) and the NFC (National Football Conference).” Side Note 5. the U. 109]. changes in skirt lengths don’t cause stock market prices to rise and vice versa.

78 CHAPTER 5. It is commonly simply called “R squared. = the dependent variable (e. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. The multiple regression equivalent of equation 5. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . . 5 See definition 5.3.6. often the most difficult part of building a multiple regression model is to pick the independent variables.3. you would use statistics software to calculate these values.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.19) Determining the values of a.15 is given by y = a + b1 x1 + b2 x2 + . p. . b1 . . “What was the R squared of your regression?” Multiple Regression Analysis In section 5. 110]. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.18 and Heizer example 15 [1. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. b2 . etc. Adding additional independent variables as predictors.g.19 (Multiple Regression) A causal forecasting method with more than one independent variable. In practice.” As the sidebar points out. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. if they are indeed related to the dependent variable. . 110].” For example.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.. (See definition 5. x2 . . The same technique can be applied to use several independent variables to predict the value of a dependent variable. b1 .17. Side Note 5. . results in additional predictive accuracy as measured by r2 . p.3. . b 2 .3. . we discussed a means by which we can attempt to predict the value of one variable using the value of another.5 Definition 5. .3.

.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.forecast| n where M AD = (5.4 standard deviations. The tracking signals should also be compared as they are generated against limits.4.11 [1. and 4 M ADs to 3. and within 4 M ADs about 99. the forecasting methodology needs to be modified.6 One M AD is equivalent to 0.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series.1.4.20) A good tracking signal has about as much positive as negative error.6. 6 Recall definition 4.2. two M ADs to 1.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.6. 111]. Side Note 5. This means that the observed value should be within 2 M ADs abut 89% of the time. 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. though large errors may be a problem as well even if the positive and negative errors balance. These limits are typically based on M ADs.4. Definition 5.9% of the time. MONITORING AND CONTROLLING FORECASTS 79 5.2 standard deviations. Definition 5. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. p. three M ADs to 2.5. If the tracking signals violate upper or lower limits. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4. Tracking signals are typically used monitor forecasts. which correspond roughly to standard deviations.8 standard deviations.1 (A Plot of Tracking Signals) Review Heizer figure 4. three M ADs about 98% of the time. In other words.6 standard deviations.

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. p.4. Side Note 5. which selects a model based on goodness-of-fit to a data set.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. changes need to be check with human eyeballs to ensure that the adjustments make sense.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. you must make your own decision as to how you select the forecasting models that you use. there has been much criticism of the approach to using models based on thier fit to the data.80 CHAPTER 5. “Summary of Forecasting Formulas. 5. Sophisticated forecasting models are not always better than simple ones. 2. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. Note that even with computer monitoring.4.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. 114]. you should be aware of the criticism of focus forecasting. Definition 5.4.4.4.g.3. There is no single technique that should be used for all products or services.2 Focus Forecasting Focus forecasting.” .2 [1.4.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. α in definition 5. Side Note 5. Definition 5. In your career. FORECASTING 5.. However.10) is automatically changed to keep errors to a minimum. is based on two principles: 1.

5 (Product Decision) The selection. Product strategy2 defines the breadth of the product line and links product decisions to [1. • Market share and dynamics. Referring to services as products is common in the service industry. pp. insurance companies often refer to their policies. They also use just-in-time production techniques. pp.0. 81 . 1 In this chapter. 124. time permitting. the word “product” will refer to both goods and services. which will be discussed in detail later in the semester. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. is a service. 2 Recall sidenote 2. definition. • Product life cycle. as an intangible. which. as products.1 .0.2. For example.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. Definition 6. 122–123].128] • Investment and cash flow. and design of products. and • The organization’s capabilities.1 Side Note 6.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.

