International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

1

Copyright c Collin Starkweather 2007. All rights reserved.

2

Contents
I International Business Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7
9 9 10 12 13 13 13 15 15 15 15 16 18 19 20 23 23 25 28 30 30 32 34 34 34 35 37 38 38 40 42

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

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. CONTENTS . . . . . . . 3. 5. . . .4 Determining the Project Schedule . .2 Build and Staff the Organization . . . . . . . . . . . . 4. . . . . . .6 Associative Models . . . . . . . . . . .2 Network Diagrams . . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . .3 3. . . . . . . . . . .2 Quantitative Forecasting Methods . Strategy Development and Implementation . 5. . . . . . . . . . 5. . . . . .4 Adjusting for Trend . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . .3. . . . . . . . . . . . . . . . . . . . .6. . . . . . . . . . . . . 5. . . . . . . . .2. . . . . . . . . . . . . . . .3. . . . . . . . 4. . . 4. .4. . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . .2 Life Cycle and Strategy . . 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. . . . . 5.4. .3 Product-by-Value Analysis .3. . . 3. . . . . . .1 The Project Manager . . . . . . . . . . . . . . . . . . . 5. 6 Design of Goods and Services 6. . . . . . . .1 Types of Forecasts . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . .1. . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . .1 Project Planning . . . . . . . . . . . . 4. . . . . .3. 5.3. 4.3 Forecasting Approaches . . .2. . . . . 6. 4. . . . . . . .2 The Strategic Importance of Forecasting 5. . . . 4. . . . . . . . . . . . . . . . . . .3. . . .1 Qualitative Forecasting Methods . . .2. . . . . . . .6 Variability in Activity Times . 3. . . . . 4.1 Adaptive Smooting . .1. . . . . . . . . . . . . . . .3 Measuring Forecast Error . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . .1 Probability of Project Completion . . . . .3. . . . .2 Focus Forecasting . . . . . . . . .1 Identify Critical Success Factors .2 Project Scheduling . . . 4. . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . .3 Dynamics . . . . . . . .5 Slack Time and Identifying the Critical Path .8 A Critique of PERT and CPM . . . . . . .1. . . . . 6. . . . . . . . . . . . . .1. . . . .1 What is Forecasting? . 4. . . . . . . . . . . . . . . .3. . . . . . . . . . . . . .1 Research .4 3. . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . .1. . . . . . .1 PERT and CPM . 6. . . . . . . . . . . . . . . . 4. . . . . . . . . .2 The Work Breakdown Structure . . . . .4 4 Project Management 4. . . . . . . . . . . . . 4. . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Goods and Services Selection .2 Preconditions . . . .4 Monitoring and Controlling Forecasts . . .3. . . . . . . . . . . . . . . .1. . . . .3. . . . . . . . . 3. . . .3 Project Controlling . . . . . . . . . . . . . . . . .5 Seasonal Variations in Data .

4 The First Minute is the Most Important . . . . .2 Some Suggestions . . . . . . . . . . . . 6. . . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . . . . . . Product Development .2.CONTENTS 6. .1 Product Development System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . Exactly? . . . . .3 After the Presentation . . 11. . . . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . . .1 What Am I Researching. . . . . . . .3 Some Style Points 11. . . .1. . . . .2. . . . . . . 111 10. . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . 92 7. . . . . . . . . . . . . . . . .2 Research Methods . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Sources of Secondary Research . . . . . . . . . . . . . . . . .2 Know Your Outline Thoroughly . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 The Plan Contents . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Organizing for Product Development . . . . . . . . . .2 Are You Ready? . . . . . . . .1 Your Audience . . . .3 Be Familiar With All Equipment to be Used 12. . 6. . . . . . . . . .1. . . . .2. . .2. . . . . . . . . . .1 Importance of New Products . . 12. 6.3. . .1 Do It Until You Get It Right . . . . . . . . . . . . . . . . 94 7. . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Characteristics of the Successful Entrepreneur . . . . . . . 104 9. . . . . . 104 10 Market Research 109 10. . . . .2. . . . . . . . . . . . . . . . . .6 So What? . . . .2 Quality Function Deployment (QFD) . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. .1 Finding Your Niche .1. . . . . . . . . . . . . . . .3 Setting Goals . . . 12. . . . . . . . . . . . . . .5 Take Notes . .2. . . . . . . . . . . 6. 101 9.2. . . . . . . . . . . .1 The Presentation . . . . . . . . . . . . . . . . . . . . . . .3. . .3 The Mission Statement . . . . . 12. .3. . . 12 Presenting the Plan 12.3 Generating New Products . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . .2 Redefining and Expanding Your Niche . . . . . . . . . . . 11. Now What? . . . . .2. . . . 12.2 Look and Feel . .2 6. . . . . . . 12. . . . . 110 10. . . . 99 9 Defining Your Market 101 9. . . . . .

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

Part I International Business Management 7 .

.

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

S. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. Easterners tend to trust people after observing a pattern of consistent behavior. 2.A. Which brings us to the subject of this lecture: Ethics.2 Corporate Corruption Side Note 1. .2.10 CHAPTER 1. • Because of this. child labor was widely used. which are more strictly enforced in the West.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. • However. Why is corruption an important business issue? • See sidenote 1. there is a perception in the West that Chinese are hard-working and smart. For example. Definition 1.1 (Ethics) The study of morality and standards of conduct.2. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. • In general. 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. 1. Note that during the industrialization of the U.S.1.A. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. 3.S. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways. and Europe but a commonly accepted practice throughout the developing world. This is something Chinese business people should be aware of.A. Western business people may not initially trust their Chinese counterparts..2. Prison labor is also considered improper in the U. • Because guanxi is less important in the West. Westerners rely more on contracts. 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.

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

4 – Bernard Ebbers. There is currently debate as to the effectiveness of the regulations relative to the costs.com/Research/15 Largest.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. WorldCom declared bankruptcy in July 2002. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.S..bankruptcydata. In Scandinavia. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. March 17.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.3. scandals such as Enron.1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.htm. . • Enron – In December 2001. was accused of looting the company to fund a lavish lifestyle. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.bankruptcydata.2 (Cultural Heritage in the U.S. 2007.3 The United States The United States has recently been rocked by a number of scandals in the business community. the SarbanesOxley Act (SOX) was passed in the U.S. 3 Source: 4 Source: http://www. Side Note 1. and Tyco make it clear that even western developed economies have significant ethical shortcomings. a high value is placed on honesty and personal integrity.S. the former CEO of WorldCom. While western developed economies often cite a high ethical standard.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. • Tyco – The CEO of Tyco. Dennis Kozlowski. 2007. March 17. Side Note 1. was convicted of fraud and conspiracy and sentenced to 25 years in jail. succeeding Enron as the largest bankruptcy in U.12 CHAPTER 1.3. Worldcom. including a $2 million birthday party for his wife.htm. Parmalat. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.2. history. http://www. See sidebar 1. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. • WorldCom – Following the Enron scandal.com/Research/15 Largest. Qwest.

were not as highly regulated as banks.2 Women in the Workplace Sexual harassment has also become an issue in Japan.pdf. with many men of the opinion that women were just biding their time until they marry and have children. Savings and loan institutions.S. • Many men do not understand why sexual harassment constitutes a problem. The government was compelled to provide public money to bail out the institutions. 5 1.S.4. This resulted in several banks being technically bankrupt [5.4.4 1..gov/bank/analytical/banking/2000dec/brv13n2 2. JAPAN 13 1. also known as thrifts and which function like banks. with many women finding their employment opportunities constrained.fdic. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. the political scandals do not appear to have been fully acknowledged and addressed. 58]. p.4. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. and as a result made high risk investments in the late 1980s and early 1990s. women have a difficult time being taken seriously. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Hodgetts et al. Side Note 1. Moreover.4. Likewise.1 (The U. cite the example of the chief prosecutor in Tokyo who was transfered to a remote city after an investigation into exhorbitant entertainment spending by private firms on public officials. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. Side Note 1. Better known is the case of Japanese banks.4.2 (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.1. . This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.

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

in an extended sense.4.. politicians. Definition 1. than any other.S.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.4.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany. . EUROPE 15 1. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.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. Side Note 1. They only have the power of persuasion.1.7 Note that lobbyists do not have any formal power.S.5.5. particularly in upper management. is the notable exception). with most in the top 20 among over 150 countries included in the survey. 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.S. Although women have entered the workforce in large numbers in recent decades. yes or no. there seems to be a glass ceiling due to social factors.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. men are disproportionately represented in management positions. 1. at 40. their attitudes towards bribery when working in foreign markets differs from that of the U. Side Note 1.4. Hodgetts et al. with the purpose to influence their votes.org.5.5 1.dict.3 Lobbying by Japan Japan spends more money lobbying in the U.5. 7 Source: http://www. to try to influence decision-makers in any circumstance.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.

1. 8 Side Note 1.about.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. though compensation is limited relative to lawsuits filed in the U.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. yes or no.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.16 CHAPTER 1. . Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender. For those students who think so. Side Note 1. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian.com/library/glossary/bldef-glassceiling.htm.. but there is a perception that there are risks and ethical considerations.5.S.5.5. • Discrimination lawsuits are more commonplace in Great Britian. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.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. 8 Source: http://careerplanning. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.

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

“.S. there are few if any issues which affect and infuriate so many in China as corruption. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. • CARE (promotes community development. political. social justice. See http://www.7. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. and economic issues such as poverty.6. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.3 (Nongovernmental Organizations (NGOs)) Private. .2. and economic issues such as poverty. and the environment. such as education and health care. . China continues a battle against corruption. health. such as Whole Foods. 1. education. a grocery chain. . 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.”[6] See also sidenote 1.7 Corporate Social Responsibility Definition 1.com/our company/our mission/index. Other companies. Side Note 1.4 (Corruption) Though things are improving. education.7.7. Definition 1.7. Definition 1.2. political. social justice. health. and the environment. not-for-profit organizations that seek to serve society’s interest by focusing on social. and emergency relief in the event of humanitarian disasters). not-for-profit organizations that seek to serve society’s interest by focusing on social. provide relief in the event of humanitarian disasters. and promotion of social equity).cfm for more detail.2 (Nongovernmental Organizations (NGOs)) Private.. In the words of a Beijing correspondent for “The Economist” magazine.18 CHAPTER 1.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.benjerry.

