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

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

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. . . . . . . . .3 3.3. . . . . . . . . . 5. . . .3. . .2 A Seven Step Forecasting System . . . .5 Slack Time and Identifying the Critical Path . .3 Forecasting Approaches . . . . . . . . . . . . .3. . . . 5. . .1. . . . . . .4 3.2.2 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . .1 Types of Forecasts . 3. . . . . . . . . . . . 3.5 Seasonal Variations in Data . . . . . . . . . . . . 5. . . . .1 Research . . . . . . . . . .1 What is Forecasting? . . . . . . . . . . . .8 A Critique of PERT and CPM . . . . . .1.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Life Cycle and Strategy . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . 3. . . . . . . . . . 4. . . . . . . . 3. . . . . . . . . . 5. . . . . .1 PERT and CPM . . . . . . . . . . . . . . 4. . . . . . .4. . . . . . . . . . . . .1 Adaptive Smooting . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . . . . .1 The Project Manager . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . 4. .1. . . . . . . . . . . . . . . 6. . . .3. 4. . . . . . . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . .1 Goods and Services Selection . . CONTENTS .3. . . . .3. . . . . . . . . . . . . .6 Variability in Activity Times . . . . . . .3. 4. . . . . . . . . . . . . . . . . . . . . . . . . . 3. .2 The Strategic Importance of Forecasting 5. . . . . . . . . .1. . . . . . . . . . . . . . . .3. . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . .2 Network Diagrams . . . . . . . . . . . . . . . . . . . . . . . . . .1 Project Planning . 6. . . . . . . . . .1 Qualitative Forecasting Methods . . . . . . . . . . . . . . . .1. . .3. . . . . . . . 5. . . . . . 4.2. .6 Associative Models . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . 4. . . . . 4. . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . .1. . . . . . .3 Measuring Forecast Error .4 Determining the Project Schedule . . . . . . . . . .3 Project Controlling . . . .1. . . . . 5. .3 Product-by-Value Analysis . . . . . . . .1 Probability of Project Completion . . . . . . . . . . . 4. . . . . . . . . . . .2 Build and Staff the Organization . . . . . . . . 4. . 5. . . .2 Preconditions . . . . . . . . . . . . .3. . . . . . . . .6. . . .3 Dynamics . . . . . . . . . . . . 4. . . . . 5. . . . . . . 5. . . . . . . . .2 The Work Breakdown Structure . . . . Strategy Development and Implementation . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . .2 Focus Forecasting . . . . . 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. 6 Design of Goods and Services 6. 6. . . . . . . . . . . . . .4 Adjusting for Trend . . . 5. . . . 5. .1 Identify Critical Success Factors . . . . . . . . . . . . 4. . . . . .

. .3 Some Style Points 11. . 12. . .1 Preparing to Put the Plan 11.2 Know Your Outline Thoroughly . . . . . . . . . . . . . . . . Exactly? . . . . . .2 Research Methods . . . . . . . . . 94 7. . .2 Redefining and Expanding Your Niche . . . . . . . . . . . . . . . .1 Do It Until You Get It Right .3. . . . . . . . . 95 8 Finding an Idea 97 8. .1 What Am I Researching. . .2 Look and Feel . . . . . . . . . . . . . . . . .3.4 The First Minute is the Most Important . . . . . . . .1. . 104 10 Market Research 109 10. . . . . . . . . . . . . .1. . . .1 Finding Your Niche .3 After the Presentation . . . . 12. .2 The Plan Contents . . . . . . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . 110 10. . . . . . . . . . . . 6. . . . . .2 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. . . 12. . . .3 The Mission Statement . .2. 12. . . .2. . . . . . . . . . . . . .1 Importance of New Products . . . .3 Organizing for Product Development . . . . . . . . . . . . .2. . . . . 12. . . . . . . . . . . . . . . . . . . . . . .2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 So What? . .3. . . . . . . . . . 12 Presenting the Plan 12. . . . . . . . . . . 6. . . . . . . . . . .2.2 Are You Ready? . . . . . . . . . . . . . . . . . Product Development . . . . . 6. . . . . . . . . . .3 Setting Goals . . . . . . .1 Sources of Secondary Research . . . . . . . . . . .2. . .1 Characteristics of the Successful Entrepreneur . . . . . . . . 12. . . . . . . . .1. . . . . . . . . .5 Take Notes . .1 The Presentation . Now What? . . . . . . . . . . . .1 You’ve Got an Idea. . . . . . . 6. . . . . . . . . . . . 92 7. . . . . . . 101 9. .CONTENTS 6. .2. . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . .1 Product Development System . . . . . . . . . . . . .2. . . . . . . . . . . . . . . 111 11 The Business Plan 11. . . . 6. . . . . . . . 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Your Audience . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . 111 10. . .3 Generating New Products . . 12.2. . . . . . . . . . . . . . 11. . . . . . . . . . . . . . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. . . 104 9. .2 Quality Function Deployment (QFD) . . . . . .

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

Part I International Business Management 7 .

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

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

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

htm. scandals such as Enron. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements.com/Research/15 Largest. a high value is placed on honesty and personal integrity. While western developed economies often cite a high ethical standard.2. Side Note 1. In Scandinavia. Qwest. was accused of looting the company to fund a lavish lifestyle. There is currently debate as to the effectiveness of the regulations relative to the costs. Worldcom.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. See sidebar 1.. March 17. WorldCom declared bankruptcy in July 2002. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.S.bankruptcydata. history. the former CEO of WorldCom.4 – Bernard Ebbers. Parmalat. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.com/Research/15 Largest.3 The United States The United States has recently been rocked by a number of scandals in the business community.3. http://www. succeeding Enron as the largest bankruptcy in U. • WorldCom – Following the Enron scandal.3. March 17.S. including a $2 million birthday party for his wife. Side Note 1.2 (Cultural Heritage in the U. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. 2007. 3 Source: 4 Source: http://www. was convicted of fraud and conspiracy and sentenced to 25 years in jail. 2007.S. and Tyco make it clear that even western developed economies have significant ethical shortcomings. • Enron – In December 2001.12 CHAPTER 1.htm.1. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.bankruptcydata. Dennis Kozlowski. the SarbanesOxley Act (SOX) was passed in the U.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.S. • Tyco – The CEO of Tyco. .

pdf. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.4. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. also known as thrifts and which function like banks. 5 1. This resulted in several banks being technically bankrupt [5. JAPAN 13 1. Better known is the case of Japanese banks. with many women finding their employment opportunities constrained. .1. were not as highly regulated as banks. • Many men do not understand why sexual harassment constitutes a problem. the political scandals do not appear to have been fully acknowledged and addressed.S. Side Note 1. Hodgetts et al. 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..S.2 Women in the Workplace Sexual harassment has also become an issue in Japan.gov/bank/analytical/banking/2000dec/brv13n2 2.2 (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.4.4.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. and as a result made high risk investments in the late 1980s and early 1990s. The government was compelled to provide public money to bail out the institutions.4.4 1. Side Note 1. Moreover. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Savings and loan institutions. women have a difficult time being taken seriously. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.1 (The U. p. Likewise. 58].fdic. with many men of the opinion that women were just biding their time until they marry and have children.4.

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

with the purpose to influence their votes. Side Note 1.7 Note that lobbyists do not have any formal power. with most in the top 20 among over 150 countries included in the survey. EUROPE 15 1. 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. particularly in upper management.3 Lobbying by Japan Japan spends more money lobbying in the U.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. Although women have entered the workforce in large numbers in recent decades. They only have the power of persuasion.5. than any other.1. 7 Source: http://www. 1.5.S. Definition 1. Side Note 1.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.S. to try to influence decision-makers in any circumstance. men are disproportionately represented in management positions. Hodgetts et al.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.4.4. at 40.org. is the notable exception).5.. there seems to be a glass ceiling due to social factors.4.1 (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. politicians.dict. their attitudes towards bribery when working in foreign markets differs from that of the U.5. in an extended sense. . yes or no.5 1.S.

6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.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.about. 1.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. .. Side Note 1. 8 Source: http://careerplanning. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 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. 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. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.3 (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. but there is a perception that there are risks and ethical considerations.5.5.16 CHAPTER 1. For those students who think so. though compensation is limited relative to lawsuits filed in the U. • Discrimination lawsuits are more commonplace in Great Britian. • More British companies have actively sought to recruit and promote women into management. 8 Side Note 1. yes or no.com/library/glossary/bldef-glassceiling.S.

• Note that for every corporate spy that is caught. International corporate spying problems. Side Note 1. Side Note 1. Bribery and other forms of corruption.S.5 billion in sales annually. • Yet another case in which software from a U. 6. 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. • A relatively stable government. .2 (Piracy and Counterfeiting) Present sidenote at [5. company in Boulder was stolen and sold to a Chinese company.6. ETHICAL CONCERNS IN CHINA 17 Side Note 1.3 (Corporate Spying) Hodgetts et al. 7. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. An increase in crime and illegal business activities. Prison labor. Child labor. [5. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Piracy and counterfeiting (see sidenote below). 5. executives. Ethical considerations include 1. Often. 64].S. and • A recent history of rapid economic development. 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 $1.6.1. there are undoubtedly many others that get away with it. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 3. pp.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. 4.6. 2.6. p. An opaque legal system.

Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. .2 (Nongovernmental Organizations (NGOs)) Private. • CARE (promotes community development. not-for-profit organizations that seek to serve society’s interest by focusing on social. and economic issues such as poverty.cfm for more detail. a grocery chain. education.2. not-for-profit organizations that seek to serve society’s interest by focusing on social. Other companies. social justice. social justice.S. such as Whole Foods.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. such as education and health care. See http://www. 1. In the words of a Beijing correspondent for “The Economist” magazine. China continues a battle against corruption.3 (Nongovernmental Organizations (NGOs)) Private. and emergency relief in the event of humanitarian disasters). education. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. Definition 1. . health.6. Definition 1.4 (Corruption) Though things are improving.7. and economic issues such as poverty. and the environment.7. political. and the environment. Side Note 1.. .7.7. provide relief in the event of humanitarian disasters. “. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.benjerry.7 Corporate Social Responsibility Definition 1. political. and promotion of social equity). 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. health.com/our company/our mission/index. there are few if any issues which affect and infuriate so many in China as corruption.2.18 CHAPTER 1.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm.”[6] See also sidenote 1. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).