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

3 Product-by-Value Analysis For firms with many products. example. • Technological change often drives product innovation. and if a company is to survive.1.1 (Example: Brainstorming) Lead the class in a brainstorming session. • Sociological and demographic change is also tied to product demand. as well as the total annual dollar contribution of the product. Definition 6. the development of cellular telephone technology or the internet. it must regularly redesign existing products or bring new products to market.500 or 100.000 yuan.3 • Political and legal change can also bring about business opportunities. • Economic factors. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. example.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. GENERATING NEW PRODUCTS 83 6. 6. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. Ideas are not reviewed until after the brainstorming session. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. Definition 6. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.6.2. are tied to product demand.2. 6.1.2 Generating New Products Most products have a limited life cycle.2.2. such as consumer incomes. 4 For 3 For .1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.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.

p. the product life cycle.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Definition 6.3 [1.2. 129]. 128]. 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. market dynamics. Many successful companies rely on sales from products introduced within the past five years. DuPont estimates that it takes 250 ideas to yield one marketable product [1.3.1 (Product Development Stages) Present Heizer figure 5.3.2 [1. Each stage should have an accompanying review to determine whether to progress or not. and the organization’s capabilities.3 6. Definition 6.84 CHAPTER 6. 128]. Translates customer desires into a product design. DESIGN OF GOODS AND SERVICES For example.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. The house of quality is a graphic technique for defining the relationship between customer desires and a product.3.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.3. Determines what will satisfy the customer and 2. Side Note 6. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. Side Note 6. . 6. p.3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. p.

Note that it is not free or open source. In other words.9 6.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.. bureaucratic companies and organizations. p.7 4.S. An organization is divided into departments.3 Organizing for Product Development In the West.2. and production departments. • Perhaps the most popular approach in the U. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. Relate customer wants to product hows. Identify relationships between the firm’s hows. • More common in large. • Effective communication and coordination between separate departments can be problematic.g. Evaluate competing products. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. • Fixed duties exist.9.qfdcapture. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. which can be an advantage. 7 In other words.2. PRODUCT DEVELOPMENT 85 Side Note 6.2. a research & development.3.3..2. 2. create the columns of the house in sidenote 6. Product development is done by teams.6. 8 These are given on the roof of the house in sidenote 6.6 3.3. Building the house of quality involves six steps: 1.” 6 For example. . 3. 10 The right-hand columns of the house in sidenote 6.3.3. as was the software described in section 4.3. with product features. Identify how the good or service satisfies customer wants.com for more information.8 5. 6.2.3. Develop importance ratings. e. design engineering. 1. Identify customer wants.2 (Example: House of Quality) Present Heizer example 1 [1.10 Side Note 6. manufacturing engineering. 2.3. identify the rows of the house in sidenote 6. See http://www. there are three popular methods by which organizations undertake product development. 130].3.

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

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

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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6 (Business Failures) A friend and former colleague. Matt McAdams.7 (Confidence vs.0.7. starting a business simply involves taking the first step. must begin with a single step. If you start a small business. fear of failure and other insecurities dissuade most people from ever starting a business. who has started two businesses and been CEO of three startups once told me. As a Chinese philosopher once said. that is. Side Note 7. ultimately. . While it is important to be realistic about risks when starting a business. See also sidenote 7. taking that first step can be extremely daunting. doing it is simple. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . then another. but also realistic. . Side Note 7. you should be confident. However. you will have to decide that you have done as much as you can do and simply take action.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex.” However. difficult undertaking. Realism) Most people perceive those who start businesses as risk-takers. Most businesses fail within the first 18 months. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge. people who can tolerate a high degree of risk. but the humor in the statement lay in the fact that there is some truth to it. In fact.” He was joking. “Every journey . then taking another step.0. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground.0.” At its core.

• Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. • Finally. we will discuss how to prepare to start a small business as well as manage a business early in its life.”’ • According to experts who have studied entrepreneurs. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. – We will discuss techniques for raising money in detail later in the course. jewelry. you will maximize your chance of success. 12–13]. – You not only have to believe in yourself.ccer. See.1 In our discussion of entrepreneurship. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. everyone would say that they want to be thier own boss. 7. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. you have to convince others to believe in you.edu. March 6.1 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 [4.92 CHAPTER 7. 1 There are a variety of studies that support this. successful entrepreneurs know how to raise money. And by believe in you. http://wistechnology. I mean believe in you enough to give you money. but a series of frustrations. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. and . make lots of money quickly and with little effort. Hopefully.asp?NewsID=5324. 2007. for example.php?id=2018 http://www.com/article.cn/en/ReadNews. If asked. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. you will finish the course with the confidence that if you decide to start a small business. pp. • Surveys and research indicates that the most common personality trait is self-confidence.