Both political groups and businesses are influenced by NGOs.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. 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. China ranked 78 out of 158. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. – Even socially responsible executives would consider the “bottom line” when making decisions. but does not outlaw payments to political party leaders.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. and • Rainforest Action Network (RAN). In 2005. Side Note 1. as executives of publicly traded companies are ultimately responsible to their shareholders. many feel that it has had a net benefit.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.9 U. 1.000 and $125. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. • And. note that while U. . Executives are people.7.2. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).S. • To prevent a boycott or other consumer defections. last but note least. too.1. MNCs do not appear to have been significantly impacted. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.S. as it gives the U.1 Corruption and the FCPA Revisited Hodgetts et al.7. Side Note 1. with a score of 3. In fact. firms a reason to refuse to pay bribes. firms are constrained by the FCPA with regards to bribery and other corrupt practices. executives may actually feel that it is the right thing to do.7. • Conservation International (promotes environmental conservation). For example.7.S.

WorldCom. and the environment. with scandals such as Enron. It is a difficult problem to solve. but most important first step is to recognize that there is a problem.0 is considered to be the borderline at which countries are considered to have a problem. and Parmalat resulting in investors losing billions of dollars.5 (Table 3-1: Principles of the Global Compact) The U. The government recognizes that it is an issue and is taking action. 5. malfeasance and diversion of corporate funds becomes increasingly difficult. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. and Germany at 7. more Chinese will own stock in companies. 2006.7. Hong Kong is number 15. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. July 1. 1.6 and 8. Commitments that many MNCs have signed on to. with a score of 8. 2.N.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. I think corruption will diminish as China economically develops for several reasons: 1. With greater financial transparency. and not based on hard data. The government is actively addressing the issue of corruption. Moreover.7. As more state-owned businesses become privatized and the size of the middle class increases.S. With more disciplined corporate governance. Global Compact. 3.3. It cannot be considered to be based on a scientific survey.html. Side Note 1.4. 10 http://www. such as the U.2 respectively. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Important: Although it is widely cited. slightly better than Sweden. specify standards and codes of conduct in domestic and global operations. Tyco.4 (Some Opinions) Personally.10 Corruption is certainly not endemic to Asia. Side Note 1. the United States and Europe have recently been rocked by corporate corruption. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.20 CHAPTER 1.7.com/ipa/A0781359.infoplease. better than the U. . Scandinavian countries are at the top of the list. societies. 4. Support and respect the protection of international human rights. Singapore is number 5 with a score of 9. Global Compact specifies 10 principles which MNCs should abide by: 1.N.

7. Freedom of association and recognition of the right of collective bargaining (i.7. 21 3. 9. and 10. the right for unions to exist). 8. including extortion and bribery.. A precautionary approach to environmental challenges. Elimination of child labor. CORPORATE SOCIAL RESPONSIBILITY 2.1. . Elimination of all forms of forced and compulsory labor.e. Ensure that MNCs are not complicit in human rights abuses. Elimination of discrimination with respect to employment and occupation. 6. Undertake initiatives to promote greater environmental responsibility. 4. Encourage development and dissemination of environmentally friendly technologies. 5. Business should work against all forms of corruption.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

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

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

p. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. one drawback of the JIT system is that the re-order level is determined by historical demand. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. This saves warehouse space and costs. quality. such as the presence or absence of a part on a shelf. He also believed that management is responsible for – Matching employees to the right job. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. 2007. 8].2.2 (A Little History) Review Heizer figure 1.2. and efficiency.2.3 “Significant Events in Operations Management” [1. When implemented correctly. • Frederick W.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. 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. the firm could deplete inventory and cause customer service issues. February 14. Definition 2.wikipedia. WHAT OPERATIONS MANAGERS DO 27 10. that tell production processes to make the next part. or Kanban. If demand rises above the historical average planning duration demand. • Eli Whitney (1800) is credited for popularizing interchangeable parts. • Reliability and stability of systems depends on well-planned maintenance schedules. and 1 Source: http://en. The process is driven by a series of signals. However. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. p.1 Side Note 2. which relied upon standardization and quality control.org/wiki/Just In Time %28business%29. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. New stock is ordered when stock reaches the re-order level. Kanban are usually simple visual signals. . – Providing the proper training. – Providing proper work methods and tools.2. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. 9].

The U. Manufacturing was dominant until about 1950 or so. In the U.3 (Information Sciences) The systematic processing of data to yield information. Side Note 2.3. . services account for over 70% of U. economic output. • Food and lodging. Bureau of Labor Statistics defines services to include [1. major contributions have come from the field of information sciences. However. the wages are considerably above average. services become increasingly important.5 [1.1 (Development of the Service Economy) Present Heizer figure 1. • Trade. and other essentials for its citizens. shelter. Today.. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. 11]. the economy transitioned from agriculture to manufacturing around 1900.28 CHAPTER 2. • Recently.1 (Services) Those economic activities that typically produce an intangible product. 2. p. such as the legal profession or computer services in the financial industry. for others professional occupations.S. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. Definition 2. such as retail. average wages are below average2 in the U. the services sector is by far the largest employer.S.S. • In some service industries. Definition 2. • Transportation.S. p.3.. • Insurance.2. 2 The average national private industry wage. 9] • Repair and maintenance.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. • In most western economies. • Government.

• Services are often knowledge-based. THE SERVICE SECTOR • Financial. such as pharmaceuticals or medical supplies.3. • Medical.3.3. Consumers interact with those providing the service. • Services are typically intangible. • Other professional occupations. • Legal.2. See definition 2. • Services are often dispersed. Note that many goods include services and many services include goods. Hospital care includes both health services and goods. • Services are often produced and consumed simultaneously.3 That is.2. the purchase price may include installation services.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. • Services have inconsistent product definition. When buying a computer. • Services are more often unique. • Entertainment. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you.3. This is important insofar as there is no inventory. Therefore it is difficult to automate. • Education. 3 Services that do not include a good as a component are called pure services. Legal advice is rarely identical for two clients. Definition 2. Customers seek services through local intermediaries. • Services have a high consumer interaction. 29 Side Note 2. .2 (Pure Service) A service that does not include a tangible product. • Real estate. used in your treatment. a support contract in case you have problems or training to familiarize you with the features of the computer. when going to a restaurant.

OPERATIONS AND PRODUCTIVITY 2. 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.2. and finished goods rapidly. Globalization has been having a dramatic impact on operations management and in the future.5. brought about in part by the internet. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. capital. • Mass customization – With increases in technical capabilities and customerlevel information management. Trends that Heizer and Render identify [1. wherever and whenever needed. or recyclable products or to minimize packaging and other wasteful production steps.2. operations managers are responding by moving decision making to the individual employee. Definition 2. • Empowered employees – With the rise of services and knowledge products.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. .5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. it will continue to strongly impact the field. p. • 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. • 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. 2. reusable. • 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. parts. operations managers are increasingly responsible for innovations that move ideas.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. Operations managers are being challenged to produce biodegradable. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. or management).30 CHAPTER 2.

Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.3. Definition 2.5. Also known as total factor productivity.5. .2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). THE PRODUCTIVITY CHALLENGE 31 Definition 2. Side Note 2.5.5. Consider today’s computers versus those from the 1970s.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. but overhead is no $800/day.5. Side Note 2.5.97 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. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.5. 15]. In order to improve productivity.2. Definition 2. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs).0077 titles per labor-hour = 0. p.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.4 (Total Factor Productivity) See definition 2.4375 titles per labor-hour = 0.25 titles per labor-hour = 0.

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

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

management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Side Note 2.5. however. productivity in the service sector has not increased as rapidly as with the production of goods.34 CHAPTER 2. management is considered as a separate input. 17].5% after allowances for depreciation.5.5. in the U. According to Heizer [1. 2. Note that in classic economic analysis and other areas of business. and the cost of capital depends on interest rates. graduate programs and the students they produce remain the best in the world. U. 2. educated.S.4 (Management as an Input) Because this is a course in business management. Note that there is a trade-off between capital and labor in most industries.4 Productivity and the Service Sector Historically. p.2 Capital Capital investment in the U. education. and because the author of the textbook is writing about operations management. and knowledge. Definition 2. has increased at about an average of 1.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.. management is not always identified separately from labor as an input.S. and knowledgeable employees and operations managers are responsible for ensuring that technology.5. as well as capital. are utilized effectively.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Difficulties arise because service-sector work is . 2.S.5. Developed economies (also known as post-industrial economies) require trained.