S. Executives are people. Side Note 1.7. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.1. • To prevent a boycott or other consumer defections. MNCs do not appear to have been significantly impacted. – Even socially responsible executives would consider the “bottom line” when making decisions. • And.1 Corruption and the FCPA Revisited Hodgetts et al.S.9 U. firms are constrained by the FCPA with regards to bribery and other corrupt practices. China ranked 78 out of 158. For example. .2.7.000 and $125. as executives of publicly traded companies are ultimately responsible to their shareholders. Side Note 1. and • Rainforest Action Network (RAN). A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising. 1.S. • Conservation International (promotes environmental conservation). too. many feel that it has had a net benefit. note that while U. firms a reason to refuse to pay bribes. as it gives the U.7. executives may actually feel that it is the right thing to do. In fact. Both political groups and businesses are influenced by NGOs. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. but does not outlaw payments to political party leaders. with a score of 3.7. 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. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). last but note least. In 2005.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament.

html. with scandals such as Enron. Global Compact specifies 10 principles which MNCs should abide by: 1. Commitments that many MNCs have signed on to.2 respectively. Global Compact. Hong Kong is number 15. and Parmalat resulting in investors losing billions of dollars. July 1. specify standards and codes of conduct in domestic and global operations. 4. better than the U. and Germany at 7.0 is considered to be the borderline at which countries are considered to have a problem. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Moreover. 2006. The government recognizes that it is an issue and is taking action. Tyco. . Important: Although it is widely cited.5 (Table 3-1: Principles of the Global Compact) The U. 5. 10 http://www.7. the United States and Europe have recently been rocked by corporate corruption. It cannot be considered to be based on a scientific survey.N.infoplease. slightly better than Sweden.com/ipa/A0781359. Singapore is number 5 with a score of 9.6 and 8. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. WorldCom. As more state-owned businesses become privatized and the size of the middle class increases.7. 3. It is a difficult problem to solve. and not based on hard data. Side Note 1. malfeasance and diversion of corporate funds becomes increasingly difficult. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. more Chinese will own stock in companies. With greater financial transparency.4 (Some Opinions) Personally.S. with a score of 8. The government is actively addressing the issue of corruption.7. such as the U. Support and respect the protection of international human rights.20 CHAPTER 1. 2. but most important first step is to recognize that there is a problem. I think corruption will diminish as China economically develops for several reasons: 1. Scandinavian countries are at the top of the list. societies.3.N.10 Corruption is certainly not endemic to Asia. and the environment. 1. Side Note 1.4. With more disciplined corporate governance.

.7. 4. Ensure that MNCs are not complicit in human rights abuses. and 10. 7. Elimination of all forms of forced and compulsory labor. Encourage development and dissemination of environmentally friendly technologies. Undertake initiatives to promote greater environmental responsibility. Elimination of child labor. including extortion and bribery. 21 3. . 9.1. CORPORATE SOCIAL RESPONSIBILITY 2. A precautionary approach to environmental challenges.e. Business should work against all forms of corruption. 5. the right for unions to exist). Elimination of discrimination with respect to employment and occupation. 8. Freedom of association and recognition of the right of collective bargaining (i. 6.

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

and Beijing. much of it will focus on the “enterprise management” component.S. e • Hard Rock Caf´s are in most major cities in the U.Chapter 2 Operations and Productivity This course is called International Enterprise Management. e they have restaurants in 38 countries. Note that the definition refers to both goods and services. casinos. While some aspects will focus on the “international” component of the name. etc. As China develops.” 2. • They have also expanded into compelementary operations. the efficient production of services will become more important. is the set of activities that creates value in the form of goods and services by transforming inputs into outputs.. In total. pp. 2–3].1 (Operations Management) Operations management.1 Defining Operations Management Definition 2.1 (Heizer Company Profile: Hard Rock Caf´) Review Heizer’s e company profile of the Hard Rock Caf´ [1.1. • They typically combine heavy merchandizing with the restaurant operation. another name for enterprise management is “operations management. 23 .1. often abbreviated OM. Side Note 2. such as hotels. In business parlance.

pays the bills. So we focus on how people organize themselves for productive activity. Finance/accounting – Tracks how well the organization is doing. OPERATIONS AND PRODUCTIVITY • Based on my limited and personal observations. and I was disappointed in the experience. – The Hard Rock Caf´ was once considered “edgy” in the United States e and built a reputation on unique atmosphere and attitude. 2. 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. People generally go for the atmosphere. Heizer states that “we look not only at how Hard Rock’s managers create value. a significant percentage have eaten in a Hard Rock Caf´ at least once. but also how a variety of managers in other industries do so. . the food is considered by many to be mediocre and overpriced.. 2. 1. Our study of operations management will have four focus areas. OM is one of the three major functions of an organization and is related to all other functions. 3. and collects the money.” The Hard Rock Caf´ will be discussed further throughout the course. 3. Production/operations – Creates the product. e Functions within organizations are typically divided between three categories: 1.24 CHAPTER 2. – However. Marketing – Generates the demand. in the U. or at least takes the order for a product or service. – So management must not focus more on product quality and continuing to draw customers despite a different image and differing customer perceptions than it originally had. – Most Americans are familiar with the Hard Rock Caf´ and among the e younger generation.S. e ∗ I have eaten there. The prices were high. 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. We will try to understand what operations managers do so that we can potentially become better operations managers ourselves. • In the profile.

Organizing. Side Note 2. 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.S. Staffing. Controlling. human resources and job design. 7].2. 3. Side Note 2. known commonly in the U. place in the heirarchy. layout design.2. 1. OM is one of the most costly aspects of an organization.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. 2. p. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. pp. p.” • Every organization with more than a few employees has an organization chart. OM decisions have been divided into ten categories by Heizer [1. and 4.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. business community as “org charts. Planning. • They are often sources of conflict among management. To accomplish these functions. process design.1. operations managers make decisions. 6–7]. as the org chart determines executives’ authority and.2. WHAT OPERATIONS MANAGERS DO 25 4. . 5]. Definition 2.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. particularly when job titles are not clear.2. inventory. and maintenance. scheduling. location selection. supply-chain management. more generally. quality.

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

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

Definition 2. • Government. 2 The average national private industry wage. average wages are below average2 in the U.S. • In most western economies. and other essentials for its citizens. p. However. 9] • Repair and maintenance.3.5 [1. • In some service industries.3..1 (Development of the Service Economy) Present Heizer figure 1. In the U. Definition 2.3 (Information Sciences) The systematic processing of data to yield information. • Trade. shelter.S. economic output. • Transportation. services account for over 70% of U. such as the legal profession or computer services in the financial industry. major contributions have come from the field of information sciences. the economy transitioned from agriculture to manufacturing around 1900.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. the wages are considerably above average.S. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. • Recently.1 (Services) Those economic activities that typically produce an intangible product. • Insurance. services become increasingly important. .. Manufacturing was dominant until about 1950 or so. such as retail. Today. 2.S. the services sector is by far the largest employer. p. 11]. • Food and lodging.2. The U. Side Note 2. for others professional occupations. Bureau of Labor Statistics defines services to include [1.28 CHAPTER 2.

This is important insofar as there is no inventory.3. When buying a computer. • Medical. • Services have inconsistent product definition. • Real estate. • Legal. 29 Side Note 2. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. Definition 2.2. See definition 2. Consumers interact with those providing the service. • Services have a high consumer interaction. Therefore it is difficult to automate. Legal advice is rarely identical for two clients. Customers seek services through local intermediaries. Hospital care includes both health services and goods. THE SERVICE SECTOR • Financial. such as pharmaceuticals or medical supplies. • Services are often dispersed. • Services are more often unique.3. when going to a restaurant. • Services are often produced and consumed simultaneously.3.2.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. • Services are typically intangible. . • Education. 3 Services that do not include a good as a component are called pure services. • Entertainment.3. • Services are often knowledge-based. Note that many goods include services and many services include goods. a support contract in case you have problems or training to familiarize you with the features of the computer.3 That is. • Other professional occupations.2 (Pure Service) A service that does not include a tangible product. used in your treatment. the purchase price may include installation services.

5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. Definition 2. Trends that Heizer and Render identify [1. or management).4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2.5. operations managers are increasingly responsible for innovations that move ideas.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. . operations managers are responding by moving decision making to the individual employee. or recyclable products or to minimize packaging and other wasteful production steps.2. p. Operations managers are being challenged to produce biodegradable. brought about in part by the internet. capital. reusable. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.30 CHAPTER 2. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. 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. Globalization has been having a dramatic impact on operations management and in the future. it will continue to strongly impact the field. • Empowered employees – With the rise of services and knowledge products. • 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.2. parts. 2. wherever and whenever needed. OPERATIONS AND PRODUCTIVITY 2. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Mass customization – With increases in technical capabilities and customerlevel information management. the next step in product development involves customizing products according to the customer’s preferences. and finished goods rapidly. • Rapid product development – The life span of products is decreasing and the need to rapidly develop and bring to market new products is consequently increasing.

p.25 titles per labor-hour = 0.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). In order to improve productivity. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Consider today’s computers versus those from the 1970s.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.0077 titles per labor-hour = 0.4 (Total Factor Productivity) See definition 2.4375 titles per labor-hour = 0.5.5. .5.5.3.5.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. but overhead is no $800/day. 15]. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Also known as total factor productivity. Side Note 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. Side Note 2. Definition 2.5. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.2. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.

no word processors. the public provision of electricity is highly variable. or other commercial software available.5 (Productivity Variables) In operations management.S. • 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. – This can be a particular problem in the service industry. 2. it may improve productivity. • Units of measure – There may not be appropriate units of measure. about 10% of the annual improvement in productivity is due to increases in labor productivity. Definition 2. There were. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. spreadsheets. green. in Cambodia. Labor productivity has increased due to • Better-educated.. A Toyota Corolla is a much different car than a Porsche 911 Turbo.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. 2.5.5. you had to write a program from scratch. such as convenience or safety. and the arts and science of management. – For example.32 CHAPTER 2. 3. where quality and other factors vary widely or the level of service provision includes items difficult to measure. Capital. If you wanted the computer to do something. Labor In the U. Labor. capital.) The screen had only one color. the three factors critical to productivity improvement – labor. – Not all cars are the same. If the public electricity provision increases in quality. of course. and was about the size of my hand. The electricity often goes out in the middle of the day and the current may vary in strength. (It used audio tapes for memory storage. Management. .

maintaining and enhancing the skills of labor. there is considerable concern over teaching of basic skills such as mathematics to grade school children. and • Healthier workers as well as • A shorter work week. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. and 4. Cannot Correctly Answer Questions of This Type. p.8 [1. and math. Diet of the labor force. THE PRODUCTIVITY CHALLENGE • Better-nourished.) Present Heizer figure 1. In developed nations. and 33 3.5. Basic education appropraite for an effective labor force. The primary variables for improving labor productivity include 1. 16]. 2.” In the U.3 (The State of Education in the U.2. Social overhead that makes labor available. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. draw the rectangle on the blackboard. What is the area of a 4 × 6 meter rectangle. “About Half of 17-Year-Olds in the U.S.. Which of the following is true about 84% of 100? 4 When presenting this question.S.5. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. . such as transportation and sanitation.S. Side Note 2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. writing.