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

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

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

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

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

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

1.” That is. People thought he was going nowhere and generally dimissed his business.2 is. Finally. used as the title of at least 12 movies and television shows. p. in the wake of 9/11.8. the business took off. you should not let it dissuade you. thinking that if he did not succeed after a couple of years.” Side Note 8. His sales are now in the millions of dollars per year and the business is very profitable. A well-known phrase in English.1 You’ve Got an Idea. And you should not risk anything you can’t afford to lose. . you should have “thick skin. or are otherwise discouraged. “Never say die. However. making just enough to get by but not much more.imdb. 8. 2 http://www. 2007. 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. February 17. such as your family.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. 33]. You should be realistic about risks.1. Warnings about risk are perhaps the criticism you should consider most carefully.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. 35]. Have students come up with examples of products that meet various criteria on the checklist. home.1. you will be spending years of your life trying to make the idea work. he would never succeed. while you should listen to criticism that others give.com/find?s=all&q=never+say+die. or health. After all. Entrepreneurs are often told their idea is flawed. to be truly self-motivated and persistent in the way you need to succeed. Now What? The number one trait needed by successful entrepreneurs is perseverance. that they will never make it.1. computer-controlled security cameras. 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. YOU’VE GOT AN IDEA. p. Side Note 8. Side Note 8. Have students fill out the form on their own time. He ran the business as a one-man operation for years.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. it is too risky.

100 CHAPTER 8. FINDING AN IDEA .

101 . your next step is to do some market research.1. Definition 9. See also 9.2.” or business-to-consumer ventures.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Not only do you need to decide whether you are marketing to businesses or consumers. Businesses. See also 9. go through the following 7 steps: 1.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. 9.Chapter 9 Defining Your Market After coming up with your idea. When trying to identify your niche market. but you should try to target your market as specifically as possible. There are two broad categories of markets: 1.0. Definition 9. Consumers and 2.0.0.” or business-to-business ventures.

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

1 (Generational Marketing) Marketing to consumers based on age as well as social.1.. New marketing techniques include generational. such as having children.1. in the U. for example. the World War II cohort.” That is. Definition 9. Many Western companies make the mistake of lumping together Japanese. young adults in the Depression.1. but their behavior differs significantly due to the different influences in their youth. Go for it! – Implement your idea. Definition 9. and other Asian customers together.) Using these new marketing techniques can allow you to narrow your market. and cohort marketing. Side Note 9. For example. buying a home. Definition 9. Likewise.. you should be able to enter your niche market with confidence. many Eastern companies make the mistake of lumping together American and European customers. Marketing to demographic groups has become much more refined in the last few decades.3.9. As older people are more active than before. they try to satisfy all possible customers and end up trying to do too many things well. .1. are similar in age to those who came of age in World War II. many are choosing to start families later in life or even have children ten years or more apart. demographic.1 (Smaller is Bigger) When starting a business. FINDING YOUR NICHE 103 7. Korean.S. when the country was immersed in a war effort. Chinese. many entrepreneurs make the mistake of being “all over the map. 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. or retiring. This marketing technique has been widely used since the early 1980s in the U. life stage. 9.1. If you did your homework. and the narrower your focus on your target. 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.1. Side Note 9. It is better to do just one thing well than to do many things poorly. This can be offensive and serve to alienate rather than appeal to your customer.2. the Depression-era cohort.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. economic.1. you should practice extra caution to avoid stereotypes or other insensitive approaches. and psychological factors. etc.1.S.1. and 9. (See definitions 9.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1. when many people were suffering from extreme poverty..

104 CHAPTER 9. 79] 9. . Falkenstein states. DEFINING YOUR MARKET 9.” [4. “Creating a niche is the difference between being in business and not being in business.2 Redefining and Expanding Your Niche Lynda C.1 (Mission Statements for Three Organizations) Review Heizer figure 2.1.2 [1.3. 28] which includes mission statements for three multinational companies: 1 See section 9. a few sentences at most. p. The mission statement should • Be succinct. • Convey the essence of your business’s goals and philosophies.3 The Mission Statement Once you have a niche. you should. Side Note 9. Every six months or so. p. create a mission statement. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. • 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. Falkenstein1 advises that you regularly reevaluate your niche.

