International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

1

Copyright c Collin Starkweather 2007. All rights reserved.

2

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

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

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

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . .3 Project Controlling . . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models . . . . . . . .2 Preconditions . . . . . . . . . . 4. . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . .3. . . . . . . . . .4 Determining the Project Schedule . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . .1 Project Planning . . . . . .4 Adjusting for Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . . . . . . . . .2 Life Cycle and Strategy . . . . . . . 6 Design of Goods and Services 6. . . 5. . . . . . . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . .1. .3. . . . 5. . . . . . . . . . .4. . . . .4. . . . . . .3 3. . . . . . . . . 6. . . . . .3 Product-by-Value Analysis . 4. . . . . . . . . . . . . . . . . . . . .3. Strategy Development and Implementation . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . 4. .8 A Critique of PERT and CPM . . . . . . . . . . . . . . . . . . . . 5. 5. . .1.2 Build and Staff the Organization . . . . . .5 Seasonal Variations in Data . . . . . . . . . . . 3.3. . 4. . . 3. . 5. . . . . . . . . . . . . . . 4. .1 The Project Manager . . . .1 Research . . . . . . . . . . 4. . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . .6. . 5. . . . . . . . . . . . . . . . . . . . 6. . . . .1. . . . . . 4.1 Identify Critical Success Factors . . . 4. . . . . . . . . . 5. . . . .1. . . . . . 3. . . . . . . . . 5. . . . . . . . . .2 The Strategic Importance of Forecasting 5. . . . .1 Qualitative Forecasting Methods . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . .2. . . . 5. . . .3 Measuring Forecast Error . . . .2 A Seven Step Forecasting System . .1 Probability of Project Completion . . . . . . . 5. . . . . . . . . . . 4.3. . CONTENTS . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . .3 Dynamics . . . .1 What is Forecasting? . 5. . . . 6.3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . .3. . . . . . . . . . . . . . . . . . . . . .2 Network Diagrams . . . . . . . . . . . .1. . .3. .1 PERT and CPM . . . . . . .4 3. . . . . . . . .3. . . . . . . . . . . . 4. . . . . .2. . . . . . . .2 Project Scheduling . .2 Quantitative Forecasting Methods . . . . . . . . .2. . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . 4. . . . .1. . . .2 Focus Forecasting . . . . 4. . . . . . . . . .3. . . . . . . .2 The Work Breakdown Structure . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . .1 Goods and Services Selection . . . . .3 Forecasting Approaches . .1 Types of Forecasts . . . .

. . . . . . . . . . . . . 110 10. . . . . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . .3 Organizing for Product Development . . 95 8 Finding an Idea 97 8. 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . .2 Are You Ready? . . . . . . . . .2 Know Your Outline Thoroughly . . . 92 7. . . . . . . . . . . . . . . . . .2. . . . . . . .2 Some Suggestions . . .4 The First Minute is the Most Important . . .2.1 Characteristics of the Successful Entrepreneur . . . . . . . . .2 Look and Feel . .2. . . . . . . . . . . . . . .1 Product Development System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . .3 Some Style Points 11. . . . . . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. . . . . 6. . . . . . . . . . . . . . . . . . . . . . . .1 Your Audience . . . . . . . . .6 So What? . . . . . . . . . . .1 What Am I Researching. . . . . . . . . . . . . . .CONTENTS 6. . . Product Development . . . . . . . . . . . . 104 9. . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . . . . . .2. . . .1 Preparing to Put the Plan 11. . . . . . . . . . . . . .3 Generating New Products . . . . . . . 12. . . . . 111 10. . . . . . . . . . .3. . . . . . . . . . . .3 The Mission Statement . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . .3. . . . . . . . . . . . . . . . . .1. . . .3. . . .3 Setting Goals . . . . 12. . . . . . . .1 The Presentation . . . . . . . . . 6. . 11. . . . . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. 12. . . . . 104 10 Market Research 109 10. . . . . . . 6. . . . . . . 12. . . . . . . . . . . . . . .1. . . . . . .1 Finding Your Niche . . . .1 Sources of Secondary Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . . . . . . Now What? . .1. . . . 101 9. . . . . . . . .5 Take Notes . . 6. .1 Importance of New Products . . . . . . .2 The Plan Contents . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche . .2. 12. . . . . . . . . . .3 After the Presentation . . . . 12 Presenting the Plan 12. . . . . Exactly? . . . . . . . . .2 6. . . . . 11. . . .2 Research Methods .3. 94 7. .1 Do It Until You Get It Right . . . . . . . . . . . . . . .1 You’ve Got an Idea. .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . . . . . . . . . . . . .2. . . 12.

