International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . 4. .2. . . . . . . 3. . . 6. . . . . . . . . 5. . . . . . . . .3 3. . . . . . . .1 Adaptive Smooting . . . .3. . . . . . . . . . . . . . . . . . . . Strategy Development and Implementation . . . . . . . . . .3 Dynamics . . 5. . . . . .1. . . . . . .3. 3. . . . . . . . .1. . .3.1 The Project Manager . . . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . .1 Product Life Cycles . . 4. . . . . . .1 Research . . . . . . 6. 5. .1. . 5.7 Cost-Time Trade-Offs and Project Crashing . . 5. .3 Product-by-Value Analysis . . . . . .1 Project Planning . . . . . . . .2 Preconditions . . . . . 5. . . . . . . . . . . . . .3 Project Controlling . . . . . .2 Focus Forecasting . . . . . . . . . . . . . . . .6 Variability in Activity Times . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . .1.4 Adjusting for Trend . . . . . . . . . . . . 4. . . . . .2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . . . . .3. . . . . . 4. . . .4 Monitoring and Controlling Forecasts . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . .2 The Work Breakdown Structure . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5.6 Associative Models .2 Network Diagrams . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . 4. . . . 5. . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Goods and Services Selection . 3. . . .4 4 Project Management 4. . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . .1. . . . . . . . . 6 Design of Goods and Services 6. . . . . . . . . . . . . . . . . 5. . . . 4. .5 Seasonal Variations in Data . . . . .4 Determining the Project Schedule . . . . . . . .4 3. . . . . . . . . . . . .1 Probability of Project Completion . . . . . . . . .1. . .3 Forecasting Approaches . . . . . . . . . . . . . .3. . . . . . 6. . . . . . . . . . . . . . . . . . . . .3 Measuring Forecast Error . . 4.8 A Critique of PERT and CPM . . . . . . . . . . 4.3.1 PERT and CPM . . . . .1 What is Forecasting? . . . . . . 4. .4. . . . . 4. . . . . . . . . . . . . . . . .2. . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . 3. . . . . . . . .1 Qualitative Forecasting Methods . . . . . . . . . . . . . .1 Identify Critical Success Factors . . . . . . .3. . . . . . . . . . . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . .2 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . .6. . . .1 Types of Forecasts . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . 4.3. . . . . .2 Build and Staff the Organization . . . . . . . . . . . . . . 3. . . . . .4. . . . . . . . . . . . . . . . . . . CONTENTS . . . . . . . . . . 5. . . . . . . .3. . . . . 5. .3. .

. . . . . . . . . . . . . . . . . .3 Generating New Products . . . . . . . . . . . . . . .3. . . . . . . .1 Importance of New Products . . . . . . . . . 6. . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . 6. 12. 12. . . . .1 Characteristics of the Successful Entrepreneur . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 9. .1 Do It Until You Get It Right . .2. . . . . . . . . . 11. .1 You’ve Got an Idea. . . . . . . . . . . . . . . . . . 104 9. . . . . . . . . . .1 Sources of Secondary Research . 12. . . . . . . . . . . . . . . . .1 Your Audience . . . . . .2.3. . . . . . . . . . . . .2. . . . . . . . . 12 Presenting the Plan 12. . 12.2 The Plan Contents . . . . 6. . . .3 Organizing for Product Development . . . . .4 The First Minute is the Most Important . . . . . . . . . . . . . . . . . . .2 6. 111 10. . 6. . . . . . . . . .2. . . . . . . . . . . . . . . .2. . . . . . . . . .6 So What? . .5 Take Notes . . . . . . . . . . . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche .2 Are You Ready? . . . . . . . . . . . . . . . . . . . . . . . . . .2 Know Your Outline Thoroughly .3 Setting Goals . . . . . 104 10 Market Research 109 10. . . . . . . . 12. . . 11. . . . . . . . . . . . . . . .3. . . . . . . . . . . . .2 Some Suggestions . 6. . . . . . . . . . . Exactly? . . . Now What? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 After the Presentation . . . . . .2 Research Methods . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . .1. . .4 Manufacturability and Value Engineering . . . . . . . . . .2 Look and Feel . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. . 95 8 Finding an Idea 97 8. . . . . . . . . . .2. . . . .1 Preparing to Put the Plan 11. . . . . . . . Product Development . . 110 10. . .1. . . . .3 The Mission Statement . . . .1 Finding Your Niche . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . 94 7. . . . .1 The Presentation . . . . . .3. . . . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. .CONTENTS 6. . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . .1. .1 What Am I Researching. . . . . .2. . . . . . .1 Product Development System . . . . . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . . . .3 Some Style Points 11. . . . . 92 7. . . . . . . . . . . .

. . . . . . .2 Tracking Inventory . . . . .5. . . . . . . . . . . . .1. . . . . . .1 Inventory Turnover . . . . . . .1 Inventory and Cash Flow . . . . . . . . . . . . . . .4 Finding People . . . . . . . . . . . 13. . . . . . . . . . . . . 14.1. . . 14. . . . 14 Hiring Employees 14. . . . . . . . . . . . 13. 13. . . . . . . .2 Payment Plans . . . . . .1 Buying Inventory . . 13. . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . .5. . . . . . . . . . . . . . . . .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . 13. . . . . . . . . . .5 Suppliers . . .4. . . . . .2 Job Description . . . . . . . . .1 Job Analysis . . . . . . . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. .1 How to Hire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . .3 Advertising the Job 14. . .3 Computerized Inventory Control 13. . . . . . . . .3.1. . . . . . . . . . . . . .1 Dealing with Suppliers . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . .

Part I International Business Management 7 .

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

Which brings us to the subject of this lecture: Ethics. Easterners tend to trust people after observing a pattern of consistent behavior. Definition 1. Why is corruption an important business issue? • See sidenote 1. 2. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways. ..A. 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. • Because of this. child labor was widely used. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. Prison labor is also considered improper in the U.A. which are more strictly enforced in the West. For example.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.1.2. Western business people may not initially trust their Chinese counterparts. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. there is a perception in the West that Chinese are hard-working and smart.2. business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like.A. Westerners rely more on contracts.1 (Ethics) The study of morality and standards of conduct.S. • Because guanxi is less important in the West. 1. and Europe but a commonly accepted practice throughout the developing world. 3.2 Corporate Corruption Side Note 1. Note that during the industrialization of the U.S.2. • In general. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.10 CHAPTER 1.S. • However. This is something Chinese business people should be aware of.

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

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

Side Note 1. were not as highly regulated as banks. This resulted in several banks being technically bankrupt [5.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. 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.4.S. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Hodgetts et al.4. and as a result made high risk investments in the late 1980s and early 1990s.4. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. p.4.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www. the political scandals do not appear to have been fully acknowledged and addressed. JAPAN 13 1.S. Moreover. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.4. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.fdic. Side Note 1. also known as thrifts and which function like banks. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. • Many men do not understand why sexual harassment constitutes a problem. 5 1. with many women finding their employment opportunities constrained. Savings and loan institutions..4 1. The government was compelled to provide public money to bail out the institutions.pdf.2 Women in the Workplace Sexual harassment has also become an issue in Japan. Likewise.gov/bank/analytical/banking/2000dec/brv13n2 2. Better known is the case of Japanese banks. women have a difficult time being taken seriously. with many men of the opinion that women were just biding their time until they marry and have children. .1 (The U.1. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. 58].

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

with the purpose to influence their votes. Hodgetts et al.4.1. . Side Note 1. politicians.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany.S. EUROPE 15 1. their attitudes towards bribery when working in foreign markets differs from that of the U. than any other. 7 Source: http://www. is the notable exception).1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.5.3 Lobbying by Japan Japan spends more money lobbying in the U. to try to influence decision-makers in any circumstance. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.4.5. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts.7 Note that lobbyists do not have any formal power. Definition 1.5. in an extended sense.4. there seems to be a glass ceiling due to social factors.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.5.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.org.S. men are disproportionately represented in management positions. particularly in upper management. yes or no.S. They only have the power of persuasion.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.dict. Side Note 1. Although women have entered the workforce in large numbers in recent decades..5 1. at 40. with most in the top 20 among over 150 countries included in the survey. 1.

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

Ethical considerations include 1. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. and • A recent history of rapid economic development. • Yet another case in which software from a U. [5. 4. An increase in crime and illegal business activities. Side Note 1. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 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.1.5 billion in sales annually. there are undoubtedly many others that get away with it. Side Note 1. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 7.2 (Piracy and Counterfeiting) Present sidenote at [5. • Note that for every corporate spy that is caught. Prison labor. executives. p. 5. • A relatively stable government. 64]. 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.S.6. company in Boulder was stolen and sold to a Chinese company. An opaque legal system. International corporate spying problems.6. 6. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute.3 (Corporate Spying) Hodgetts et al. 3. Bribery and other forms of corruption. .6. 2. Often.S.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. Child labor. pp.6. Piracy and counterfeiting (see sidenote below).

give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. and the environment. See http://www..7 Corporate Social Responsibility Definition 1.com/our company/our mission/index.2. social justice. political.”[6] See also sidenote 1. . education. a grocery chain. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. . . “. health. China continues a battle against corruption. and economic issues such as poverty.3 (Nongovernmental Organizations (NGOs)) Private.7. social justice.18 CHAPTER 1. political.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. provide relief in the event of humanitarian disasters. Definition 1. Other companies. such as education and health care. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). not-for-profit organizations that seek to serve society’s interest by focusing on social. • CARE (promotes community development. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. there are few if any issues which affect and infuriate so many in China as corruption.S.cfm for more detail.6.4 (Corruption) Though things are improving. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.2. and the environment. Definition 1.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. education.7. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.7. Side Note 1. not-for-profit organizations that seek to serve society’s interest by focusing on social. and economic issues such as poverty. 1. In the words of a Beijing correspondent for “The Economist” magazine.benjerry.2 (Nongovernmental Organizations (NGOs)) Private. such as Whole Foods.7. and promotion of social equity). and emergency relief in the event of humanitarian disasters). health.

many feel that it has had a net benefit.7. and • Rainforest Action Network (RAN). . A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. Side Note 1. • And. MNCs do not appear to have been significantly impacted.1 Corruption and the FCPA Revisited Hodgetts et al.S.9 U. Both political groups and businesses are influenced by NGOs. executives may actually feel that it is the right thing to do. In fact. In 2005. note that while U. but does not outlaw payments to political party leaders.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. • Conservation International (promotes environmental conservation). Executives are people. last but note least. 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. with a score of 3.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. – Even socially responsible executives would consider the “bottom line” when making decisions.000 and $125.1. firms a reason to refuse to pay bribes. 1. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.2. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).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. For example. • To prevent a boycott or other consumer defections. as executives of publicly traded companies are ultimately responsible to their shareholders. firms are constrained by the FCPA with regards to bribery and other corrupt practices.7. too.7. as it gives the U. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.S. China ranked 78 out of 158.7.S. Side Note 1.

