International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . . . . . . . . . . . . . . 5. . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . .3. .1 Identify Critical Success Factors . . . . . . . . . . . . . .2. . 3. .1. .3 Product-by-Value Analysis . . . . .3. . 4. 4. . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . 4. . . . . 3. .3 Integrate OM With Other Activities Global Operations Strategy Options . CONTENTS . . . 4. . . . .1 Probability of Project Completion . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . . . . . 4. . . 6. . . . . 6 Design of Goods and Services 6. . . . . . . . . . . . . . 5. . . . .3 Dynamics . . . . . . . . . . . . . . . .3 Project Controlling . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . 5. . . . .4 Adjusting for Trend . .1 Qualitative Forecasting Methods . . . . . . . . . . . . . .3. . .3.3. . 4. . . . . . . . . . . 4. . . . . 5.5 Seasonal Variations in Data . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing .1. . . . .1. . . . . . . . . . 5. . . . . . . . . . . . .2 Project Scheduling . . . . . 4. . . . . . 5. . 4. . . . . . 6. . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . .4 Determining the Project Schedule . . . . . . . . . . . . . . . . . 4.3. . . . . . . 4.3 Forecasting Approaches .3. . . . . . . . . . . . . . . .2 The Work Breakdown Structure . . . . . .1 Product Life Cycles . . 5. . . . . . . . . . . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . .4 3. . . . . Strategy Development and Implementation .3. . . . . . . . . . . .1. . . . . 5. . . . . . . .2 Focus Forecasting . . . . . . . 3. .1 The Project Manager . . . . . . . . . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . .2 Preconditions . . . . . . . . . . . . . . . . . . . . . . .3 3. .8 A Critique of PERT and CPM . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. .6 Associative Models . . . . . . . . . . . . . . . . . . . . . . . .4.1 Adaptive Smooting . . . . . . . . . . . . . . . . . . . . .1 Goods and Services Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Research . . .2 Life Cycle and Strategy . . .4. . . . . . . . . . . . .1 Types of Forecasts . . . . . . . . . . . . . . . 5.3. . . . . . . . . . . 4. . . . . . 4.1.4 4 Project Management 4. .1. . . . . . . . . . . . . . . . . . 3. . . . . . . . .1 What is Forecasting? . . . . . . . . . . . . . . . . . . . . . . . .6. . . . . . . . . . . . .1 Project Planning . . . . . . .3. .2 Build and Staff the Organization . . . . 3. . . . . . . . . . . . . . . . . .2 Network Diagrams . . . . . . . . . . . . . . . . 6. . . . .1 PERT and CPM . . . .3 Measuring Forecast Error .2.6 Variability in Activity Times . . . . . . . . . . . . 5.2. . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . .

.1 You’ve Got an Idea. 11. . . . . . . . . . . . 12. . . . . . . . . . .1 Preparing to Put the Plan 11. . . . . . . . . .2. . . . . . . .5 Take Notes . . . . 104 9. . . . 12. . . . . . .1 Characteristics of the Successful Entrepreneur . . . 110 10. . . . . . . .1 Product Development System . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . .2. . . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . . . . . . . .3 The Mission Statement . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . .2. . . . . . . . . . . . . . . .6 So What? . . . . . . .2 The Plan Contents . . .2 Research Methods . . . . .2 Look and Feel . . . . . . . . . . . . . . . . . . . . . . . . . 11. . . . . . . . . .2 Redefining and Expanding Your Niche . .1. . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . 104 10 Market Research 109 10. . . . . . . . . .3 Some Style Points 11. . . . .1 Finding Your Niche . . . . . .3 Setting Goals . . . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . . .3 Organizing for Product Development . . . . .2. . . . . . . . . . . .1 Sources of Secondary Research . . . . . . . . Exactly? . . . . . . . 111 10. . .1 Your Audience . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . . . . . . . . . . . 94 7. .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Some Suggestions . . . . Now What? . 6. . . . . . . . . . . . . . . . . . . . . . . . .1 Importance of New Products . . . . . . . . .2. . . . . . .2 Know Your Outline Thoroughly . . . . . . . . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . .1.4 The First Minute is the Most Important . . . . . . . . . . . .2 Are You Ready? . . . .CONTENTS 6.3. . . . . 12 Presenting the Plan 12. . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 6. . . . . 92 7. . . . .1 Do It Until You Get It Right . . . . . . . 6. . . . . .2. .2. . .1 What Am I Researching. . . . 12. . . 6. . . . . . . . . . . 12. . . . . . . . . . . . . . . .3 After the Presentation . . . . .2 Quality Function Deployment (QFD) . . . . . . .3. . . . . . . . . . . .1 The Presentation . . . 12. . . . . . .3 Generating New Products . . . . . . . 111 11 The Business Plan 11. . Product Development . . . . 12. . . . . . . . . 101 9. . .2. . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . . . .

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

Part I International Business Management 7 .

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

child labor was widely used. Why is corruption an important business issue? • See sidenote 1.S. Definition 1. 3. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. there is a perception in the West that Chinese are hard-working and smart. Prison labor is also considered improper in the U. • However. Easterners tend to trust people after observing a pattern of consistent behavior. 2.A.1 (Ethics) The study of morality and standards of conduct. 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. which are more strictly enforced in the West. 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.2. business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like. Western business people may not initially trust their Chinese counterparts.A. 1. Note that during the industrialization of the U.1.2.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. • Because of this.2 Corporate Corruption Side Note 1.10 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. Westerners rely more on contracts.A. and Europe but a commonly accepted practice throughout the developing world.S. • In general. This is something Chinese business people should be aware of.2. Which brings us to the subject of this lecture: Ethics. For example.S. . • Because guanxi is less important in the West.. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.

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

bankruptcydata. 3 Source: 4 Source: http://www. Side Note 1. scandals such as Enron. • WorldCom – Following the Enron scandal. Parmalat.htm. the former CEO of WorldCom.S. While western developed economies often cite a high ethical standard. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. 2007.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.htm.S. March 17. Worldcom. . Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. the SarbanesOxley Act (SOX) was passed in the U. See sidebar 1.3 The United States The United States has recently been rocked by a number of scandals in the business community.com/Research/15 Largest. and Tyco make it clear that even western developed economies have significant ethical shortcomings. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.3.bankruptcydata. was convicted of fraud and conspiracy and sentenced to 25 years in jail. including a $2 million birthday party for his wife.3. was accused of looting the company to fund a lavish lifestyle.12 CHAPTER 1. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.S. In Scandinavia.com/Research/15 Largest. Qwest. http://www.1. March 17. Side Note 1. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. history. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. Dennis Kozlowski. succeeding Enron as the largest bankruptcy in U. 2007. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. WorldCom declared bankruptcy in July 2002.4 – Bernard Ebbers.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. • Enron – In December 2001.. • Tyco – The CEO of Tyco. There is currently debate as to the effectiveness of the regulations relative to the costs.2 (Cultural Heritage in the U. a high value is placed on honesty and personal integrity.S.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.2.

which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. • Many men do not understand why sexual harassment constitutes a problem. the political scandals do not appear to have been fully acknowledged and addressed.pdf. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. Side Note 1.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www.4. Moreover. women have a difficult time being taken seriously. 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. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. also known as thrifts and which function like banks. Better known is the case of Japanese banks. and as a result made high risk investments in the late 1980s and early 1990s.4 1.gov/bank/analytical/banking/2000dec/brv13n2 2. Hodgetts et al. JAPAN 13 1. This resulted in several banks being technically bankrupt [5.. 5 1.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. The government was compelled to provide public money to bail out the institutions.4. with many men of the opinion that women were just biding their time until they marry and have children. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.4.1 (The U. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. 58]. Savings and loan institutions. with many women finding their employment opportunities constrained.1. Side Note 1.S.fdic. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. . Likewise.S. p. were not as highly regulated as banks.4.4.2 Women in the Workplace Sexual harassment has also become an issue in Japan.

• The harasser can be the victim’s supervisor. or other issues. unreasonably interferes with an individual’s work performance or creates an intimidating. • The harasser’s conduct must be unwelcome.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances.g. an agent of the employer. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. Furthermore.4.. Are women with equal qualifications as men given equal pay and position? Take a show of hands. gender. a co-worker. hostile or offensive work environment. The victim does not have to be of the opposite sex. yes or no. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. . Definition 1. and for most public institutions and many large corporations.S. Side Note 1.de2.edu/harassment/legal. have paid substantial penalties as a result of sexual harassment or discrimination based on race.4.14 CHAPTER 1. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. requests for sexual favors. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace.psu. 6 Source: http://www. and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment. cite two cases in which foreign firms operating in the U. or a non-employee. It is considered a very serious issue. a supervisor in another area. in the millions of dollars) to those who are successfully prosecuted. sexual harassment lawsuits result in significant penalties (e. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. Hodgetts et al.

7 Source: http://www.4.4. politicians. yes or no.5. with the purpose to influence their votes.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. than any other. there seems to be a glass ceiling due to social factors. Side Note 1. with most in the top 20 among over 150 countries included in the survey. their attitudes towards bribery when working in foreign markets differs from that of the U. at 40.5. Although women have entered the workforce in large numbers in recent decades.dict.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.S. Hodgetts et al..1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.5. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. to try to influence decision-makers in any circumstance. EUROPE 15 1.3 Lobbying by Japan Japan spends more money lobbying in the U. 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. They only have the power of persuasion.5 1. particularly in upper management.7 Note that lobbyists do not have any formal power.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. Side Note 1.S.org. is the notable exception). men are disproportionately represented in management positions. in an extended sense.S. Definition 1.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.4. .1. 1.5.