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

Part I International Business Management 7 .

.

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

. 1. 2. Why is corruption an important business issue? • See sidenote 1. Westerners rely more on contracts. Western business people may not initially trust their Chinese counterparts. and Europe but a commonly accepted practice throughout the developing world. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.2.A. • Because of this. This is something Chinese business people should be aware of.1.10 CHAPTER 1.2. which are more strictly enforced in the West.S. Prison labor is also considered improper in the U.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.S. there is a perception in the West that Chinese are hard-working and smart. Which brings us to the subject of this lecture: Ethics. • Because guanxi is less important in the West. child labor was widely used.A. • However.A. • In general. Note that during the industrialization of the U.2 Corporate Corruption Side Note 1.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.S. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways. Easterners tend to trust people after observing a pattern of consistent behavior. . How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. 3.1 (Ethics) The study of morality and standards of conduct. Definition 1. For example. 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.

Definition 1.1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. . For example. September 20. gift. • On a macroeconomic level.2 Though things are improving. they must factor additional uncertainty into their calculations. . – In the wake of Enron. Source: texttthttp://www. • It increases the cost of doing business.transparency. • Of course. September 20. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. investors in the United States had to reevaluate the risk associated with owning stock. China continues a battle against corruption. it is simply inefficient. – 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. or other person in a position of trust. 2006.”[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. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. reward. WorldCom.dict. – A bribe is a business expense that goes to no productive purpose and decreases profits.2.org. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. and Tyco. “. these are all generalizations and individuals may differ significantly from their cultural affiliations. voter.org/policy research/surveys indices/cpi. . – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). In the words of a Beijing correspondent for “The Economist” magazine. 2006. witness. 2 Source: http://www. there are few if any issues which affect and infuriate so many in China as corruption.2. which requires strict monitoring and verification of financial information.1 (Bribe) A price.2 (Corruption) Corruption is of concern for business people because • It increases risk.2. Side Note 1.

scandals such as Enron. • Tyco – The CEO of Tyco.htm. the former CEO of WorldCom. Worldcom. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. March 17. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. including a $2 million birthday party for his wife.htm. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. 3 Source: 4 Source: http://www.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.S. and Tyco make it clear that even western developed economies have significant ethical shortcomings. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. March 17.S. See sidebar 1. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. Parmalat. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. In Scandinavia. http://www. .4 – Bernard Ebbers. • WorldCom – Following the Enron scandal.3. a high value is placed on honesty and personal integrity. Qwest. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.2.bankruptcydata.2 (Cultural Heritage in the U.1. Side Note 1.S. succeeding Enron as the largest bankruptcy in U.bankruptcydata.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.12 CHAPTER 1. • Enron – In December 2001. 2007. Dennis Kozlowski. was convicted of fraud and conspiracy and sentenced to 25 years in jail. WorldCom declared bankruptcy in July 2002.com/Research/15 Largest..S. was accused of looting the company to fund a lavish lifestyle. There is currently debate as to the effectiveness of the regulations relative to the costs. 2007. history.3. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. While western developed economies often cite a high ethical standard.3 The United States The United States has recently been rocked by a number of scandals in the business community. Side Note 1. the SarbanesOxley Act (SOX) was passed in the U.com/Research/15 Largest.