Developed economies (also known as post-industrial economies) require trained. as well as capital. and because the author of the textbook is writing about operations management.5. and knowledge.5. education. 2. educated. U. p. Difficulties arise because service-sector work is .4 Productivity and the Service Sector Historically.5% after allowances for depreciation. Definition 2.4 (Management as an Input) Because this is a course in business management.5.S.S. has increased at about an average of 1.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.2 Capital Capital investment in the U.S. and the cost of capital depends on interest rates. management is not always identified separately from labor as an input. 2. are utilized effectively. in the U. management is considered as a separate input.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.. graduate programs and the students they produce remain the best in the world. however. Note that there is a trade-off between capital and labor in most industries. Note that in classic economic analysis and other areas of business.5. productivity in the service sector has not increased as rapidly as with the production of goods. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. 2.5. Side Note 2. 17]. According to Heizer [1. and knowledgeable employees and operations managers are responsible for ensuring that technology.34 CHAPTER 2.

• Keeping the workplace safe. p. These challenges include such issues as • Maintaining a clean environment. legislation protects shopkeepers from discount retailers. 2.. government agencies. but from customers. 4.) Productivity is highest in the U. the performance of a law firm).S. teaching).S.g. and other stakeholders. such as cleaning.g. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.S. a haircut)..g. These demands come not only from the manager’s personal ethic. Side Note 2. banking system is about 33% more productive than Germany’s.S. • General ethical behavior concerning issues such as child labor and corruption. food preparation. telephone industry is twice as productive as Germany’s. 5 In Japan. Low-productivity activities. and child care.g.. is twice as productive as in Japan.. 35 3. and • The U. We will discuss this challenge in more detail throughout the course. SOCIAL RESPONSIBILITY 1. medical diagnosis).2.5. and 5. Frequently individually processed (e. Often difficult to automate (e. investment advice).g..5 (Service Productivity in the U. Difficult to evaluate for quality (e.6 Social Responsibility As discussed in chapter 1. watchdog groups such as NGOs.6. 2. Typically labor-intensive (e.5 • The U.S. Often an intellectual task performed by professionals (e. in both overall and service productivity. Heizer notes [1. . laundry service. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. 18] • Retailing in the U.

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

an understanding of cultural differences in preferences is needed to best meet customer needs. • Provide additional insights and opportunities. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1. Attract and Retain Global Talent – By offering more employment opportunities.1 (Mission Statements for Three Organizations) Review Heizer figure 2. competitively superior.38CHAPTER 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. p. • Perfumers tend to concentrate in Grasse. Missions state the rationale for an organization’s existence. Equally important. FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable. Side Note 3. I recommend that all companies draft a mission statement. France. FedEx.1 (Mission) The purpose or rationale for an organization’s existence. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. 4. time-certain delivery.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there. 28] which includes mission statements for three multinational companies: 1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. 6.1.1. global organizations can attract and retain better employees. 3. 3. and • Increase sales. Definition 3.1 Mission Whether large or small. global air-ground transportation of high-priority goods and documents that require rapid. Provide Better Goods and Services – For companies doing business in an international setting. 5. 3.2 [1.

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

• The “look and feel” of the product. • Availability of complementary products. the Operations Function. See http://www.40CHAPTER 3.1. Cost leadership – Providing cheaper products. 3.3 (Competitive Advantage) In operations management. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. 2. Side Note 3.” Note that mission statements are used not only at the company-wide level. Differentiation can arise from anything that the customer may value about a product or a services. but can be used at the department level and even at the project level.1. Definition 3. more responsive products or services.benjerry.1. be it • Product features. • Interoperability with other products.2 (Strategy) How an organization expects to achieve its missions and goals. 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. Definition 3. Differentiation – They make their product better. • Training. and Major Departments in an Operations Function.cfm for more detail.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.1.3 (Sample Mission Statements) Present Heizer’s figure 2. Responsiveness – By providing timelier.3: “Sample Missions for a Company.com/our company/our mission/index. the creation of a unique advantage over competitors. .

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.

3. Implement an OM strategy.3. Provide competitive advantage. 37]. Opportunities. These critical success factors are used to develop a competitive advantage.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Increase productivity. those activities or factors that are key to achieving competitive advantage.3.3. Identify a strategy and critical success factors. Definition 3.” The process of developing a strategy involves the following steps: • Environmental Analysis. 2. • Determine Corporate Mission. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. and 3.1 (Strategy Development Process) Present Heizer figure 2. and 3.2 (Critical Success Factors) In operations management. p. Group the necessary activities into an organizational structure.44CHAPTER 3. then determine whether the organization does these things well (and. Staff the organization with personnel that will get the job done.6 [1. 2. Definition 3. in particular. Weakness. if the firm has a competitive advantage in these things) and where failures are most likely. then • Form a Strategy. Side Note 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. The purpose of this process is to 1.1 (SWOT Analysis) In operations management. The operations manager’s job is a three-step process: 1. . determining internal strengths and weaknesses and external opportunities and threats. and Threats) analysis to develop strategies. 3. “Strategy Development Process.

3. CSFs. MIS.3 (Activity Map) In operations management. Side Note 3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.5 and HR. . an activity map can be used to link an organization’s competitive advantage to the CSFs.3.1. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. Southwest Airlines has a competitive advantage in providing low-cost airfares.3. p.2.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3.3.3.1 as a checklist to determine critical success factors. 3.3 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.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.6 3.2 as examples of how firms organize their activities. Recall the “org charts” in sidenote 2.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. 5 Management 6 Human Information Systems Resources. and supporting activities. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. 39]. Definition 3. a graphical link of competitive advantage. • Red arrows – critical success factors • Blue arrows – support activities 3.4. Once CSFs are determined. finance.

4. a strategy that uses exports and licenses to penetrate the global arena. with beer on the menu in Germany. 95% of its assets and 98% of its sales are made outside Switzerland. [1. owning or controlling facilities in more than one country. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.4. 42] Definition 3. Definition 3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Only 10% of its work force is Swiss. and hamburgers without beef in India. Definition 3. Typically characterized by subsidiaries.5 (Global Strategy) In operations management. Definition 3. 4. • Texas Instruments is an example of a country with a global strategy. See definition 3. Definition 3. International strategy – Often the easiest strategy. p.3 (International Strategy) In operations management. or joint ventures with substantial independence.4. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. 2. See definition 3. .4. Also one of the least profitable due to transport costs and little local responsiveness. Its menu reflects the country in which it operates.4 (Multidomestic Strategy) In operations management.6.4. Global strategy – Not characterized by local responsiveness.3. but a good strategy for cost reduction when products do not need to be adapted locally. 3.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. products do not need to be localized. 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. Usually does not confer a cost advantage.4.4. franchises.4. • Nestl´ is an example of a country with a transnational strategy. wine in France.1 (International Business) A firm that engages in cross-border transactions.5. See definition 3. In the semiconductor industry. • McDonald’s is an example of a country with a multidomestic strategy. Although e it is legally Swiss. as exports require little change in operations and licenses often leave risk with the licensee. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. See definition 3.4.46CHAPTER 3.

6]. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness..6 (Transnational Strategy) In operations management.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.3. 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 . p. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. Side Note 3.S.4.4.4.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

and budgets.1 [1. quality. 2.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. and team organization. Project management involves three phases: 1. Even Microsoft.0. Plans are also revised to meet changes in time and cost demands.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. Controlling – Monitoring of resources. defining the project.0.Chapter 4 Project Management Side Note 4. Side Note 4. the largest software company in the world. Planning – Goal setting. pp. Scheduling – People. 3. The profile highlights the importance of project management in achieving competitive advantage. and supplies are tasked to specific activities and activities are related to each other. and Controlling) Present Heizer figure 3. costs.3 (Project Planning. p. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. money. Side Note 4. 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. 49].0. Scheduling. 46–47]. 49 .

50 CHAPTER 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. The job is unique or somewhat unfamiliar to the existing organization. p.1 The Project Manager As alluded to in sidenote 4. You may be managing resources far in excess of your individual salary. a temporary project organization is formed to address a specific project.1. 4.0. However. and you will be forced to improvise. you should always expect the unexpected.” [1.1 Project Planning While many projects are run within an existing organization. if things go wrong. If you become a project manager on projects of significant complexity. it is very obvious and can be very costly.5. People will not come through with what they promised. you are doing your job well if noone notices the project management. you will be confronted with a daunting task. The project is temporary but critical to the organization. Side Note 4.0. often times. Moreover. 4. Work can be defined with a specific goal and deadline.5 (Personal Advice on Project Management) Project management is a tricky profession. and/or 5. The responsibilities of project managers are to make sure that . 48] 1. p. Your job is to make things go smoothly and according to plan. 3. 69]. PROJECT MANAGEMENT However. 2. things you thought were certain turn out not to be. See also Heizer sidenote “Project Management and Software Development. The work contains complex interrelated tasks requiring specialized skills. The project cuts across organizational lines. Definition 4.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. 4. Project organizations work best when [1.1. In a sense.

1.4. The project meets its quality goals. • Build the user account input web page is a much better task division than 1.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). 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. Review software architecture for user account input web page functionality 6. Complete software architecture for user account input web page functionality 5. Approve graphic design for user account input web page 4.2 (Work Breakdown Structure (WBS)) In operations management. When dividing a project into tasks. and 4. Approve software architecture for user account input web page functionality . The project is on or under budget.1. 2.1. dividing a project into more and more detailed components. 3. Definition 4. in a software engineering project. you have divided the tasks too finely. In a project that includes allowing a user to enter personal information on a web page. Side Note 4. Complete graphic design for user account input web page 2. PROJECT PLANNING 1. All projects come in on time.1. People receive motivation and information necessary to do their jobs. 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. 51 4. a task that should only take a day or so. For example. a web page takes about a day to build for an experienced team.