Important: Although it is widely cited. and the environment.4 (Some Opinions) Personally. Singapore is number 5 with a score of 9. 3. but most important first step is to recognize that there is a problem. With greater financial transparency. and Parmalat resulting in investors losing billions of dollars. Moreover.N. such as the U. WorldCom. The government recognizes that it is an issue and is taking action. .3.7. Hong Kong is number 15. Side Note 1.com/ipa/A0781359. 5. with scandals such as Enron. 10 http://www. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. better than the U. Side Note 1.7. It is a difficult problem to solve. Support and respect the protection of international human rights.5 (Table 3-1: Principles of the Global Compact) The U. I think corruption will diminish as China economically develops for several reasons: 1. It cannot be considered to be based on a scientific survey. with a score of 8. slightly better than Sweden. 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.2 respectively.7.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. 4. Tyco. 2006. societies. Commitments that many MNCs have signed on to. Global Compact.S. July 1.infoplease. the United States and Europe have recently been rocked by corporate corruption. malfeasance and diversion of corporate funds becomes increasingly difficult.6 and 8. As more state-owned businesses become privatized and the size of the middle class increases. and not based on hard data. 2.20 CHAPTER 1. more Chinese will own stock in companies. specify standards and codes of conduct in domestic and global operations. and Germany at 7. With more disciplined corporate governance.10 Corruption is certainly not endemic to Asia. The government is actively addressing the issue of corruption. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.N.4. 1. Global Compact specifies 10 principles which MNCs should abide by: 1.html. Scandinavian countries are at the top of the list.0 is considered to be the borderline at which countries are considered to have a problem.

Elimination of child labor. including extortion and bribery. the right for unions to exist).e. Elimination of all forms of forced and compulsory labor. 8. 21 3.7. Ensure that MNCs are not complicit in human rights abuses.1. 6. Freedom of association and recognition of the right of collective bargaining (i. A precautionary approach to environmental challenges. 5. and 10.. 9. Encourage development and dissemination of environmentally friendly technologies. Undertake initiatives to promote greater environmental responsibility. . Business should work against all forms of corruption. Elimination of discrimination with respect to employment and occupation. CORPORATE SOCIAL RESPONSIBILITY 2. 4. 7.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

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

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

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. • Reliability and stability of systems depends on well-planned maintenance schedules. 9]. New stock is ordered when stock reaches the re-order level. that tell production processes to make the next part.2. When implemented correctly. Definition 2. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. 8].wikipedia. 2007. • Eli Whitney (1800) is credited for popularizing interchangeable parts. – Providing proper work methods and tools. – Providing the proper training. such as the presence or absence of a part on a shelf.3 “Significant Events in Operations Management” [1. February 14.org/wiki/Just In Time %28business%29. quality.2. However. or Kanban. . and 1 Source: http://en.2.1 Side Note 2.2. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. p. If demand rises above the historical average planning duration demand. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. the firm could deplete inventory and cause customer service issues. The process is driven by a series of signals. which relied upon standardization and quality control. • Frederick W.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. WHAT OPERATIONS MANAGERS DO 27 10. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. p. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. 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. He also believed that management is responsible for – Matching employees to the right job. one drawback of the JIT system is that the re-order level is determined by historical demand. This saves warehouse space and costs. and efficiency. Kanban are usually simple visual signals.

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

Customers seek services through local intermediaries. such as pharmaceuticals or medical supplies. • Real estate. • Education. • Other professional occupations. Definition 2.2 (Pure Service) A service that does not include a tangible product.3.3. THE SERVICE SECTOR • Financial. • Services have a high consumer interaction. 29 Side Note 2. • Services are more often unique. 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. When buying a computer. Therefore it is difficult to automate.2.2. • Services are typically intangible.3. the purchase price may include installation services. See definition 2. • Services are often produced and consumed simultaneously. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. • Medical. Hospital care includes both health services and goods. This is important insofar as there is no inventory.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed.3. . used in your treatment. 3 Services that do not include a good as a component are called pure services. Legal advice is rarely identical for two clients. • Legal. Consumers interact with those providing the service. • Entertainment. • Services are often dispersed.3 That is. • Services have inconsistent product definition. • Services are often knowledge-based. when going to a restaurant.

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

1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.25 titles per labor-hour = 0. 15]. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5. Also known as total factor productivity.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.4 (Total Factor Productivity) See definition 2. Side Note 2. .3. p. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.2.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5.4375 titles per labor-hour = 0. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Side Note 2.5. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5.5. Definition 2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Consider today’s computers versus those from the 1970s. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. but overhead is no $800/day. Definition 2.0077 titles per labor-hour = 0. In order to improve productivity.5.5.

OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. Capital. A Toyota Corolla is a much different car than a Porsche 911 Turbo. the public provision of electricity is highly variable.5.) The screen had only one color. – For example. If the public electricity provision increases in quality. – Not all cars are the same. you had to write a program from scratch.5 (Productivity Variables) In operations management.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. such as convenience or safety. of course.S. Definition 2. 2. no word processors. Labor In the U. The electricity often goes out in the middle of the day and the current may vary in strength. about 10% of the annual improvement in productivity is due to increases in labor productivity. capital. (It used audio tapes for memory storage. • 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. Labor productivity has increased due to • Better-educated. 3.32 CHAPTER 2.. . where quality and other factors vary widely or the level of service provision includes items difficult to measure.5. • Units of measure – There may not be appropriate units of measure. the three factors critical to productivity improvement – labor. in Cambodia. Labor. and was about the size of my hand. There were. green. spreadsheets. If you wanted the computer to do something. and the arts and science of management. – This can be a particular problem in the service industry. or other commercial software available. it may improve productivity. Management. 2.

If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. THE PRODUCTIVITY CHALLENGE • Better-nourished. Cannot Correctly Answer Questions of This Type. there is considerable concern over teaching of basic skills such as mathematics to grade school children. Social overhead that makes labor available.5. 2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.) Present Heizer figure 1. Side Note 2. Basic education appropraite for an effective labor force. writing.. and 4. draw the rectangle on the blackboard. and • Healthier workers as well as • A shorter work week. The primary variables for improving labor productivity include 1. Diet of the labor force. In developed nations. 16].5.S. “About Half of 17-Year-Olds in the U. maintaining and enhancing the skills of labor. p. and math. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.S. Which of the following is true about 84% of 100? 4 When presenting this question. and 33 3.S. What is the area of a 4 × 6 meter rectangle.2.8 [1.” In the U.3 (The State of Education in the U. such as transportation and sanitation. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. .

management is not always identified separately from labor as an input.4 Productivity and the Service Sector Historically.2 Capital Capital investment in the U.S. Side Note 2. are utilized effectively.. and because the author of the textbook is writing about operations management. U. management is considered as a separate input. p. productivity in the service sector has not increased as rapidly as with the production of goods. 2.4 (Management as an Input) Because this is a course in business management.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Definition 2.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. however. in the U. Note that in classic economic analysis and other areas of business.5. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. as well as capital. and knowledge.S. According to Heizer [1. education. graduate programs and the students they produce remain the best in the world. educated.5. Note that there is a trade-off between capital and labor in most industries. has increased at about an average of 1.34 CHAPTER 2. and knowledgeable employees and operations managers are responsible for ensuring that technology.5. 17]. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.5.5. Difficulties arise because service-sector work is .S. 2. 2.5% after allowances for depreciation. and the cost of capital depends on interest rates. Developed economies (also known as post-industrial economies) require trained.

Heizer notes [1.2. 35 3. and 5. SOCIAL RESPONSIBILITY 1.) Productivity is highest in the U. Frequently individually processed (e. • Keeping the workplace safe.6 Social Responsibility As discussed in chapter 1. Side Note 2. but from customers. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. 2. the performance of a law firm).. watchdog groups such as NGOs.S. and • The U.g. banking system is about 33% more productive than Germany’s. These demands come not only from the manager’s personal ethic. 2. p.5 • The U. These challenges include such issues as • Maintaining a clean environment. such as cleaning.S. medical diagnosis). 4. 18] • Retailing in the U. legislation protects shopkeepers from discount retailers.6.. a haircut).S. Typically labor-intensive (e. telephone industry is twice as productive as Germany’s. government agencies.g.. Difficult to evaluate for quality (e. 5 In Japan. • General ethical behavior concerning issues such as child labor and corruption. teaching). investment advice). and child care. Often difficult to automate (e. We will discuss this challenge in more detail throughout the course. in both overall and service productivity.5. and other stakeholders.g.. food preparation.g.S. . laundry service.5 (Service Productivity in the U. Often an intellectual task performed by professionals (e. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.S. Low-productivity activities. is twice as productive as in Japan.g..