1. Likewise. Side Note 1.4.. were not as highly regulated as banks. Side Note 1.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.4. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.2 Women in the Workplace Sexual harassment has also become an issue in Japan.4. also known as thrifts and which function like banks.S. This resulted in several banks being technically bankrupt [5.pdf. JAPAN 13 1. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. 5 1. .2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www. and as a result made high risk investments in the late 1980s and early 1990s.4 1. • Many men do not understand why sexual harassment constitutes a problem. with many men of the opinion that women were just biding their time until they marry and have children. the political scandals do not appear to have been fully acknowledged and addressed.fdic.4.4. with many women finding their employment opportunities constrained. Moreover.S. Better known is the case of Japanese banks.gov/bank/analytical/banking/2000dec/brv13n2 2.1 (The U. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. 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. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. 58]. Hodgetts et al. women have a difficult time being taken seriously. p. The government was compelled to provide public money to bail out the institutions. Savings and loan institutions. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.

gender. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. cite two cases in which foreign firms operating in the U.. 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.psu. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. yes or no. or a non-employee. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim.de2. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. hostile or offensive work environment. • The harasser can be the victim’s supervisor.14 CHAPTER 1. an agent of the employer. sexual harassment lawsuits result in significant penalties (e.S.g. requests for sexual favors. Are women with equal qualifications as men given equal pay and position? Take a show of hands. Hodgetts et al. a co-worker. • The harasser’s conduct must be unwelcome.4.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. have paid substantial penalties as a result of sexual harassment or discrimination based on race. The victim does not have to be of the opposite sex. It is considered a very serious issue.4. Side Note 1. and for most public institutions and many large corporations. . in the millions of dollars) to those who are successfully prosecuted. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. Definition 1. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. unreasonably interferes with an individual’s work performance or creates an intimidating. Furthermore. a supervisor in another area. or other issues. 6 Source: http://www.edu/harassment/legal.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace.

Definition 1.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. with the purpose to influence their votes.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. there seems to be a glass ceiling due to social factors.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.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. Hodgetts et al. men are disproportionately represented in management positions.4.S. than any other.org.S. EUROPE 15 1. politicians.5. Although women have entered the workforce in large numbers in recent decades.7 Note that lobbyists do not have any formal power. in an extended sense. Side Note 1.5 1.5.4. particularly in upper management. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.4. with most in the top 20 among over 150 countries included in the survey. 1.. to try to influence decision-makers in any circumstance. their attitudes towards bribery when working in foreign markets differs from that of the U.dict. Side Note 1. They only have the power of persuasion. . yes or no.1. at 40.3 Lobbying by Japan Japan spends more money lobbying in the U. 7 Source: http://www.5.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.S.5. is the notable exception). 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.

1. • Discrimination lawsuits are more commonplace in Great Britian.5. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.5. though compensation is limited relative to lawsuits filed in the U.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. Side Note 1. • More British companies have actively sought to recruit and promote women into management.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 8 Source: http://careerplanning.htm.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.5. 8 Side Note 1.about.com/library/glossary/bldef-glassceiling. .16 CHAPTER 1. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.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.S. but there is a perception that there are risks and ethical considerations. yes or no. For those students who think so. 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.

• Yet another case in which software from a U.6. An increase in crime and illegal business activities. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 3. Often. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. and • A recent history of rapid economic development. 2. executives. ETHICAL CONCERNS IN CHINA 17 Side Note 1. there are undoubtedly many others that get away with it.3 (Corporate Spying) Hodgetts et al. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Child labor.1. p. Prison labor. Ethical considerations include 1. company in Boulder was stolen and sold to a Chinese company.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. [5. 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. International corporate spying problems. 7. 64].6.2 (Piracy and Counterfeiting) Present sidenote at [5. Side Note 1. • Note that for every corporate spy that is caught.6. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign firms.S. An opaque legal system. pp. .6. 4. 6. • A relatively stable government. Bribery and other forms of corruption. Piracy and counterfeiting (see sidenote below). Side Note 1.S. 5.5 billion in sales annually.