5. 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.5.htm. For those students who think so. 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.16 CHAPTER 1. • More British companies have actively sought to recruit and promote women into management. though compensation is limited relative to lawsuits filed in the U. but there is a perception that there are risks and ethical considerations.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. 8 Side Note 1.S.. .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. yes or no. • Discrimination lawsuits are more commonplace in Great Britian. Side Note 1. 1. 8 Source: http://careerplanning. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian.com/library/glossary/bldef-glassceiling. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.about.5.

Bribery and other forms of corruption.6.2 (Piracy and Counterfeiting) Present sidenote at [5. 6. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.6.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets. • A relatively stable government. • Yet another case in which software from a U.5 billion in sales annually. 64]. Side Note 1. ETHICAL CONCERNS IN CHINA 17 Side Note 1.1. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Prison labor. there are undoubtedly many others that get away with it. 3.6.S. and • A recent history of rapid economic development. pp. Child labor. An increase in crime and illegal business activities. Piracy and counterfeiting (see sidenote below). p. [5.6. 4. company in Boulder was stolen and sold to a Chinese company.S. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. An opaque legal system. 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. International corporate spying problems. Often. 7. executives.3 (Corporate Spying) Hodgetts et al. . 5. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. Side Note 1. 2. Ethical considerations include 1. • Note that for every corporate spy that is caught.

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

7. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.7. For example. and • Rainforest Action Network (RAN). as executives of publicly traded companies are ultimately responsible to their shareholders. – Even socially responsible executives would consider the “bottom line” when making decisions.S.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. as it gives the U.7.2. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.000 and $125. note that while U. Side Note 1. . A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. with a score of 3. China ranked 78 out of 158. In fact.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. 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. last but note least. • To prevent a boycott or other consumer defections. • Conservation International (promotes environmental conservation).7.1 Corruption and the FCPA Revisited Hodgetts et al.1. 1. many feel that it has had a net benefit. In 2005. Executives are people.9 U.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament.S. executives may actually feel that it is the right thing to do. • And. firms a reason to refuse to pay bribes. Both political groups and businesses are influenced by NGOs. too. firms are constrained by the FCPA with regards to bribery and other corrupt practices. MNCs do not appear to have been significantly impacted.S. but does not outlaw payments to political party leaders. Side Note 1.

. but most important first step is to recognize that there is a problem. 4. It is a difficult problem to solve. 2.4 (Some Opinions) Personally. societies. Global Compact specifies 10 principles which MNCs should abide by: 1. specify standards and codes of conduct in domestic and global operations.infoplease. WorldCom. Singapore is number 5 with a score of 9.7.2 respectively.5 (Table 3-1: Principles of the Global Compact) The U. malfeasance and diversion of corporate funds becomes increasingly difficult. It cannot be considered to be based on a scientific survey. Important: Although it is widely cited. and Germany at 7. Support and respect the protection of international human rights. Scandinavian countries are at the top of the list. Moreover.S. the United States and Europe have recently been rocked by corporate corruption.7. The government recognizes that it is an issue and is taking action.4.10 Corruption is certainly not endemic to Asia. Tyco.N. 2006. slightly better than Sweden. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. With more disciplined corporate governance. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.6 and 8. Commitments that many MNCs have signed on to. Hong Kong is number 15. 10 http://www. With greater financial transparency.20 CHAPTER 1. Global Compact. such as the U. more Chinese will own stock in companies. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.html. Side Note 1. Side Note 1. I think corruption will diminish as China economically develops for several reasons: 1. with scandals such as Enron.0 is considered to be the borderline at which countries are considered to have a problem.N.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. The government is actively addressing the issue of corruption. better than the U. and not based on hard data. 3. 5. and the environment.7. 1.com/ipa/A0781359. July 1.3. with a score of 8. and Parmalat resulting in investors losing billions of dollars. As more state-owned businesses become privatized and the size of the middle class increases.

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

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

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

6. Quality management – Who is responsible for quality? How do we define the quality? • The customer’s quality expectations must be determined and a quality assurance process must be put in place. • Discuss Active. 3. 9. 5. Poor location decisions may overwhelm other efficiencies. 8. 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. personnel levels. 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. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. capacity needs. and maintenance and determine much of the cost of a product or service. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. 7. and inventory requirements. 4. quality.com’s location decisions and Matt McAdams a posteriori assessment of the choices. 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. Inventory. personnel use. material requirements planning. and human resource planning. technology decisions. and price. delivery. Location – Where should we put the facility? • Location decisions are crucial. • Personnel costs are a significant part of most production or service processes. innovation. .26 CHAPTER 2. production scheduling. OPERATIONS AND PRODUCTIVITY 2. • Mutual trust between buyers and suppliers is crucial. Supply-chain management – Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program? • Managers must consider quality.

Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. and 1 Source: http://en. 8]. • Frederick W. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. • Reliability and stability of systems depends on well-planned maintenance schedules. 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. This saves warehouse space and costs. However. • Eli Whitney (1800) is credited for popularizing interchangeable parts. New stock is ordered when stock reaches the re-order level. that tell production processes to make the next part.2. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock.2. The process is driven by a series of signals. WHAT OPERATIONS MANAGERS DO 27 10. which relied upon standardization and quality control. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. Definition 2.org/wiki/Just In Time %28business%29. p.2 (A Little History) Review Heizer figure 1. – Providing the proper training. the firm could deplete inventory and cause customer service issues. 2007. Kanban are usually simple visual signals. one drawback of the JIT system is that the re-order level is determined by historical demand. or Kanban. If demand rises above the historical average planning duration demand. 9].1 Side Note 2. and efficiency. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. He also believed that management is responsible for – Matching employees to the right job. quality. . When implemented correctly.2. February 14.3 “Significant Events in Operations Management” [1.wikipedia. such as the presence or absence of a part on a shelf.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.2. p. – Providing proper work methods and tools. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment.

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

3. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. • Entertainment. Customers seek services through local intermediaries. . 29 Side Note 2. 3 Services that do not include a good as a component are called pure services. Therefore it is difficult to automate. • Medical. • Services have inconsistent product definition. such as pharmaceuticals or medical supplies. • Services have a high consumer interaction.2. • Services are often produced and consumed simultaneously. Hospital care includes both health services and goods. This is important insofar as there is no inventory. See definition 2.3. • Services are often dispersed.3.3. Definition 2. THE SERVICE SECTOR • Financial. the purchase price may include installation services. • Services are typically intangible. used in your treatment. Consumers interact with those providing the service. When buying a computer. when going to a restaurant. • Services are more often unique. • Services are often knowledge-based. • Education.2. • Other professional occupations.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. • Real estate.2 (Pure Service) A service that does not include a tangible product. • Legal.3 That is. a support contract in case you have problems or training to familiarize you with the features of the computer. Note that many goods include services and many services include goods. Legal advice is rarely identical for two clients.

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

5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).0077 titles per labor-hour = 0. 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. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Also known as total factor productivity.5.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs).25 titles per labor-hour = 0. Consider today’s computers versus those from the 1970s.5.5.4375 titles per labor-hour = 0. Side Note 2.5. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Side Note 2.5. . Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. 15]. but overhead is no $800/day. Definition 2.3.4 (Total Factor Productivity) See definition 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.97 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. p. In order to improve productivity. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. Definition 2.

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

“About Half of 17-Year-Olds in the U. THE PRODUCTIVITY CHALLENGE • Better-nourished. 16]. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. Social overhead that makes labor available. .8 [1.S. writing.2. draw the rectangle on the blackboard. In developed nations. and math.5.3 (The State of Education in the U.) Present Heizer figure 1.S. Side Note 2. and 33 3.” In the U. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. Basic education appropraite for an effective labor force.5.S. maintaining and enhancing the skills of labor. What is the area of a 4 × 6 meter rectangle. The primary variables for improving labor productivity include 1. and • Healthier workers as well as • A shorter work week. 2. and 4. Which of the following is true about 84% of 100? 4 When presenting this question. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. p. there is considerable concern over teaching of basic skills such as mathematics to grade school children. Cannot Correctly Answer Questions of This Type. such as transportation and sanitation. Diet of the labor force..

graduate programs and the students they produce remain the best in the world. 17]. 2. as well as capital. management is not always identified separately from labor as an input. Side Note 2. and knowledge.5. in the U.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. education. Note that there is a trade-off between capital and labor in most industries. however. Difficulties arise because service-sector work is ..S. management is considered as a separate input.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. 2.5. productivity in the service sector has not increased as rapidly as with the production of goods. U.S.34 CHAPTER 2. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. p.5. Definition 2. and the cost of capital depends on interest rates.4 (Management as an Input) Because this is a course in business management.5.2 Capital Capital investment in the U. According to Heizer [1. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. educated.5. has increased at about an average of 1. and knowledgeable employees and operations managers are responsible for ensuring that technology.4 Productivity and the Service Sector Historically. Developed economies (also known as post-industrial economies) require trained.S. Note that in classic economic analysis and other areas of business. are utilized effectively. 2.5% after allowances for depreciation. and because the author of the textbook is writing about operations management.

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

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

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

We will be helpful. DEVELOPING MISSIONS AND STRATEGIES systems. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . contributing member of our community and offering the Hard Rock family a fun.S. 3. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees.1. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. The Hard Rock Caf´. 2..3. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. and professional to each other and the public. We will strive to have a completely satisfied customer at the end of each transaction. 39 Side Note 3.1. • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally. natural ingredients and promoting business practices that respect the Earth and the Environment. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. We are committed to being an important. A complete record of each shipment and delivery will be presented with our request for payment. Other companies. Merck. healthy. such as Whole Foods. Our mission consists of 3 interrelated parts: • Product Mission – To make. nationally & internationally. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. and nurturing work environment while ensuring our long-term success. courteous. and The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. a grocery chain.