Write software for user account input confirmation page functionality 9. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Write software for user account input web page functionality 8. The actual WBS for Windows XP would. Show the relationship between each activity to others and to the whole project 2.3 (Reality Check: WBS) In reality.1. At the time you are creating the work breakdown structure. 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. which we will discuss next in section 4. of course.1.2. you should also take note of time and cost estimates given by your technical staff.2 (Work Breakdown Structure) Present Heizer figure 3. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.3 [1. They will be useful for project scheduling.2 Project Scheduling After dividing activities into a work breakdown structure (WBS).52 CHAPTER 4. Encourage realistic time and cost estimates for each activity . Scheduling serves to 1. Major tasks in the project 3. Subtasks in major tasks 4. p. Side Note 4. Activities (also known as “work packages”) to be completed Side Note 4. 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Identify precedence relationships among activities 3. the work breakdown structure is not something you go to your office to do in isolation. Project 2. fill hundreds if not thousands of pages. PROJECT MANAGEMENT 7.

Definition 4.2. MS Project’s Gantt chart functions demand you assign employees. moeny. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.1 (Gantt Charts) Planning charts used to schedule resources and allocate time.2. 3. Make better use of people.2. Side Note 4. and other values to each activity.2. PERT. 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 . Derives from the typical shape of a bottle. p.4 [1.” This will give the class an idea of the look and feel of a typical Gantt chart. The order of performance is accounted for. right by the bridge. PERT. and CPM) Inexperienced project managers often feel the need to use Gantt. It can actually be quite time consuming to create and maintain Gantt charts.2 (Using Gantt. which becomes narrower as one approaches the neck of the bottle. Definition 4. and CPM tools for every project management activity. as. PERT and other formal documents. and 4. For smaller projects. 51]. cost estimates. All activities are planned for. Gantt charts are perhaps the most widely used tool for ensuring that 1. Overall project time is developed.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded.4. However. PERT and CPM help answer questions such as • When will the entire project be completed? . Perhaps they imagine that they are not doing their jobs professionally if they are not. – said of roads. PROJECT SCHEDULING 53 4. the road bottlenecks.2. 2. these should be considered merely tools to be used when they are useful by saving time or energy. Activity time estimates are recorded. and material resources by identifying critical bottlenecks in the project Side Note 4.

Cost breakdowns for each task. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. 7. and budgets of projects. 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. Time analysis reports.3. Definition 4. Work status reports. . behind schedule. were developed in the 1950s for project control. quality. or ahead of schedule? • On any given date. is the project on schedule.3. 5. 2. 3. Cost distribution tables. 4. 6.3 Project Controlling Project control involves monitoring resources. PERT and CPM. is the money spent equal to.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity.1 PERT and CPM Two methods. 4. Functional cost and hour summaries. Control programs typically produce reports detailing 1.54 CHAPTER 4. and 8. 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. Total program labor curves. what is the best way to accomplish this goal at the least cost? 4. Variance reports. less than. Raw material and expenditure forecasts. costs.

3.3. Define the project and prepare the WBS. 4.3. See also definition 4. Also. 53].5 [1. 6.4. PROJECT CONTROLLING 55 Definition 4. As the names describe. p. See also definition 4.2. 2. Gantt charts are the “go to” visualization method for even very complex projects. .3. Use the network to help plan. monitor. Definition 4. AON associates the activity with the node whereas AOA associates the activity with the arrow. Activity on Arrow (AOA). in my experience. Compute the longest time path. and ontrol the project. 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. Draw the network connecting all of the activities.3. Side Note 4. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.2 (Example: AON and AOA) Present Heizer’s figure 3. 5. Assign time and/or cost estimates to each activity. Side Note 4.3. Develop the relationships among activities.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Personally.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.2 Network Diagrams There are two approaches to visualizing activity networks: 1. schedule. or the critical path. They both follow six steps: 1.3. 4. Activity on Node (AON) and 2.3. it will do for you automatically much of what we will go through manually in this class.3 (Critical Path) The computed longest time path through a network.3. 3. Moreover. through the network.

.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3.56 CHAPTER 4.8 [1. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. that is.4.9 [1.1 gives sufficient information to describe the network. that is. its LF equals its LS of the activity that immediately follows it. – If an activity is an immediate predecessor to more than one activity. we must use time estimates of each activity to determine the overall schedule for the project.3. – If an activity has multiple immediate predecessors. 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. Follow with example 3 and figure 3. LF = min{LS of all immediate following activities}. 2. 54–55]. that is. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. EF = ES + Activity time. analysis used to determine the project schedule. 4. their dependencies. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. In other words. Definition 4. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. 1. We do this with a critical path analysis with involves a 2-step procedure. its LF is the minimum of all LS values of all activities that immediately follow it. its ES is the maximum of all EF values of its predecessors. p.4 Determining the Project Schedule Once we have identified all of our activities. pp. LS = LF − Activity time. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. See also definition 4.3. 56].1 (Critical Path Analysis) In project management. PROJECT MANAGEMENT Side Note 4. • Table 3.6–3.3. ES = max{EF of all immediate predecessors}.

and • Includes only critical activities (see sidenote 4. p.2 (Total Slack) In project scheduling.1.4. 4. they share total slack. Note that activities A. If an activity2 does not impact the slack time of any other activity. 60]. and H have no slack time and cannot be delayed without delaying the entire project. The critical path is one that • Begins at the first activity in the project.3.4.5. 2 For example.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. “Notation Used in Nodes for Forward and Backward Pass. in the example in sidenote 4. activity F in sidenote 4.4.5.4.3 (Free Slack) In project scheduling. the free time for an activity. the time shared among more than one activity. we cannot complete the project in 15 weeks.1.10 [1. p. Note also that if we delay each activity by the amount of slack that activity has. it is said to have free slack.5.4.3 and Heizer figure 3.1). or the amount of time an activity can be delayed without delaying the entire project. 1 For example. .2 (Forward Pass) In project management scheduling. the time associated with a single activity. Side Note 4. the step that identifies all the earliest times that activities can be completed. the time devoted to one of these activities must also be reduced. G. Slack time is just Slack = LS − ES or Slack = LF − EF . we may delay the project as a whole. Also notable is that if the total time of the project needs to be reduced. Definition 4. C.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. • Terminates at the last.3 [1.1 When several noncritical activities appear successively in a path.13 [1. These are called critical activities. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. Definition 4. if we delay activities B and D by one week each.5. Definition 4. 57]. p.1 (Slack Time) In project scheduling. E.” Then complete Heizer example 7 figure 3. 61] based on table 3.4.

and the other uses β = β − 1 and α = α − 1 .3. Most likely time – The most realistic estimate of the time required to complete an activity. Definition 4.1 and 4. See also definitions 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Definition 4.3. we do not. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. the “worst” activity completion time that could be obtained in a PERT network. In reality.6.6. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.. three time estimates are used: 1.6. However. In PERT.6.6. Side Note 4. unexpected complexities.1 (Optimistic Time) In project scheduling. Effectively. which are labeled according to one of two notational conventions. Definition 4.6.2 and 4. Beta distributions have two free parameters. in most cases.6.1 and 4.3 (Most Likely Time) In project scheduling. the time required to complete an activity is often uncertain due to supply problems.6.58 CHAPTER 4.2.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.2 (Pessimistic Time) In project scheduling. the project manager pulls the number “out of the air” based on their experience managing related activities. The usual definition calls these alpha and beta. the “best” activity completion time that could be obtained in a PERT network. the most probable activity completion time that could be obtained in a PERT network. etc. See also definitions 4. The beta distribution is used as a prior distribution for binomial proportions in .6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.6.6. technical considerations that were unknown at the time the project schedule was drawn up.6. See also definitions 4. Definition 4. PROJECT MANAGEMENT 4.

The variance of the activity time is Variance = [(b − a)/6]2 .78 weeks.6. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.html http://mathworld.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. Total project completion times follow a normal probability distribution and 2. 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.00 week. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. and pessimistic times of 1.3 The domain is [0. 8 1. 4.β) with α = 1 and β ranging from 0.00.4. 4.4. The expected activity time for activity F is 3 weeks5 and the variance is 1.wolfram. 2. February 21.com/BetaFunction.1 Probability of Project Completion If we assume that 1.6.1]. and 9 weeks.25 to 3.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. p. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.6. 2007.wolfram. 62]. 63] for activity F based on optimistic.1) where B(p. 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1. p. Side Note 4. β) Γ(α)Γ(β) P (x) = (4.com/BetaDistribution. and .html. and pessimistic times of 1.78 6 6 36 7 4 weeks. q) = (4. Activity times are statistically independent 3 Source: http://mathworld. most likely.6. most likely. 4 See definition 4. and 7. The above plots are for various values of (α.

6.76 weeks approximately 16% of the time. the population variance var(X). Definition 4.6. Side Note 4.6. definition 4. “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. two standard deviations approximately 95% of the time. See also 4.3) Definition 4. and within 3 standard deviations approximately 99.6.1.6.3 (Example: Project Variance) Review Heizer example 9 [1.6.6.10 Determining Project Completion Time for a Given Confidence Interval A common question is.6. p. commonly also N written σ 2 .” Review Heizer example 10 [1. Note that the standard deviation of 1. pp.60 CHAPTER 4. 64]. 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) (4.4 (Using the Normal Table) Pass out Heizer Appendix I [1. .com/StandardDeviation.76 weeks implies that the project will exceed the expected completion time by more than 1. A2– A3] “Normal Curve Areas. p. 9 For 10 See more information.html.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6. See definition 4.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. 65] and figure 3.5.16. see http://mathworld.6.6 (Standard Deviation) The standard deviation is the square root of the variance. 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.wolfram. Side Note 4.7% of the time.

and if you become a project manager. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. Crashing a project involves a four step process: 1.4) 11 Since crashing a project often involves adding additional resources to activities.7.7. crash cost is the cost required to complete an activity in the shortest time possible. you will doubtless experience one or both of these eventualities many times in your career. See definition 4. in fact. and • The total cost of crashing is as small as possible. we want to do so in the least cost mannger possible.1 (Crashing) In project management. we need to ensure • The amount by which an activity is crashed is. Definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon.3 (Crash Cost) In project management.7. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. crash time is the shortest duration of an activity. the crash cost is typically higher than the normal cost.4.1. Since activity completion times are typically shortened by adding resources.2 (Crash Time) In project management. 4. Project crashing is the name given to the process of rushing a project to completion.7. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.7. Step 1 – Compute the crash cost per week. Definition 4. Assuming linear costs. • The shortened durations will actually enable us to finish the project on time.7. .11 Definition 4. See definition 4.1. it may result in the project being delayed. if certain activities off the critical path take the pessimistic time estimate or more to complete. permissible and realistic. When crashing a project.