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

Provide Better Goods and Services – For companies doing business in an international setting. France. 3. and • Increase sales. global air-ground transportation of high-priority goods and documents that require rapid.1.38CHAPTER 3. I recommend that all companies draft a mission statement.1. • Provide additional insights and opportunities. 3. We will produce outstanding financial returns by providing totally reliable. global organizations can attract and retain better employees. 6.1 (Mission) The purpose or rationale for an organization’s existence. • Perfumers tend to concentrate in Grasse. 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. Attract and Retain Global Talent – By offering more employment opportunities.1 Mission Whether large or small. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. positive control of each package will be maintained utilizing real time electronic tracking and tracing . FedEx. 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. Missions state the rationale for an organization’s existence. 5.2 [1. p.1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Side Note 3. an understanding of cultural differences in preferences is needed to best meet customer needs. Equally important. FedEx is committed to our People-Service-Profit philosophy. 4. 28] which includes mission statements for three multinational companies: 1. competitively superior. Definition 3.

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

• Training. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. See http://www.1. . Side Note 3.3 (Sample Mission Statements) Present Heizer’s figure 2.benjerry.1. 2. Differentiation – They make their product better. Cost leadership – Providing cheaper products. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.2 (Strategy) How an organization expects to achieve its missions and goals. • Availability of complementary products.1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. Differentiation can arise from anything that the customer may value about a product or a services. Definition 3. • The “look and feel” of the product.1.com/our company/our mission/index.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. the Operations Function. but can be used at the department level and even at the project level. the creation of a unique advantage over competitors. and Major Departments in an Operations Function.3: “Sample Missions for a Company. 3. 3.40CHAPTER 3. more responsive products or services. • Interoperability with other products. Responsiveness – By providing timelier.cfm for more detail. Definition 3.3 (Competitive Advantage) In operations management. be it • Product features.” Note that mission statements are used not only at the company-wide level.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

Group the necessary activities into an organizational structure. Increase productivity.3. and Threats) analysis to develop strategies. Staff the organization with personnel that will get the job done. those activities or factors that are key to achieving competitive advantage. Weakness.3. Side Note 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.1 (SWOT Analysis) In operations management. Definition 3.” The process of developing a strategy involves the following steps: • Environmental Analysis. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. 2. and 3.44CHAPTER 3.2 (Critical Success Factors) In operations management. 2.3. in particular. then determine whether the organization does these things well (and. if the firm has a competitive advantage in these things) and where failures are most likely. “Strategy Development Process.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Identify a strategy and critical success factors. then • Form a Strategy. Provide competitive advantage. determining internal strengths and weaknesses and external opportunities and threats. These critical success factors are used to develop a competitive advantage. and 3. Definition 3.1 (Strategy Development Process) Present Heizer figure 2. • Determine Corporate Mission. The operations manager’s job is a three-step process: 1. p. 3. 37]. The purpose of this process is to 1. Opportunities. . Implement an OM strategy.3.6 [1.

3 (Activity Map) In operations management. • Red arrows – critical success factors • Blue arrows – support activities 3. 3.5 and HR. an activity map can be used to link an organization’s competitive advantage to the CSFs. Recall the “org charts” in sidenote 2.3 Integrate OM With Other Activities In order to achieve its strategy.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. 39].2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.1 as a checklist to determine critical success factors. Definition 3. p.6 3. OM activities are most productive when they are integrated with other activities such as marketing. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.2.3.3.4. CSFs. 5 Management 6 Human Information Systems Resources. Side Note 3.1. Once CSFs are determined. . MIS.3.3. and supporting activities.3. Southwest Airlines has a competitive advantage in providing low-cost airfares. a graphical link of competitive advantage.2 as examples of how firms organize their activities. finance.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.

4. a strategy that uses exports and licenses to penetrate the global arena. as exports require little change in operations and licenses often leave risk with the licensee.4.4. 3.4. or joint ventures with substantial independence. 95% of its assets and 98% of its sales are made outside Switzerland. Although e it is legally Swiss. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.4.5. In the semiconductor industry. and hamburgers without beef in India. Also one of the least profitable due to transport costs and little local responsiveness. [1. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.4 (Multidomestic Strategy) In operations management. • Texas Instruments is an example of a country with a global strategy.3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. 4. p. Usually does not confer a cost advantage. Definition 3. • Nestl´ is an example of a country with a transnational strategy. See definition 3. 42] Definition 3. products do not need to be localized.6.4.46CHAPTER 3.3 (International Strategy) In operations management. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. International strategy – Often the easiest strategy. Typically characterized by subsidiaries.1 (International Business) A firm that engages in cross-border transactions. See definition 3. See definition 3. See definition 3. • McDonald’s is an example of a country with a multidomestic strategy. Its menu reflects the country in which it operates.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business.4.4. Definition 3. owning or controlling facilities in more than one country. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.4. Definition 3. . 2. but a good strategy for cost reduction when products do not need to be adapted locally. wine in France. Global strategy – Not characterized by local responsiveness. Definition 3. franchises. with beer on the menu in Germany.5 (Global Strategy) In operations management.4. Only 10% of its work force is Swiss.

Side Note 3. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.3. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. 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 .6 (Transnational Strategy) In operations management..4. p. 6]. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.4.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.S.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

Project management involves three phases: 1. Planning – Goal setting. 3. Plans are also revised to meet changes in time and cost demands. money. and budgets. and supplies are tasked to specific activities and activities are related to each other. defining the project. Scheduling – People.0. 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.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management.0. Even Microsoft. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Side Note 4. 49 . Controlling – Monitoring of resources.Chapter 4 Project Management Side Note 4. and Controlling) Present Heizer figure 3.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. 49]. pp. Side Note 4. p.0. costs.1 [1.3 (Project Planning. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Scheduling. 46–47]. and team organization. quality. 2. the largest software company in the world. The profile highlights the importance of project management in achieving competitive advantage.

PROJECT MANAGEMENT However.5. if things go wrong. You may be managing resources far in excess of your individual salary. 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 work contains complex interrelated tasks requiring specialized skills. 3. The project cuts across organizational lines. 48] 1. Moreover. often times.1. Definition 4.0. Your job is to make things go smoothly and according to plan. it is very obvious and can be very costly. Project organizations work best when [1. you should always expect the unexpected. Work can be defined with a specific goal and deadline. you will be confronted with a daunting task.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.0.” [1.1 The Project Manager As alluded to in sidenote 4. 69]. and/or 5. In a sense. The project is temporary but critical to the organization. People will not come through with what they promised. Side Note 4. However. 4.1. p.5 (Personal Advice on Project Management) Project management is a tricky profession. a temporary project organization is formed to address a specific project.50 CHAPTER 4. 4. See also Heizer sidenote “Project Management and Software Development. 2. 4. If you become a project manager on projects of significant complexity. you are doing your job well if noone notices the project management. The job is unique or somewhat unfamiliar to the existing organization. things you thought were certain turn out not to be. The responsibilities of project managers are to make sure that . and you will be forced to improvise. p.1 Project Planning While many projects are run within an existing organization.

3. Review graphic design for user account input web page 3. Definition 4. Approve software architecture for user account input web page functionality .4.1. you have divided the tasks too finely.1. a web page takes about a day to build for an experienced team. Complete graphic design for user account input web page 2. a task that should only take a day or so.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. For example. 51 4. 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. When dividing a project into tasks.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). in a software engineering project. The project meets its quality goals. The project is on or under budget.1. Side Note 4. PROJECT PLANNING 1. and 4.1. In a project that includes allowing a user to enter personal information on a web page.2 (Work Breakdown Structure (WBS)) In operations management. • Build the user account input web page is a much better task division than 1. Approve graphic design for user account input web page 4. Review software architecture for user account input web page functionality 6. 2. All projects come in on time. Complete software architecture for user account input web page functionality 5. People receive motivation and information necessary to do their jobs. dividing a project into more and more detailed components.

Write software for user account input web page functionality 8.52 CHAPTER 4. Project 2. the work breakdown structure is not something you go to your office to do in isolation.2. At the time you are creating the work breakdown structure.2 (Work Breakdown Structure) Present Heizer figure 3. 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. Identify precedence relationships among activities 3. Major tasks in the project 3. Show the relationship between each activity to others and to the whole project 2. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. They will be useful for project scheduling. Subtasks in major tasks 4.1. Activities (also known as “work packages”) to be completed Side Note 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities.1. Encourage realistic time and cost estimates for each activity . of course. p. Write software for user account input confirmation page functionality 9. you should also take note of time and cost estimates given by your technical staff.3 (Reality Check: WBS) In reality. The actual WBS for Windows XP would.3 [1. Scheduling serves to 1. Side Note 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). PROJECT MANAGEMENT 7. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. fill hundreds if not thousands of pages. 4. which we will discuss next in section 4.

Definition 4. Activity time estimates are recorded.2. p. Side Note 4.” This will give the class an idea of the look and feel of a typical Gantt chart. Gantt charts are perhaps the most widely used tool for ensuring that 1.2. which becomes narrower as one approaches the neck of the bottle.2. PERT. However. moeny. and material resources by identifying critical bottlenecks in the project Side Note 4. the road bottlenecks. All activities are planned for. PROJECT SCHEDULING 53 4.2. Overall project time is developed.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. 51]. these should be considered merely tools to be used when they are useful by saving time or energy. Perhaps they imagine that they are not doing their jobs professionally if they are not.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. It can actually be quite time consuming to create and maintain Gantt charts. I have found that simple spreadsheets or even just writing things down on a notepad (I typically use a separate notepad for each project to keep organized) is more productive than using Gantt . PERT. 2.2. – said of roads.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. MS Project’s Gantt chart functions demand you assign employees. and 4. Derives from the typical shape of a bottle. The order of performance is accounted for. and CPM tools for every project management activity. as. cost estimates. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. Make better use of people.4 [1.2 (Using Gantt. 3. PERT and other formal documents. and CPM) Inexperienced project managers often feel the need to use Gantt. right by the bridge. and other values to each activity.4. PERT and CPM help answer questions such as • When will the entire project be completed? . For smaller projects. Definition 4.

is the money spent equal to. costs. . Total program labor curves. 7. 4. Work status reports. 4. behind schedule. were developed in the 1950s for project control.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. quality.1 PERT and CPM Two methods. Cost distribution tables. Definition 4. Time analysis reports. and budgets of projects.3.54 CHAPTER 4. Control programs typically produce reports detailing 1. 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. 2. and 8.3 Project Controlling Project control involves monitoring resources.3. 6. 3. PERT and CPM. is the project on schedule. Functional cost and hour summaries. Variance reports. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. Cost breakdowns for each task. 5. or ahead of schedule? • On any given date. what is the best way to accomplish this goal at the least cost? 4. Raw material and expenditure forecasts. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. less than.