Difficult to evaluate for quality (e.. 18] • Retailing in the U. Side Note 2. 5 In Japan. Heizer notes [1..5 (Service Productivity in the U.6.S.g.S.. 2. laundry service. Low-productivity activities. and other stakeholders. Frequently individually processed (e.S.S. Often difficult to automate (e. telephone industry is twice as productive as Germany’s..S. . 2. but from customers.g. government agencies.g. 4. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. banking system is about 33% more productive than Germany’s. is twice as productive as in Japan.. • Keeping the workplace safe.g. in both overall and service productivity. We will discuss this challenge in more detail throughout the course. legislation protects shopkeepers from discount retailers. teaching). have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. SOCIAL RESPONSIBILITY 1. 35 3. investment advice).6 Social Responsibility As discussed in chapter 1. These demands come not only from the manager’s personal ethic.2. a haircut). such as cleaning. and 5.5. Typically labor-intensive (e. medical diagnosis). food preparation. Often an intellectual task performed by professionals (e.5 • The U. and • The U. These challenges include such issues as • Maintaining a clean environment. p. watchdog groups such as NGOs.g. the performance of a law firm).) Productivity is highest in the U. • General ethical behavior concerning issues such as child labor and corruption. and child care.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

Provide Better Goods and Services – For companies doing business in an international setting.38CHAPTER 3.1 (Mission Statements for Three Organizations) Review Heizer figure 2. FedEx is committed to our People-Service-Profit philosophy. Side Note 3. I recommend that all companies draft a mission statement. p. positive control of each package will be maintained utilizing real time electronic tracking and tracing . Equally important. • Perfumers tend to concentrate in Grasse. 3. global air-ground transportation of high-priority goods and documents that require rapid. time-certain delivery. 6. France.1 (Mission) The purpose or rationale for an organization’s existence. We will produce outstanding financial returns by providing totally reliable. 28] which includes mission statements for three multinational companies: 1. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.1. 4. and • Increase sales. 3.2 [1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product.1. • Provide additional insights and opportunities. competitively superior.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. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. an understanding of cultural differences in preferences is needed to best meet customer needs. Definition 3. Missions state the rationale for an organization’s existence.1. FedEx. 3. global organizations can attract and retain better employees. Attract and Retain Global Talent – By offering more employment opportunities.1 Mission Whether large or small. 5.

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

2. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.benjerry.1.40CHAPTER 3.” Note that mission statements are used not only at the company-wide level. the creation of a unique advantage over competitors.1. • The “look and feel” of the product.1. Differentiation can arise from anything that the customer may value about a product or a services. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.3 (Competitive Advantage) In operations management. • Availability of complementary products. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers.2 (Strategy) How an organization expects to achieve its missions and goals. • Interoperability with other products. Differentiation – They make their product better. more responsive products or services.com/our company/our mission/index. Definition 3. 3. 3. Definition 3. be it • Product features.3 (Sample Mission Statements) Present Heizer’s figure 2.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. but can be used at the department level and even at the project level.3: “Sample Missions for a Company. Responsiveness – By providing timelier. Side Note 3. . See http://www. Cost leadership – Providing cheaper products.1. the Operations Function.cfm for more detail. • Training. and Major Departments in an Operations Function.

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.

Group the necessary activities into an organizational structure. 37].1 (Strategy Development Process) Present Heizer figure 2. if the firm has a competitive advantage in these things) and where failures are most likely. Weakness. Side Note 3. and 3.6 [1. Provide competitive advantage. p. Staff the organization with personnel that will get the job done.44CHAPTER 3. • Determine Corporate Mission. and 3. “Strategy Development Process. Opportunities. Definition 3.3. The purpose of this process is to 1. . OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.3.2 (Critical Success Factors) In operations management. determining internal strengths and weaknesses and external opportunities and threats. Implement an OM strategy. and Threats) analysis to develop strategies. These critical success factors are used to develop a competitive advantage.3. 3. then determine whether the organization does these things well (and.3.” The process of developing a strategy involves the following steps: • Environmental Analysis. 2. Definition 3.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Identify a strategy and critical success factors. Increase productivity.1 (SWOT Analysis) In operations management. The operations manager’s job is a three-step process: 1. in particular. those activities or factors that are key to achieving competitive advantage. then • Form a Strategy. 2.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.

2. p.1 as a checklist to determine critical success factors. Definition 3. CSFs. and supporting activities. Side Note 3.5 and HR. OM activities are most productive when they are integrated with other activities such as marketing.3. • Red arrows – critical success factors • Blue arrows – support activities 3.3. 5 Management 6 Human Information Systems Resources.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.4. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.3 Integrate OM With Other Activities In order to achieve its strategy.3. Once CSFs are determined.2 as examples of how firms organize their activities.3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. an activity map can be used to link an organization’s competitive advantage to the CSFs.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3.1.3. 39].6 3. . 3. Southwest Airlines has a competitive advantage in providing low-cost airfares. finance. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. MIS. Recall the “org charts” in sidenote 2. a graphical link of competitive advantage.3 (Activity Map) In operations management.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.

In the semiconductor industry. See definition 3. p.3 (International Strategy) In operations management. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. [1. or joint ventures with substantial independence.4. 42] Definition 3. See definition 3. wine in France. Global strategy – Not characterized by local responsiveness.1 (International Business) A firm that engages in cross-border transactions.4 (Multidomestic Strategy) In operations management.5. See definition 3. owning or controlling facilities in more than one country. and hamburgers without beef in India.4. franchises.4. a strategy that uses exports and licenses to penetrate the global arena.4. with beer on the menu in Germany. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.4. Its menu reflects the country in which it operates.46CHAPTER 3. Although e it is legally Swiss. Only 10% of its work force is Swiss. Typically characterized by subsidiaries.4.4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. as exports require little change in operations and licenses often leave risk with the licensee.4. 4. Also one of the least profitable due to transport costs and little local responsiveness. Definition 3.5 (Global Strategy) In operations management. • McDonald’s is an example of a country with a multidomestic strategy. but a good strategy for cost reduction when products do not need to be adapted locally.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. 2. .4. Definition 3.3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. • Texas Instruments is an example of a country with a global strategy. Usually does not confer a cost advantage.6. 95% of its assets and 98% of its sales are made outside Switzerland. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. • Nestl´ is an example of a country with a transnational strategy. See definition 3. Definition 3. products do not need to be localized. International strategy – Often the easiest strategy. Definition 3. 3.

4. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.3.6 (Transnational Strategy) In operations management. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.4. 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 .4.. 6].S. Side Note 3. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

defining the project.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. 46–47]. Plans are also revised to meet changes in time and cost demands.3 (Project Planning. pp. 49]. p.Chapter 4 Project Management Side Note 4.1 [1. quality. and team organization. 49 . Side Note 4. Scheduling.0. the largest software company in the world. money. 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. Side Note 4.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. Controlling – Monitoring of resources. 2. Scheduling – People. costs.0. and Controlling) Present Heizer figure 3. and budgets. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Even Microsoft. 3. Project management involves three phases: 1.0. and supplies are tasked to specific activities and activities are related to each other. Planning – Goal setting. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. The profile highlights the importance of project management in achieving competitive advantage.

4.1 The Project Manager As alluded to in sidenote 4. and/or 5.0. often times.5 (Personal Advice on Project Management) Project management is a tricky profession. p. Work can be defined with a specific goal and deadline. project managers are highly visible in a firm and have significant responsibilities. it is also an area in which there will continue to be high demand for qualified people. You may be managing resources far in excess of your individual salary. 4.1. 2. The job is unique or somewhat unfamiliar to the existing organization.1 Project Planning While many projects are run within an existing organization.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. things you thought were certain turn out not to be. The work contains complex interrelated tasks requiring specialized skills. and you will be forced to improvise.0. p. you are doing your job well if noone notices the project management.5. Side Note 4. People will not come through with what they promised. PROJECT MANAGEMENT However.50 CHAPTER 4. The project is temporary but critical to the organization. a temporary project organization is formed to address a specific project. See also Heizer sidenote “Project Management and Software Development. Your job is to make things go smoothly and according to plan.1. 48] 1. 69].” [1. Definition 4. if things go wrong. The project cuts across organizational lines. it is very obvious and can be very costly. The responsibilities of project managers are to make sure that . 3. Moreover. If you become a project manager on projects of significant complexity. 4. Project organizations work best when [1. you will be confronted with a daunting task. you should always expect the unexpected. In a sense. However.

51 4. 3. a task that should only take a day or so. Side Note 4. • Build the user account input web page is a much better task division than 1.2 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). When dividing a project into tasks. Approve graphic design for user account input web page 4. Review graphic design for user account input web page 3. The project meets its quality goals. For example. All projects come in on time. The project is on or under budget.1. 2. Approve software architecture for user account input web page functionality .1.4. and 4.1. Complete software architecture for user account input web page functionality 5. PROJECT PLANNING 1. dividing a project into more and more detailed components. you have divided the tasks too finely. Definition 4. in a software engineering project. a web page takes about a day to build for an experienced team. Complete graphic design for user account input web page 2.1.1 (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.2 (Work Breakdown Structure (WBS)) In operations management. People receive motivation and information necessary to do their jobs. Review software architecture for user account input web page functionality 6. In a project that includes allowing a user to enter personal information on a web page. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.

4. 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. Side Note 4.2 (Work Breakdown Structure) Present Heizer figure 3. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. p.52 CHAPTER 4.3 [1. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. At the time you are creating the work breakdown structure. Write software for user account input web page functionality 8. the work breakdown structure is not something you go to your office to do in isolation. PROJECT MANAGEMENT 7. Write software for user account input confirmation page functionality 9. Activities (also known as “work packages”) to be completed Side Note 4. Identify precedence relationships among activities 3. you should also take note of time and cost estimates given by your technical staff. The actual WBS for Windows XP would. of course. Major tasks in the project 3.3 (Reality Check: WBS) In reality. Project 2.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Subtasks in major tasks 4. Encourage realistic time and cost estimates for each activity . They will be useful for project scheduling.1. Scheduling serves to 1. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. which we will discuss next in section 4. Show the relationship between each activity to others and to the whole project 2.1.2. fill hundreds if not thousands of pages.