Definition 3. • Availability of complementary products.benjerry. Differentiation can arise from anything that the customer may value about a product or a services.1. • Training. • The “look and feel” of the product. • Interoperability with other products.3 (Sample Mission Statements) Present Heizer’s figure 2. 2. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. be it • Product features. the creation of a unique advantage over competitors. the Operations Function. .1. but can be used at the department level and even at the project level. Differentiation – They make their product better.” Note that mission statements are used not only at the company-wide level.1.3 (Competitive Advantage) In operations management. Side Note 3.1. Responsiveness – By providing timelier. more responsive products or services. and Major Departments in an Operations Function. Definition 3.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Cost leadership – Providing cheaper 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.3: “Sample Missions for a Company. 3. 3.cfm for more detail.40CHAPTER 3. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.com/our company/our mission/index.2 (Strategy) How an organization expects to achieve its missions and goals. See http://www.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

• Determine Corporate Mission. Staff the organization with personnel that will get the job done. The operations manager’s job is a three-step process: 1. 3. p. then determine whether the organization does these things well (and. 37].1 (Strategy Development Process) Present Heizer figure 2.6 [1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Increase productivity. determining internal strengths and weaknesses and external opportunities and threats. Group the necessary activities into an organizational structure. Implement an OM strategy.3. if the firm has a competitive advantage in these things) and where failures are most likely.3. These critical success factors are used to develop a competitive advantage. Identify a strategy and critical success factors.3.3. and 3. Side Note 3. “Strategy Development Process. 2. in particular. then • Form a Strategy. Definition 3. 2.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. and 3.2 (Critical Success Factors) In operations management. Weakness. and Threats) analysis to develop strategies.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. . The purpose of this process is to 1. Definition 3.1 (SWOT Analysis) In operations management. those activities or factors that are key to achieving competitive advantage. Provide competitive advantage.” The process of developing a strategy involves the following steps: • Environmental Analysis. Opportunities.44CHAPTER 3.

GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. • Red arrows – critical success factors • Blue arrows – support activities 3.6 3.2. a graphical link of competitive advantage. p. 3. CSFs. 5 Management 6 Human Information Systems Resources. .2 as examples of how firms organize their activities. 39]. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.3. MIS.3. Side Note 3. and supporting activities. Once CSFs are determined.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.1 as a checklist to determine critical success factors.3.3.3.4. Recall the “org charts” in sidenote 2. finance.3. Southwest Airlines has a competitive advantage in providing low-cost airfares.5 and HR.3 (Activity Map) In operations management. Definition 3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3 Integrate OM With Other Activities In order to achieve its strategy. OM activities are most productive when they are integrated with other activities such as marketing. an activity map can be used to link an organization’s competitive advantage to the CSFs.1.2 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.

International strategy – Often the easiest strategy.4. products do not need to be localized. In the semiconductor industry. as exports require little change in operations and licenses often leave risk with the licensee.4 (Multidomestic Strategy) In operations management.4. a strategy that uses exports and licenses to penetrate the global arena. 42] Definition 3.6. but a good strategy for cost reduction when products do not need to be adapted locally.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. 95% of its assets and 98% of its sales are made outside Switzerland.4. See definition 3. • Texas Instruments is an example of a country with a global strategy. with beer on the menu in Germany. owning or controlling facilities in more than one country. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. Global strategy – Not characterized by local responsiveness. 3. p. Although e it is legally Swiss. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. Usually does not confer a cost advantage.4.1 (International Business) A firm that engages in cross-border transactions. franchises. . Multidomestic strategy – Exporting management talent and processes but not necessarily the product. Only 10% of its work force is Swiss. wine in France. Definition 3.3 (International Strategy) In operations management. See definition 3. Definition 3. • Nestl´ is an example of a country with a transnational strategy.4.5 (Global Strategy) In operations management.4.3.46CHAPTER 3.5. See definition 3. Its menu reflects the country in which it operates.4. Definition 3. 4. • McDonald’s is an example of a country with a multidomestic strategy.4.4. [1. and hamburgers without beef in India. 2.4. Typically characterized by subsidiaries. Definition 3. or joint ventures with substantial independence. Also one of the least profitable due to transport costs and little local responsiveness. See definition 3.

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

48CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .

and Controlling) Present Heizer figure 3. 2. Planning – Goal setting.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. money. Even Microsoft. defining the project. costs. p.0. 49 . 46–47]. Project management involves three phases: 1. The profile highlights the importance of project management in achieving competitive advantage. Scheduling – People. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Side Note 4.0. Side Note 4. Plans are also revised to meet changes in time and cost demands. and supplies are tasked to specific activities and activities are related to each other. pp.1 [1. and budgets. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. 3. Scheduling. Controlling – Monitoring of resources. 49]. quality.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. and team organization.Chapter 4 Project Management Side Note 4.3 (Project Planning. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. the largest software company in the world.0.

Your job is to make things go smoothly and according to plan. Side Note 4.1 The Project Manager As alluded to in sidenote 4. The project is temporary but critical to the organization. and you will be forced to improvise. The job is unique or somewhat unfamiliar to the existing organization. The work contains complex interrelated tasks requiring specialized skills. things you thought were certain turn out not to be. it is very obvious and can be very costly. Definition 4. Moreover. People will not come through with what they promised.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. and/or 5. However. The responsibilities of project managers are to make sure that . 4. 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 will be confronted with a daunting task.5. In a sense. Project organizations work best when [1. often times. p. If you become a project manager on projects of significant complexity. See also Heizer sidenote “Project Management and Software Development. you should always expect the unexpected.0.5 (Personal Advice on Project Management) Project management is a tricky profession. 4. You may be managing resources far in excess of your individual salary.1.1.0. if things go wrong.50 CHAPTER 4. The project cuts across organizational lines. 4.” [1. 69]. you are doing your job well if noone notices the project management. a temporary project organization is formed to address a specific project. 2. p.1 Project Planning While many projects are run within an existing organization. PROJECT MANAGEMENT However. 48] 1. 3. Work can be defined with a specific goal and deadline.

and 4.1. PROJECT PLANNING 1. Definition 4. The project is on or under budget. you have divided the tasks too finely. Approve graphic design for user account input web page 4.1. Side Note 4. For example. Approve software architecture for user account input web page functionality . 51 4. The project meets its quality goals. 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.2 (Work Breakdown Structure (WBS)) In operations management. Complete software architecture for user account input web page functionality 5.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). a task that should only take a day or so. dividing a project into more and more detailed components.1. When dividing a project into tasks. In a project that includes allowing a user to enter personal information on a web page.1. 2. All projects come in on time. 3.4. Complete graphic design for user account input web page 2. in a software engineering project. People receive motivation and information necessary to do their jobs. Review software architecture for user account input web page functionality 6. Review graphic design for user account input web page 3.1 (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. a web page takes about a day to build for an experienced team. • Build the user account input web page is a much better task division than 1.

Scheduling serves to 1. of course. PROJECT MANAGEMENT 7. Encourage realistic time and cost estimates for each activity . Project 2. p. Subtasks in major tasks 4.3 (Reality Check: WBS) In reality. Major tasks in the project 3.2 (Work Breakdown Structure) Present Heizer figure 3. At the time you are creating the work breakdown structure. Identify precedence relationships among activities 3. fill hundreds if not thousands of pages. you should also take note of time and cost estimates given by your technical staff. Write software for user account input confirmation page functionality 9. the work breakdown structure is not something you go to your office to do in isolation. 4. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Activities (also known as “work packages”) to be completed Side Note 4. which we will discuss next in section 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS).52 CHAPTER 4. Show the relationship between each activity to others and to the whole project 2. Write software for user account input web page functionality 8.1.3 [1. Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1.2.1. They will be useful for project scheduling. Side Note 4. The actual WBS for Windows XP would.

and CPM) Inexperienced project managers often feel the need to use Gantt. 3. as.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded.4 [1. and other values to each activity. 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 . PERT. Derives from the typical shape of a bottle. – said of roads.2 (Using Gantt.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. Perhaps they imagine that they are not doing their jobs professionally if they are not. which becomes narrower as one approaches the neck of the bottle. Side Note 4. Gantt charts are perhaps the most widely used tool for ensuring that 1.2. All activities are planned for. moeny. PERT and CPM help answer questions such as • When will the entire project be completed? . For smaller projects.2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. PERT. p. Make better use of people. MS Project’s Gantt chart functions demand you assign employees. and CPM tools for every project management activity. However. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. the road bottlenecks.2. It can actually be quite time consuming to create and maintain Gantt charts. Overall project time is developed. and material resources by identifying critical bottlenecks in the project Side Note 4.4. Definition 4. and 4.” This will give the class an idea of the look and feel of a typical Gantt chart.2. 2. cost estimates. right by the bridge. PERT and other formal documents. PROJECT SCHEDULING 53 4.2. these should be considered merely tools to be used when they are useful by saving time or energy. Definition 4. Activity time estimates are recorded. The order of performance is accounted for. 51].

4. Cost breakdowns for each task. 6.1 PERT and CPM Two methods. or ahead of schedule? • On any given date. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Cost distribution tables. Total program labor curves.3. behind schedule.3 Project Controlling Project control involves monitoring resources. PERT and CPM. 7. 5. and budgets of projects. is the project on schedule. 2. 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. Time analysis reports. Work status reports. . Variance reports.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Raw material and expenditure forecasts. 3. Functional cost and hour summaries. were developed in the 1950s for project control. and 8. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. quality. less than. costs.54 CHAPTER 4. Definition 4. what is the best way to accomplish this goal at the least cost? 4. 4.3. Control programs typically produce reports detailing 1. is the money spent equal to.

and ontrol the project. 53].3. See also definition 4. Moreover. Assign time and/or cost estimates to each activity. 4.3 (Critical Path) The computed longest time path through a network. 6. Use the network to help plan. Develop the relationships among activities. p. AON associates the activity with the node whereas AOA associates the activity with the arrow. schedule.3. Gantt charts are the “go to” visualization method for even very complex projects. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. or the critical path. Also. . PROJECT CONTROLLING 55 Definition 4.3. Activity on Arrow (AOA). Personally. in my experience. Activity on Node (AON) and 2.3. 5.4. 4.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set.3. See also definition 4.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3.2.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.5 [1. Draw the network connecting all of the activities. it will do for you automatically much of what we will go through manually in this class.3. 3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. As the names describe. Definition 4. They both follow six steps: 1. monitor. Define the project and prepare the WBS.3. through the network. Compute the longest time path. 2. Side Note 4. Side Note 4.3.2 (Example: AON and AOA) Present Heizer’s figure 3.

• Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. .3.3. 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. its ES is the maximum of all EF values of its predecessors. ES = max{EF of all immediate predecessors}. Follow with example 3 and figure 3. LF = min{LS of all immediate following activities}.1 gives sufficient information to describe the network.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. that is.56 CHAPTER 4. that is. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. analysis used to determine the project schedule. its LF equals its LS of the activity that immediately follows it. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Table 3. their dependencies.9 [1. We do this with a critical path analysis with involves a 2-step procedure.8 [1. pp. its LF is the minimum of all LS values of all activities that immediately follow it. 2. See also definition 4.3. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. 56]. we must use time estimates of each activity to determine the overall schedule for the project.1 (Critical Path Analysis) In project management. – If an activity has multiple immediate predecessors. In other words. 1. EF = ES + Activity time. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. PROJECT MANAGEMENT Side Note 4. Definition 4.4.6–3. – If an activity is an immediate predecessor to more than one activity. 54–55]. LS = LF − Activity time. 4.4 Determining the Project Schedule Once we have identified all of our activities. p. that is.

or the amount of time an activity can be delayed without delaying the entire project.” Then complete Heizer example 7 figure 3. These are called critical activities. the free time for an activity. 57]. we cannot complete the project in 15 weeks. they share total slack. and H have no slack time and cannot be delayed without delaying the entire project.4.13 [1. and • Includes only critical activities (see sidenote 4.1). activity F in sidenote 4. if we delay activities B and D by one week each. Definition 4.1. the time devoted to one of these activities must also be reduced.5. 4.3 (Free Slack) In project scheduling.10 [1.5. • Terminates at the last.2 (Forward Pass) In project management scheduling.5.4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. 60]. 2 For example.1.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. the step that identifies all the earliest times that activities can be completed.3 and Heizer figure 3.3 [1. p.3. Side Note 4. p.1 (Slack Time) In project scheduling. Slack time is just Slack = LS − ES or Slack = LF − EF .1 When several noncritical activities appear successively in a path.2 (Total Slack) In project scheduling. 61] based on table 3. . in the example in sidenote 4.4. Also notable is that if the total time of the project needs to be reduced.4.4. Definition 4. If an activity2 does not impact the slack time of any other activity. E.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. Note also that if we delay each activity by the amount of slack that activity has. C.4. Definition 4. the time associated with a single activity. the time shared among more than one activity. 1 For example. p. The critical path is one that • Begins at the first activity in the project. G. Note that activities A. it is said to have free slack. “Notation Used in Nodes for Forward and Backward Pass. we may delay the project as a whole.5.

1 and 4.2. in most cases.1 and 4.6.6. etc.3.6. we do not. the “best” activity completion time that could be obtained in a PERT network.6. Definition 4. and the other uses β = β − 1 and α = α − 1 .6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.58 CHAPTER 4.. See also definitions 4.1 (Optimistic Time) In project scheduling. In PERT.3 (Most Likely Time) In project scheduling.3. three time estimates are used: 1. which are labeled according to one of two notational conventions.6. Side Note 4. the most probable activity completion time that could be obtained in a PERT network.6. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. The usual definition calls these alpha and beta.2 and 4. the “worst” activity completion time that could be obtained in a PERT network. Beta distributions have two free parameters. In reality.6.6. unexpected complexities. Most likely time – The most realistic estimate of the time required to complete an activity. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. Definition 4. technical considerations that were unknown at the time the project schedule was drawn up.6. However. Definition 4. The beta distribution is used as a prior distribution for binomial proportions in . PROJECT MANAGEMENT 4. the time required to complete an activity is often uncertain due to supply problems.2 (Pessimistic Time) In project scheduling. the project manager pulls the number “out of the air” based on their experience managing related activities. See also definitions 4. See also definitions 4. Effectively.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. Definition 4.6.

6. and .1 Probability of Project Completion If we assume that 1. 2.com/BetaFunction.6.wolfram. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. Activity times are statistically independent 3 Source: http://mathworld. The expected activity time for activity F is 3 weeks5 and the variance is 1.html http://mathworld. 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. most likely. and pessimistic times of 1.4. and 7.00 week. 2007. February 21.3 The domain is [0.4.wolfram. 4 See definition 4. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.00.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.com/BetaDistribution. most likely. 8 1. p.html.25 to 3.78 weeks.78 6 6 36 7 4 weeks. p.6. The variance of the activity time is Variance = [(b − a)/6]2 . 4. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Total project completion times follow a normal probability distribution and 2.6. and pessimistic times of 1. 63] for activity F based on optimistic. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. 62].1) where B(p.1]. β) Γ(α)Γ(β) P (x) = (4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. The above plots are for various values of (α. and 9 weeks. 4. q) = (4. Side Note 4.β) with α = 1 and β ranging from 0.

6. Side Note 4.6.6.76 weeks implies that the project will exceed the expected completion time by more than 1. definition 4. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. “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.com/StandardDeviation. the population variance var(X). pp.16. 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.” Review Heizer example 10 [1.4 (Using the Normal Table) Pass out Heizer Appendix I [1.wolfram.6.10 Determining Project Completion Time for a Given Confidence Interval A common question is. p. .5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.6. Note that the standard deviation of 1.60 CHAPTER 4.6.7% of the time. see http://mathworld.6 (Standard Deviation) The standard deviation is the square root of the variance.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.76 weeks approximately 16% of the time. Side Note 4.6. commonly also N written σ 2 .6. 65] and figure 3.3 (Example: Project Variance) Review Heizer example 9 [1. 9 For 10 See more information. 64]. See definition 4.6. Definition 4.1.5.3) Definition 4. p. and within 3 standard deviations approximately 99.6. two standard deviations approximately 95% of the time.html. See also 4. A2– A3] “Normal Curve Areas.

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. Project crashing is the name given to the process of rushing a project to completion. we need to ensure • The amount by which an activity is crashed is. Step 1 – Compute the crash cost per week. in fact. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. Definition 4.1 (Crashing) In project management. the crash cost is typically higher than the normal cost. Definition 4.7. crash time is the shortest duration of an activity. See definition 4. 4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. Since activity completion times are typically shortened by adding resources. When crashing a project.1.11 Definition 4. if certain activities off the critical path take the pessimistic time estimate or more to complete. and • The total cost of crashing is as small as possible. you will doubtless experience one or both of these eventualities many times in your career. we want to do so in the least cost mannger possible. • The shortened durations will actually enable us to finish the project on time. crash cost is the cost required to complete an activity in the shortest time possible.7. it may result in the project being delayed. See definition 4.7.1. Assuming linear costs. Crashing a project involves a four step process: 1.2 (Crash Time) In project management.3 (Crash Cost) In project management.4) 11 Since crashing a project often involves adding additional resources to activities. and if you become a project manager.7.7. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.4. permissible and realistic. .

they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.5 and figures 3. 3. If you find yourself needing to rush a project. Side Note 4.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates. If the due date has been reached. Note that one activity may be on several critical paths.2 (Example: Crashing a Project) Present Heizer example 12 [1. Crash this activity by one period. If there is more than one critical path. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. 67–69] including table 3.62 CHAPTER 4. If you accept the challenge and try to rush the project to please upper management. If not. 4. As a project manager.19. go to step 2. you should be very wary of such pressure.7. Step 3 – If there is only one critical path. 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. stop. pp. Then crash each activity by one period. Side Note 4. At times this may be politically infeasible. Step 2 – Find the critical path(s) in the project network. • Advantages – Especially useful for large projects . Step 4 – Update all activity times. select one activity from each such that • Each selected activity can still be crashed and • The total crash cost per period of all selected activities is smallest. PROJECT MANAGEMENT 2.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. 4.18–3. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.7. the advice given in this section should be helpful.

to mediumsized projects. Information on Achievo can be found at http://www.7 [1.org.gnome.net. However. Noncritical paths should be closely monitored as well. independent. pp.wikipedia. 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. 70–74] with figures demonstrating MS Project functionality.org/wiki/List of project management software for a list of project management software or ask Dr. they are often overkill for small. . Starkweather about his impression of various alternatives. including open source software that is free. There are a variety of alternatives.dotproject. 4. Note that most project management textbooks refer to MS Project as the software of choice for project management. You may also refer to http://en.9 Using Microsoft Project for Managing Projects Present programs 3.1.4.7.9. Information on Planner can be found at http://live.org/Planner. Information on dotProject can be found at http://www. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined. 12 Recall sidenote 4. it is relatively expensive and the features are so numerous and complex.1–3.achievo. It is perhaps the most widely known and featureful project management software available.

64 CHAPTER 4. PROJECT MANAGEMENT .

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

Useful for – – – – Planning for new products.to long-range forecasts. See also definitions 5. and • Demand forecasts. . money supply.1. which impacts purchases of new plant and equipment as well as development of new products. 3.66 – – – – Sales forecasting. long-term forecasts concerned with the rates of technological progress.2 and 5. 5. • Technological forecasts. 2.4. CHAPTER 5.3 (Technological Forecasts) In operations management. and 4. planning indicators valuable in helping organizations prepare medium.1. and Research and development. longer forecasts are needed. See also definitions 5.1.4. Definition 5. Maturity.1. Generally deals with more comprehensive issues than short-range forecasts. and other economic indicators. and Analyzing various operating plans. Cash budgeting. Decline. Growth. Facility locations or expansion. These may include inflation rates. FORECASTING • Long-range forecasts – Generally more than 3 years.1.2 (Economic Forecasts) In operations management. housing starts. These concern rates of technological progress.1. Introduction. Definition 5. Capital expenditures. Production planning and budgeting.1 Types of Forecasts Organizations typically use • Economic forecasts.1. In the first two stages.3 and 5. Product life cycles tend to follow four stages: 1.