4. Develop the relationships among activities. in my experience. Assign time and/or cost estimates to each activity.3. PROJECT CONTROLLING 55 Definition 4. and ontrol the project. 6.3 (Critical Path) The computed longest time path through a network. . Also. 53]. 4. p.3. or the critical path.5 [1.1 (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. Draw the network connecting all of the activities.3. 2. Moreover. 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. Gantt charts are the “go to” visualization method for even very complex projects.3. schedule.2. See also definition 4. AON associates the activity with the node whereas AOA associates the activity with the arrow. Personally.3. They both follow six steps: 1. Define the project and prepare the WBS. Use the network to help plan. 3.3. Definition 4. through the network.3. Compute the longest time path.2 (Example: AON and AOA) Present Heizer’s figure 3. Activity on Node (AON) and 2.3.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. As the names describe. it will do for you automatically much of what we will go through manually in this class. Activity on Arrow (AOA).3. See also definition 4. monitor. 4. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts.2 Network Diagrams There are two approaches to visualizing activity networks: 1. Side Note 4. 5.

Follow with example 3 and figure 3.3. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. Definition 4. that is. its LF equals its LS of the activity that immediately follows it. that is. EF = ES + Activity time. 4.3. 1. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.56 CHAPTER 4. LF = min{LS of all immediate following activities}. . their dependencies. its ES is the maximum of all EF values of its predecessors. its LF is the minimum of all LS values of all activities that immediately follow it.4.4 Determining the Project Schedule Once we have identified all of our activities. PROJECT MANAGEMENT Side Note 4.1 gives sufficient information to describe the network. p.1 (Critical Path Analysis) In project management.6–3. 54–55].3. – If an activity is an immediate predecessor to more than one activity.9 [1. that is.8 [1. LS = LF − Activity time. In other words. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. pp. analysis used to determine the project schedule. – If an activity has multiple immediate predecessors. we must use time estimates of each activity to determine the overall schedule for the project. See also definition 4. 56]. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Table 3. We do this with a critical path analysis with involves a 2-step procedure. ES = max{EF of all 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. 2.

4.3 [1. If an activity2 does not impact the slack time of any other activity. the free time for an activity. p. the time associated with a single activity.1). we cannot complete the project in 15 weeks. G.3. “Notation Used in Nodes for Forward and Backward Pass. Note that activities A. Slack time is just Slack = LS − ES or Slack = LF − EF . and • Includes only critical activities (see sidenote 4.4. it is said to have free slack. • Terminates at the last.4.5. Definition 4. 60].1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.5.10 [1. or the amount of time an activity can be delayed without delaying the entire project.5. E. 57].13 [1.2 (Forward Pass) In project management scheduling.4. The critical path is one that • Begins at the first activity in the project. 1 For example. p. in the example in sidenote 4. activity F in sidenote 4.3 and Heizer figure 3.1. they share total slack. p. we may delay the project as a whole. Definition 4. 61] based on table 3. Side Note 4.” Then complete Heizer example 7 figure 3. Note also that if we delay each activity by the amount of slack that activity has.1 When several noncritical activities appear successively in a path. and H have no slack time and cannot be delayed without delaying the entire project. 2 For example. C.2 (Total Slack) In project scheduling.3 (Free Slack) In project scheduling. These are called critical activities. Also notable is that if the total time of the project needs to be reduced. Definition 4. if we delay activities B and D by one week each. . 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.1 (Slack Time) In project scheduling.5.1.4.4.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. the time shared among more than one activity. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.

See also definitions 4. technical considerations that were unknown at the time the project schedule was drawn up.6.1 and 4. The usual definition calls these alpha and beta.58 CHAPTER 4. we do not.6. Definition 4. etc. Definition 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. Most likely time – The most realistic estimate of the time required to complete an activity. The beta distribution is used as a prior distribution for binomial proportions in . the most probable activity completion time that could be obtained in a PERT network.2. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. Side Note 4. Definition 4. In reality. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. See also definitions 4. PROJECT MANAGEMENT 4. See also definitions 4.6.3 (Most Likely Time) In project scheduling.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.6.6. the “worst” activity completion time that could be obtained in a PERT network.6. Beta distributions have two free parameters. the “best” activity completion time that could be obtained in a PERT network. unexpected complexities.6. which are labeled according to one of two notational conventions.3.1 (Optimistic Time) In project scheduling.1 and 4. the project manager pulls the number “out of the air” based on their experience managing related activities.6. Effectively.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Definition 4.2 and 4.6. However. three time estimates are used: 1. In PERT.3.2 (Pessimistic Time) In project scheduling..6. the time required to complete an activity is often uncertain due to supply problems. and the other uses β = β − 1 and α = α − 1 . in most cases.

63] for activity F based on optimistic. 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. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. q) = (4.78 weeks. most likely. The above plots are for various values of (α. Activity times are statistically independent 3 Source: http://mathworld.html.html http://mathworld. p. 2007.4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.25 to 3. 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. February 21. 4.com/BetaDistribution.1) where B(p.β) with α = 1 and β ranging from 0. p. The expected activity time for activity F is 3 weeks5 and the variance is 1. 62].1 Probability of Project Completion If we assume that 1.wolfram.1].00. and 9 weeks. and .3 The domain is [0. Total project completion times follow a normal probability distribution and 2. 4 See definition 4.6. and pessimistic times of 1. 8 1.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.4. 4. Side Note 4. β) Γ(α)Γ(β) P (x) = (4. and pessimistic times of 1. 2.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. most likely.6.wolfram.6. The variance of the activity time is Variance = [(b − a)/6]2 .78 6 6 36 7 4 weeks.6. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.00 week.com/BetaFunction. and 7.

6.5.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. Side Note 4. Side Note 4.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. 9 For 10 See more information.com/StandardDeviation. and within 3 standard deviations approximately 99. 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) (4.16.76 weeks implies that the project will exceed the expected completion time by more than 1. the population variance var(X). pp. “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 4.6.6.60 CHAPTER 4.6.3) Definition 4.” Review Heizer example 10 [1. definition 4.6. Definition 4. p. Note that the standard deviation of 1.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1.6 (Standard Deviation) The standard deviation is the square root of the variance.6. commonly also N written σ 2 .76 weeks approximately 16% of the time. .6. 64]. 65] and figure 3. See also 4.6. See definition 4.7% of the time.wolfram. see http://mathworld. two standard deviations approximately 95% of the time.3 (Example: Project Variance) Review Heizer example 9 [1.1.10 Determining Project Completion Time for a Given Confidence Interval A common question is.html. 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. A2– A3] “Normal Curve Areas. p.

• The shortened durations will actually enable us to finish the project on time.7. Step 1 – Compute the crash cost per week. we need to ensure • The amount by which an activity is crashed is. and if you become a project manager.1. and • The total cost of crashing is as small as possible. Assuming linear costs.1. crash cost is the cost required to complete an activity in the shortest time possible. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. Definition 4. if certain activities off the critical path take the pessimistic time estimate or more to complete. you will doubtless experience one or both of these eventualities many times in your career. 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.4.7. 4. it may result in the project being delayed.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. we want to do so in the least cost mannger possible.7. When crashing a project.7.11 Definition 4. permissible and realistic.2 (Crash Time) In project management. in fact. See definition 4. .1 (Crashing) In project management. Since activity completion times are typically shortened by adding resources.7. Definition 4.7. See definition 4. 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. Project crashing is the name given to the process of rushing a project to completion.4) 11 Since crashing a project often involves adding additional resources to activities.

Note that one activity may be on several critical paths. PROJECT MANAGEMENT 2. 67–69] including table 3. the advice given in this section should be helpful. If you find yourself needing to rush a project.62 CHAPTER 4. stop. Step 4 – Update all activity times.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If there is more than one critical path. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. At times this may be politically infeasible. Step 2 – Find the critical path(s) in the project network. Then crash each activity by one period.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. 4.2 (Example: Crashing a Project) Present Heizer example 12 [1. go to step 2. If the due date has been reached.19. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. As a project manager. Side Note 4. 4. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.7.18–3. 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. If not. Crash this activity by one period. If you accept the challenge and try to rush the project to please upper management.5 and figures 3. Step 3 – If there is only one critical path. pp.7. 3. you should be very wary of such pressure. • Advantages – Especially useful for large projects . 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. Side Note 4.

pp. It is perhaps the most widely known and featureful project management software available.9 Using Microsoft Project for Managing Projects Present programs 3.1. Information on Achievo can be found at http://www. including open source software that is free.org/wiki/List of project management software for a list of project management software or ask Dr.gnome.7 [1. You may also refer to http://en.7. Information on Planner can be found at http://live. . There are a variety of alternatives. Noncritical paths should be closely monitored as well. 12 Recall sidenote 4.org.wikipedia. Information on dotProject can be found at http://www.4. 4. However. Note that most project management textbooks refer to MS Project as the software of choice for project management.dotproject.net.org/Planner. independent. it is relatively expensive and the features are so numerous and complex. Starkweather about his impression of various alternatives.to mediumsized projects. 70–74] with figures demonstrating MS Project functionality. 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. they are often overkill for small.1–3.9. 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.achievo.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

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

2. • Training. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. Make the forecast. Validate and implement the results.5.2. capacity.1. Also called sales forecasts. Determine the use of the forecast. Gather the data needed to make the forecast. and • Layoffs. Determine the time horizon of the forecast. 4. 7. 3.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Capacity – Underestimating demand can result in • Undependable delivery. marketing.2 and 5. projections of a company’s sales for each time period in the planning horizon. See also definitions 5. 5. 3. 5. Select the forecasting models.4 (Demand Forecasts) In operations management.1.1. and personnel planning.1. 6. • Loss of customers. and scheduling decisions and serve as inputs to financial. Select the items to be forecasted. 5. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.3. 2. Human resources – Anticipated demand is needed to estimate the need for • Hiring. these drive a company’s production.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. and • Loss of market share. .