1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. PERT and CPM help answer questions such as • When will the entire project be completed? . Definition 4.2. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. which becomes narrower as one approaches the neck of the bottle.2.2.” This will give the class an idea of the look and feel of a typical Gantt chart. 51]. 2. I have found that simple spreadsheets or even just writing things down on a notepad (I typically use a separate notepad for each project to keep organized) is more productive than using Gantt .2. For smaller projects.4.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. All activities are planned for. Gantt charts are perhaps the most widely used tool for ensuring that 1. – said of roads. PERT. as. the road bottlenecks.4 [1. and other values to each activity. 3. Perhaps they imagine that they are not doing their jobs professionally if they are not.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. and CPM) Inexperienced project managers often feel the need to use Gantt. moeny. It can actually be quite time consuming to create and maintain Gantt charts. Overall project time is developed. these should be considered merely tools to be used when they are useful by saving time or energy. However. Definition 4. Activity time estimates are recorded. cost estimates. Side Note 4. Derives from the typical shape of a bottle. and CPM tools for every project management activity.2 (Using Gantt. PROJECT SCHEDULING 53 4. right by the bridge.2. PERT and other formal documents. The order of performance is accounted for. and material resources by identifying critical bottlenecks in the project Side Note 4. and 4. p. MS Project’s Gantt chart functions demand you assign employees. PERT. Make better use of people.

3.54 CHAPTER 4.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Cost distribution tables.1 PERT and CPM Two methods. costs. Total program labor curves. 4. what is the best way to accomplish this goal at the least cost? 4. 7. 6. and 8. Raw material and expenditure forecasts. is the money spent equal to. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. 4. Time analysis reports. Work status reports. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. . or ahead of schedule? • On any given date. Control programs typically produce reports detailing 1. Definition 4. 3.3. PERT and CPM. is the project on schedule.3 Project Controlling Project control involves monitoring resources. were developed in the 1950s for project control. less than. and budgets of projects. Functional cost and hour summaries. 5. Cost breakdowns for each task. 2. behind schedule. quality. Variance reports. 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.

53].2 Network Diagrams There are two approaches to visualizing activity networks: 1. Assign time and/or cost estimates to each activity. it will do for you automatically much of what we will go through manually in this class. Also. p. Personally. 2.3. 5. See also definition 4.3. 6.3 (Critical Path) The computed longest time path through a network.5 [1. or the critical path.3. Draw the network connecting all of the activities. 4. Define the project and prepare the WBS.3.3. PROJECT CONTROLLING 55 Definition 4. . in my experience. schedule. Side Note 4.2.3. Use the network to help plan.4. They both follow six steps: 1.3.2 (Example: AON and AOA) Present Heizer’s figure 3. Compute the longest time path.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Activity on Arrow (AOA). Gantt charts are the “go to” visualization method for even very complex projects. As the names describe. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. AON associates the activity with the node whereas AOA associates the activity with the arrow. Moreover. 4.3. Develop the relationships among activities. monitor. through the network.3. Side Note 4.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. Definition 4. See also definition 4. 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. and ontrol the project. 3. Activity on Node (AON) and 2.

its ES is the maximum of all EF values of its predecessors. analysis used to determine the project schedule.8 [1. 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. 4. See also definition 4. 54–55]. – If an activity has multiple immediate predecessors.56 CHAPTER 4. 2.9 [1. that is. • Table 3. we must use time estimates of each activity to determine the overall schedule for the project. Follow with example 3 and figure 3. 1. that is. 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. p.3.1 (Critical Path Analysis) In project management. pp.3. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. 56].3. their dependencies. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. Definition 4. In other words. PROJECT MANAGEMENT Side Note 4. – If an activity is an immediate predecessor to more than one activity.6–3. that is. LS = LF − Activity time. EF = ES + Activity time.4 Determining the Project Schedule Once we have identified all of our activities. .4. its LF is the minimum of all LS values of all activities that immediately follow it.1 gives sufficient information to describe the network. ES = max{EF of all immediate predecessors}. its LF equals its LS of the activity that immediately follows it. We do this with a critical path analysis with involves a 2-step procedure.

60]. and H have no slack time and cannot be delayed without delaying the entire project. 61] based on table 3. the time devoted to one of these activities must also be reduced. C. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.4. 2 For example. activity F in sidenote 4.3 (Free Slack) In project scheduling. “Notation Used in Nodes for Forward and Backward Pass. it is said to have free slack. These are called critical activities. Note also that if we delay each activity by the amount of slack that activity has.5. E.3 [1. The critical path is one that • Begins at the first activity in the project.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.4. Definition 4.5. p. 1 For example.1.2 (Total Slack) In project scheduling. Definition 4.3. if we delay activities B and D by one week each.5.2 (Forward Pass) In project management scheduling. . Also notable is that if the total time of the project needs to be reduced.10 [1.13 [1. p.4. or the amount of time an activity can be delayed without delaying the entire project. the free time for an activity. in the example in sidenote 4.4.1 (Slack Time) In project scheduling. If an activity2 does not impact the slack time of any other activity. the time shared among more than one activity.4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. Note that activities A. p. 4. we may delay the project as a whole. • Terminates at the last. the time associated with a single activity.” Then complete Heizer example 7 figure 3. G.3 and Heizer figure 3.5.1). 57].1 When several noncritical activities appear successively in a path. the step that identifies all the earliest times that activities can be completed. we cannot complete the project in 15 weeks.1. they share total slack.4. and • Includes only critical activities (see sidenote 4. Side Note 4. Slack time is just Slack = LS − ES or Slack = LF − EF . Definition 4.

58 CHAPTER 4.6.6. Definition 4. PROJECT MANAGEMENT 4. in most cases.1 (Optimistic Time) In project scheduling. The usual definition calls these alpha and beta. technical considerations that were unknown at the time the project schedule was drawn up. In reality.2 and 4. etc.3 (Most Likely Time) In project scheduling. we do not. Most likely time – The most realistic estimate of the time required to complete an activity. the “best” 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. Definition 4. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6.6. The beta distribution is used as a prior distribution for binomial proportions in . See also definitions 4.6.6. Definition 4. and the other uses β = β − 1 and α = α − 1 . However. the “worst” activity completion time that could be obtained in a PERT network.6.6.3. In PERT. Beta distributions have two free parameters.3. Definition 4.6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. See also definitions 4. Effectively. three time estimates are used: 1. the time required to complete an activity is often uncertain due to supply problems.2.6. which are labeled according to one of two notational conventions. the project manager pulls the number “out of the air” based on their experience managing related activities. Side Note 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.2 (Pessimistic Time) In project scheduling. unexpected complexities.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. See also definitions 4.1 and 4..1 and 4.6. the most probable activity completion time that could be obtained in a PERT network.

q) = (4. 62]. Side Note 4.4. 63] for activity F based on optimistic.com/BetaFunction. 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. Total project completion times follow a normal probability distribution and 2.β) with α = 1 and β ranging from 0. February 21.1]. 2007. p. 2. and pessimistic times of 1. and 9 weeks. The above plots are for various values of (α.25 to 3.1) where B(p.html http://mathworld. Activity times are statistically independent 3 Source: http://mathworld.78 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. 8 1. p. 4.6. β) Γ(α)Γ(β) P (x) = (4.6. The expected activity time for activity F is 3 weeks5 and the variance is 1. The variance of the activity time is Variance = [(b − a)/6]2 .6.com/BetaDistribution. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. 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 = 1.4. most likely.78 6 6 36 7 4 weeks.3 The domain is [0. and 7.00 week.00.html.6.wolfram.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.wolfram. and pessimistic times of 1. most likely. 4. and .1 Probability of Project Completion If we assume that 1. 4 See definition 4.

6. see http://mathworld.3 (Example: Project Variance) Review Heizer example 9 [1. and within 3 standard deviations approximately 99. 9 For 10 See more information. Side Note 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. pp. 65] and figure 3. two standard deviations approximately 95% of the time.com/StandardDeviation.6.html.6. commonly also N written σ 2 . Note that the standard deviation of 1.6 (Standard Deviation) The standard deviation is the square root of the variance.1.6.76 weeks approximately 16% of the time. the population variance var(X). p. .5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. “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. A2– A3] “Normal Curve Areas.16.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.76 weeks implies that the project will exceed the expected completion time by more than 1.” Review Heizer example 10 [1.6. See definition 4.5. Side Note 4.7% of the time.wolfram.6.10 Determining Project Completion Time for a Given Confidence Interval A common question is.60 CHAPTER 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.3) Definition 4. definition 4.6. p. Definition 4.6.6. See also 4. 64].4 (Using the Normal Table) Pass out Heizer Appendix I [1.

7. we need to ensure • The amount by which an activity is crashed is. See definition 4. you will doubtless experience one or both of these eventualities many times in your career. permissible and realistic.1 (Crashing) In project management. crash time is the shortest duration of an activity. When crashing a project.7.7 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. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.2 (Crash Time) In project management.7. See definition 4. and • The total cost of crashing is as small as possible. Project crashing is the name given to the process of rushing a project to completion.7. Assuming linear costs. if certain activities off the critical path take the pessimistic time estimate or more to complete.4) 11 Since crashing a project often involves adding additional resources to activities. we want to do so in the least cost mannger possible.1. it may result in the project being delayed.3 (Crash Cost) In project management. . 4.7. 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.1. in fact. the crash cost is typically higher than the normal cost. crash cost is the cost required to complete an activity in the shortest time possible.4. • The shortened durations will actually enable us to finish the project on time.7. Crashing a project involves a four step process: 1. Definition 4. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Since activity completion times are typically shortened by adding resources. and if you become a project manager. Definition 4.11 Definition 4.

pp. As a project manager. the advice given in this section should be helpful.18–3. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. 4.62 CHAPTER 4. Step 3 – If there is only one critical path.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates. If the due date has been reached. If you find yourself needing to rush a project. PROJECT MANAGEMENT 2. 4. Step 4 – Update all activity times.7. you should be very wary of such pressure. 3. Note that one activity may be on several critical paths. If you accept the challenge and try to rush the project to please upper management. Crash this activity by one period. Side Note 4. Step 2 – Find the critical path(s) in the project network.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. go to step 2. If not.7. Side Note 4. Then crash each activity by one period. 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. At times this may be politically infeasible.5 and figures 3. 67–69] including table 3. • Advantages – Especially useful for large projects . they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. If there is more than one critical path. stop. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.2 (Example: Crashing a Project) Present Heizer example 12 [1. 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.19.