a grocery chain. education.2. provide relief in the event of humanitarian disasters. political. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. Side Note 1.3 (Nongovernmental Organizations (NGOs)) Private. not-for-profit organizations that seek to serve society’s interest by focusing on social. education.com/our company/our mission/index.cfm for more detail.7. such as Whole Foods. “.7. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. Definition 1. and economic issues such as poverty. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). 1. In the words of a Beijing correspondent for “The Economist” magazine. Other companies. there are few if any issues which affect and infuriate so many in China as corruption.benjerry. • CARE (promotes community development. China continues a battle against corruption. such as education and health care.7.S. and the environment.7. and promotion of social equity). political.. social justice. .4 (Corruption) Though things are improving. .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. and economic issues such as poverty. and the environment.18 CHAPTER 1. See http://www. not-for-profit organizations that seek to serve society’s interest by focusing on social. health. Definition 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. social justice.”[6] See also sidenote 1. health.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty.7 Corporate Social Responsibility Definition 1.2 (Nongovernmental Organizations (NGOs)) Private. and emergency relief in the event of humanitarian disasters). BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.6. .2.

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.1 Corruption and the FCPA Revisited Hodgetts et al.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.2. In 2005.7. last but note least. Both political groups and businesses are influenced by NGOs.9 U. • And.1. 1. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). • To prevent a boycott or other consumer defections. and • Rainforest Action Network (RAN). Side Note 1.S.7. Side Note 1. firms a reason to refuse to pay bribes. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. Executives are people. with a score of 3. many feel that it has had a net benefit. MNCs do not appear to have been significantly impacted. For example.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. China ranked 78 out of 158. firms are constrained by the FCPA with regards to bribery and other corrupt practices.S. – Even socially responsible executives would consider the “bottom line” when making decisions. note that while U. but does not outlaw payments to political party leaders.000 and $125. • Conservation International (promotes environmental conservation). as it gives the U.7. executives may actually feel that it is the right thing to do.S. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. In fact.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.7. . too. as executives of publicly traded companies are ultimately responsible to their shareholders.

more Chinese will own stock in companies. malfeasance and diversion of corporate funds becomes increasingly difficult. and Parmalat resulting in investors losing billions of dollars. and the environment.0 is considered to be the borderline at which countries are considered to have a problem. societies. Tyco.S.N. such as the U. Side Note 1. specify standards and codes of conduct in domestic and global operations.7. and Germany at 7. Scandinavian countries are at the top of the list. Hong Kong is number 15. better than the U. with a score of 8. the United States and Europe have recently been rocked by corporate corruption. slightly better than Sweden.4 (Some Opinions) Personally.3. 5. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. . but most important first step is to recognize that there is a problem. 2006. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. As more state-owned businesses become privatized and the size of the middle class increases. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.7. Support and respect the protection of international human rights.N.2 respectively. Important: Although it is widely cited. Side Note 1.20 CHAPTER 1. with scandals such as Enron.html. 10 http://www. Global Compact. 2. Singapore is number 5 with a score of 9. The government recognizes that it is an issue and is taking action. 1. I think corruption will diminish as China economically develops for several reasons: 1. Commitments that many MNCs have signed on to. With more disciplined corporate governance. Moreover. The government is actively addressing the issue of corruption. With greater financial transparency. WorldCom.4.infoplease. and not based on hard data.7.10 Corruption is certainly not endemic to Asia.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. It cannot be considered to be based on a scientific survey.5 (Table 3-1: Principles of the Global Compact) The U. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.6 and 8.com/ipa/A0781359. Global Compact specifies 10 principles which MNCs should abide by: 1. July 1. It is a difficult problem to solve. 3. 4.

7. 21 3. Business should work against all forms of corruption.e. Encourage development and dissemination of environmentally friendly technologies. the right for unions to exist). Freedom of association and recognition of the right of collective bargaining (i. including extortion and bribery. Ensure that MNCs are not complicit in human rights abuses. Undertake initiatives to promote greater environmental responsibility. 4.. 7.1. Elimination of discrimination with respect to employment and occupation. 5. Elimination of all forms of forced and compulsory labor. 6. . Elimination of child labor. A precautionary approach to environmental challenges. 8. and 10. 9. CORPORATE SOCIAL RESPONSIBILITY 2.