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

∗ Moving averages · Simple.8. · See definition 5.3. and · Respondents. the naive approach. · Staff personnel. or other incentives to over or understate demand. · Useful as a starting point or sanity check for more sophisticated methods. · There are three problems with moving averages 1. say. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. Sales people typically respond to incentives. 2. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. they will do so. · The simplest and easiest way to estimate demand. the more likely it is your results will be accurate.5. Moving averages require more past data to work with than.9. ∗ However.3. be sure that the sales force is clear that their incentive is to be as accurate as possible. 3. · Requires less past data than moving averages.3. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. for example. · See definition 5. – Sales force composite ∗ You would be surprised how accurate your sales force can be. and if they perceive there is an incentive to exaggerate. political. . • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. Moving averages cannot pick out trends very well. useful method if we can assume that market demands will stay fairly steady over time. ∗ The more independent your decision makers are from economic.

Definition 5.5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.1.3. See also definitions 5.3. Definition 5.3. Definition 5. See also definition 5. and 5.5. a forecasting technique using a group process that allows experts to make forecasts.3. 5.6 (Consumer Market Survey) In operations management.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. emotions. .6.10.6.3.3.3. See also definition 5. Definition 5.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.4. and 5. personal experiences. 5.3.3. See also definitions 5.4.6.3 (Jury of Executive Opinion) In operations management. 5. and 5. See also definitions 5.3. See also definitions 5.4 (Delphi Method) In operations management.70 CHAPTER 5.3.4.3. 5.5 (Sales Force Composite) In operations management. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3.1 Qualitative Forecasting Methods Definition 5.3. and value system.3. · See definition 5.3. a forecasting technique based on salespersons estimates of expected sales.2.3.3.5. 5.3.3. and 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.3.

Higher values give more weight to recent data. See also definition 5.9.3.10. Definition 5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. 5. and 5.3.05 to 0. a simple moving average is given by demand in previous n periods Moving average = (5.1) n • Weighted Moving Average – Mathematically.3.8.3.3) The smoothing constant.5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.7. Definition 5.3. See also definitions 5. Definition 5.5. and are appropriate to use when the underlying average .7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. α.3. Mathematically. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.3.2) See also definition 5. That is. FORECASTING APPROACHES 71 5. 5.3.7.3. Moving averages can be either simple or weighted.2 Quantitative Forecasting Methods Definition 5.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.11. 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. generally ranges from 0. • Simple Moving Average – Mathematically.3.

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 5.3.3. and 5.3. and are appropriate to use when the underlying average is relatively stable.0.14. 1 See |actual − forecast| n (5. Mean absolute percent error (MAPE).3.3. When α = 1. exponential smoothing is equivalent to naive forecasting.3. 5.8.3.13.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. See also definition 5. such as the mean absolute deviation (see definition 5. See also definition 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.12). FORECASTING is likely to change. Mean squared error (MSE).3.3 Measuring Forecast Error Once a forecast is made.7. Three popular measures are 1. 2. while lower values give more weight to past data.15.4) definition 5. Mean absolute deviation (MAD). it is good practice to compare the estimated value with the actual value as actual values become available. 3. Definition 5. . Definition 5.13).3.3. 5. Definition 5.7.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.12.11 (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.72 CHAPTER 5.3.

12. FORECASTING APPROACHES 73 Definition 5.5) |actuali − forecasti |/actuali n (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3.12. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.3.8) With smoothing constants α for the average and β for the trend. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.5.6) 5. Mathematically.3. MAPE is given by MAPE = See also definition 5.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3. expressed as a percent of actual values. Mathematically.3.11) .10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.7) or F ITt = Ft + Tt (5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5. Definition 5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3. 100 n i=1 (forecast errors)2 n (5. MSE is given by MSE = See also definition 5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.

Ordinary Least Squares Regression analysis is also useful for predicting trends.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.14) .74 or CHAPTER 5. Compute the smoothed trend. 2. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. by the formula F ITt = Ft + Tt .12. Tt with equation 5.12) = 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. time) (5. Compute Ft . 1.10. 3. Calculate the forecast including trend. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. the emponentially smoothed forecast for period t using equation 5. It is also commonly called linear regression analysis. F ITt .

¯ x The least squares method has several drawbacks.3. 5. 5. Most businesses experience a surge in sales around Christmas. 4.5 Seasonal Variations in Data In most businesses. Deviations around the least squares line are assumed to be random. We do that with a 5-step process. In the U.5. demand is seasonal. 2. during the summer months when it is common to take a vacation. to account for seasonal changes in demand in our forecasting. . such as cars and washing machines.3. Find the average historical demand for each season. Compute a seasonal index for each season by dividing the historical demand by average demand. the multiplicative seasonal model. the more uncertain it is. 2. 1.. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. Definition 5. Recall that the equation 5. This provides the seasonal forecast. Estimate next year’s total annual demand. 3.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. we will examine one model. Divide this estimate of total annual demand by the number of seasons. Although there are many methods to accomodate seasonal demand. 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¯. then multiply it by the seasonal index for that month. consumers often make fewer purchases of durable goods. 3.3.S.13 assumes a linear relationship. Compute the average demand over all months. The first step is to calculate the seasonal forecast. 1.

mathematically. is given by (y − yc )2 n−2 Sy.x = (5.3.x = (5.3..g. However.4. pp.76 CHAPTER 5. but x will be something other than time.1 (Example: Using OLS) Present Heizer example 12 [1. We will use the same technique.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. 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. if you are uncertain about predictions of x.g. average local salary) (5. FORECASTING 5. It is also called the standard deviation of the regression and. If there are published estimates you can cite (e.. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. Note that making predictions of future demand involves also making predictions about the independent variable x.. 106– 107]. 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. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. whatever uncertainties you may have transfer to your predicition of y.17) .15) Side Note 5.g.16 is y2 − a y − b n−2 xy Sy.

3. Correlation) Correlation merely means that the values of two variables are historically related. or National Football League. Other interesting correlations that have been identified over the years include banana prices and U. Even the Year of the Pig correlates strongly with the U. leading stock indexes.S. but the relationship is coincidental.4 (Causation vs.3 (Examples of Correlation Coefficients) Present Heizer figure 4. February 28. It does not imply causation one way or the other. Certainly.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.time. p. “Distribution about the Point Estimate of $600 Million Payroll.3. stock market. changes in skirt lengths don’t cause stock market prices to rise and vice versa. 107]. Dow Jones Industrial Average and Standard and Poor 500. Definition 5.” Note that the regression assumes a standard normal distribution about the estimate. the U. which is divided into two “conferences. 4 Source: http://www.html?xid=sitecnn-partner.3.3.S. have been correlated. The correlation coefficient of variables x and y is given by r= See also definition 5.” Side Note 5.S.3 and the U. 109].” the AFL (American Football Conference) and the NFC (National Football Conference). a football game played between two football conferences in the U.18. pp.3. has risen. Correlation Coefficients for Regression Lines Definition 5.S. Since 1935. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. football in the U.4 .18) .1594488.10 [1.00. Side Note 5. the note in the margin accompanying Heizer example 14 [1.S. FORECASTING APPROACHES 77 Side Note 5. stock market prices as well as the winner of the Super Bowl. 2007.9 [1.S.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. nor does it imply that they will continue to be related. stock markets. the average length of a woman’s skirt and stock market prices in the U.S. 108]. p. is monopolized by the NFL.3.8599.2 with stock prices generally rising as skirts rise. in all but one Year of the Pig. Historically.2 (Distribution About the Point Estimate) Present Heizer figure 4.3. “Four Values of the Correlation Coefficient.com/time/business/article/0.5.

In practice. . = the dependent variable (e. It is commonly simply called “R squared. x2 . .19 (Multiple Regression) A causal forecasting method with more than one independent variable. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. b 2 .19) Determining the values of a.3. b2 .” As the sidebar points out. p. . 110].3..3. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.3.6. etc. results in additional predictive accuracy as measured by r2 .18 and Heizer example 15 [1. . b1 . . often the most difficult part of building a multiple regression model is to pick the independent variables.17. .78 CHAPTER 5. .” For example.15 is given by y = a + b1 x1 + b2 x2 + . ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3. 5 See definition 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable. Adding additional independent variables as predictors.g. Side Note 5. . in a multiple regression analysis involves a complex formula which is beyond the scope of this class. The multiple regression equivalent of equation 5. if they are indeed related to the dependent variable. . (See definition 5. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. you would use statistics software to calculate these values. we discussed a means by which we can attempt to predict the value of one variable using the value of another. p. b1 . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.5 Definition 5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. 110].