• Advantages – Especially useful for large projects . select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. 3. If you find yourself needing to rush a project. pp. 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. 4.62 CHAPTER 4. As a project manager. you should be very wary of such pressure. 4. 67–69] including table 3.7. At times this may be politically infeasible. Step 4 – Update all activity times.19. PROJECT MANAGEMENT 2.5 and figures 3. Crash this activity by one period. 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.2 (Example: Crashing a Project) Present Heizer example 12 [1. Note that one activity may be on several critical paths. If the due date has been reached. go to step 2.7. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Step 3 – If there is only one critical path. stop. Side Note 4. If you accept the challenge and try to rush the project to please upper management.18–3. Then crash each activity by one period. the advice given in this section should be helpful.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 there is more than one critical path. Step 2 – Find the critical path(s) in the project network. Side Note 4. If not.

9 Using Microsoft Project for Managing Projects Present programs 3. 70–74] with figures demonstrating MS Project functionality.4. Starkweather about his impression of various alternatives. pp.achievo. Information on Planner can be found at http://live.net.to mediumsized projects. 4. Noncritical paths should be closely monitored as well.7 [1.1. 12 Recall sidenote 4. they are often overkill for small.dotproject. There are a variety of alternatives. including open source software that is free. Information on dotProject can be found at http://www. It is perhaps the most widely known and featureful project management software available. it is relatively expensive and the features are so numerous and complex. .org.org/wiki/List of project management software for a list of project management software or ask Dr.1–3. 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. You may also refer to http://en. Information on Achievo can be found at http://www.7.9.gnome. 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. However. Note that most project management textbooks refer to MS Project as the software of choice for project management.wikipedia. independent.org/Planner.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

• Technological forecasts. See also definitions 5. and 4. See also definitions 5. Generally deals with more comprehensive issues than short-range forecasts. 5.1. CHAPTER 5.4. 2. and Research and development. Product life cycles tend to follow four stages: 1.1. Decline. long-term forecasts concerned with the rates of technological progress.1. In the first two stages. FORECASTING • Long-range forecasts – Generally more than 3 years. planning indicators valuable in helping organizations prepare medium. 3. Production planning and budgeting.2 (Economic Forecasts) In operations management.1. and Analyzing various operating plans. and other economic indicators.66 – – – – Sales forecasting. Definition 5.3 (Technological Forecasts) In operations management. Maturity. and • Demand forecasts.3 and 5.2 and 5.1. Introduction. Cash budgeting. longer forecasts are needed. These may include inflation rates.to long-range forecasts.1 Types of Forecasts Organizations typically use • Economic forecasts.1. Facility locations or expansion. which impacts purchases of new plant and equipment as well as development of new products. These concern rates of technological progress. Capital expenditures. Growth. Definition 5. .4. money supply.1. Useful for – – – – Planning for new products. housing starts.

5. capacity. Human resources – Anticipated demand is needed to estimate the need for • Hiring. marketing. 4. 6. See also definitions 5. Make the forecast. 3.2. and • Layoffs. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. Validate and implement the results. 2.5. Capacity – Underestimating demand can result in • Undependable delivery. 3.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Select the forecasting models. Also called sales forecasts. Gather the data needed to make the forecast. these drive a company’s production. and personnel planning. Select the items to be forecasted.1. 7.1. Determine the time horizon of the forecast.2 and 5.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1.1. 5.1.4 (Demand Forecasts) In operations management. 2. and scheduling decisions and serve as inputs to financial. Determine the use of the forecast. . and • Loss of market share. projections of a company’s sales for each time period in the planning horizon. • Training. 5. • Loss of customers.3.

5. – If they do not match. – Many people try to apply ordinary least squares (OLS) regression techniques. – If you do not truly understand the mathematics. I have seen otherwise competent people (including Ph. • Lack of sanity checking. use something simpler. FORECASTING Side Note 5.68 CHAPTER 5.D. – If someone challenges your forecast and you do not have supporting logic or documentation. you will be unable to defend your numbers. it is a bit of an art that mixes both. . – You should be able to explain how and why you arrived at each and every number that you forecast.2. – After making a forecast. track the actual outcomes and compare them to the forecasts.1 (The Most Common Errors in Forecasting Methodology) In my experience.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. • Lack of follow-up. – On a number of occasions. ask yourself if they make sense. based on a linear model. In practice. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. Any quantitative approach should be complemented with a qualitative “reality check. – In one case. – Before you show your numbers to others. to inherently nonlinear systems. • Lack of support for the forecasts. figure out whether an improvement to the forecasting methodology can be made.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. • Using models that are more sophisticated than the user’s understanding. 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.

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

5. and 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3. Definition 5.2.3. personal experiences. 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.5. a forecasting technique using a group process that allows experts to make forecasts.3.3.3.3. emotions. See also definitions 5. Definition 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. Definition 5. See also definition 5.3.3. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3.3.3.6. See also definitions 5. . and value system. and 5.3. 5. 5.3.3.10.6 (Consumer Market Survey) In operations management.3. See also definitions 5.3.3. See also definition 5. · See definition 5.5 (Sales Force Composite) In operations management.5. and 5. a forecasting technique based on salespersons estimates of expected sales. See also definitions 5.3.1.3.6. 5.3.3.4 (Delphi Method) In operations management. Definition 5.4.3 (Jury of Executive Opinion) In operations management.3.6. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. and 5.70 CHAPTER 5.1 Qualitative Forecasting Methods Definition 5.4.4. 5.3.3. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.

3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.7.3. • Simple Moving Average – Mathematically. Definition 5. Mathematically.9.5. generally ranges from 0. Definition 5.3.05 to 0. Moving averages can be either simple or weighted. See also definition 5.8.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. 5. and 5.3.3. 5. α.3.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.11.3.3. a simple moving average is given by demand in previous n periods Moving average = (5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.3) The smoothing constant.7.1) n • Weighted Moving Average – Mathematically.3. Definition 5. See also definitions 5.3.5.2 Quantitative Forecasting Methods Definition 5. and are appropriate to use when the underlying average . exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.3. That is.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.10. FORECASTING APPROACHES 71 5. Higher values give more weight to recent data.2) See also definition 5.

0.13.11 (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. When α = 1.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.72 CHAPTER 5.3. Mean absolute deviation (MAD). . Mean absolute percent error (MAPE). 1 See |actual − forecast| n (5. such as the mean absolute deviation (see definition 5.3 Measuring Forecast Error Once a forecast is made.3.3.3.3. 2.14. See also definition 5.3. 5.12. it is good practice to compare the estimated value with the actual value as actual values become available.7.3. Definition 5.3. 5.8. while lower values give more weight to past data. and are appropriate to use when the underlying average is relatively stable.7. Three popular measures are 1. Definition 5. See also definition 5.13). and 5.3. FORECASTING is likely to change. Mean squared error (MSE). Definition 5.15.3.3. exponential smoothing is equivalent to naive forecasting.3.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.12).4) 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 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. 3.3.

3.3. expressed as a percent of actual values.7) or F ITt = Ft + Tt (5. Mathematically.3.8) With smoothing constants α for the average and β for the trend.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.5) |actuali − forecasti |/actuali n (5.5.3. 100 n i=1 (forecast errors)2 n (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.3. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. MSE is given by MSE = See also definition 5.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.11) .6) 5.12.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Mathematically.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3. Definition 5. MAPE is given by MAPE = See also definition 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. FORECASTING APPROACHES 73 Definition 5.12.

Compute Ft . 3. Tt with equation 5. Calculate the forecast including trend. It is also commonly called linear regression analysis. time) (5.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 2.12. the emponentially smoothed forecast for period t using equation 5. Compute the smoothed trend. F ITt . 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. 1. Ordinary Least Squares Regression analysis is also useful for predicting trends. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. by the formula F ITt = Ft + Tt .14) .12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast.74 or CHAPTER 5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.10.

to account for seasonal changes in demand in our forecasting. 2. we will examine one model. Find the average historical demand for each season. 2. demand is seasonal. Compute the average demand over all months.5. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 5. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. The first step is to calculate the seasonal forecast. 5. Estimate next year’s total annual demand..3. 3. Definition 5.13 assumes a linear relationship. Compute a seasonal index for each season by dividing the historical demand by average demand. 3.S. In the U. We do that with a 5-step process. Although there are many methods to accomodate seasonal demand. consumers often make fewer purchases of durable goods. 4. 1. such as cars and washing machines. the multiplicative seasonal model.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Divide this estimate of total annual demand by the number of seasons.5 Seasonal Variations in Data In most businesses. then multiply it by the seasonal index for that month.3. Deviations around the least squares line are assumed to be random.3. ¯ x The least squares method has several drawbacks. Most businesses experience a surge in sales around Christmas. 1. during the summer months when it is common to take a vacation. This provides the seasonal forecast. . Recall that the equation 5. the more uncertain it is.

15) Side Note 5. if you are uncertain about predictions of x. 106– 107]. If there are published estimates you can cite (e.. pp.g. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model.3. FORECASTING 5. average local salary) (5.16 is y2 − a y − b n−2 xy Sy.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5..g. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.x = (5.x = (5. It is also called the standard deviation of the regression and. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. whatever uncertainties you may have transfer to your predicition of y.g. Note that making predictions of future demand involves also making predictions about the independent variable x. but x will be something other than time..17) . is given by (y − yc )2 n−2 Sy.3. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. We will use the same technique.76 CHAPTER 5.4. However. mathematically.1 (Example: Using OLS) Present Heizer example 12 [1.3.

2 with stock prices generally rising as skirts rise. 2007.” Side Note 5. Certainly.3. Correlation Coefficients for Regression Lines Definition 5. has risen. which is divided into two “conferences. The correlation coefficient of variables x and y is given by r= See also definition 5. Since 1935. leading stock indexes.00. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.3.8599. p. stock market prices as well as the winner of the Super Bowl. stock markets. “Distribution about the Point Estimate of $600 Million Payroll. Even the Year of the Pig correlates strongly with the U.time.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.S.3 and the U.4 .” Note that the regression assumes a standard normal distribution about the estimate. Other interesting correlations that have been identified over the years include banana prices and U. pp.5.10 [1.3.1594488.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.3.” the AFL (American Football Conference) and the NFC (National Football Conference). It does not imply causation one way or the other.18. is monopolized by the NFL. or National Football League.4 (Causation vs. Historically.com/time/business/article/0. changes in skirt lengths don’t cause stock market prices to rise and vice versa.9 [1. nor does it imply that they will continue to be related. a football game played between two football conferences in the U.S.2 (Distribution About the Point Estimate) Present Heizer figure 4. FORECASTING APPROACHES 77 Side Note 5. Definition 5. the average length of a woman’s skirt and stock market prices in the U. 108].html?xid=sitecnn-partner. “Four Values of the Correlation Coefficient.S. Dow Jones Industrial Average and Standard and Poor 500. but the relationship is coincidental. Side Note 5. February 28.S.3. p. the note in the margin accompanying Heizer example 14 [1.S.S. 109]. Correlation) Correlation merely means that the values of two variables are historically related.18) .S. the U. 4 Source: http://www.3 (Examples of Correlation Coefficients) Present Heizer figure 4. stock market. 107].3. football in the U. have been correlated. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. in all but one Year of the Pig.3.

b2 .19) Determining the values of a. x2 . b1 . Adding additional independent variables as predictors. p. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . .5 Definition 5.78 CHAPTER 5.3. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.19 (Multiple Regression) A causal forecasting method with more than one independent variable.g. .. b 2 . = the dependent variable (e. The same technique can be applied to use several independent variables to predict the value of a dependent variable.17. It is commonly simply called “R squared. if they are indeed related to the dependent variable. . you would use statistics software to calculate these values. results in additional predictive accuracy as measured by r2 . The multiple regression equivalent of equation 5. . (See definition 5. .3. often the most difficult part of building a multiple regression model is to pick the independent variables. p.” As the sidebar points out.6. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. 5 See definition 5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.” For example.3. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.3. . 110]. Side Note 5.15 is given by y = a + b1 x1 + b2 x2 + . 110].3. . in a multiple regression analysis involves a complex formula which is beyond the scope of this class.18 and Heizer example 15 [1. In practice. b1 . etc. .