FedEx FedEx is committed to our People-Service-Profit philosophy. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. and nurturing work environment while ensuring our long-term success. and professional to each other and the public. 105 Side Note 9. 3. time-certain delivery. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. natural ingredients and promoting business practices that respect the Earth and the Environment. competitively superior. contributing member of our community and offering the Hard Rock family a fun. global air-ground transportation of high-priority goods and documents that require rapid. THE MISSION STATEMENT 1.3. We will strive to have a completely satisfied customer at the end of each transaction.9. A complete record of each shipment and delivery will be presented with our request for payment. . • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. Our mission consists of 3 interrelated parts: • Product Mission – To make. Equally important.3. healthy. courteous. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We are committed to being an important. 2. We will produce outstanding financial returns by providing totally reliable. Merck The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. We will be helpful. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

” Definition 10. you need to take a step back for a sanity check. and the particular competitors you face. spending habits. says “A lot of companies skim over the important background information because they’re so interested in getting their product to market.1 (Market Research) Research into the characteristics. Donna Barson.. Inc. the industry as a whole.Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business. president of Barson Marketing. But the companies that do the best are the ones that do their homework. Market research should answer the following questions: • Who will by my product or service? • Why will they buy it? • Where will they buy it? In a store? On the internet? • What do I need to charge to make a sufficient profit? • What products or services will mine be competing with? • Am I positioning my product or service correctly? How do I compete successfully with existing suppliers? • What government regulations do I need to be aware of with respect to my products or services? 109 . location and needs of your business’s target market.0.

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CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

RESEARCH METHODS 113 Side Note 10.10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.” [4. pp. .2.

114 CHAPTER 10. MARKET RESEARCH .

It must describe current status. 3. expected needs. Definition 11. Set up a timetable with specific steps to be accomplished in a specific period. In terms of sanity checking. 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. Those who provide financing are aware of these pitfalls.0. 5. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. 1.4 (Business Plan) A business plan is a written document that details a proposed venture. 4. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. including 115 . 2. and projected results of the new business. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. and so should you be. Your business plan should list obstacles that may arise and what will be done to address them. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will 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.

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

301]: • Appearance – It should look good. you will not even get your foot in the door and be invited to present your plan to investors. Note that less than a minute on average is devoted to each step. Read the latest balance sheet. pretentious. – Binding and printing should not be sloppy. Read the plan over casually.1.1. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. the trash can. 300].e. not ostentatious. 2. p. 1. 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. bear in mind that once the plan is advanced to the next stage of financing. If you cannot impress the financier with these three steps. thorough and careful. While the initial read-through might be only a five-minute perusal.11. 6. but not too good. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. i. other financing professionals may spend more time analyzing the details of the plan. Determine the characteristics of the venture and its industry. p. .. 4. Determine the quality of the entrepreneurs. Determine the financial structure of the plan.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. including debt or equity financing required. Kuratko suggests the following [3. or spendthrift. Establish the unique details of this venture. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. They will want to see something that reflects that you are neat. 11. 2 Do not underestimate the importance of this step. 3.”1 Many venture capitalists use the following six step process to evaluate a business plan [3.2 5. but should not be too lavish.

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

THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly.6 Note any industry developments and describe the business thoroughly. Some details on each section of the business plan: 1.” Instead.2 [3. trademarks. Executive Summary – This should be the last thing you write. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed.” “they. which describes the 10 sections of a typical business plan. is it based on a family name? Does it include technical terms you need to identify? . Include any pictures or designs that would be helpful. be sure to include them in the business description. but it is the first thing that your audience will read. Use the spell checker on your word processor to check for spelling mistakes. Business Description – Name the business.2. Present a focused plan. • Do Not Overdiversify – Don’t try to be all things to all people. • Identify the Target Market – Market research should support a focused customer niche.” or “us. use “he. p. 2.1 (10 Sections of a Business Plan) Present Kuratko Table 10. Your credibility is established in part by the credibility of your plan. • If there are patents. The executive summary gives readers their first impression. • Orient the Plant Toward the Future – Create an air of excitement.2. 6 E.g. 305]. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. • Avoid Exaggeration – Your sales and revenue estimates should be well researched.2 The Plan Contents Side Note 11. • Keep the Plan Written in the Third Person – Do not use “I. and tell why it is named what it is. copyrights. 11.11.. so be sure the writing is finely crafted.” or “them. or other special market advantages you have.” “we.