Determine the time horizon of the forecast. Determine the use of the forecast.1. 5. 5. . 2. Capacity – Underestimating demand can result in • Undependable delivery.4 (Demand Forecasts) In operations management. 3. marketing. See also definitions 5. Select the items to be forecasted. 4. these drive a company’s production. Make the forecast. Validate and implement the results.1.1.2 and 5.5. 5. capacity.2. and • Layoffs. 3. projections of a company’s sales for each time period in the planning horizon. and • Loss of market share. • Loss of customers.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Human resources – Anticipated demand is needed to estimate the need for • Hiring. 6. 7. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. and personnel planning. Gather the data needed to make the forecast. • Training. 2.1. and scheduling decisions and serve as inputs to financial. Select the forecasting models. Also called sales forecasts.3.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.

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

∗ However. political. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. Moving averages cannot pick out trends very well. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. and · Respondents. 3. ∗ The more independent your decision makers are from economic. ∗ Moving averages · Simple. for example. Sales people typically respond to incentives. Moving averages require more past data to work with than.3. · Useful as a starting point or sanity check for more sophisticated methods. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.3.9. · The simplest and easiest way to estimate demand.5. .8. · Requires less past data than moving averages. 2. say. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · See definition 5. or other incentives to over or understate demand. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. useful method if we can assume that market demands will stay fairly steady over time. the naive approach. · There are three problems with moving averages 1. and if they perceive there is an incentive to exaggerate. they will do so.3. · See definition 5. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. the more likely it is your results will be accurate. be sure that the sales force is clear that their incentive is to be as accurate as possible. · Staff personnel.

3.3 (Jury of Executive Opinion) In operations management. Definition 5.3.3. Definition 5.3. and value system.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3. 5. See also definitions 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. emotions. See also definitions 5. See also definitions 5. and 5. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3. a forecasting technique using a group process that allows experts to make forecasts.6.5 (Sales Force Composite) In operations management. and 5.3.5.3.5.3.4.3.6 (Consumer Market Survey) In operations management.3.10.1.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.4 (Delphi Method) In operations management.3. Definition 5.3.5.3. 5. See also definition 5.4.70 CHAPTER 5.3. 5. See also definitions 5. a forecasting technique based on salespersons estimates of expected sales. and 5.2. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. Definition 5.3.1 Qualitative Forecasting Methods Definition 5.3. 5.3. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3. See also definition 5. and 5.3. · See definition 5.4.3. personal experiences.6.3.6. . 5.3.

7. That is. FORECASTING APPROACHES 71 5. • Simple Moving Average – Mathematically. 5. and 5.05 to 0.8. See also definitions 5.3. a simple moving average is given by demand in previous n periods Moving average = (5. See also definition 5.5. Moving averages can be either simple or weighted.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.10.5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. generally ranges from 0. Definition 5.3.3.3.3.3.3.3.11. Mathematically. and are appropriate to use when the underlying average . 5. α. Definition 5.7.3.1) n • Weighted Moving Average – Mathematically.9.3) The smoothing constant.2) See also definition 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.3.2 Quantitative Forecasting Methods Definition 5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Definition 5.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3. 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. Higher values give more weight to recent data.

Definition 5. and 5. Mean squared error (MSE).3 Measuring Forecast Error Once a forecast is made.4) definition 5. and are appropriate to use when the underlying average is relatively stable. See also definition 5.3. 1 See |actual − forecast| n (5.72 CHAPTER 5.3.12.13. 3.3. Definition 5.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. . 5. Three popular measures are 1.8.0.3.15.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3.7. such as the mean absolute deviation (see definition 5. 5.3. FORECASTING is likely to change.3. See also definition 5. while lower values give more weight to past data. Mean absolute percent error (MAPE).3. When α = 1.3.13). Mean absolute deviation (MAD).1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3. Definition 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.14.12).7.3. 2. it is good practice to compare the estimated value with the actual value as actual values become available.3.3. exponential smoothing is equivalent to naive forecasting.

Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.3.3. MSE is given by MSE = See also definition 5.7) or F ITt = Ft + Tt (5.5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Definition 5. expressed as a percent of actual values. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.12. 100 n i=1 (forecast errors)2 n (5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.6) 5.5) |actuali − forecasti |/actuali n (5. Mathematically.3.3.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.11) . FORECASTING APPROACHES 73 Definition 5. MAPE is given by MAPE = See also definition 5.8) With smoothing constants α for the average and β for the trend.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.12.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3. Mathematically. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.

Compute the smoothed trend. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.14) . 2. Tt with equation 5. 1. time) (5. Ordinary Least Squares Regression analysis is also useful for predicting trends.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 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. by the formula F ITt = Ft + Tt .74 or CHAPTER 5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. It is also commonly called linear regression analysis. F ITt . Compute Ft . the emponentially smoothed forecast for period t using equation 5.12.12) = 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. Calculate the forecast including trend. 3.

demand is seasonal. 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¯. Deviations around the least squares line are assumed to be random. 2. we will examine one model. Recall that the equation 5. 1. Although there are many methods to accomodate seasonal demand. This provides the seasonal forecast.3. such as cars and washing machines.S. 5. We do that with a 5-step process. . 3. the more uncertain it is.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. to account for seasonal changes in demand in our forecasting.13 assumes a linear relationship.3. 2. The first step is to calculate the seasonal forecast. 1. ¯ x The least squares method has several drawbacks. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 4. consumers often make fewer purchases of durable goods. 5. Definition 5. Divide this estimate of total annual demand by the number of seasons. In the U. during the summer months when it is common to take a vacation. Most businesses experience a surge in sales around Christmas. Compute a seasonal index for each season by dividing the historical demand by average demand. the multiplicative seasonal model. 3. Compute the average demand over all months. Find the average historical demand for each season.. Estimate next year’s total annual demand.5.3. then multiply it by the seasonal index for that month.5 Seasonal Variations in Data In most businesses.

g. We will use the same technique.g.g. pp.3. 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. However.17) ..6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. mathematically.x = (5.. If there are published estimates you can cite (e.. but x will be something other than time.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 5.15) Side Note 5. is given by (y − yc )2 n−2 Sy.4. It is also called the standard deviation of the regression and. whatever uncertainties you may have transfer to your predicition of y. 106– 107]. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.x = (5. Note that making predictions of future demand involves also making predictions about the independent variable x.16 is y2 − a y − b n−2 xy Sy.3. FORECASTING 5.1 (Example: Using OLS) Present Heizer example 12 [1.3. 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. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.76 CHAPTER 5. if you are uncertain about predictions of x.

S. Even the Year of the Pig correlates strongly with the U. football in the U. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. is monopolized by the NFL. in all but one Year of the Pig.18) .S.4 . stock market.S.S.html?xid=sitecnn-partner. but the relationship is coincidental. Since 1935. Other interesting correlations that have been identified over the years include banana prices and U. the note in the margin accompanying Heizer example 14 [1.3 (Examples of Correlation Coefficients) Present Heizer figure 4.5.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.9 [1. 4 Source: http://www. leading stock indexes.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. Definition 5.time. FORECASTING APPROACHES 77 Side Note 5. Historically. p.” Note that the regression assumes a standard normal distribution about the estimate.1594488.com/time/business/article/0. Correlation) Correlation merely means that the values of two variables are historically related. The correlation coefficient of variables x and y is given by r= See also definition 5.3. has risen.S.3.S.” the AFL (American Football Conference) and the NFC (National Football Conference). 108].4 (Causation vs.3 and the U.18.00. 109].3. Certainly.2 with stock prices generally rising as skirts rise. changes in skirt lengths don’t cause stock market prices to rise and vice versa.3.3.” Side Note 5. p. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. the U. stock markets. February 28. the average length of a woman’s skirt and stock market prices in the U. “Distribution about the Point Estimate of $600 Million Payroll. Side Note 5. a football game played between two football conferences in the U.3. stock market prices as well as the winner of the Super Bowl. pp.2 (Distribution About the Point Estimate) Present Heizer figure 4. 2007.3. nor does it imply that they will continue to be related. Dow Jones Industrial Average and Standard and Poor 500.S. Correlation Coefficients for Regression Lines Definition 5.10 [1. “Four Values of the Correlation Coefficient. which is divided into two “conferences. 107].8599. or National Football League. have been correlated. It does not imply causation one way or the other.

b 2 . . . (See definition 5. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. . often the most difficult part of building a multiple regression model is to pick the independent variables.17. The multiple regression equivalent of equation 5.3.. Side Note 5.3.5 Definition 5.15 is given by y = a + b1 x1 + b2 x2 + .19 (Multiple Regression) A causal forecasting method with more than one independent variable.18 and Heizer example 15 [1.” As the sidebar points out. 5 See definition 5. . In practice. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. . b1 . p.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. we discussed a means by which we can attempt to predict the value of one variable using the value of another. . p. 110]. It is commonly simply called “R squared. . results in additional predictive accuracy as measured by r2 . .” For example. Adding additional independent variables as predictors. etc. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.g. = the dependent variable (e.6. x2 . in a multiple regression analysis involves a complex formula which is beyond the scope of this class.3. The same technique can be applied to use several independent variables to predict the value of a dependent variable. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3.19) Determining the values of a. 110].) It measures the percent of variation in the dependent variable (y) explained by the regression equation. b2 .3. b1 . if they are indeed related to the dependent variable.78 CHAPTER 5. you would use statistics software to calculate these values. .