pp. it is relatively expensive and the features are so numerous and complex.org/wiki/List of project management software for a list of project management software or ask Dr. Noncritical paths should be closely monitored as well.to mediumsized projects. including open source software that is free. There are a variety of alternatives.1–3. independent.9 Using Microsoft Project for Managing Projects Present programs 3. It is perhaps the most widely known and featureful project management software available.1.org/Planner. 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. .9.7 [1. Starkweather about his impression of various alternatives. Information on Planner can be found at http://live. You may also refer to http://en.7.dotproject.achievo.wikipedia. 12 Recall sidenote 4. Information on Achievo can be found at http://www. Note that most project management textbooks refer to MS Project as the software of choice for project management. 70–74] with figures demonstrating MS Project functionality. 4.4. 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.net. However.gnome. they are often overkill for small.org. Information on dotProject can be found at http://www.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

Introduction. and • Demand forecasts. Generally deals with more comprehensive issues than short-range forecasts.1.3 (Technological Forecasts) In operations management. money supply. longer forecasts are needed. and Research and development. FORECASTING • Long-range forecasts – Generally more than 3 years.1 Types of Forecasts Organizations typically use • Economic forecasts.2 and 5.4. Definition 5. See also definitions 5. Cash budgeting. housing starts. Definition 5. planning indicators valuable in helping organizations prepare medium. • Technological forecasts. Capital expenditures.2 (Economic Forecasts) In operations management. Facility locations or expansion. These may include inflation rates.1. and 4. Useful for – – – – Planning for new products. 5.1. Production planning and budgeting. Growth. CHAPTER 5.to long-range forecasts. . These concern rates of technological progress. and other economic indicators. See also definitions 5.1.3 and 5.1. Decline. which impacts purchases of new plant and equipment as well as development of new products. and Analyzing various operating plans. 2. long-term forecasts concerned with the rates of technological progress. 3. In the first two stages.1. Maturity.4. Product life cycles tend to follow four stages: 1.1.66 – – – – Sales forecasting.

Determine the time horizon of the forecast. 7. • Loss of customers.3. and scheduling decisions and serve as inputs to financial. . 6. See also definitions 5. 5. and • Layoffs. Capacity – Underestimating demand can result in • Undependable delivery. Make the forecast. 2.1.2. Validate and implement the results. Also called sales forecasts. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. 5. 5.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. marketing. projections of a company’s sales for each time period in the planning horizon. these drive a company’s production. capacity.4 (Demand Forecasts) In operations management. Gather the data needed to make the forecast.1. 3.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. and • Loss of market share. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Determine the use of the forecast. 3.1. Select the forecasting models. Select the items to be forecasted. 4. • Training. 2.1. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. and personnel planning.2 and 5.5.

it is a bit of an art that mixes both. • Using models that are more sophisticated than the user’s understanding. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. – On a number of occasions.68 CHAPTER 5. I have seen otherwise competent people (including Ph. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations.D. statisticians) embarrassed in front of a room full of people when presenting numerical results that don’t actually make sense based on some simple logic checks. • Lack of sanity checking. • Lack of follow-up. – If someone challenges your forecast and you do not have supporting logic or documentation. figure out whether an improvement to the forecasting methodology can be made. – After making a forecast. based on a linear model. – If you do not truly understand the mathematics. – In one case. you will be unable to defend your numbers. • Lack of support for the forecasts. FORECASTING Side Note 5.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. 5. – Many people try to apply ordinary least squares (OLS) regression techniques.1 (The Most Common Errors in Forecasting Methodology) In my experience. ask yourself if they make sense. use something simpler.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. – You should be able to explain how and why you arrived at each and every number that you forecast.2. – If they do not match. track the actual outcomes and compare them to the forecasts. Any quantitative approach should be complemented with a qualitative “reality check. to inherently nonlinear systems. In practice. . – Before you show your numbers to others.

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

a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. and 5.3. and 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. 5. personal experiences.2.5. · See definition 5.3.3 (Jury of Executive Opinion) In operations management.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. 5.4 (Delphi Method) In operations management. a forecasting technique using a group process that allows experts to make forecasts. Definition 5.3.6. Definition 5. See also definitions 5.6 (Consumer Market Survey) In operations management. Definition 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.3.3. See also definition 5.4. Definition 5. and 5.6.3.3.1. . See also definitions 5.4. 5. and 5. a forecasting technique based on salespersons estimates of expected sales.5. emotions.10.6.3.4.1 Qualitative Forecasting Methods Definition 5. and value system.3.3.3.3.3. See also definitions 5.3.3.3.3. See also definitions 5. See also definition 5.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.5. 5.3.70 CHAPTER 5.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3.3. 5.5 (Sales Force Composite) In operations management.3.

3. FORECASTING APPROACHES 71 5.5.3.05 to 0.3.3.3.2 Quantitative Forecasting Methods Definition 5. Moving averages can be either simple or weighted. Definition 5.3. α. generally ranges from 0. Higher values give more weight to recent data. Mathematically.3. 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.1) n • Weighted Moving Average – Mathematically.2) See also definition 5.3. See also definitions 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.9. Definition 5. and 5.3.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. and are appropriate to use when the underlying average .3.10. That is. Definition 5.3.7. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.8. See also definition 5.7. a simple moving average is given by demand in previous n periods Moving average = (5.5. • Simple Moving Average – Mathematically. 5.3) The smoothing constant.11.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.

3. .3. Definition 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 5.8. and are appropriate to use when the underlying average is relatively stable.15. it is good practice to compare the estimated value with the actual value as actual values become available. 5.3.3.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. FORECASTING is likely to change.3. Mean absolute deviation (MAD).12). 1 See |actual − forecast| n (5. and 5.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 2.72 CHAPTER 5. Three popular measures are 1.7.14.4) definition 5.3.7. See also definition 5. Definition 5.3.3.3.13.3. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. exponential smoothing is equivalent to naive forecasting.3 Measuring Forecast Error Once a forecast is made. 5. 3. When α = 1. Definition 5. See also definition 5. Mean absolute percent error (MAPE). while lower values give more weight to past data. Mean squared error (MSE).3.12.13). such as the mean absolute deviation (see definition 5.3.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.0.

3. MAPE is given by MAPE = See also definition 5. FORECASTING APPROACHES 73 Definition 5.3.3.3.3. expressed as a percent of actual values.12. Mathematically.3. MSE is given by MSE = See also definition 5. Definition 5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.6) 5. Mathematically. 100 n i=1 (forecast errors)2 n (5.7) or F ITt = Ft + Tt (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.12.11) .10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.5) |actuali − forecasti |/actuali n (5.8) With smoothing constants α for the average and β for the trend.

time) (5.74 or CHAPTER 5. the emponentially smoothed forecast for period t using equation 5. by the formula F ITt = Ft + Tt .12. It is also commonly called linear regression analysis. 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.10. Calculate the forecast including trend. F ITt .13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Ordinary Least Squares Regression analysis is also useful for predicting trends. 3. Tt with equation 5.14) .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. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Compute Ft . FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. 2. 1. Compute the smoothed trend.

2. Definition 5. Although there are many methods to accomodate seasonal demand. Compute the average demand over all months. demand is seasonal. Compute a seasonal index for each season by dividing the historical demand by average demand. 3. Estimate next year’s total annual demand. .3. Deviations around the least squares line are assumed to be random. This provides the seasonal forecast. to account for seasonal changes in demand in our forecasting. In the U. ¯ x The least squares method has several drawbacks. the more uncertain it is. such as cars and washing machines. We do that with a 5-step process. 3. the multiplicative seasonal model. we will examine one model.. 1. Find the average historical demand for each season. consumers often make fewer purchases of durable goods.3.5. 1. Most businesses experience a surge in sales around Christmas. Divide this estimate of total annual demand by the number of seasons. 5. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 4. then multiply it by the seasonal index for that month.5 Seasonal Variations in Data In most businesses.3. during the summer months when it is common to take a vacation. 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 first step is to calculate the seasonal forecast. 2.13 assumes a linear relationship. Recall that the equation 5.S.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. 5.

average local salary) (5. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.15) Side Note 5.3. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. Note that making predictions of future demand involves also making predictions about the independent variable x. FORECASTING 5. whatever uncertainties you may have transfer to your predicition of y.x = (5.1 (Example: Using OLS) Present Heizer example 12 [1. is given by (y − yc )2 n−2 Sy. if you are uncertain about predictions of x. 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. but x will be something other than time. However.g.g. It is also called the standard deviation of the regression and.. mathematically. 106– 107].17) . We will use the same technique.3..x = (5.4.76 CHAPTER 5.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. pp.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. If there are published estimates you can cite (e.g.3.16 is y2 − a y − b n−2 xy Sy.

S. or National Football League. pp.3 (Examples of Correlation Coefficients) Present Heizer figure 4. p.” the AFL (American Football Conference) and the NFC (National Football Conference).S.3 and the U. It does not imply causation one way or the other. FORECASTING APPROACHES 77 Side Note 5.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.8599. in all but one Year of the Pig.3. 2007. but the relationship is coincidental. nor does it imply that they will continue to be related.3. stock market. Side Note 5. Correlation) Correlation merely means that the values of two variables are historically related.18) . which is divided into two “conferences.” Note that the regression assumes a standard normal distribution about the estimate. Definition 5. 107]. 4 Source: http://www. The correlation coefficient of variables x and y is given by r= See also definition 5.10 [1.S. 109]. a football game played between two football conferences in the U.S. Historically.3. the note in the margin accompanying Heizer example 14 [1. leading stock indexes.4 (Causation vs. Certainly.S.” Side Note 5.1594488. Correlation Coefficients for Regression Lines Definition 5.time.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. stock market prices as well as the winner of the Super Bowl.18. 108].5. February 28. Dow Jones Industrial Average and Standard and Poor 500.3. changes in skirt lengths don’t cause stock market prices to rise and vice versa. Even the Year of the Pig correlates strongly with the U. “Four Values of the Correlation Coefficient. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. “Distribution about the Point Estimate of $600 Million Payroll. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. football in the U.S. the U. Other interesting correlations that have been identified over the years include banana prices and U.4 . the average length of a woman’s skirt and stock market prices in the U.9 [1.00.html?xid=sitecnn-partner.3. stock markets.2 (Distribution About the Point Estimate) Present Heizer figure 4. Since 1935.S. p.2 with stock prices generally rising as skirts rise. is monopolized by the NFL. has risen.3.com/time/business/article/0. have been correlated.3.