These limits are typically based on M ADs. p.6 standard deviations.forecast| n where M AD = (5.9% of the time.8 standard deviations. The tracking signals should also be compared as they are generated against limits. one of the most common problems with forecasting is a lack of follow-up. Definition 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.2. three M ADs to 2. MONITORING AND CONTROLLING FORECASTS 79 5. though large errors may be a problem as well even if the positive and negative errors balance. . Side Note 5.4.4 standard deviations. Tracking signals are typically used monitor forecasts. If the tracking signals violate upper or lower limits. three M ADs about 98% of the time. 6 Recall definition 4.1 (A Plot of Tracking Signals) Review Heizer figure 4. and within 4 M ADs about 99. which correspond roughly to standard deviations.6. and 4 M ADs to 3. two M ADs to 1.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. 111].20) A good tracking signal has about as much positive as negative error. In other words. This means that the observed value should be within 2 M ADs abut 89% of the time.4.5.11 [1.6. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.2 standard deviations. the forecasting methodology needs to be modified. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).1.6 One M AD is equivalent to 0. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.4. Definition 5.

there has been much criticism of the approach to using models based on thier fit to the data. 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. Note that even with computer monitoring. Definition 5. In your career.4.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. 2.4. There is no single technique that should be used for all products or services. which selects a model based on goodness-of-fit to a data set.4. you should be aware of the criticism of focus forecasting. However.10) is automatically changed to keep errors to a minimum. Side Note 5. 5. you must make your own decision as to how you select the forecasting models that you use.g.3.. α in definition 5.4.2 Focus Forecasting Focus forecasting. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. changes need to be check with human eyeballs to ensure that the adjustments make sense.4. Sophisticated forecasting models are not always better than simple ones. is based on two principles: 1. 114]. Definition 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.” .2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. FORECASTING 5.80 CHAPTER 5. Side Note 5. p. “Summary of Forecasting Formulas.4.2 [1.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.

definition. 2 Recall sidenote 2. insurance companies often refer to their policies. is a service. For example. They also use just-in-time production techniques. pp. as an intangible. Product strategy2 defines the breadth of the product line and links product decisions to [1.128] • Investment and cash flow. pp.1 . Referring to services as products is common in the service industry. • Product life cycle. 1 In this chapter. 81 . and • The organization’s capabilities.0.1 Side Note 6.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. 122–123]. • Market share and dynamics. which. which will be discussed in detail later in the semester. time permitting. as products.2. and design of products.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. 124. Definition 6. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. the word “product” will refer to both goods and services.0.5 (Product Decision) The selection.

.g. and – Supplier development. restaurants or nightclubs). months (e. and innovative production is appropriate. Product strategy involves determining the best strategy for each product based on its position in the life cycle. • Growth phase – Effective capacity forecasting is necessary. • Introductory phase – In the introductory phase... Introduction. years (e. 2. DESIGN OF GOODS AND SERVICES 6. products expenses are often high for – Research and development. and 4. 3.1 Product Life Cycles Product life cycles can be divided into four phases: 1. clothing fashions).g. 6. • Decline phase – Investment needs to be minimized and resources need to be redeployed. YouTube videos). • Maturity phase – Competitors have entered or are entering the market. Maturity.82 CHAPTER 6. Growth. Life cycles can be in the days or weeks (e. .1.1 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. or even decades. – Process modification and enhancement.1. Decline. often ruthlessly. so high volume.g.2 Life Cycle and Strategy Strategies change as products move through their life cycle. low-cost.

2. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. 6.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. GENERATING NEW PRODUCTS 83 6. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. it must regularly redesign existing products or bring new products to market.6.000 yuan.2.3 • Political and legal change can also bring about business opportunities. and if a company is to survive. example.2 Generating New Products Most products have a limited life cycle. • Sociological and demographic change is also tied to product demand. as well as the total annual dollar contribution of the product. are tied to product demand.1. • Economic factors.2. the development of cellular telephone technology or the internet. • Technological change often drives product innovation.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.500 or 100. Definition 6.1. Ideas are not reviewed until after the brainstorming session. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. such as consumer incomes.4 Side Note 6. 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.3 Product-by-Value Analysis For firms with many products.2. Definition 6. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted. 4 For 3 For . Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. example.1 (Example: Brainstorming) Lead the class in a brainstorming session.

3. Definition 6.1 (Product Development Stages) Present Heizer figure 5. 6. Side Note 6.3.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. Definition 6. market dynamics. 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. The house of quality is a graphic technique for defining the relationship between customer desires and a product. the product life cycle.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.2.3.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. Many successful companies rely on sales from products introduced within the past five years.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on.3 6.84 CHAPTER 6. DESIGN OF GOODS AND SERVICES For example. p. 129]. 6. Translates customer desires into a product design.3. Determines what will satisfy the customer and 2. Each stage should have an accompanying review to determine whether to progress or not.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 [1. Side Note 6. DuPont estimates that it takes 250 ideas to yield one marketable product [1. 128]. p. and the organization’s capabilities.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.3. . 128].3 [1.

. 130]. In other words. PRODUCT DEVELOPMENT 85 Side Note 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.2.3. e. • Fixed duties exist. • Perhaps the most popular approach in the U.com for more information. Evaluate competing products.7 4. 3.3. 10 The right-hand columns of the house in sidenote 6.6 3. . manufacturing engineering.3. 2.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. 8 These are given on the roof of the house in sidenote 6.3. Identify how the good or service satisfies customer wants. Product development is done by teams.. Identify relationships between the firm’s hows.9 6. and production departments. identify the rows of the house in sidenote 6.2. 2.3. bureaucratic companies and organizations. See http://www.6.3. • Effective communication and coordination between separate departments can be problematic. Building the house of quality involves six steps: 1. with product features. Identify customer wants. An organization is divided into departments.2. there are three popular methods by which organizations undertake product development. • More common in large.8 5. 1. design engineering.qfdcapture. Note that it is not free or open source.2 (Example: House of Quality) Present Heizer example 1 [1. Develop importance ratings. p.3.2. as was the software described in section 4.S. a research & development.3 Organizing for Product Development In the West. Relate customer wants to product hows. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.9. create the columns of the house in sidenote 6.3.2.10 Side Note 6. 7 In other words. 6.g. which can be an advantage.3.” 6 For example.

it can also be problematic because teams.3. engineering.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.3. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. etc. design.86 CHAPTER 6.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. development. organizations are less structured and typically not divided into research and development.11 In Japan. However. and use. maintainability. Definition 6.4 (Concurrent Engineering) In project development.3. . manufacturing. engineering.4. 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.S. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. Definition 6.3. production. These teams often include representatives from marketing.. purchasing. Some teams even include representatives from vendors.3. 6.3.S. and field service personnel.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.3. The goals of manufacturability and value engineering are 11 See definition 6. Side Note 6. Definition 6. will often advocate for continuation of their project past the point that it is profitable for the company. use of participating teams in design and engineering activities. My experience may not be indicative of management practices in general in the U.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. production. quality assurance. and production stages of product development. Side Note 6..5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. but my personal impression is that formal QFD practices are not widespread in practice..

Reduced complexity of the product. Robust design. 6. Cost reduction. and 7. 3. PRODUCT DEVELOPMENT 1.6. 5. 87 . 2. Improvement of functional aspects of the product. Standardization of components. 4. Improved job design and job safety.3. Improved maintainability (serviceability) of the product.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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

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

com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. month after month. Often. If after many long hours at work your family will be asking you. you may not be prepared to start a company. • Among the means by which you can to raise money. – However. week after week. possibly even years at a time. Putting in long hours is not something that is done once in a while. – For now. If you are not prepared to redefine relationships relative to your business life. Side Note 7.1.com management and Jerry’s difficulty balancing work and family life.7. You may lose friends because you do not have the time to maintain the friendship. Venture capital financing is common in the United States but is not yet a common means of financing in China. 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.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. it may be difficult to keep the necessary focus on the business.1. but something you may need to do day after day. “When are you coming home for dinner?” or criticizing you for ignoring them. take note of this information. the use of venture capital will probably increase over time in China. we will discuss venture capital. friends. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. For many people. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7. – Additionally. starting a business will require the kind of effort that means you cannot spend sufficient time to maintain your personal relationships the way you are accustomed to. at Active. for example. friends and family are the most important concerns in their life. It may be useful later in your career. • Some of the information is intended for those who have an established career and real-world experience to draw upon.1.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act.com. we suffered a database corruption that resulted in my practically living at work for three weeks . Discuss the impact of the demands of a startup on the marriages of Active. or angel investors.