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

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

THE BUSINESS PLAN .122 CHAPTER 11.

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

Most Ph. “How can you tell when a lawyer is lying?” The answer. 44] Side Note 12. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. Adobe Reader. 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. Lexecon. PRESENTING THE PLAN times. There will always be glitches. 12.2. By the time I gave my job talk to my eventual employer. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out.2. • Bring a backup thumb drive with your presentation on it. You don’t want to try to figure out other people’s equipment. The original joke goes. the lawyer joke. Most graduates get between 5 and 15 interviews when they graduate. I had given it over a dozen times. of course. • Bring paper copies3 of your presentation in case all else fails.1 (The Job Talk) Every Ph. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. p. I don’t think it was quite right until somewhere between the 8th and 10th time. and you don’t want something as silly as a burned-out light bulb to cost you an investor. In retrospect. 12. Bring at least twice as many as you expect there to be people in the room. Post a copy of your presentation in a secure location on your homepage just in case. “His lips are moving. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving.D.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.124 CHAPTER 12. • Test the equipment the day before.” 3 Color copies! . Guy Kawasaki likes to tell a different version of an old joke.2.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. they may have another version of PowerPoint.D.”2 [2. 2 This originally comes from an American classic. • Bring your own laptop. and even if you can figure it out. is.

12. In general. They may ask you something that makes you want to change your presentation. Guy Kawasaki recommends you set a timer [2. 12. 12.3.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. p. Ask them what your company will do. Everyone. it is quite the opposite.5 Take Notes Have a pen and paper ready and take notes during the pitch.6 So What? When you are planning your presentation. 12. It is easy for things to get lost in the heat of the moment. If they cannot explain it clearly. you are not presenting it well. 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. Stop when it goes off. everyone brought a pen and paper. where some of the smartest people in the world worked. • Your audience may ask you several questions at once. you need to change or eliminate the statement. but in reality. ask yourself after every statement you make. Much of the material required use of the internet. They may ask you something you want to respond to in an e-mail later. Give your presentation to friends or family. I always bring a pen and paper to meetings. AFTER THE PRESENTATION 125 Side Note 12. Many people feel as if taking notes makes them look stupid. “So what?” If you cannot answer this question simply and easily. You should be prepared for the unexpected. 45]. • Taking notes also makes you look conscientious. and each investor will respond differently. and although you go into each presentation . At my company in Chicago.2.12.2.3 After the Presentation Each presentation will be different.2.2. so write things down to make sure you don’t forget.

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

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

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

3. 13. INVENTORY ACCOUNTING 131 Definition 13. See definitions 13. 13.4. First Out)) LIFO (last in. Definition 13. Definition 13. The author is unfamiliar with Chinese tax codes. The author is unfamiliar with Chinese tax codes.1. which allows you to pay less taxes on your inventory. If there is inflation.3 See also 13. In deciding which to use. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. but you should at least know about LIFO and FIFO.5 (Needs Period) In inventory management. Many businesses also measure turnover by measuring sales per square foot (or square meter).3. . the needs period is the sum of the count cycle.1 (LIFO (Last In.4. In the U. In other words. and 13.S. Calculate your sales per square meter once per month.2. 2 At 3 At least this is true in the U.3.. 13.3.3. and delivery cycle. LIFO and FIFO are two accounting methods used to do this. First Out)) FIFO (first in. you must estimate your inventory value when you file your taxes. follow the recommendation of your accountant.13.4.4.4. You should know how many sales per square meter per year you need to survive. which may result in higher taxes.S.S. first out) assumes that you sell the most recently purchased inventory first. After you have been in business your inventory control system should give you a better idea of stocking levels. it values your remaining inventory based on the prices of the most recently purchased items. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.2 See also 13. least this is true in the U. order cycle.4.4 Inventory Accounting Your accountant will typically handle inventory accounting.2. it values your remaining inventory based on the prices of the least recently purchased items.1 Buying Inventory In the process of putting together your business plan.4.2 (FIFO (First In. first out) assumes that you sell the least recently purchased inventory first. If there is inflation.

Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. three or four months. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. author of Start Your Own Business.132 CHAPTER 13. • Some suppliers demand a minimum number of items per order. usually one. – The minimum may be higher for first orders to cover the cost of setting up a new account. 3. and they will respond in kind. 13. Import sources – They operate like domestic wholesalers. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales .3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. says.1 Dealing with Suppliers The most important thing about a supplier is reliability.actual inventory .4. Independent craftspeople 4. courteous and firm with your suppliers. Distributors – Also known as wholesalers.5.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. 2. Their prices are higher than a manufacturers. “Be open. 13. INVENTORY CONTROL Definition 13. Manufacturers – Note that some manufacturers refuse to fill small orders. brokers or jobbers.” . Rieva Lesonsky.5 Suppliers Suppliers can be divided into four categories: 1.

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

com/jargon. 5 FOB Destination changes the location where title and risk pass.b.o.html.7 4 Source: 5 Source: http://www.5. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Seattle” to indicate that an item being shipped from Seattle is free on board.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. Destination)) Free on board destination.5. May 19. 6 Source: http://www.5. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. 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.2 (FOB (or f.wikipedia. INVENTORY CONTROL • Depending on whether the supplier pays frieght.6 See also definition 13.4 Colloquially. 2007. This differs from a forward order where stock is available but delivery is postponed for other reasons.134 CHAPTER 13. Definition 13.com/shippers/glossary.roadway.5. 2007. As opposed to FOB.epoi.o. Be aware of your supplier’s priorities.b.com/reference/glossary/glossary efg. Definition 13.b.html.html. people often say something like “f. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.abcsmallbiz.org/wiki/Backorder.3 (FOB Destination (or f. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.)) Free on board. Under this arrangement.5. Definition 13. 3. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.2. The FOB term requires the seller to clear the goods for export. . Specify a cancellation date on your order forms. See also definition 13. http://www. 5. 7 Source: http://en.o. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. 2007. 2007. May 19. May 19.3.

besides being bad for business. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).0.2 (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.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.0.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. Side Note 14. • Part-time employees. On the other hand. p. and • Independent contractors. 135 . Side Note 14. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. 337]. 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. they are often emotionally draining for the manager as well as the employee involved. a bad hire. The benefits of finding the right person for a job cannot be overstated. • Temporary employees (temps).

136 CHAPTER 14.1.2 Job Description Side Note 14. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. you need to consider • The physical or mental tasks involved. etc. creating a job description. • How the job will be done. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. selling. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists. you will likely find that they will come to you at some point to demand a vice president’s salary. • You may not leave enough buffer above the employee. Cleaning. If you call someone a Vice President but don’t compensate them as such. then want to hire someone else later at a position above them in the company. you have nothing to offer. lifting. writing reports. 14.. Side Note 14.1.1. 14. but personality traits. programming. Not only education and skills.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. However. an employee with an inflated job title may expect an inflated severance package. HIRING EMPLOYEES 14.1 Job Analysis Before creating a job description. • If you have do terminate the employee. and recruiting. they will soon expect compensation commensurate with their job title.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. you’ll be grateful to have spent the time to go through a more formal process.1.1 How to Hire Hiring involves analyzing the job requirements. . by the time you hire your 40th employee. If you give someone a job as Vice President.