4.1 (A Plot of Tracking Signals) Review Heizer figure 4.4. 111]. p. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6 standard deviations.20) A good tracking signal has about as much positive as negative error. one of the most common problems with forecasting is a lack of follow-up.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.9% of the time. and 4 M ADs to 3.4.6. which correspond roughly to standard deviations. These limits are typically based on M ADs.forecast| n where M AD = (5. three M ADs about 98% of the time. and within 4 M ADs about 99. the forecasting methodology needs to be modified.5. If the tracking signals violate upper or lower limits. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.8 standard deviations.6 One M AD is equivalent to 0. Definition 5. MONITORING AND CONTROLLING FORECASTS 79 5. Side Note 5. 6 Recall definition 4.2 standard deviations. three M ADs to 2. though large errors may be a problem as well even if the positive and negative errors balance.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .1.4.6.4 standard deviations. In other words.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. two M ADs to 1. .2. Definition 5.11 [1. The tracking signals should also be compared as they are generated against limits. Tracking signals are typically used monitor forecasts. This means that the observed value should be within 2 M ADs abut 89% of the time. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).

Side Note 5.2 Focus Forecasting Focus forecasting. is based on two principles: 1. 114]. Definition 5. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.4.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. However.4. you should be aware of the criticism of focus forecasting.” . Side Note 5. Definition 5.4. There is no single technique that should be used for all products or services.4..g. which selects a model based on goodness-of-fit to a data set. Sophisticated forecasting models are not always better than simple ones.3.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. you must make your own decision as to how you select the forecasting models that you use.10) is automatically changed to keep errors to a minimum.4.2 [1. 5.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. 2. 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.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4. there has been much criticism of the approach to using models based on thier fit to the data. In your career. α in definition 5. FORECASTING 5. “Summary of Forecasting Formulas. Note that even with computer monitoring.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.80 CHAPTER 5. p. changes need to be check with human eyeballs to ensure that the adjustments make sense.

which. pp.1 . 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. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches.5 (Product Decision) The selection. 81 . 124. and • The organization’s capabilities. insurance companies often refer to their policies. pp. • Market share and dynamics. Definition 6. 122–123].0. • Product life cycle. Referring to services as products is common in the service industry.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.128] • Investment and cash flow. time permitting.0. is a service.1 Side Note 6. 1 In this chapter. For example. the word “product” will refer to both goods and services. which will be discussed in detail later in the semester. 2 Recall sidenote 2.2. as products. They also use just-in-time production techniques. Product strategy2 defines the breadth of the product line and links product decisions to [1. definition. as an intangible.

6. Growth. • Maturity phase – Competitors have entered or are entering the market.g. so high volume. Decline. years (e. • Introductory phase – In the introductory phase. Introduction. restaurants or nightclubs). often ruthlessly. months (e. and innovative production is appropriate. products expenses are often high for – Research and development. • Growth phase – Effective capacity forecasting is necessary.1 Goods and Services Selection Product decisions focus on creating a competitive advantage via • Differentiation – Offering distinctly unique or high-quality products • Low cost – Providing quality goods and services at a lower cost than competitors • Rapid response – Executing rapid design and product development to respond to changing consumer demand 6. 3. Life cycles can be in the days or weeks (e. Product strategy involves determining the best strategy for each product based on its position in the life cycle. clothing fashions).. low-cost..2 Life Cycle and Strategy Strategies change as products move through their life cycle. and – Supplier development. DESIGN OF GOODS AND SERVICES 6.1 Product Life Cycles Product life cycles can be divided into four phases: 1.g.1.82 CHAPTER 6. YouTube videos).1.g. and 4. • Decline phase – Investment needs to be minimized and resources need to be redeployed. – Process modification and enhancement. .. Maturity. or even decades. 2.

3 • Political and legal change can also bring about business opportunities. 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. GENERATING NEW PRODUCTS 83 6.500 or 100. the development of cellular telephone technology or the internet.2 Generating New Products Most products have a limited life cycle. as well as the total annual dollar contribution of the product. Definition 6.2.000 yuan. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1.2.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.1 (Example: Brainstorming) Lead the class in a brainstorming session.4 Side Note 6.2. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. • Economic factors. example. 6.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.1.3 Product-by-Value Analysis For firms with many products.2. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. 4 For 3 For . • Technological change often drives product innovation. Ideas are not reviewed until after the brainstorming session.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. Definition 6.6. it must regularly redesign existing products or bring new products to market. 6. are tied to product demand. example. • Sociological and demographic change is also tied to product demand. and if a company is to survive. such as consumer incomes.

1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. p.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on. DuPont estimates that it takes 250 ideas to yield one marketable product [1.3. 128]. .3.3. The house of quality is a graphic technique for defining the relationship between customer desires and a product.2. market dynamics. Each stage should have an accompanying review to determine whether to progress or not. Side Note 6.3. Translates customer desires into a product design.84 CHAPTER 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 6. p.3 6.1 (Product Development Stages) Present Heizer figure 5. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. Definition 6.2 [1. Many successful companies rely on sales from products introduced within the past five years. Definition 6. 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Determines what will satisfy the customer and 2. DESIGN OF GOODS AND SERVICES For example. Side Note 6. 128]. and the organization’s capabilities. the product life cycle.3 [1.3. 129].2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. p.

. In other words. 130].qfdcapture. manufacturing engineering.2.3.8 5.9.com for more information. Relate customer wants to product hows.3.” 6 For example. design engineering. bureaucratic companies and organizations.3. 8 These are given on the roof of the house in sidenote 6. Identify how the good or service satisfies customer wants. 10 The right-hand columns of the house in sidenote 6. 3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. 6.6. 1.3.6 3. and production departments.2. a research & development. there are three popular methods by which organizations undertake product development.3. create the columns of the house in sidenote 6.10 Side Note 6. See http://www.9 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. Evaluate competing products.3. • Perhaps the most popular approach in the U. with product features.2. Building the house of quality involves six steps: 1.3. • Fixed duties exist.2 (Example: House of Quality) Present Heizer example 1 [1. 2. • More common in large. identify the rows of the house in sidenote 6.2. 7 In other words.S. PRODUCT DEVELOPMENT 85 Side Note 6. .7 4. e.3. as was the software described in section 4. Product development is done by teams. which can be an advantage. Identify relationships between the firm’s hows. p. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.g. • Effective communication and coordination between separate departments can be problematic. An organization is divided into departments.2. Note that it is not free or open source.3. 2.. Identify customer wants. Develop importance ratings.3 Organizing for Product Development In the West.

3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product. development.3. and use.3. 6. production. and production stages of product development. and field service personnel. engineering. maintainability. Definition 6.3. Side Note 6. purchasing.S. Definition 6. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. Definition 6.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.3. organizations are less structured and typically not divided into research and development. engineering. The goals of manufacturability and value engineering are 11 See definition 6.4. but my personal impression is that formal QFD practices are not widespread in practice.3.3. manufacturing. design.. .11 In Japan. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. use of participating teams in design and engineering activities. Side Note 6.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. quality assurance. These teams often include representatives from marketing. production.S. etc.4 (Concurrent Engineering) In project development. it can also be problematic because teams.86 CHAPTER 6.3.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. because their fate is tied to a product. However. My experience may not be indicative of management practices in general in the U.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. Some teams even include representatives from vendors. will often advocate for continuation of their project past the point that it is profitable for the company..

87 . PRODUCT DEVELOPMENT 1. Robust design. Reduced complexity of the product. 5. Cost reduction. 3. Standardization of components. Improvement of functional aspects of the product.3.6. 6. Improved maintainability (serviceability) of the product. 4. Improved job design and job safety. 2. and 7.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

2007.com/article. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. – You not only have to believe in yourself. – We will discuss techniques for raising money in detail later in the course. jewelry. everyone would say that they want to be thier own boss. we will discuss how to prepare to start a small business as well as manage a business early in its life. and .ccer. And by believe in you. you have to convince others to believe in you. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house.cn/en/ReadNews. I mean believe in you enough to give you money. Hopefully. you will maximize your chance of success.asp?NewsID=5324.92 CHAPTER 7. • Finally. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. If asked. pp. 1 There are a variety of studies that support this. 7.1 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. but a series of frustrations. http://wistechnology.1 In our discussion of entrepreneurship. March 6. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. successful entrepreneurs know how to raise money.”’ • According to experts who have studied entrepreneurs. make lots of money quickly and with little effort. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. See. • Surveys and research indicates that the most common personality trait is self-confidence.edu. you will finish the course with the confidence that if you decide to start a small business. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. for example.php?id=2018 http://www. 12–13].

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

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

try to figure out why they were not successful.7. When setting goals. If your goal is to raise 1. although the successful ones generally view their experiences as positive on the whole. ask yourself the following questions: • Income – How much do you want to earn. Learning from failure is as important. Move on to larger goals once the small goals have been met. if not more important. When setting goals. it is common to exchange “war stories” about the difficult times and sacrifices. • Be specific. 10.1 (What’s It Really Like?) If you wonder what running a business is really like.000. Consider at least a five-year time horizon.” • Be realistic. it helps to set goals. 7.000 yuan and you’ve never had a job before. marketing. When I talk to those who I know who have started businesses. than learning from success.3. – Start with small goals. – Long-term goals are those that may take 5. 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.” • Be optimistic. advertising. your goal may not be realistic. • Set both short-term goals and long-term goals. even the successful ones will probably focus on the negative.000 yuan by July 1” is a much better goal than “raise money.3. or 20 years to accomplish.3 Setting Goals With any major endeavor. • Analyze Your Professional Attributes – Be aware of where you need help. Like parents. ask other entrepreneurs. . “Raise 100.” you may not want to start a business that focuses on customer relationships. – Short-term goals are those that can be accomplished within a year. such as sales. SETTING GOALS 95 If you are not a “people person. “Achieve financial independence” is much better than “pay the bills. If you talk to an entrepreneur who has not been successful. Side Note 7. and administration.

How much is your ego worth? Side Note 7. – Hours of work. Eliminate question 1 and substract one point from the scoring given on p. pp. The reasons given for adding or subtracting points are as interesting as the ultimate score. Have the class write down their answers and evaluate their own EQ. – Geographic location. 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.3.96 CHAPTER 7.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. . Acknowledge this fact and factor it into your decisionmaking. 18–20].2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. 20. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. pp. Many people want to start their own business for ego gratification. Side Note 7.3. 21]. and – Investment of personal assets.