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

Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. marketing. ask other entrepreneurs. it is common to exchange “war stories” about the difficult times and sacrifices. • Analyze Your Professional Attributes – Be aware of where you need help. • Be specific. it helps to set goals.000. When I talk to those who I know who have started businesses.1 (What’s It Really Like?) If you wonder what running a business is really like. advertising. your goal may not be realistic. Consider at least a five-year time horizon. than learning from success. When setting goals.” • Be realistic. When setting goals. ask yourself the following questions: • Income – How much do you want to earn. . SETTING GOALS 95 If you are not a “people person. or 20 years to accomplish.” • Be optimistic.3. Like parents.3. such as sales. – Long-term goals are those that may take 5. try to figure out why they were not successful. If you talk to an entrepreneur who has not been successful. 7. if not more important.3 Setting Goals With any major endeavor. and administration. Learning from failure is as important. “Achieve financial independence” is much better than “pay the bills. • Set both short-term goals and long-term goals. Side Note 7. even the successful ones will probably focus on the negative.000 yuan and you’ve never had a job before. – Short-term goals are those that can be accomplished within a year. although the successful ones generally view their experiences as positive on the whole.7. “Raise 100. Move on to larger goals once the small goals have been met.” you may not want to start a business that focuses on customer relationships. If your goal is to raise 1. 10.000 yuan by July 1” is a much better goal than “raise money. – Start with small goals.

and – Investment of personal assets. How much is your ego worth? Side Note 7. – Geographic location. pp. – Hours of work. 20. Many people want to start their own business for ego gratification. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. Side Note 7. 18–20]. Eliminate question 1 and substract one point from the scoring given on p. . such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic.3. 21].3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.96 CHAPTER 7. Acknowledge this fact and factor it into your decisionmaking.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. The reasons given for adding or subtracting points are as interesting as the ultimate score. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel.3. Have the class write down their answers and evaluate their own EQ. pp.

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

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

2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.com/find?s=all&q=never+say+die. home. 2007.2 is. YOU’VE GOT AN IDEA.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.1 You’ve Got an Idea. Have students come up with examples of products that meet various criteria on the checklist. Side Note 8. you should not let it dissuade you. Entrepreneurs are often told their idea is flawed. you should have “thick skin. He ran the business as a one-man operation for years. 35]. while you should listen to criticism that others give. it is too risky. Side Note 8. he would never succeed. Finally. You should be realistic about risks. And you should not risk anything you can’t afford to lose. February 17.8. 33]. thinking that if he did not succeed after a couple of years. or health. 8.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4.1.” Side Note 8. used as the title of at least 12 movies and television shows. making just enough to get by but not much more. to be truly self-motivated and persistent in the way you need to succeed. that they will never make it. computer-controlled security cameras. the business took off. 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. you will be spending years of your life trying to make the idea work.1. “Never say die.imdb. 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. His sales are now in the millions of dollars per year and the business is very profitable. p.1. Have students fill out the form on their own time. or are otherwise discouraged.1. People thought he was going nowhere and generally dimissed his business.” That is. A well-known phrase in English. in the wake of 9/11. p. such as your family. However. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. After all. Warnings about risk are perhaps the criticism you should consider most carefully. Now What? The number one trait needed by successful entrepreneurs is perseverance. . 2 http://www.

FINDING AN IDEA .100 CHAPTER 8.

0. Businesses.1. your next step is to do some market research. go through the following 7 steps: 1.0. Definition 9. Definition 9. 101 . When trying to identify your niche market.” or business-to-business ventures. See also 9.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.2.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.0. See also 9. but you should try to target your market as specifically as possible.0. There are two broad categories of markets: 1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Not only do you need to decide whether you are marketing to businesses or consumers.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Consumers and 2. 9.Chapter 9 Defining Your Market After coming up with your idea.” or business-to-consumer ventures.

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

1.1. such as having children. Side Note 9. This marketing technique has been widely used since the early 1980s in the U.1. FINDING YOUR NICHE 103 7.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. Marketing to demographic groups has become much more refined in the last few decades. and the narrower your focus on your target. This can be offensive and serve to alienate rather than appeal to your customer. Many Western companies make the mistake of lumping together Japanese. Go for it! – Implement your idea..1. Definition 9.) Using these new marketing techniques can allow you to narrow your market.3. are similar in age to those who came of age in World War II. when many people were suffering from extreme poverty. young adults in the Depression.1 (Smaller is Bigger) When starting a business.1. It is better to do just one thing well than to do many things poorly. Korean. Chinese. demographic. you should practice extra caution to avoid stereotypes or other insensitive approaches.1.1.. Side Note 9.1. they try to satisfy all possible customers and end up trying to do too many things well. life stage. and 9.1. and other Asian customers together. If you did your homework. many entrepreneurs make the mistake of being “all over the map. the more likely you are to score a hit. the Depression-era cohort. As older people are more active than before. economic. 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. Definition 9. For example. many Eastern companies make the mistake of lumping together American and European customers. etc.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1 (Generational Marketing) Marketing to consumers based on age as well as social. . and psychological factors. you should be able to enter your niche market with confidence. but their behavior differs significantly due to the different influences in their youth. 9. Likewise. New marketing techniques include generational. the World War II cohort. and cohort marketing.. buying a home.S.S. many are choosing to start families later in life or even have children ten years or more apart. (See definitions 9.2.1. when the country was immersed in a war effort. or retiring. in the U. for example.” That is. Definition 9.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.9.

Side Note 9. The mission statement should • Be succinct.3 The Mission Statement Once you have a niche.2 Redefining and Expanding Your Niche Lynda C.” [4. • Convey the essence of your business’s goals and philosophies. 28] which includes mission statements for three multinational companies: 1 See section 9. create a mission statement. Falkenstein states. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.104 CHAPTER 9. DEFINING YOUR MARKET 9. Every six months or so.1 (Mission Statements for Three Organizations) Review Heizer figure 2. p. 79] 9. “Creating a niche is the difference between being in business and not being in business.3.2 [1.1. a few sentences at most. . you should. Falkenstein1 advises that you regularly reevaluate your niche. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business. p.

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

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

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

DEFINING YOUR MARKET .108 CHAPTER 9.

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

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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.

6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2.” [4. 102–103] The questionnaire supposes that someone is going to open an interior decoration business. pp. RESEARCH METHODS 113 Side Note 10. .2.10.

114 CHAPTER 10. MARKET RESEARCH .

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

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

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

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

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

• Any innovative sales or marketing concepts that will enhance customer acceptance. Justify any price increases over competitors based on newness. time. such as equipment. 7. and customer availability and proximity. and that you can beat the competition. and • Possible support of local banks.7 (d) Pricing Policy – Compare your pricing policy with competitors. pay and ownership (such e e as stock agreements) should be described. This should be an honest assessment. etc. should be described. 9 Research and Development . 8 Such as magazines. quality. facilities requirements. Important aspects of location include • Labor. and r´sum´s should be given. 5. 4. (e) Advertising Plan – Discuss any promotional campaign. and project status should be discussed. their job descriptions and responsibilities. supplier. including the type of media8 and. service. if the promotional campaign will be a significant portion of expenses. etc. if you are going to market leases on equipment where previously only sales were allowed.. Management Segment – Key personnel. • Features of the product to be emphasized in your sales efforts. radio. Gross profit margin should be discussed. testing. (c) Marketing Strategy – Your marketing strategy should be described based on research. cost. In addition. • Methods of identifying and contacting customers. television. describe the location of the new segment. Any risks should also be detailed. Research. offices. that your sales estimates are reasonable. 6.120 CHAPTER 11. Financial Segment – The financial segment should include 7 For example. how and when expenses will be incurred. In addition. • The Kinds of customer groups to be targeted as the business matures. storage. Design. Operations Segment – First. THE BUSINESS PLAN 3. including • The kinds of customer groups to be initially targeted. (b) Competitive Analysis – Assess the strengths and weaknesses of the competition. warranty. (a) Market Niche – Define your market niche. and Development – If R&D9 is to be performed. Marketing Segment – You must convince investors that a market exists. • Local taxes and zoning requirements. Costs should be detailed for all major expenses. or internet.

Costs exceeding estimates. First sales and first deliveries.com.com) Discuss the growth of Active.. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. (b) An income statement. etc.2. Side Note 11. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. These might include • • • • • • • • • • Incorporation of the new venture. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.11. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Product display at trade shows. detailing projected inflows and outflows. Unexpected competitions. Receipt of first orders. working capital. 11. Completion of design and development. 8. of the risks than you are.2 (The Growth of Active. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. and Payment of first accounts receivable. Completion of prototypes. 9. Difficulty purchasing parts or materials. Hiring of sales representatives. Try to be honest and realistic. For example. Design or research difficulties. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan.2. as opposed to actual. inventory turnover. Signing up distributors and dealers. current ratios. Ordering production quantities of materials. a balance sheet containing projected balances is called a pro forma balance sheet. . Risks might include • • • • • Negative industry trends. which investors will use to estimate debt/equity ratios.2. detailing projected profits and losses. (c) A cash-flow statement. Your investors are probably as aware. Appendix – If there are documents. or more aware. Critical-Risks Segment – Discuss business risks and the ways you might address them. include an appendix.1 (Pro Forma) A latin term that means projected. Definition 11.

THE BUSINESS PLAN .122 CHAPTER 11.

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

p. Post a copy of your presentation in a secure location on your homepage just in case. The original joke goes. Most graduates get between 5 and 15 interviews when they graduate.2. I had given it over a dozen times. 2 This originally comes from an American classic. Lexecon.124 CHAPTER 12. • Bring paper copies3 of your presentation in case all else fails.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. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. Adobe Reader.”2 [2. they may have another version of PowerPoint. You don’t want to try to figure out other people’s equipment.2.” 3 Color copies! . the lawyer joke. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. “His lips are moving. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. • Bring your own laptop. • Bring a backup thumb drive with your presentation on it. 12. I don’t think it was quite right until somewhere between the 8th and 10th time. Guy Kawasaki likes to tell a different version of an old joke.2. 12. By the time I gave my job talk to my eventual employer. • Test the equipment the day before. 44] Side Note 12. and even if you can figure it out. Bring at least twice as many as you expect there to be people in the room. PRESENTING THE PLAN times. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.D. There will always be glitches. is. of course. In retrospect. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving.1 (The Job Talk) Every Ph. Most Ph. and you don’t want something as silly as a burned-out light bulb to cost you an investor.D. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. “How can you tell when a lawyer is lying?” The answer.

You should be prepared for the unexpected. Ask them what your company will do. • Taking notes also makes you look conscientious.2. 12. where some of the smartest people in the world worked. Guy Kawasaki recommends you set a timer [2. everyone brought a pen and paper. It is easy for things to get lost in the heat of the moment. In general.5 Take Notes Have a pen and paper ready and take notes during the pitch. AFTER THE PRESENTATION 125 Side Note 12.12. Much of the material required use of the internet. but in reality.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. 12. Give your presentation to friends or family. 45].3.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 12. p. you are not presenting it well. They may ask you something that makes you want to change your presentation. it is quite the opposite. 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. “So what?” If you cannot answer this question simply and easily. so write things down to make sure you don’t forget. and each investor will respond differently. 12. They may ask you something you want to respond to in an e-mail later. Everyone. Stop when it goes off.2. • Your audience may ask you several questions at once.2. I always bring a pen and paper to meetings. ask yourself after every statement you make. and although you go into each presentation . Many people feel as if taking notes makes them look stupid.3 After the Presentation Each presentation will be different.6 So What? When you are planning your presentation. you need to change or eliminate the statement. If they cannot explain it clearly. At my company in Chicago.2.