1) and should include the personal requirements expected of an employee [4.14. • If you give someone an inflated job title but do not offer a salary commensurate with the title. HOW TO HIRE 137 • There is little room for advancement. . Part of retaining quality employees is the prospect of advancement. • Benefits. Definition 14. You may actually be doing your employee a disservice by inflating their job title.1. • A salary range. and • A summary description of the position. then they go on to a Director position at another company. • Specialized skills or knowledge. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. Side Note 14. • Physical or other special requirements associated with the job. • Desired experience. it includes • The job title.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. It also includes • Any educational requirements. Definition 14.1. and • Any occupational hazards. • The position of that employee in the corporate heirarchy. p. and • Job summary with major and minor duties. Like a job description.1 (Job Description) Job descriptions should include • A job title. • Who the person reports to.1. If. you hire someone as Director who is not qualified to be a director. p. 339].3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. If you hire someone at the highest level of their competency. you may find it difficult to give them a promotion later.1.1. 338]. you may find they are tempted to leverage that job title to seek employment elsewhere. for example.

2 See sidenote 14.S.3 Advertising the Job When you write an advertisement. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.” or people who may not have them will just try to fake those personality traits in the interview.1. • List the top 4 or 5 skills that are most essential to the job.138 CHAPTER 14.1. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. 14. due to the number of applicants for competitive positions. – For other positions. • Do not list requirements other than educational or experience-related ones. such as “outgoing” or “detailoriented. • Do not ask for specific personality traits.4 (Using an E-mail Address) For professional positions.1. . companies. It also makes it easy to receive and process a large number of applications with a minimum of effort.. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. – For professional positions. Many American companies are no longer providing phone numbers.S. e-mail addresses have become perhaps the most popular way to get applicant information at U. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.2 Side Note 14. HIRING EMPLOYEES 14. • Be sure to list appropriate contact information. if you are looking for an accountant. With e-mail. For example.5.4 Finding People There are many possible sources of applicants. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. particularly those that advertise on web sites. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.1.

2007 turned up more than 5. Try to perform a search on a job sites such as http://www. the hiring process proceeds as follows: 1. not a science. To “weed out” candidates.dice.S. for professional positions. you will get several candidates for any job you are offering..” And 921 in “Engineering. HOW TO HIRE 139 • Senior Citizen Centers – Senior citizens who need extra income or retirees who want to make productive use of their time often make excellent employees • An Unemployment Agency – Contact government and private agencies who assist unemployed persons • Job Banks – Professional associations often have “job banks” where professionals who are looking for employment can supply their resumes.1. • Industry Publications – Most trade publications take ads for job openings. In the U.com with the keyword Java on May 19. Screening People Reviewing resumes and applications is an art. 6. • Online – In the U. There were 4. 2. 4. • Focus on the skills that a person can bring to your company. Software” category.monster. You interview the candidates. many positions are being filled online. 3 Java is a programming language. 159 in “Financial Services.com or http://www. Searching on Monster.” . 5.” 665 in “Internet/E-Commerce. 3.314 listings in the “Computers. You can evaluate their personality during the interview.000 hits searching just the “Information Technology” search category. about 10 or so. particularly in the high-tech industry. For any job.. If you are lucky. You narrow down the 10 candidates to 3. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. but when looking at a resume. You hire the preferred candidate. be sure that a candidate can provide what you are looking for.S.3 Generally.com with the keyword “java” will demonstrate just how widely used online tools are.14. You check references. You narrow the number of resumes down to about 10. You conduct a second round of interviews with the remaining 3 candidates. most professional associations’ job banks are now online.

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

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

” 9 This is a very typical job interview question in the United States. Hopefully they will be neat and clean. You want the candidate to talk enough to give you a detailed impression. Be sure to ask open-ended questions. only one of them answered.” The interviewer laughed out loud. He got the job. a recent debate. Good candidates will do their best to put their best foot forward. First impressions are the most important. 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. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. “bowling.” Don’t ask yes-or-no questions. friendly. p. Curiously. 8 In 7 Taken . 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 [4.142 CHAPTER 14. Texas. It is as important to get the candidate excited about your company as you want to be about them. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. He answered. and demonstrate good communication skills. Then ask them about their skills and background.1. so much so that it is almost a clich´.” or “Tell me about a problem that you solved at your last job and the way you solved it. 349]. “President of the United States. Begin with some small talk. You should do the same. Side Note 14. such as “Tell me about your last position.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself.

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

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

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

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