.6. 6 Recall definition 4. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.4.11 [1. three M ADs about 98% of the time. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . two M ADs to 1.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.9% of the time.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.4.forecast| n where M AD = (5. three M ADs to 2. If the tracking signals violate upper or lower limits.4. Definition 5.1. MONITORING AND CONTROLLING FORECASTS 79 5. and within 4 M ADs about 99.20) A good tracking signal has about as much positive as negative error.6 standard deviations. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. the forecasting methodology needs to be modified.2. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.4. though large errors may be a problem as well even if the positive and negative errors balance. and 4 M ADs to 3.6 One M AD is equivalent to 0.8 standard deviations.4 standard deviations. The tracking signals should also be compared as they are generated against limits. In other words. which correspond roughly to standard deviations. This means that the observed value should be within 2 M ADs abut 89% of the time.6. one of the most common problems with forecasting is a lack of follow-up. p. Definition 5. 111]. Tracking signals are typically used monitor forecasts. Side Note 5.2 standard deviations.1 (A Plot of Tracking Signals) Review Heizer figure 4. These limits are typically based on M ADs.

2 Focus Forecasting Focus forecasting.80 CHAPTER 5. Definition 5. There is no single technique that should be used for all products or services.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.3.10) is automatically changed to keep errors to a minimum. However. Side Note 5. 114]. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. Sophisticated forecasting models are not always better than simple ones. In your career.4. you should be aware of the criticism of focus forecasting. there has been much criticism of the approach to using models based on thier fit to the data.g. 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.” .2 [1. “Summary of Forecasting Formulas. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally flawed in its approach. p.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. FORECASTING 5.4. Side Note 5.4. 2. 5. you must make your own decision as to how you select the forecasting models that you use. α in definition 5.4..4. is based on two principles: 1. which selects a model based on goodness-of-fit to a data set. Definition 5. Note that even with computer monitoring.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.

81 . Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. pp. • Market share and dynamics.5 (Product Decision) The selection. is a service. insurance companies often refer to their policies. 1 In this chapter. Product strategy2 defines the breadth of the product line and links product decisions to [1. which. • Product life cycle. pp.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. Definition 6. as products. time permitting. the word “product” will refer to both goods and services. Referring to services as products is common in the service industry. 124.128] • Investment and cash flow. and design of products. definition.2. For example.Chapter 6 Design of Goods and Services Many companies derive a competitive advantage by using product strategies to efficiently produce a variety of products and/or services to meet changing customer demand or target specific consumer niches. as an intangible.1 Side Note 6.0. They also use just-in-time production techniques. 2 Recall sidenote 2. 122–123]. and • The organization’s capabilities. which will be discussed in detail later in the semester.0.1 .

often ruthlessly. – Process modification and enhancement. 2. or even decades.. clothing fashions).g.1. Introduction. 3. so high volume.2 Life Cycle and Strategy Strategies change as products move through their life cycle.g. and 4. Growth. Life cycles can be in the days or weeks (e. 6. Decline. and innovative production is appropriate. • Maturity phase – Competitors have entered or are entering the market. Maturity.1 Product Life Cycles Product life cycles can be divided into four phases: 1. and – Supplier development. .g. • Introductory phase – In the introductory phase. Product strategy involves determining the best strategy for each product based on its position in the life cycle.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. years (e. • Decline phase – Investment needs to be minimized and resources need to be redeployed. months (e. products expenses are often high for – Research and development.. low-cost.82 CHAPTER 6. • Growth phase – Effective capacity forecasting is necessary.. restaurants or nightclubs). YouTube videos). DESIGN OF GOODS AND SERVICES 6.1.

3 Product-by-Value Analysis For firms with many products. and if a company is to survive. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. such as consumer incomes. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. • Economic factors. GENERATING NEW PRODUCTS 83 6. the development of cellular telephone technology or the internet.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1. example.1 (Example: Brainstorming) Lead the class in a brainstorming session.2. Definition 6. example. it must regularly redesign existing products or bring new products to market. as well as the total annual dollar contribution of the product.2.2.2 Generating New Products Most products have a limited life cycle. 4 For 3 For . Definition 6. 6. • Sociological and demographic change is also tied to product demand.500 or 100. 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.3 • Political and legal change can also bring about business opportunities.2. • Technological change often drives product innovation.1. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.000 yuan. are tied to product demand.6. Ideas are not reviewed until after the brainstorming session.4 Side Note 6.

1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. DESIGN OF GOODS AND SERVICES For example. Many successful companies rely on sales from products introduced within the past five years. Definition 6.3.3.2.3 [1.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Determines what will satisfy the customer and 2. Definition 6. p. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. 128]. 129]. p. p.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.1 (Product Development Stages) Present Heizer figure 5. Side Note 6. 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. and the organization’s capabilities.2 [1. Each stage should have an accompanying review to determine whether to progress or not. the product life cycle. Side Note 6. market dynamics.3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.3. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Translates customer desires into a product design.84 CHAPTER 6.3 6.3. 6. 128]. .

3. design engineering. Identify relationships between the firm’s hows. bureaucratic companies and organizations. 1.9 6.3.3. • Fixed duties exist.7 4. manufacturing engineering. Develop importance ratings. 8 These are given on the roof of the house in sidenote 6. 2. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. Identify how the good or service satisfies customer wants.10 Side Note 6. Product development is done by teams.6 3. .qfdcapture.6.2.2 (Example: House of Quality) Present Heizer example 1 [1. An organization is divided into departments.3. Evaluate competing products. • More common in large. which can be an advantage. 10 The right-hand columns of the house in sidenote 6.. there are three popular methods by which organizations undertake product development.3.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. and production departments. with product features.2.2. 6.3.S.8 5. Building the house of quality involves six steps: 1. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. p.3 Organizing for Product Development In the West.2.2. a research & development. In other words. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. 7 In other words. • Perhaps the most popular approach in the U. create the columns of the house in sidenote 6. identify the rows of the house in sidenote 6. See http://www. Identify customer wants.” 6 For example.3. • Effective communication and coordination between separate departments can be problematic.3. 2. Note that it is not free or open source. e. 130].com for more information. as was the software described in section 4. PRODUCT DEVELOPMENT 85 Side Note 6. 3. Relate customer wants to product hows.9.3..g.

11 In Japan.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. it can also be problematic because teams.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. and production stages of product development. etc.. These teams often include representatives from marketing. use of participating teams in design and engineering activities.3. but my personal impression is that formal QFD practices are not widespread in practice.3. production. will often advocate for continuation of their project past the point that it is profitable for the company.3.4 (Concurrent Engineering) In project development.. manufacturing.3. and use. Definition 6.4. engineering.86 CHAPTER 6. design.. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product. Definition 6.3. engineering.3. . and field service personnel.S.3. Definition 6. maintainability.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.S.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. quality assurance. The goals of manufacturability and value engineering are 11 See definition 6. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. Side Note 6. My experience may not be indicative of management practices in general in the U. development.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. 6. production. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. because their fate is tied to a product. Some teams even include representatives from vendors. organizations are less structured and typically not divided into research and development. However. purchasing. Side Note 6.

Improved job design and job safety. Robust design. 6. 3. PRODUCT DEVELOPMENT 1.3. Standardization of components. Reduced complexity of the product. 5. Improved maintainability (serviceability) of the product. Cost reduction. 2. and 7. Improvement of functional aspects of the product.6. 4. 87 .

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

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

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

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

– Long-term goals are those that may take 5.3. even the successful ones will probably focus on the negative. although the successful ones generally view their experiences as positive on the whole.7.” you may not want to start a business that focuses on customer relationships.3. – Start with small goals. If you talk to an entrepreneur who has not been successful. 10. 7.” • Be optimistic. your goal may not be realistic.000 yuan and you’ve never had a job before. – Short-term goals are those that can be accomplished within a year. . marketing.” • Be realistic. Side Note 7.000 yuan by July 1” is a much better goal than “raise money. • Analyze Your Professional Attributes – Be aware of where you need help. ask other entrepreneurs. “Raise 100.000. if not more important. it helps to set goals. If your goal is to raise 1. • Set both short-term goals and long-term goals. Consider at least a five-year time horizon. try to figure out why they were not successful.1 (What’s It Really Like?) If you wonder what running a business is really like. Like parents. than learning from success. When I talk to those who I know who have started businesses. and administration. advertising. “Achieve financial independence” is much better than “pay the bills. Move on to larger goals once the small goals have been met.3 Setting Goals With any major endeavor. When setting goals. When setting goals. • Be specific. ask yourself the following questions: • Income – How much do you want to earn. SETTING GOALS 95 If you are not a “people person. such as sales. Learning from failure is as important. it is common to exchange “war stories” about the difficult times and sacrifices. or 20 years to accomplish. 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.

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

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

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

1. 2 http://www. 33]. in the wake of 9/11. YOU’VE GOT AN IDEA. Entrepreneurs are often told their idea is flawed. 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.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. that they will never make it. computer-controlled security cameras. Have students fill out the form on their own time. the business took off. Finally. Side Note 8. Have students come up with examples of products that meet various criteria on the checklist.1.com/find?s=all&q=never+say+die.” Side Note 8. or are otherwise discouraged. to be truly self-motivated and persistent in the way you need to succeed. After all.1 You’ve Got an Idea. February 17.2 is. A well-known phrase in English.imdb. such as your family. home. He ran the business as a one-man operation for years.1. 2007. 8. making just enough to get by but not much more. “Never say die.1. His sales are now in the millions of dollars per year and the business is very profitable. . 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. 35]. you will be spending years of your life trying to make the idea work. Warnings about risk are perhaps the criticism you should consider most carefully. Side Note 8.8.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. used as the title of at least 12 movies and television shows. p. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. People thought he was going nowhere and generally dimissed his business. And you should not risk anything you can’t afford to lose. However. it is too risky. You should be realistic about risks. Now What? The number one trait needed by successful entrepreneurs is perseverance. while you should listen to criticism that others give.” That is.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. you should not let it dissuade you. or health. he would never succeed. you should have “thick skin. thinking that if he did not succeed after a couple of years. p.