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

However. business ideas come at a rapid rate. • 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. • Etc..5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. • A nose piercing that consists of a small. I continue to generate business ideas as a matter of habit. 28–29]. Often times. It sounds silly. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. • The ideas are easily copied and would be quickly appropriated by more able competitors. people have to remove nose piercings for work or social occasions. • They require business relationships that the entrepreneur does not have. The tube could be made unobtrusive enough that it would not need to be removed for work.0.98 CHAPTER 8. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. Side Note 8. hollow tube.0. Those with nose piercings would not need to remove the piercing and risk it closing. most ideas are not feasible because • They would not be profitable enough.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. but it is a major complaint for female rock climbers. often one or more a day. . etc. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. Side Note 8. • The business would involve too much risk. however. • They require more financing than the entrepreneur has access to. • They require expertise that the entrepreneur does not have.. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. pp.

YOU’VE GOT AN IDEA. He ran the business as a one-man operation for years.2 is.1. 33]. Have students fill out the form on their own time. such as your family.8. it is too risky.” That is. or are otherwise discouraged. you should have “thick skin. Side Note 8.1 You’ve Got an Idea. Entrepreneurs are often told their idea is flawed. Finally. His sales are now in the millions of dollars per year and the business is very profitable.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. However. After all. Have students come up with examples of products that meet various criteria on the checklist. home. 35].com/find?s=all&q=never+say+die. Side Note 8. p. to be truly self-motivated and persistent in the way you need to succeed. while you should listen to criticism that others give.” Side Note 8. February 17. used as the title of at least 12 movies and television shows. 2007. that they will never make it. he would never succeed. computer-controlled security cameras. “Never say die. in the wake of 9/11.1. you should not let it dissuade you. the business took off. People thought he was going nowhere and generally dimissed his business. thinking that if he did not succeed after a couple of years.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. Warnings about risk are perhaps the criticism you should consider most carefully.1. A well-known phrase in English.imdb. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your idea. 8. p. Now What? The number one trait needed by successful entrepreneurs is perseverance. you will be spending years of your life trying to make the idea work. And you should not risk anything you can’t afford to lose.1.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. You should be realistic about risks. making just enough to get by but not much more. 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. . NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. 2 http://www. or health.

FINDING AN IDEA .100 CHAPTER 8.

2. Not only do you need to decide whether you are marketing to businesses or consumers. See also 9. When trying to identify your niche market.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. go through the following 7 steps: 1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0. See also 9.0.1. 9. Definition 9. but you should try to target your market as specifically as possible. There are two broad categories of markets: 1.” or business-to-consumer ventures.” or business-to-business ventures.0.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. Consumers and 2.0.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Definition 9. 101 .Chapter 9 Defining Your Market After coming up with your idea. Businesses. your next step is to do some market research.

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

Chinese.9.. many entrepreneurs make the mistake of being “all over the map. life stage. 9. are similar in age to those who came of age in World War II. and 9.1 (Smaller is Bigger) When starting a business. when the country was immersed in a war effort.1.1.1. (See definitions 9. and psychological factors. Likewise. demographic. but their behavior differs significantly due to the different influences in their youth. you should be able to enter your niche market with confidence. Side Note 9. many Eastern companies make the mistake of lumping together American and European customers. for example.1.1. FINDING YOUR NICHE 103 7.) Using these new marketing techniques can allow you to narrow your market.1. such as having children. the Depression-era cohort.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. the more likely you are to score a hit. As older people are more active than before. and cohort marketing. For example. many are choosing to start families later in life or even have children ten years or more apart.2. Definition 9. Many Western companies make the mistake of lumping together Japanese. buying a home.1.” That is. Definition 9. Side Note 9. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different. young adults in the Depression..S.1. and the narrower your focus on your target..3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. Definition 9. in the U. Marketing to demographic groups has become much more refined in the last few decades. This can be offensive and serve to alienate rather than appeal to your customer. and other Asian customers together.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. New marketing techniques include generational. or retiring. . It is better to do just one thing well than to do many things poorly. Go for it! – Implement your idea.1 (Generational Marketing) Marketing to consumers based on age as well as social. This marketing technique has been widely used since the early 1980s in the U. etc.3.1. If you did your homework. when many people were suffering from extreme poverty. economic. you should practice extra caution to avoid stereotypes or other insensitive approaches.S. the World War II cohort. they try to satisfy all possible customers and end up trying to do too many things well. Korean.1.

104 CHAPTER 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. . Side Note 9.2 Redefining and Expanding Your Niche Lynda C. you should. p.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Falkenstein states. Every six months or so. The mission statement should • Be succinct. 28] which includes mission statements for three multinational companies: 1 See section 9. p. 79] 9.3.3 The Mission Statement Once you have a niche. “Creating a niche is the difference between being in business and not being in business. a few sentences at most.2 [1. • 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. create a mission statement.1.” [4. Falkenstein1 advises that you regularly reevaluate your niche. DEFINING YOUR MARKET 9. • Convey the essence of your business’s goals and philosophies.

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

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

Do not discard any ideas. THE MISSION STATEMENT When crafting your mission statement. • Use “radiant” words. • Be prepared. Colorful.3.9. • Set aside a full day to work on your statement. 107 • Involve others. Other people can help you with creative ideas and identify weaknesses you might miss. spicy language conveys your excitement and conviction in your idea. no matter how silly. Write down your thoughts so you can lead people logically through your ideas. • Plan a date to meet with people. Bring paper and pens and some refreshments for your guests. • Brainstorm. .

108 CHAPTER 9. DEFINING YOUR MARKET .

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

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

102–103] The questionnaire supposes that someone is going to open an interior decoration business. pp.” [4. RESEARCH METHODS 113 Side Note 10.2.2.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. .10.

114 CHAPTER 10. MARKET RESEARCH .

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

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

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

address. p. 5 I suggest the lower-right corner. and full contact information4 for the company. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. The financial forecasts. Its products or services. The amount of financing needed. 6. – 40 pages is ideal. The company’s current status.3 Some Style Points Kuratko also recommends that you [3. You should use this to keep track of who has which copy. The benefits to customers. – Inside the front cover should be a title page repeating the cover information. and How investors will benefit. 5. they will not read it. . 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. 4 Phone number. • The Executive Summary – Two or three pages immediately following the title page.3 • The Cover and Title Page – The cover should have the name of the company. The venture’s objectives in 3 to 5 years.118 CHAPTER 11. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 3. e-mail address. – It should explain 1.1. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. and/or web site. 7. 4. – It is worth repeating: Keep it down to at most two or three pages. 11. the date of the plan. 3 Note that for this class. THE BUSINESS PLAN – It should be no more than 50 pages. a number should be in a corner5 indicating the copy number. though you should not put it in the same corner as page numbers appear. 2. – On the title page. If you write to much.

g. The executive summary gives readers their first impression.. • Identify the Target Market – Market research should support a focused customer niche. Executive Summary – This should be the last thing you write. • Keep the Plan Written in the Third Person – Do not use “I. or other special market advantages you have.6 Note any industry developments and describe the business thoroughly. • If there are patents. p. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. 11.” or “them. be sure to include them in the business description. Some details on each section of the business plan: 1.1 (10 Sections of a Business Plan) Present Kuratko Table 10. Include any pictures or designs that would be helpful.11. Your credibility is established in part by the credibility of your plan.2. trademarks. • Do Not Overdiversify – Don’t try to be all things to all people. copyrights.2 [3.” or “us.” “they.” Instead. Business Description – Name the business. is it based on a family name? Does it include technical terms you need to identify? .” “we.2. 305]. 6 E. Present a focused plan. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. which describes the 10 sections of a typical business plan.2 The Plan Contents Side Note 11. 2. and tell why it is named what it is.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. use “he. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. so be sure the writing is finely crafted. but it is the first thing that your audience will read. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. Use the spell checker on your word processor to check for spelling mistakes. • Orient the Plant Toward the Future – Create an air of excitement.

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

Costs exceeding estimates. (c) A cash-flow statement. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Completion of prototypes. or more aware. Difficulty purchasing parts or materials. For example. 8. 9..2. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. as opposed to actual. Signing up distributors and dealers. Try to be honest and realistic.11. Side Note 11.com. Unexpected competitions.1 (Pro Forma) A latin term that means projected. inventory turnover. Appendix – If there are documents. Definition 11. and Payment of first accounts receivable. current ratios. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. 11.2 (The Growth of Active. detailing projected profits and losses.2. Ordering production quantities of materials. detailing projected inflows and outflows. Critical-Risks Segment – Discuss business risks and the ways you might address them. of the risks than you are. etc. Risks might include • • • • • Negative industry trends. Your investors are probably as aware. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. (b) An income statement.com) Discuss the growth of Active. Completion of design and development. a balance sheet containing projected balances is called a pro forma balance sheet. include an appendix.2. Receipt of first orders. First sales and first deliveries. which investors will use to estimate debt/equity ratios. These might include • • • • • • • • • • Incorporation of the new venture. Design or research difficulties. . Product display at trade shows. Hiring of sales representatives. working capital. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished.

THE BUSINESS PLAN .122 CHAPTER 11.

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

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

They may ask you something you want to respond to in an e-mail later. it is quite the opposite. but in reality.12. If they cannot explain it clearly. ask yourself after every statement you make. It is easy for things to get lost in the heat of the moment. At my company in Chicago.3 After the Presentation Each presentation will be different. In general. you need to change or eliminate the statement. 12. so write things down to make sure you don’t forget. Much of the material required use of the internet. 12.2. • Taking notes also makes you look conscientious. Give your presentation to friends or family.3. everyone brought a pen and paper. Ask them what your company will do. you are not presenting it well.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. “So what?” If you cannot answer this question simply and easily. p. AFTER THE PRESENTATION 125 Side Note 12. They may ask you something that makes you want to change your presentation. 45].2.2. 12.6 So What? When you are planning your presentation. and each investor will respond differently. Many people feel as if taking notes makes them look stupid. 12. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access. I always bring a pen and paper to meetings. Everyone. You should be prepared for the unexpected. Stop when it goes off. where some of the smartest people in the world worked.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. • Your audience may ask you several questions at once.2.5 Take Notes Have a pen and paper ready and take notes during the pitch. Guy Kawasaki recommends you set a timer [2. and although you go into each presentation .