“What was the R squared of your regression?” Multiple Regression Analysis In section 5.. p. In practice. . in a multiple regression analysis involves a complex formula which is beyond the scope of this class. 110]. .18 and Heizer example 15 [1. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.3. you would use statistics software to calculate these values. b1 . . ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .19) Determining the values of a. p. 110].5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.” For example. we discussed a means by which we can attempt to predict the value of one variable using the value of another. Side Note 5.3. . x2 . The multiple regression equivalent of equation 5.3. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.15 is given by y = a + b1 x1 + b2 x2 + . .3. = the dependent variable (e.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. b2 .” As the sidebar points out. etc. b1 . if they are indeed related to the dependent variable. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. . 5 See definition 5.g.17. .5 Definition 5. b 2 .6.78 CHAPTER 5.19 (Multiple Regression) A causal forecasting method with more than one independent variable. It is commonly simply called “R squared. results in additional predictive accuracy as measured by r2 . often the most difficult part of building a multiple regression model is to pick the independent variables. .3. (See definition 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable. Adding additional independent variables as predictors. .

8 standard deviations. These limits are typically based on M ADs.9% of the time. 111].6 standard deviations.1.11 [1. and 4 M ADs to 3. . Definition 5.20) A good tracking signal has about as much positive as negative error.1 (A Plot of Tracking Signals) Review Heizer figure 4. two M ADs to 1. If the tracking signals violate upper or lower limits. and within 4 M ADs about 99. one of the most common problems with forecasting is a lack of follow-up. though large errors may be a problem as well even if the positive and negative errors balance.forecast| n where M AD = (5.6 One M AD is equivalent to 0.4 standard deviations.2.2 standard deviations.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).4. Tracking signals are typically used monitor forecasts. p. MONITORING AND CONTROLLING FORECASTS 79 5. 6 Recall definition 4.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.4. three M ADs about 98% of the time. The tracking signals should also be compared as they are generated against limits. three M ADs to 2.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.6. Definition 5. In other words.6.4.5. This means that the observed value should be within 2 M ADs abut 89% of the time. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.4. the forecasting methodology needs to be modified. which correspond roughly to standard deviations. Side Note 5. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .

g. FORECASTING 5.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. α in definition 5.80 CHAPTER 5. Side Note 5.4.3.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. there has been much criticism of the approach to using models based on thier fit to the data.” .2 Focus Forecasting Focus forecasting. Side Note 5. changes need to be check with human eyeballs to ensure that the adjustments make sense.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.4.4. “Summary of Forecasting Formulas.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. 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. 5. There is no single technique that should be used for all products or services. Definition 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. Note that even with computer monitoring. which selects a model based on goodness-of-fit to a data set. Definition 5.4. However. you must make your own decision as to how you select the forecasting models that you use. Sophisticated forecasting models are not always better than simple ones.4.10) is automatically changed to keep errors to a minimum. 114]. you should be aware of the criticism of focus forecasting.. 2. p.4.2 [1. In your career. is based on two principles: 1.

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

• Decline phase – Investment needs to be minimized and resources need to be redeployed. – Process modification and enhancement.2 Life Cycle and Strategy Strategies change as products move through their life cycle. Product strategy involves determining the best strategy for each product based on its position in the life cycle.. • Maturity phase – Competitors have entered or are entering the market. 6. Decline. Life cycles can be in the days or weeks (e.g. YouTube videos). and innovative production is appropriate.1.1.1 Product Life Cycles Product life cycles can be divided into four phases: 1. low-cost.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. • Introductory phase – In the introductory phase. restaurants or nightclubs). Introduction. Growth. and – Supplier development. products expenses are often high for – Research and development.. and 4. years (e. • Growth phase – Effective capacity forecasting is necessary. Maturity. clothing fashions). or even decades.g.g..82 CHAPTER 6. 2. so high volume. DESIGN OF GOODS AND SERVICES 6. . months (e. often ruthlessly. 3.

1. • Sociological and demographic change is also tied to product demand. are tied to product demand. the development of cellular telephone technology or the internet.6. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. 4 For 3 For . such as consumer incomes. Definition 6.2. Definition 6. • Technological change often drives product innovation.3 Product-by-Value Analysis For firms with many products. 6.500 or 100.2.2 Generating New Products Most products have a limited life cycle. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. example.1 (Example: Brainstorming) Lead the class in a brainstorming session. • Economic factors. GENERATING NEW PRODUCTS 83 6. example.2. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted.1.2. 6.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Ideas are not reviewed until after the brainstorming session. as well as the total annual dollar contribution of the product.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. and if a company is to survive.3 • Political and legal change can also bring about business opportunities.4 Side Note 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.000 yuan. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. it must regularly redesign existing products or bring new products to market.

2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Translates customer desires into a product design.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. p.1 (Product Development Stages) Present Heizer figure 5. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market.2. Definition 6. 6.3 [1. Side Note 6. p. The house of quality is a graphic technique for defining the relationship between customer desires and a product. 128].3. p. 128]. Side Note 6.3. 129].3 6.3. Definition 6. . Many successful companies rely on sales from products introduced within the past five years. DESIGN OF GOODS AND SERVICES For example. Each stage should have an accompanying review to determine whether to progress or not. Determines what will satisfy the customer and 2.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. 6. and the organization’s capabilities.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.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. the product life cycle.3.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.2 [1.84 CHAPTER 6. market dynamics.3.

See http://www.8 5.S.7 4. identify the rows of the house in sidenote 6. create the columns of the house in sidenote 6. Product development is done by teams. there are three popular methods by which organizations undertake product development. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.6 3. a research & development.3. • Fixed duties exist.3 Organizing for Product Development In the West.10 Side Note 6.2 (Example: House of Quality) Present Heizer example 1 [1.2. and production departments.2.3. PRODUCT DEVELOPMENT 85 Side Note 6. design engineering. Building the house of quality involves six steps: 1. p. 130]. • More common in large. 2.g.9 6..3. as was the software described in section 4. bureaucratic companies and organizations. Develop importance ratings.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. which can be an advantage. An organization is divided into departments. • Effective communication and coordination between separate departments can be problematic.9.6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. e. Note that it is not free or open source.” 6 For example.2.3. Identify relationships between the firm’s hows. • Perhaps the most popular approach in the U. 6.3. 7 In other words. Evaluate competing products.3. 2.com for more information. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.3. . with product features. 10 The right-hand columns of the house in sidenote 6.3. In other words. manufacturing engineering. Identify how the good or service satisfies customer wants.3.. Relate customer wants to product hows. 3. 1. 8 These are given on the roof of the house in sidenote 6.qfdcapture.2.2. Identify customer wants.

I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.3. My experience may not be indicative of management practices in general in the U. quality assurance. purchasing. will often advocate for continuation of their project past the point that it is profitable for the company. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.S. but my personal impression is that formal QFD practices are not widespread in practice.3..5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. it can also be problematic because teams. because their fate is tied to a product. Some teams even include representatives from vendors. use of participating teams in design and engineering activities. The goals of manufacturability and value engineering are 11 See definition 6.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. Definition 6. etc. Side Note 6.4.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. . design.3.4 (Concurrent Engineering) In project development. However..86 CHAPTER 6. Definition 6.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. engineering.. These teams often include representatives from marketing. Side Note 6. and use.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. production.3. and production stages of product development. Definition 6. development. organizations are less structured and typically not divided into research and development. and field service personnel.S. production. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.3.11 In Japan. 6. maintainability.3. manufacturing.3. engineering.

PRODUCT DEVELOPMENT 1. 6. 3. and 7.3. 2. Improvement of functional aspects of the product. 87 . Reduced complexity of the product. 4. Cost reduction.6. Improved maintainability (serviceability) of the product. 5. Standardization of components. Robust design. Improved job design and job safety.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

.

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

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

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

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

“Achieve financial independence” is much better than “pay the bills.3 Setting Goals With any major endeavor. advertising. even the successful ones will probably focus on the negative. • Be specific. • Analyze Your Professional Attributes – Be aware of where you need help. such as sales. it helps to set goals. marketing. 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. 7.3. Like parents. try to figure out why they were not successful. – Long-term goals are those that may take 5. although the successful ones generally view their experiences as positive on the whole.3. ask other entrepreneurs.000. and administration. When setting goals.” • Be optimistic. If your goal is to raise 1.7. or 20 years to accomplish.000 yuan by July 1” is a much better goal than “raise money. – Short-term goals are those that can be accomplished within a year. Consider at least a five-year time horizon. 10. if not more important. • Set both short-term goals and long-term goals. .1 (What’s It Really Like?) If you wonder what running a business is really like.” • Be realistic. “Raise 100. than learning from success. – Start with small goals. your goal may not be realistic. Learning from failure is as important. Side Note 7. When I talk to those who I know who have started businesses. If you talk to an entrepreneur who has not been successful. SETTING GOALS 95 If you are not a “people person.000 yuan and you’ve never had a job before.” you may not want to start a business that focuses on customer relationships. Move on to larger goals once the small goals have been met. it is common to exchange “war stories” about the difficult times and sacrifices. ask yourself the following questions: • Income – How much do you want to earn. When setting goals.