100 CHAPTER 8. FINDING AN IDEA .

go through the following 7 steps: 1. your next step is to do some market research. Consumers and 2. Businesses.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.0.2.Chapter 9 Defining Your Market After coming up with your idea. but you should try to target your market as specifically as possible.1. Definition 9.0. 9.0. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. 101 . When trying to identify your niche market. See also 9.0.” or business-to-consumer ventures.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. There are two broad categories of markets: 1. See also 9.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.” or business-to-business ventures. Not only do you need to decide whether you are marketing to businesses or consumers. Definition 9.

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

and 9. Side Note 9. many entrepreneurs make the mistake of being “all over the map. when the country was immersed in a war effort.1. the World War II cohort. are similar in age to those who came of age in World War II. and psychological factors.2.. Definition 9.1. or retiring. but their behavior differs significantly due to the different influences in their youth. Definition 9.” That is.. you should be able to enter your niche market with confidence.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.. and cohort marketing. Likewise. economic. buying a home. For example. It is better to do just one thing well than to do many things poorly.S. for example.9.1. they try to satisfy all possible customers and end up trying to do too many things well.1. (See definitions 9.S. FINDING YOUR NICHE 103 7. Marketing to demographic groups has become much more refined in the last few decades. Korean. Definition 9. New marketing techniques include generational. . when many people were suffering from extreme poverty. demographic. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different.1 (Generational Marketing) Marketing to consumers based on age as well as social.1 (Smaller is Bigger) When starting a business.1. life stage. many Eastern companies make the mistake of lumping together American and European customers. the more likely you are to score a hit.1.1.1. 9. such as having children.1. and the narrower your focus on your target. If you did your homework.3. etc. Many Western companies make the mistake of lumping together Japanese. Side Note 9. many are choosing to start families later in life or even have children ten years or more apart. in the U. This can be offensive and serve to alienate rather than appeal to your customer. Go for it! – Implement your idea.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. and other Asian customers together. you should practice extra caution to avoid stereotypes or other insensitive approaches. This marketing technique has been widely used since the early 1980s in the U. young adults in the Depression. As older people are more active than before. the Depression-era cohort. Chinese.) Using these new marketing techniques can allow you to narrow your market.1.

Side Note 9.3 The Mission Statement Once you have a niche. you should.3. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. Falkenstein1 advises that you regularly reevaluate your niche.2 Redefining and Expanding Your Niche Lynda C. “Creating a niche is the difference between being in business and not being in business.104 CHAPTER 9.” [4. 79] 9.1 (Mission Statements for Three Organizations) Review Heizer figure 2. 28] which includes mission statements for three multinational companies: 1 See section 9. create a mission statement. p.2 [1.1. Every six months or so. p. a few sentences at most. • 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. . DEFINING YOUR MARKET 9. • Convey the essence of your business’s goals and philosophies. The mission statement should • Be succinct. Falkenstein states.

9.3. 3. FedEx FedEx is committed to our People-Service-Profit philosophy. natural ingredients and promoting business practices that respect the Earth and the Environment. . time-certain delivery. Merck The mission of Merck is to provide society with superior products and services – invations and solutions that improve the quality of life and satisfy customer needs – to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. and professional to each other and the public. and nurturing work environment while ensuring our long-term success. courteous. 2.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. 105 Side Note 9. We are committed to being an important. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. A complete record of each shipment and delivery will be presented with our request for payment. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. We will produce outstanding financial returns by providing totally reliable. healthy. Equally important. contributing member of our community and offering the Hard Rock family a fun. THE MISSION STATEMENT 1.3. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. global air-ground transportation of high-priority goods and documents that require rapid. We will be helpful. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. competitively superior. We will strive to have a completely satisfied customer at the end of each transaction. Our mission consists of 3 interrelated parts: • Product Mission – To make.

cfm for more detail. Answering the following questions can provide you with a clear picture of what your mission statement should include: • Who are your customers?2 • What image of your business do you want to convey? • What is the nature of your products and services? – What determines pricing and quantity? – What is your competitive edge? Price? Features? – Will this change over time? • What level of service do you provide? • What roles do you and your employees play? – You should develop a leadership that organizes. and recognizes outstanding employees. processes. nationally & internationally. a grocery chain. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. so do your partners.106 CHAPTER 9.. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. such as Whole Foods. . challenges.1. Other companies. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.benjerry.S.com/our company/our mission/index. 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. capital. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. See http://www.

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

DEFINING YOUR MARKET .108 CHAPTER 9.

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

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CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

” [4. RESEARCH METHODS 113 Side Note 10.2.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. pp.10.2. . 102–103] The questionnaire supposes that someone is going to open an interior decoration business.

114 CHAPTER 10. MARKET RESEARCH .

expected needs. Definition 11. 1. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. Those who provide financing are aware of these pitfalls. Every aspect of the venture should be covered. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. and so should you be. Your business plan should list obstacles that may arise and what will be done to address them.Chapter 11 The Business Plan The business plan is an essential document not only to seek funding but to provide a sanity check and to give you a framework for developing your business. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. Lack of demonstrated experience – Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. and projected results of the new business. 4.0. It must describe current status. In terms of sanity checking. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture.4 (Business Plan) A business plan is a written document that details a proposed venture. 5. 3. including 115 . 2. 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.

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

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

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

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

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

2. detailing projected inflows and outflows. working capital. inventory turnover. and Payment of first accounts receivable. For example. 8. Hiring of sales representatives. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.2. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. These might include • • • • • • • • • • Incorporation of the new venture. Definition 11. Difficulty purchasing parts or materials. Product display at trade shows. which investors will use to estimate debt/equity ratios. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors.1 (Pro Forma) A latin term that means projected. etc. Try to be honest and realistic. Side Note 11. Risks might include • • • • • Negative industry trends. Critical-Risks Segment – Discuss business risks and the ways you might address them. Signing up distributors and dealers. of the risks than you are. Unexpected competitions. Completion of design and development. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Design or research difficulties. as opposed to actual.2 (The Growth of Active. Ordering production quantities of materials. detailing projected profits and losses. Your investors are probably as aware. (b) An income statement. Costs exceeding estimates. . include an appendix.11. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. (c) A cash-flow statement. or more aware..2. current ratios. 11. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. 9. Appendix – If there are documents. a balance sheet containing projected balances is called a pro forma balance sheet.com) Discuss the growth of Active.com. Completion of prototypes. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. First sales and first deliveries. Receipt of first orders.

THE BUSINESS PLAN .122 CHAPTER 11.

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

• Test the equipment the day before. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. “His lips are moving. • Bring your own laptop. Most Ph. I don’t think it was quite right until somewhere between the 8th and 10th time. Lexecon. and you don’t want something as silly as a burned-out light bulb to cost you an investor. By the time I gave my job talk to my eventual employer. The original joke goes. 12. 2 This originally comes from an American classic. p. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. I had given it over a dozen times. of course.2.D.2 Know Your Outline Thoroughly It often helps to include key words in the outline that will help you recall examples and other details during the presentation.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to.2.1 (The Job Talk) Every Ph. • Bring paper copies3 of your presentation in case all else fails. 44] Side Note 12. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. PRESENTING THE PLAN times.124 CHAPTER 12. Adobe Reader. Post a copy of your presentation in a secure location on your homepage just in case. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. is. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors.”2 [2.2. You don’t want to try to figure out other people’s equipment. In retrospect.” 3 Color copies! . “How can you tell when a lawyer is lying?” The answer.D. Bring at least twice as many as you expect there to be people in the room. they may have another version of PowerPoint. There will always be glitches. and even if you can figure it out. 12. Guy Kawasaki likes to tell a different version of an old joke. the lawyer joke. Most graduates get between 5 and 15 interviews when they graduate. • Bring a backup thumb drive with your presentation on it.

12. • Your audience may ask you several questions at once. p. 12. They may ask you something that makes you want to change your presentation. Give your presentation to friends or family.5 Take Notes Have a pen and paper ready and take notes during the pitch. They may ask you something you want to respond to in an e-mail later. • Taking notes also makes you look conscientious. At my company in Chicago. Stop when it goes off. Much of the material required use of the internet. you need to change or eliminate the statement.12. 12. You should be prepared for the unexpected. it is quite the opposite. Guy Kawasaki recommends you set a timer [2. AFTER THE PRESENTATION 125 Side Note 12.3. I always bring a pen and paper to meetings. and each investor will respond differently.2.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.2.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. “So what?” If you cannot answer this question simply and easily. you are not presenting it well. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access. and although you go into each presentation .2. Everyone. everyone brought a pen and paper. If they cannot explain it clearly. 12.3 After the Presentation Each presentation will be different. where some of the smartest people in the world worked.2.6 So What? When you are planning your presentation. but in reality. Ask them what your company will do. In general. It is easy for things to get lost in the heat of the moment. so write things down to make sure you don’t forget. ask yourself after every statement you make. Many people feel as if taking notes makes them look stupid. 45].

you should also realize that most most comments will be negative and most presentations are rejected. Remember that persistence is the most important character trait of entrepreneurs. p. PRESENTING THE PLAN with only success on your mind. 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.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Each time your are rejected improves your future opportunities. Side Note 12.3.5 [3.” .126 CHAPTER 12. 321]: “What to do when a venture capitalist turns you down: Ten questions.