” . 321]: “What to do when a venture capitalist turns you down: Ten questions. 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.5 [3. Remember that persistence is the most important character trait of entrepreneurs.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Side Note 12. p. Each time your are rejected improves your future opportunities. you should also realize that most most comments will be negative and most presentations are rejected.126 CHAPTER 12. PRESENTING THE PLAN with only success on your mind.3.

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

1 Inventory Turnover Typically. For example. if you perform an inventory count four times a year. the order cycle is the amount of time it takes to process paperwork and place orders. such as for volume discounts for preferred customers.3. work with suppliers to improve delivery times and count inventory more often. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons.130 • Maintain a sales history.3. . your count cycle is 12 weeks. Definition 13.2 (Order Cycle) In inventory management.3. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item.3 (Count Cycle) In inventory management. the delivery cycle is the amount of time between placing an order and receiving it. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet. the count cycle is the amount of time between counting inventory. Definition 13.3. CHAPTER 13.4 (Delivery Cycle) In inventory management.1 (Turnover) When you have replaced 100% of your original inventory. Definition 13. a high inventory turnover is a mark of a well-managed inventory system. be sure it’s not easy to “hack” the system. INVENTORY CONTROL When considering the purchase of a POS. and • Improve pricing accuracy. • Updating product information – At the time a sale is entered. • Security – To prevent theft. you have “turned over” your inventory. Definition 13. To improve efficiency of inventory control. these systems should automatically update inventory and accounting records.3. 13.

See definitions 13. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.4. Calculate your sales per square meter once per month. First Out)) LIFO (last in.3. The author is unfamiliar with Chinese tax codes.5 (Needs Period) In inventory management.4. and delivery cycle. INVENTORY ACCOUNTING 131 Definition 13. In the U.3.1 Buying Inventory In the process of putting together your business plan.3 See also 13. the needs period is the sum of the count cycle.3..S.4. 13. least this is true in the U.1. 13. 13.4. After you have been in business your inventory control system should give you a better idea of stocking levels. Many businesses also measure turnover by measuring sales per square foot (or square meter).4. In deciding which to use. you must estimate your inventory value when you file your taxes.S.2 (FIFO (First In. which may result in higher taxes.S. In other words.2 See also 13. but you should at least know about LIFO and FIFO. which allows you to pay less taxes on your inventory.3.3. it values your remaining inventory based on the prices of the least recently purchased items. . If there is inflation.1 (LIFO (Last In.2. LIFO and FIFO are two accounting methods used to do this. You should know how many sales per square meter per year you need to survive. The author is unfamiliar with Chinese tax codes. first out) assumes that you sell the most recently purchased inventory first. 2 At 3 At least this is true in the U. If there is inflation. first out) assumes that you sell the least recently purchased inventory first. it values your remaining inventory based on the prices of the most recently purchased items. follow the recommendation of your accountant. Definition 13. order cycle.13.2.4.4. First Out)) FIFO (first in.4 Inventory Accounting Your accountant will typically handle inventory accounting. and 13. Definition 13.

13.5 Suppliers Suppliers can be divided into four categories: 1. Import sources – They operate like domestic wholesalers. Independent craftspeople 4. Rieva Lesonsky. says. 3. three or four months. 13.132 CHAPTER 13. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. – The minimum may be higher for first orders to cover the cost of setting up a new account.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. brokers or jobbers. Their prices are higher than a manufacturers.4. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. “Be open. INVENTORY CONTROL Definition 13. Manufacturers – Note that some manufacturers refuse to fill small orders.” . 2.1 Dealing with Suppliers The most important thing about a supplier is reliability. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales .actual inventory . Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. author of Start Your Own Business.5.stock on order = open-to-buy Note that formulas and computerized inventory control systems and other means to manage inventory don’t make up for a business owner’s intuition. • Some suppliers demand a minimum number of items per order. Distributors – Also known as wholesalers. courteous and firm with your suppliers. usually one. and they will respond in kind.

If you are dealing with a reticent large supplier.13.d. At least in the U. and • Allowances before you make a decision. the supplier will pay for freight. • Discounts.)) Cash on delivery. Side Note 13.5. You can also present your financial statements and prospects for success. 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. Definition 13.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. it is considered a felony.1 (COD (or c. Be sure to add up • Costs.o. Suppliers sometimes try to complicate pricing to their advantage.. If a supplier does not extend credit.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. they will put you on a c.o. If a supplier is uncertain about you.d.5. Ask about the freight policy before ordering. you should know who is liable for damage to goods in transit. customers may be required to pay upon receipt of goods. Discuss • Their negotiating technique when discussing pricing. • Sometimes if an order is large enough. I regularly had to deal with food vendors. • For items being shipped. Tips for dealing with suppliers: 1.5. and • The need to be firm but fair. Whatever you do. personal interaction can work wonders. 2.S. do not falsify or misrepresent your financial statements.5. basis until you have proven yourself reliable. . 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. SUPPLIERS 133 13.

May 19. This differs from a forward order where stock is available but delivery is postponed for other reasons.2 (FOB (or f.epoi.6 See also definition 13.b. 5. 2007.o. See also definition 13. 6 Source: http://www. Destination)) Free on board destination. Specify a cancellation date on your order forms. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. Seattle” to indicate that an item being shipped from Seattle is free on board. http://www.com/jargon. 2007.html.2.org/wiki/Backorder. people often say something like “f. 5 FOB Destination changes the location where title and risk pass. INVENTORY CONTROL • Depending on whether the supplier pays frieght. 2007.3.b. As opposed to FOB.5. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. May 19.)) Free on board. Be aware of your supplier’s priorities.html.5.html.abcsmallbiz. 2007. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. The FOB term requires the seller to clear the goods for export.o. .3 (FOB Destination (or f. 7 Source: http://en.5. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Under this arrangement. May 19.roadway.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. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.5. Definition 13.wikipedia.o.134 CHAPTER 13.com/reference/glossary/glossary efg.com/shippers/glossary.7 4 Source: 5 Source: http://www. 3.4 Colloquially.5. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Definition 13.b. May 19. Definition 13.

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

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

p. you hire someone as Director who is not qualified to be a director. • The position of that employee in the corporate heirarchy. If you hire someone at the highest level of their competency. • If you give someone an inflated job title but do not offer a salary commensurate with the title. 338]. for example. • Benefits. Definition 14. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. Part of retaining quality employees is the prospect of advancement. and • Job summary with major and minor duties.1 (Job Description) Job descriptions should include • A job title. and • A summary description of the position.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. HOW TO HIRE 137 • There is little room for advancement. 339]. If. Definition 14. and • Any occupational hazards. It also includes • Any educational requirements. You may actually be doing your employee a disservice by inflating their job title.1. • A salary range. Side Note 14.1. you may find it difficult to give them a promotion later. . • Desired experience.14.1.1. • Specialized skills or knowledge.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. p. it includes • The job title. • Who the person reports to. Like a job description.1) and should include the personal requirements expected of an employee [4. you may find they are tempted to leverage that job title to seek employment elsewhere. • Physical or other special requirements associated with the job.1. then they go on to a Director position at another company.

HIRING EMPLOYEES 14. such as “outgoing” or “detailoriented. . 14.1. – For professional positions. 2 See sidenote 14. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. companies. – For other positions. e-mail addresses have become perhaps the most popular way to get applicant information at U.1.1.5.1. With e-mail. • Be sure to list appropriate contact information.” or people who may not have them will just try to fake those personality traits in the interview. • 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.. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. For example. due to the number of applicants for competitive positions. if you are looking for an accountant. Many American companies are no longer providing phone numbers. • Do not list requirements other than educational or experience-related ones. particularly those that advertise on web sites. • List the top 4 or 5 skills that are most essential to the job.S. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.3 Advertising the Job When you write an advertisement.S.2 Side Note 14. It also makes it easy to receive and process a large number of applications with a minimum of effort.138 CHAPTER 14. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.4 (Using an E-mail Address) For professional positions.4 Finding People There are many possible sources of applicants. • Do not ask for specific personality traits.

most professional associations’ job banks are now online. the hiring process proceeds as follows: 1.314 listings in the “Computers. particularly in the high-tech industry. • Focus on the skills that a person can bring to your company. Software” category. For any job. 4. To “weed out” candidates. If you are lucky. but when looking at a resume.com or http://www. You interview the candidates. Screening People Reviewing resumes and applications is an art.. 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. be sure that a candidate can provide what you are looking for.S. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. not a science.. There were 4. Try to perform a search on a job sites such as http://www.monster.000 hits searching just the “Information Technology” search category. You narrow the number of resumes down to about 10.S.14.com with the keyword Java on May 19. 3. 5. 6.com with the keyword “java” will demonstrate just how widely used online tools are. about 10 or so. 2007 turned up more than 5. Searching on Monster. You hire the preferred candidate. You can evaluate their personality during the interview. 3 Java is a programming language.” 665 in “Internet/E-Commerce. In the U. 2.1. You check references. you will get several candidates for any job you are offering. You narrow down the 10 candidates to 3.dice. many positions are being filled online.3 Generally. • Online – In the U.” . You conduct a second round of interviews with the remaining 3 candidates. 159 in “Financial Services. • Industry Publications – Most trade publications take ads for job openings. for professional positions.” And 921 in “Engineering.

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

S. • Whether the applicant has every been treated by a psychologist or psychiatrist. • Maiden name (for female applicants). race.1.6 Questions that are not explicitly prohibited. 347] • Age or date of birth..14. • Marital status.S. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. 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. • Whether the applicant has every been arrested. include • Whether the applicant has children. Though laws undoubtedly differ in China. 6 Employers can.. Get clarification on anything that you think may be suspect. Several of the engineers I hired did not finish their undergraduate degree. such as through a “Green Card. religion. • Ask people questions about their resume during the interview. employers may not ask about anything not related to the job.7 (No-nos) In the U. • How many days the applicant was sick in the previous year.5 Side Note 14. They were the type of people who would write software all day. • Sex. in the U. • Do not hire people who are discovered to be lying on their resume. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. including [4. • Whether the applicant has every been treated for drug or alcohol addiction. p. however. color. creed. Ever. • Disabilities of any kind. 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. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. or • If a person is a citizen.1. or national origin. then go home and play on computers in their spare time.” . However. Not also that many of the best people we hired were not the best on paper. but which can get employers in legal trouble.

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

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

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

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

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