2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [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. Many people want to start their own business for ego gratification. Side Note 7.96 CHAPTER 7. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Have the class write down their answers and evaluate their own EQ. Acknowledge this fact and factor it into your decisionmaking. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. – Geographic location. . 21]. pp. The reasons given for adding or subtracting points are as interesting as the ultimate score. – Hours of work. pp.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. 20. and – Investment of personal assets.3. Eliminate question 1 and substract one point from the scoring given on p.3. How much is your ego worth? Side Note 7. 18–20].

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

• They require business relationships that the entrepreneur does not have.0.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. hollow tube. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. • The ideas are easily copied and would be quickly appropriated by more able competitors. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. Side Note 8. . most ideas are not feasible because • They would not be profitable enough. • A nose piercing that consists of a small. pp. Often times. etc. • An escrow service that arbitrages the differences in contract enforcement practices and business ethics between Scandinavia and other nations such as those which are not as highly placed on Transparency International’s Corruption Perceptions Index. people have to remove nose piercings for work or social occasions. However. • Etc. but it is a major complaint for female rock climbers.. It sounds silly. • They require more financing than the entrepreneur has access to. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself.0. • The business would involve too much risk. The tube could be made unobtrusive enough that it would not need to be removed for work. 28–29]. • They require expertise that the entrepreneur does not have. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. however. Side Note 8. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. Those with nose piercings would not need to remove the piercing and risk it closing. often one or more a day.. I continue to generate business ideas as a matter of habit.98 CHAPTER 8. business ideas come at a rapid rate.

3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. or are otherwise discouraged. Side Note 8. And you should not risk anything you can’t afford to lose. while you should listen to criticism that others give. used as the title of at least 12 movies and television shows.” Side Note 8. making just enough to get by but not much more. 2 http://www.8. 33]. However.1.1 You’ve Got an Idea. the business took off. YOU’VE GOT AN IDEA. it is too risky. that they will never make it. Finally. After all. You do not want all of that time to go to waste and potentially lose your personal investment and that of friends and relatives because you overlooked something. Have students fill out the form on their own time. People thought he was going nowhere and generally dimissed his business. 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. 8. 35]. Entrepreneurs are often told their idea is flawed. in the wake of 9/11. or health.2 is. Side Note 8. you should not let it dissuade you.com/find?s=all&q=never+say+die. He ran the business as a one-man operation for years.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. thinking that if he did not succeed after a couple of years. p. 2007. Have students come up with examples of products that meet various criteria on the checklist.1. A well-known phrase in English. Now What? The number one trait needed by successful entrepreneurs is perseverance.” That is. His sales are now in the millions of dollars per year and the business is very profitable. you will be spending years of your life trying to make the idea work. p.1. February 17.1. computer-controlled security cameras. such as your family.imdb. “Never say die. you should have “thick skin. to be truly self-motivated and persistent in the way you need to succeed. . You should be realistic about risks. he would never succeed. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. Warnings about risk are perhaps the criticism you should consider most carefully. home.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.

100 CHAPTER 8. FINDING AN IDEA .

1 Finding Your Niche Finding a niche can be a more daunting task than you might think.0.0. Not only do you need to decide whether you are marketing to businesses or consumers. Consumers and 2. Definition 9. Definition 9.” or business-to-consumer ventures. Businesses. There are two broad categories of markets: 1. See also 9.0.Chapter 9 Defining Your Market After coming up with your idea. When trying to identify your niche market. go through the following 7 steps: 1. your next step is to do some market research. 101 .2 (B2C) Businesses whose customers are primarily consumers are called “B2C.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.” or business-to-business ventures.2.1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. See also 9. 9. but you should try to target your market as specifically as possible.0.

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

economic.1. life stage. and psychological factors. Likewise. are similar in age to those who came of age in World War II. 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. in the U.1 (Generational Marketing) Marketing to consumers based on age as well as social. If you did your homework.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. For example. (See definitions 9. This marketing technique has been widely used since the early 1980s in the U. for example. Definition 9. 9. many are choosing to start families later in life or even have children ten years or more apart.1. but their behavior differs significantly due to the different influences in their youth.1. buying a home. etc.1. As older people are more active than before. you should practice extra caution to avoid stereotypes or other insensitive approaches. New marketing techniques include generational. or retiring. Many Western companies make the mistake of lumping together Japanese.3.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. FINDING YOUR NICHE 103 7. and cohort marketing. Chinese.) Using these new marketing techniques can allow you to narrow your market. and other Asian customers together. Definition 9. young adults in the Depression. and the narrower your focus on your target.1. demographic. the World War II cohort. they try to satisfy all possible customers and end up trying to do too many things well. . the more likely you are to score a hit. such as having children.1.S. This can be offensive and serve to alienate rather than appeal to your customer. the Depression-era cohort. many entrepreneurs make the mistake of being “all over the map.2. and 9.” That is. It is better to do just one thing well than to do many things poorly. Definition 9.1. Korean.S.9. Side Note 9. when many people were suffering from extreme poverty. Go for it! – Implement your idea.1 (Smaller is Bigger) When starting a business. 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. you should be able to enter your niche market with confidence.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.1.1. when the country was immersed in a war effort... Side Note 9..

79] 9.1. DEFINING YOUR MARKET 9.2 Redefining and Expanding Your Niche Lynda C. Falkenstein1 advises that you regularly reevaluate your niche. . • 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.3 The Mission Statement Once you have a niche. Side Note 9.” [4.3. • Convey the essence of your business’s goals and philosophies. p. p. Falkenstein states. create a mission statement. a few sentences at most.104 CHAPTER 9. The mission statement should • Be succinct. Every six months or so. “Creating a niche is the difference between being in business and not being in business.1 (Mission Statements for Three Organizations) Review Heizer figure 2. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. you should.2 [1. 28] which includes mission statements for three multinational companies: 1 See section 9.

increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. 2. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. competitively superior. global air-ground transportation of high-priority goods and documents that require rapid. Equally important.3.3. . 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. A complete record of each shipment and delivery will be presented with our request for payment. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. Merck The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. 105 Side Note 9. 3.9. We will be helpful. Our mission consists of 3 interrelated parts: • Product Mission – To make.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. and professional to each other and the public. We will strive to have a completely satisfied customer at the end of each transaction. FedEx FedEx is committed to our People-Service-Profit philosophy. contributing member of our community and offering the Hard Rock family a fun. time-certain delivery. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. THE MISSION STATEMENT 1. courteous. and nurturing work environment while ensuring our long-term success. healthy. We are committed to being an important. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. We will produce outstanding financial returns by providing totally reliable.

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.cfm for more detail.106 CHAPTER 9. capital.com/our company/our mission/index. so do your partners. nationally & internationally. challenges.benjerry. • 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 9.1. a grocery chain. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. . and recognizes outstanding employees. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. 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. processes. such as Whole Foods. Other companies.. See http://www.S.

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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 .0. Donna Barson. you need to take a step back for a sanity check.. president of Barson Marketing. location and needs of your business’s target market. says “A lot of companies skim over the important background information because they’re so interested in getting their product to market. spending habits.Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business. and the particular competitors you face.” Definition 10.1 (Market Research) Research into the characteristics. Inc. the industry as a whole.

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business. . RESEARCH METHODS 113 Side Note 10.10. pp.” [4.2.

MARKET RESEARCH .114 CHAPTER 10.

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

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

Kuratko suggests the following [3. p. 2. Determine the financial structure of the plan. Read the latest balance sheet. you will not even get your foot in the door and be invited to present your plan to investors. but should not be too lavish.1. – Binding and printing should not be sloppy.”1 Many venture capitalists use the following six step process to evaluate a business plan [3.2 5. If you cannot impress the financier with these three steps. p. While the initial read-through might be only a five-minute perusal. 3. or spendthrift.1.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Establish the unique details of this venture.11. 301]: • Appearance – It should look good. 300]. . 4. pretentious. bear in mind that once the plan is advanced to the next stage of financing. thorough and careful. 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. including debt or equity financing required. Determine the quality of the entrepreneurs. the trash can. but not too good. other financing professionals may spend more time analyzing the details of the plan. Note that less than a minute on average is devoted to each step. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. not ostentatious. They will want to see something that reflects that you are neat. 11. Read the plan over casually. 2 Do not underestimate the importance of this step.e. i. Determine the characteristics of the venture and its industry. 1.. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. 6.

The company’s current status.3 Some Style Points Kuratko also recommends that you [3. 5. Its products or services. The amount of financing needed. The benefits to customers. a number should be in a corner5 indicating the copy number. and full contact information4 for the company. though you should not put it in the same corner as page numbers appear. 6.118 CHAPTER 11. The venture’s objectives in 3 to 5 years. – It should explain 1. You should use this to keep track of who has which copy. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. 4. 7. – 40 pages is ideal. p. and How investors will benefit. 3 Note that for this class. 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. 2. – It is worth repeating: Keep it down to at most two or three pages. If you write to much.3 • The Cover and Title Page – The cover should have the name of the company. 3. THE BUSINESS PLAN – It should be no more than 50 pages. The financial forecasts. – On the title page. . the date of the plan. address. 4 Phone number. 11. e-mail address. • The Executive Summary – Two or three pages immediately following the title page. 5 I suggest the lower-right corner. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. – Inside the front cover should be a title page repeating the cover information. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages.1. and/or web site. they will not read it.

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

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

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

THE BUSINESS PLAN .122 CHAPTER 11.

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

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

• Your audience may ask you several questions at once. “So what?” If you cannot answer this question simply and easily. 45].4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation.2. but in reality. 12. you need to change or eliminate the statement. where some of the smartest people in the world worked. everyone brought a pen and paper.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. and each investor will respond differently. Guy Kawasaki recommends you set a timer [2. If they cannot explain it clearly. I always bring a pen and paper to meetings.2.2.6 So What? When you are planning your presentation. It is easy for things to get lost in the heat of the moment. 12. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access. ask yourself after every statement you make. At my company in Chicago. Ask them what your company will do. p.2. Much of the material required use of the internet. You should be prepared for the unexpected. 12.3. it is quite the opposite. In general. AFTER THE PRESENTATION 125 Side Note 12. They may ask you something you want to respond to in an e-mail later. Give your presentation to friends or family. so write things down to make sure you don’t forget. Many people feel as if taking notes makes them look stupid. you are not presenting it well. Stop when it goes off. 12. They may ask you something that makes you want to change your presentation. and although you go into each presentation . • Taking notes also makes you look conscientious.12.5 Take Notes Have a pen and paper ready and take notes during the pitch.3 After the Presentation Each presentation will be different. Everyone.