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

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– “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 13.1 (Turnover) When you have replaced 100% of your original inventory. be sure it’s not easy to “hack” the system.130 • Maintain a sales history. • 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.3.3. your count cycle is 12 weeks.2 (Order Cycle) In inventory management.3 (Count Cycle) In inventory management. a high inventory turnover is a mark of a well-managed inventory system. 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. you have “turned over” your inventory. CHAPTER 13.3.3. Definition 13. .1 Inventory Turnover Typically. and • Improve pricing accuracy. if you perform an inventory count four times a year. • Security – To prevent theft. To improve efficiency of inventory control. such as for volume discounts for preferred customers. INVENTORY CONTROL When considering the purchase of a POS. For example. Definition 13. • Updating product information – At the time a sale is entered. the delivery cycle is the amount of time between placing an order and receiving it. 13. the order cycle is the amount of time it takes to process paperwork and place orders.4 (Delivery Cycle) In inventory management. Definition 13. these systems should automatically update inventory and accounting records.3. 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. the count cycle is the amount of time between counting inventory. work with suppliers to improve delivery times and count inventory more often.

5 (Needs Period) In inventory management.3.1 (LIFO (Last In.3. which allows you to pay less taxes on your inventory.2 See also 13. If there is inflation.2. and 13..4. 13. first out) assumes that you sell the most recently purchased inventory first.2.3. The author is unfamiliar with Chinese tax codes. which may result in higher taxes. follow the recommendation of your accountant.1. LIFO and FIFO are two accounting methods used to do this. you must estimate your inventory value when you file your taxes. See definitions 13.4. .4.3 See also 13.13. Definition 13. first out) assumes that you sell the least recently purchased inventory first. and delivery cycle. but you should at least know about LIFO and FIFO. After you have been in business your inventory control system should give you a better idea of stocking levels.4. First Out)) LIFO (last in. it values your remaining inventory based on the prices of the most recently purchased items. In deciding which to use. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.S.S.3. First Out)) FIFO (first in.S.4. You should know how many sales per square meter per year you need to survive. order cycle. The author is unfamiliar with Chinese tax codes. 2 At 3 At least this is true in the U.2 (FIFO (First In. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.1 Buying Inventory In the process of putting together your business plan. In other words. 13. 13. In the U.4.4 Inventory Accounting Your accountant will typically handle inventory accounting. it values your remaining inventory based on the prices of the least recently purchased items. least this is true in the U. the needs period is the sum of the count cycle. Definition 13. INVENTORY ACCOUNTING 131 Definition 13. If there is inflation. Many businesses also measure turnover by measuring sales per square foot (or square meter). Calculate your sales per square meter once per month.4.3.

Their prices are higher than a manufacturers.5.132 CHAPTER 13. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales .5 Suppliers Suppliers can be divided into four categories: 1. “Be open. Import sources – They operate like domestic wholesalers.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. Distributors – Also known as wholesalers. Independent craftspeople 4.1 Dealing with Suppliers The most important thing about a supplier is reliability.4. brokers or jobbers. 13. courteous and firm with your suppliers.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. 2. 13.” . Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. usually one. INVENTORY CONTROL Definition 13. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Rieva Lesonsky. 3. – The minimum may be higher for first orders to cover the cost of setting up a new account. Manufacturers – Note that some manufacturers refuse to fill small orders. says. • Some suppliers demand a minimum number of items per order.actual inventory . three or four months. author of Start Your Own Business. and they will respond in kind.

customers may be required to pay upon receipt of goods. I regularly had to deal with food vendors. Discuss • Their negotiating technique when discussing pricing. and • The need to be firm but fair. At least in the U. Tips for dealing with suppliers: 1.d. Suppliers sometimes try to complicate pricing to their advantage. do not falsify or misrepresent your financial statements.5. 2. Whatever you do. Be sure to add up • Costs. Ask about the freight policy before ordering. If a supplier is uncertain about you.. . If a supplier does not extend credit.13.)) Cash on delivery. you should know who is liable for damage to goods in transit.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. Side Note 13.5. basis until you have proven yourself reliable. If you are dealing with a reticent large supplier. and • Allowances before you make a decision.5.o. 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. the supplier will pay for freight. they will put you on a c.5. • Discounts.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references.o. • Sometimes if an order is large enough.d. personal interaction can work wonders. • For items being shipped. Definition 13. 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.S. it is considered a felony. You can also present your financial statements and prospects for success. SUPPLIERS 133 13.1 (COD (or c.

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.3.5.epoi.abcsmallbiz.134 CHAPTER 13.2. 6 Source: http://www. May 19.com/shippers/glossary.6 See also definition 13. . Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.o.b. 7 Source: http://en. Be aware of your supplier’s priorities. 2007.7 4 Source: 5 Source: http://www. The FOB term requires the seller to clear the goods for export. As opposed to FOB. Seattle” to indicate that an item being shipped from Seattle is free on board. May 19. people often say something like “f. Specify a cancellation date on your order forms.com/jargon.)) Free on board.wikipedia.2 (FOB (or f. http://www. 3.b.roadway. Destination)) Free on board destination. This differs from a forward order where stock is available but delivery is postponed for other reasons. See also definition 13. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.5. Definition 13. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. May 19. 2007.o. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.5.html. INVENTORY CONTROL • Depending on whether the supplier pays frieght.4 Colloquially.o. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.org/wiki/Backorder. Definition 13. Under this arrangement. 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. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.b.5.5. 2007. May 19.com/reference/glossary/glossary efg. 5 FOB Destination changes the location where title and risk pass. Definition 13. 2007.html. 5.3 (FOB Destination (or f.html.

besides being bad for business.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. • Part-time employees. Side Note 14. 135 . they are often emotionally draining for the manager as well as the employee involved. p.0. a bad hire. and • Independent contractors. 337]. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. • Temporary employees (temps). This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). 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. Side Note 14.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.0.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. On the other hand. The benefits of finding the right person for a job cannot be overstated.

then want to hire someone else later at a position above them in the company. programming. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. you will likely find that they will come to you at some point to demand a vice president’s salary. you’ll be grateful to have spent the time to go through a more formal process. Not only education and skills.1 (Formalities) While it may seem when you hire your first employee an unnecessary burden to write a job description and create all the other formalities. lifting.1 How to Hire Hiring involves analyzing the job requirements. HIRING EMPLOYEES 14.1 Job Analysis Before creating a job description. If you call someone a Vice President but don’t compensate them as such. 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. Cleaning. they will soon expect compensation commensurate with their job title. 14. by the time you hire your 40th employee.1.1. • You may not leave enough buffer above the employee. you have nothing to offer. 14. you need to consider • The physical or mental tasks involved. creating a job description. and recruiting. but personality traits. • If you have do terminate the employee. • How the job will be done. an employee with an inflated job title may expect an inflated severance package. etc. However. If you give someone a job as Vice President.2 Job Description Side Note 14..1. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. Side Note 14.2 (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.136 CHAPTER 14. writing reports. selling. .1.

• Who the person reports to.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4.1 (Job Description) Job descriptions should include • A job title. • If you give someone an inflated job title but do not offer a salary commensurate with the title. you may find it difficult to give them a promotion later. Like a job description. Definition 14. If.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. you may find they are tempted to leverage that job title to seek employment elsewhere. it includes • The job title.1. and • Any occupational hazards. Definition 14. If you hire someone at the highest level of their competency. You may actually be doing your employee a disservice by inflating their job title.14. you hire someone as Director who is not qualified to be a director. for example. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. • Desired experience. p. then they go on to a Director position at another company. 339]. HOW TO HIRE 137 • There is little room for advancement. and • A summary description of the position. . Side Note 14. It also includes • Any educational requirements.1) and should include the personal requirements expected of an employee [4. Part of retaining quality employees is the prospect of advancement. • Benefits.1. • Physical or other special requirements associated with the job. • A salary range. 338].1.1. • Specialized skills or knowledge. p. • The position of that employee in the corporate heirarchy.1. and • Job summary with major and minor duties.

HIRING EMPLOYEES 14.5. • Be sure to list appropriate contact information. – For other positions. It also makes it easy to receive and process a large number of applications with a minimum of effort. .. 14. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. • List the top 4 or 5 skills that are most essential to the job.” or people who may not have them will just try to fake those personality traits in the interview.S. particularly those that advertise on web sites. With e-mail.2 Side Note 14. if you are looking for an accountant.4 (Using an E-mail Address) For professional positions. • 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.1.1. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.1. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. e-mail addresses have become perhaps the most popular way to get applicant information at U.1. Many American companies are no longer providing phone numbers. – 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. For example. companies. • Do not list requirements other than educational or experience-related ones.4 Finding People There are many possible sources of applicants. – For professional positions. due to the number of applicants for competitive positions. • Do not ask for specific personality traits.138 CHAPTER 14. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.S. 2 See sidenote 14. such as “outgoing” or “detailoriented.

You check references. You can evaluate their personality during the interview. particularly in the high-tech industry. • Focus on the skills that a person can bring to your company. for professional positions. 2007 turned up more than 5. You interview the candidates. There were 4.3 Generally. 5.com with the keyword “java” will demonstrate just how widely used online tools are. Software” category. Searching on Monster. For any job. not a science.monster. 2. about 10 or so.dice.” . 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.. 4. many positions are being filled online. 3. be sure that a candidate can provide what you are looking for.1.S. most professional associations’ job banks are now online.com with the keyword Java on May 19. Screening People Reviewing resumes and applications is an art. 6. 159 in “Financial Services. To “weed out” candidates. but when looking at a resume. You hire the preferred candidate. you will get several candidates for any job you are offering..000 hits searching just the “Information Technology” search category. In the U. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. If you are lucky. Try to perform a search on a job sites such as http://www.” And 921 in “Engineering. You conduct a second round of interviews with the remaining 3 candidates.314 listings in the “Computers.” 665 in “Internet/E-Commerce. • Industry Publications – Most trade publications take ads for job openings.14. • Online – In the U. You narrow the number of resumes down to about 10. the hiring process proceeds as follows: 1. 3 Java is a programming language.com or http://www.S. You narrow down the 10 candidates to 3.

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

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

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

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

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

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

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