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

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.

and • Improve pricing accuracy.1 Inventory Turnover Typically. these systems should automatically update inventory and accounting records. .4 (Delivery Cycle) In inventory management. • Updating product information – At the time a sale is entered. For example. a high inventory turnover is a mark of a well-managed inventory system. 13. INVENTORY CONTROL When considering the purchase of a POS.1 (Turnover) When you have replaced 100% of your original inventory. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item. 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.3. the count cycle is the amount of time between counting inventory. Definition 13.3. the order cycle is the amount of time it takes to process paperwork and place orders. work with suppliers to improve delivery times and count inventory more often. Definition 13. your count cycle is 12 weeks.3. To improve efficiency of inventory control. 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. CHAPTER 13.3. if you perform an inventory count four times a year.3 (Count Cycle) In inventory management. such as for volume discounts for preferred customers.2 (Order Cycle) In inventory management. Definition 13. be sure it’s not easy to “hack” the system. • Security – To prevent theft. you have “turned over” your inventory.3. Definition 13.130 • Maintain a sales history.

Many businesses also measure turnover by measuring sales per square foot (or square meter).3. First Out)) FIFO (first in. follow the recommendation of your accountant. you must estimate your inventory value when you file your taxes.4. least this is true in the U.3 See also 13.4. 13.2. first out) assumes that you sell the most recently purchased inventory first.5 (Needs Period) In inventory management. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. The author is unfamiliar with Chinese tax codes.3. 13.S. which may result in higher taxes.1 (LIFO (Last In.3.4.4 Inventory Accounting Your accountant will typically handle inventory accounting. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. and 13. You should know how many sales per square meter per year you need to survive. If there is inflation. it values your remaining inventory based on the prices of the most recently purchased items.. 13. . first out) assumes that you sell the least recently purchased inventory first. Definition 13.3. In deciding which to use. and delivery cycle.2 See also 13. Definition 13.4. The author is unfamiliar with Chinese tax codes. After you have been in business your inventory control system should give you a better idea of stocking levels. In the U. INVENTORY ACCOUNTING 131 Definition 13. but you should at least know about LIFO and FIFO. 2 At 3 At least this is true in the U.4.1.2. it values your remaining inventory based on the prices of the least recently purchased items.1 Buying Inventory In the process of putting together your business plan.3. the needs period is the sum of the count cycle. Calculate your sales per square meter once per month. order cycle.4.S.4. If there is inflation. In other words. which allows you to pay less taxes on your inventory.13.2 (FIFO (First In. LIFO and FIFO are two accounting methods used to do this. First Out)) LIFO (last in.S. See definitions 13.

3. • Some suppliers demand a minimum number of items per order.5.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. three or four months. author of Start Your Own Business. Rieva Lesonsky. – The minimum may be higher for first orders to cover the cost of setting up a new account. usually one. Manufacturers – Note that some manufacturers refuse to fill small orders. Import sources – They operate like domestic wholesalers.stock on order = open-to-buy Note that formulas and computerized inventory control systems and other means to manage inventory don’t make up for a business owner’s intuition. 13. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . INVENTORY CONTROL Definition 13. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Distributors – Also known as wholesalers.1 Dealing with Suppliers The most important thing about a supplier is reliability. 13.5 Suppliers Suppliers can be divided into four categories: 1.” . brokers or jobbers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands.132 CHAPTER 13. Their prices are higher than a manufacturers.actual inventory . says. Independent craftspeople 4. courteous and firm with your suppliers. and they will respond in kind. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.4. “Be open. 2.

Ask about the freight policy before ordering. customers may be required to pay upon receipt of goods. . • Sometimes if an order is large enough.13. they will put you on a c.5.)) Cash on delivery. the supplier will pay for freight. you should know who is liable for damage to goods in transit. Be sure to add up • Costs. If you don’t have trade references or a credit rating (as is the case with many starting businesses) you may find smaller suppliers more accomodating than large suppliers.d. I regularly had to deal with food vendors. and • Allowances before you make a decision. Whatever you do.5. • Discounts.1 (COD (or c. basis until you have proven yourself reliable. Side Note 13. do not falsify or misrepresent your financial statements.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. it is considered a felony. personal interaction can work wonders. If you are dealing with a reticent large supplier. Discuss • Their negotiating technique when discussing pricing. If a supplier is uncertain about you.. Definition 13.o. 2.o.S. If a supplier does not extend credit. 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. Tips for dealing with suppliers: 1.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. • For items being shipped. At least in the U.5.d.5. You can also present your financial statements and prospects for success. Suppliers sometimes try to complicate pricing to their advantage. and • The need to be firm but fair. SUPPLIERS 133 13.

Definition 13.o. May 19.html. As opposed to FOB.com/shippers/glossary. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. http://www.b.5. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.)) Free on board.2. 2007.roadway. See also definition 13.7 4 Source: 5 Source: http://www. 2007. Definition 13.com/reference/glossary/glossary efg. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.o.5.html. Definition 13. Destination)) Free on board destination. May 19.wikipedia.3.4 (Back Order) This is a Distribution (business) term and refers to the status of items on a purchase order in the event that some or all of the inventory required to fulfil the order is out of stock. The FOB term requires the seller to clear the goods for export. . 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. INVENTORY CONTROL • Depending on whether the supplier pays frieght.com/jargon. May 19. 5. 5 FOB Destination changes the location where title and risk pass. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.5.5.6 See also definition 13.4 Colloquially.epoi. 2007.org/wiki/Backorder. Be aware of your supplier’s priorities.3 (FOB Destination (or f.html. Seattle” to indicate that an item being shipped from Seattle is free on board. 7 Source: http://en. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. 3.134 CHAPTER 13.b. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.b.2 (FOB (or f. May 19. This differs from a forward order where stock is available but delivery is postponed for other reasons. 2007.5. Under this arrangement.o. 6 Source: http://www. Specify a cancellation date on your order forms.abcsmallbiz. people often say something like “f.

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. • Temporary employees (temps). 337]. 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. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). besides being bad for business. can take a tremendous personal toll on the entrepreneur as he or she is faced with the prospect of stressful personnel management duties such firing the employee. Side Note 14. On the other hand. a bad hire. they are often emotionally draining for the manager as well as the employee involved. 135 .Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. and • Independent contractors. • Part-time employees.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4.0. p.0. Side Note 14.

and recruiting.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.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. Cleaning. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. Not only education and skills. 14. HIRING EMPLOYEES 14.1.1 Job Analysis Before creating a job description. If you call someone a Vice President but don’t compensate them as such. by the time you hire your 40th employee. If you give someone a job as Vice President. an employee with an inflated job title may expect an inflated severance package. programming. 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. • How the job will be done.1. creating a job description. you’ll be grateful to have spent the time to go through a more formal process. • You may not leave enough buffer above the employee. 14. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists. lifting. selling. you have nothing to offer. Side Note 14. writing reports.2 Job Description Side Note 14. • If you have do terminate the employee.1 How to Hire Hiring involves analyzing the job requirements. etc. then want to hire someone else later at a position above them in the company. However.136 CHAPTER 14.1. . but personality traits. you need to consider • The physical or mental tasks involved. you will likely find that they will come to you at some point to demand a vice president’s salary..

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

• Do not list requirements other than educational or experience-related ones.2 Side Note 14. 14. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.4 Finding People There are many possible sources of applicants. – For professional positions. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. 2 See sidenote 14. For example. companies. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.” or people who may not have them will just try to fake those personality traits in the interview. With e-mail. HIRING EMPLOYEES 14.3 Advertising the Job When you write an advertisement.138 CHAPTER 14. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. Many American companies are no longer providing phone numbers. e-mail addresses have become perhaps the most popular way to get applicant information at U.S. It also makes it easy to receive and process a large number of applications with a minimum of effort.4 (Using an E-mail Address) For professional positions. • Do not ask for specific personality traits. if you are looking for an accountant.S. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.1. particularly those that advertise on web sites.1.5. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.1. such as “outgoing” or “detailoriented. • Be sure to list appropriate contact information.1. – For other positions. • List the top 4 or 5 skills that are most essential to the job.. . due to the number of applicants for competitive positions.

You narrow the number of resumes down to about 10. but when looking at a resume. 5.. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. You can evaluate their personality during the interview. 6. You conduct a second round of interviews with the remaining 3 candidates. the hiring process proceeds as follows: 1. 3 Java is a programming language.14. not a science. For any job.com with the keyword “java” will demonstrate just how widely used online tools are. Screening People Reviewing resumes and applications is an art. You hire the preferred candidate. • Industry Publications – Most trade publications take ads for job openings. In the U.com with the keyword Java on May 19.S. You interview the candidates.” And 921 in “Engineering. particularly in the high-tech industry. • Online – In the U. 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. To “weed out” candidates. Try to perform a search on a job sites such as http://www. for professional positions.” .monster.dice. 3. about 10 or so. 4.com or http://www. 2007 turned up more than 5.” 665 in “Internet/E-Commerce. Searching on Monster. many positions are being filled online. Software” category. You narrow down the 10 candidates to 3. 2.S. If you are lucky. You check references.3 Generally.000 hits searching just the “Information Technology” search category. most professional associations’ job banks are now online. you will get several candidates for any job you are offering. There were 4.314 listings in the “Computers. • Focus on the skills that a person can bring to your company.. be sure that a candidate can provide what you are looking for.1. 159 in “Financial Services.

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

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

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

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

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

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

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