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

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.

Definition 13.3. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet. 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. be sure it’s not easy to “hack” the system.3 (Count Cycle) In inventory management.3.130 • Maintain a sales history. the order cycle is the amount of time it takes to process paperwork and place orders. 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.1 (Turnover) When you have replaced 100% of your original inventory. the delivery cycle is the amount of time between placing an order and receiving it.3. • Updating product information – At the time a sale is entered. and • Improve pricing accuracy. if you perform an inventory count four times a year. work with suppliers to improve delivery times and count inventory more often.3. . For example.3. Definition 13. Definition 13. you have “turned over” your inventory.1 Inventory Turnover Typically. To improve efficiency of inventory control.4 (Delivery Cycle) In inventory management. Definition 13. a high inventory turnover is a mark of a well-managed inventory system. such as for volume discounts for preferred customers. these systems should automatically update inventory and accounting records. the count cycle is the amount of time between counting inventory. INVENTORY CONTROL When considering the purchase of a POS. • Security – To prevent theft.2 (Order Cycle) In inventory management. CHAPTER 13. 13. your count cycle is 12 weeks.

See definitions 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.3.2. and 13. Definition 13. 13. but you should at least know about LIFO and FIFO. Many businesses also measure turnover by measuring sales per square foot (or square meter). First Out)) FIFO (first in. the needs period is the sum of the count cycle.S. The author is unfamiliar with Chinese tax codes.3.S. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. If there is inflation. INVENTORY ACCOUNTING 131 Definition 13. Definition 13. Calculate your sales per square meter once per month. First Out)) LIFO (last in. first out) assumes that you sell the least recently purchased inventory first.1 (LIFO (Last In.3 See also 13. first out) assumes that you sell the most recently purchased inventory first.4 Inventory Accounting Your accountant will typically handle inventory accounting.4. you must estimate your inventory value when you file your taxes. it values your remaining inventory based on the prices of the least recently purchased items.3. After you have been in business your inventory control system should give you a better idea of stocking levels.S.4. In the U.4.4. The author is unfamiliar with Chinese tax codes.2.3. least this is true in the U.4. LIFO and FIFO are two accounting methods used to do this. In deciding which to use. and delivery cycle.1 Buying Inventory In the process of putting together your business plan. In other words.1. which may result in higher taxes..3. follow the recommendation of your accountant. .2 See also 13. order cycle. it values your remaining inventory based on the prices of the most recently purchased items.5 (Needs Period) In inventory management.2 (FIFO (First In.13. 13. 2 At 3 At least this is true in the U. which allows you to pay less taxes on your inventory.4. If there is inflation. 13. You should know how many sales per square meter per year you need to survive.4.

Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. Independent craftspeople 4.5 Suppliers Suppliers can be divided into four categories: 1.1 Dealing with Suppliers The most important thing about a supplier is reliability. three or four months.actual inventory . brokers or jobbers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Distributors – Also known as wholesalers. – The minimum may be higher for first orders to cover the cost of setting up a new account. “Be open. Import sources – They operate like domestic wholesalers.” .3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Their prices are higher than a manufacturers. author of Start Your Own Business. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. says. INVENTORY CONTROL Definition 13. 2. 13. usually one.5. Rieva Lesonsky. • Some suppliers demand a minimum number of items per order. and they will respond in kind. courteous and firm with your suppliers.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.4. 13. 3.132 CHAPTER 13. Manufacturers – Note that some manufacturers refuse to fill small orders.

d.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. 2. • Discounts. Whatever you do. do not falsify or misrepresent your financial statements. Definition 13.. At least in the U. the supplier will pay for freight. Discuss • Their negotiating technique when discussing pricing. You can also present your financial statements and prospects for success.S. If you are dealing with a reticent large supplier. and • Allowances before you make a decision. and • The need to be firm but fair.5. SUPPLIERS 133 13.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. If a supplier does not extend credit. I regularly had to deal with food vendors. Side Note 13.o. Tips for dealing with suppliers: 1. • Sometimes if an order is large enough. such as the occasions on which we had to send back bad food or refuse an entire shipment (and make do with what was on hand) in order to make a point about late deliveries. you should know who is liable for damage to goods in transit. personal interaction can work wonders.1 (COD (or c.5.o. Suppliers sometimes try to complicate pricing to their advantage.)) Cash on delivery. basis until you have proven yourself reliable. . • For items being shipped.5. 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.d. Ask about the freight policy before ordering. they will put you on a c.13. customers may be required to pay upon receipt of goods.5. If a supplier is uncertain about you. it is considered a felony. Be sure to add up • Costs.

Seattle” to indicate that an item being shipped from Seattle is free on board.3.5.5. This differs from a forward order where stock is available but delivery is postponed for other reasons. May 19. May 19. people often say something like “f. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. Specify a cancellation date on your order forms. 3.4 (Back Order) This is a Distribution (business) term and refers to the status of items on a purchase order in the event that some or all of the inventory required to fulfil the order is out of stock.b. 2007. 7 Source: http://en. Destination)) Free on board destination.2 (FOB (or f. 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. 5 FOB Destination changes the location where title and risk pass.html. 2007. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.o.o. 2007.7 4 Source: 5 Source: http://www. Definition 13. 5.com/jargon. Be aware of your supplier’s priorities. Definition 13.org/wiki/Backorder.5.wikipedia.2. .com/shippers/glossary. 6 Source: http://www.4 Colloquially.roadway. May 19. As opposed to FOB. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. INVENTORY CONTROL • Depending on whether the supplier pays frieght. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. May 19.abcsmallbiz.html.134 CHAPTER 13.o.b. The FOB term requires the seller to clear the goods for export.com/reference/glossary/glossary efg. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. See also definition 13. http://www.5.epoi. 2007.)) Free on board.3 (FOB Destination (or f.b.5.html. Under this arrangement. Definition 13.6 See also definition 13.

Side Note 14.2 (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. • Part-time employees. 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. 135 . While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. they are often emotionally draining for the manager as well as the employee involved. besides being bad for business. Side Note 14. 337]. On the other hand. a bad hire.0.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.0. • Temporary employees (temps).3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). The benefits of finding the right person for a job cannot be overstated. and • Independent contractors. p.

and recruiting. etc. Side Note 14. . you have nothing to offer. 14. However. • If you have do terminate the employee. lifting.1 (Formalities) While it may seem when you hire your first employee an unnecessary burden to write a job description and create all the other formalities. 14. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. 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. selling.136 CHAPTER 14. creating a job description.1 Job Analysis Before creating a job description.1. an employee with an inflated job title may expect an inflated severance package. then want to hire someone else later at a position above them in the company. they will soon expect compensation commensurate with their job title. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists.1.1. but personality traits. by the time you hire your 40th employee. writing reports. Cleaning. HIRING EMPLOYEES 14.1 How to Hire Hiring involves analyzing the job requirements. • You may not leave enough buffer above the employee.2 Job Description Side Note 14. you will likely find that they will come to you at some point to demand a vice president’s salary. Not only education and skills.1. you’ll be grateful to have spent the time to go through a more formal process. If you give someone a job as Vice President. If you call someone a Vice President but don’t compensate them as such. • How the job will be done.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. programming.

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

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

You narrow down the 10 candidates to 3. but when looking at a resume.” 665 in “Internet/E-Commerce. There were 4. • Industry Publications – Most trade publications take ads for job openings. You conduct a second round of interviews with the remaining 3 candidates. • Online – In the U. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. the hiring process proceeds as follows: 1. • Focus on the skills that a person can bring to your company. 3 Java is a programming language. For any job..com or http://www. 5. You interview the candidates. 2007 turned up more than 5.” And 921 in “Engineering.com with the keyword Java on May 19.S. 6. for professional positions.314 listings in the “Computers.S. most professional associations’ job banks are now online. 3. 159 in “Financial Services. You narrow the number of resumes down to about 10.” . If you are lucky.monster.com with the keyword “java” will demonstrate just how widely used online tools are.dice. Try to perform a search on a job sites such as http://www. Screening People Reviewing resumes and applications is an art. You hire the preferred candidate. about 10 or so. You check references.000 hits searching just the “Information Technology” search category. In the U. many positions are being filled online. not a science. particularly in the high-tech industry.14. 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.1.3 Generally. To “weed out” candidates. Searching on Monster. 4. You can evaluate their personality during the interview. be sure that a candidate can provide what you are looking for.. 2. you will get several candidates for any job you are offering. Software” category.

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

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

a recent debate. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. He got the job. Curiously. Side Note 14.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. It is as important to get the candidate excited about your company as you want to be about them. Texas. 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. so much so that it is almost a clich´. Hopefully they will be neat and clean. p. only one of them answered.” Don’t ask yes-or-no questions.” 9 This is a very typical job interview question in the United States. “President of the United States. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Then ask them about their skills and background. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. “bowling. and demonstrate good communication skills.142 CHAPTER 14. Begin with some small talk. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. such as “Tell me about your last position. 349].” The interviewer laughed out loud.” or “Tell me about a problem that you solved at your last job and the way you solved it. Be sure to ask open-ended questions. You should do the same. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. Good candidates will do their best to put their best foot forward. friendly. Discuss the job and the company. 8 In 7 Taken . First impressions are the most important. You want the candidate to talk enough to give you a detailed impression. He answered.1.

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

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

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

Sign up to vote on this title
UsefulNot useful