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

scheduling.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. 2.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. 7].2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. known commonly in the U. Side Note 2. as the org chart determines executives’ authority and.” • Every organization with more than a few employees has an organization chart. process design.S. supply-chain management. Staffing. 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. • They are often sources of conflict among management. OM is one of the most costly aspects of an organization.2. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. more generally. operations managers make decisions. p. 2. . Organizing. Planning. Controlling. 1. OM decisions have been divided into ten categories by Heizer [1. 5]. Side Note 2. particularly when job titles are not clear. and maintenance.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. Definition 2. and 4. human resources and job design. location selection. layout design. 3. 6–7]. To accomplish these functions. inventory. place in the heirarchy. quality. p. business community as “org charts.1. WHAT OPERATIONS MANAGERS DO 25 4.2. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.2.2. pp.

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

such as the presence or absence of a part on a shelf. and 1 Source: http://en. 9]. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. • Frederick W. • Eli Whitney (1800) is credited for popularizing interchangeable parts.2. WHAT OPERATIONS MANAGERS DO 27 10. • Reliability and stability of systems depends on well-planned maintenance schedules. or Kanban. p. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. If demand rises above the historical average planning duration demand.2. Kanban are usually simple visual signals.1 Side Note 2. 8]. that tell production processes to make the next part. 2007. He also believed that management is responsible for – Matching employees to the right job. – Providing proper work methods and tools. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. . In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide.2. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.org/wiki/Just In Time %28business%29. one drawback of the JIT system is that the re-order level is determined by historical demand. When implemented correctly. However. which relied upon standardization and quality control. and efficiency.wikipedia.3 “Significant Events in Operations Management” [1. This saves warehouse space and costs. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. 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. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. February 14. – Providing the proper training. New stock is ordered when stock reaches the re-order level.2 (A Little History) Review Heizer figure 1.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs.2. The process is driven by a series of signals. quality. Definition 2. p. the firm could deplete inventory and cause customer service issues.

• Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. • Government. economic output. p. services account for over 70% of U. shelter. • In some service industries. • Insurance. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. Side Note 2. such as the legal profession or computer services in the financial industry.S. services become increasingly important. .1 (Development of the Service Economy) Present Heizer figure 1. Definition 2.28 CHAPTER 2. • In most western economies. average wages are below average2 in the U.3 (Information Sciences) The systematic processing of data to yield information. the wages are considerably above average. Bureau of Labor Statistics defines services to include [1.S. p.2. 9] • Repair and maintenance. • Recently. The U. • Trade.1 (Services) Those economic activities that typically produce an intangible product.. such as retail.S. 2. for others professional occupations.3. 2 The average national private industry wage. • Food and lodging.5 [1.3. and other essentials for its citizens. • Transportation. the economy transitioned from agriculture to manufacturing around 1900. Manufacturing was dominant until about 1950 or so.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. Today. However. major contributions have come from the field of information sciences. Definition 2.S.. In the U. 11]. the services sector is by far the largest employer.

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

it will continue to strongly impact the field. brought about in part by the internet. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. • Empowered employees – With the rise of services and knowledge products.30 CHAPTER 2.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. parts. Globalization has been having a dramatic impact on operations management and in the future. Operations managers are being challenged to produce biodegradable. or management). operations managers are responding by moving decision making to the individual employee. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. Definition 2. reusable. capital. 2. • Mass customization – With increases in technical capabilities and customerlevel information management. • 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. • 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.5. and finished goods rapidly. . • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. or recyclable products or to minimize packaging and other wasteful production steps. wherever and whenever needed. the next step in product development involves customizing products according to the customer’s preferences. OPERATIONS AND PRODUCTIVITY 2. Trends that Heizer and Render identify [1.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. p. 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. operations managers are increasingly responsible for innovations that move ideas.2.

Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. Also known as total factor productivity. 15]. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.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.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Definition 2. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.25 titles per labor-hour = 0. but overhead is no $800/day. THE PRODUCTIVITY CHALLENGE 31 Definition 2.4 (Total Factor Productivity) See definition 2.3. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.5.4375 titles per labor-hour = 0.5.5. Consider today’s computers versus those from the 1970s. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Side Note 2. In order to improve productivity.5. Definition 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. .5.0077 titles per labor-hour = 0.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5. p.5. Side Note 2.2.

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

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

has increased at about an average of 1. however.4 (Management as an Input) Because this is a course in business management.S. 2.S. graduate programs and the students they produce remain the best in the world.5% after allowances for depreciation. Note that in classic economic analysis and other areas of business. in the U. as well as capital. 2.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Difficulties arise because service-sector work is .5. educated.S.5. and knowledge. education. 2. management is considered as a separate input. management is not always identified separately from labor as an input. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.4 Productivity and the Service Sector Historically. According to Heizer [1.2 Capital Capital investment in the U. Developed economies (also known as post-industrial economies) require trained. and the cost of capital depends on interest rates. and because the author of the textbook is writing about operations management. p. Note that there is a trade-off between capital and labor in most industries.. U. 17]. Side Note 2. are utilized effectively.5.5.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Definition 2.5. and knowledgeable employees and operations managers are responsible for ensuring that technology. productivity in the service sector has not increased as rapidly as with the production of goods.34 CHAPTER 2.

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

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

Equally important. 3.1. Definition 3. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product.1. Attract and Retain Global Talent – By offering more employment opportunities. France. 6. FedEx. an understanding of cultural differences in preferences is needed to best meet customer needs. 3. global air-ground transportation of high-priority goods and documents that require rapid. competitively superior. p.38CHAPTER 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.1 Mission Whether large or small. Side Note 3. I recommend that all companies draft a mission statement. • Perfumers tend to concentrate in Grasse. FedEx is committed to our People-Service-Profit philosophy. 4. positive control of each package will be maintained utilizing real time electronic tracking and tracing . We will produce outstanding financial returns by providing totally reliable. 3.1 (Mission Statements for Three Organizations) Review Heizer figure 2.1 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. • Provide additional insights and opportunities. Provide Better Goods and Services – For companies doing business in an international setting. 28] which includes mission statements for three multinational companies: 1.2 [1. Missions state the rationale for an organization’s existence. and • Increase sales. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. time-certain delivery.1. global organizations can attract and retain better employees.1 (Mission) The purpose or rationale for an organization’s existence. 5.

such as Whole Foods. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. 3.3. We will be helpful. • 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. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . a grocery chain.S. We are committed to being an important.1. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome.. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. and professional to each other and the public. courteous. 39 Side Note 3. Merck. nationally & internationally. natural ingredients and promoting business practices that respect the Earth and the Environment. contributing member of our community and offering the Hard Rock family a fun. The Hard Rock Caf´. Our mission consists of 3 interrelated parts: • Product Mission – To make. DEVELOPING MISSIONS AND STRATEGIES systems. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. Other companies. We will strive to have a completely satisfied customer at the end of each transaction.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. healthy.1. 2. 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. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. and nurturing work environment while ensuring our long-term success. A complete record of each shipment and delivery will be presented with our request for payment.

be it • Product features. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Definition 3.benjerry. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers.3 (Sample Mission Statements) Present Heizer’s figure 2. Definition 3. . • Interoperability with other products. the creation of a unique advantage over competitors. Responsiveness – By providing timelier. 2. but can be used at the department level and even at the project level. 3. Cost leadership – Providing cheaper products.2 (Strategy) How an organization expects to achieve its missions and goals. the Operations Function. more responsive products or services. and Major Departments in an Operations Function. Differentiation can arise from anything that the customer may value about a product or a services.com/our company/our mission/index.1.1. • Availability of complementary products. • The “look and feel” of the product.1.cfm for more detail.” Note that mission statements are used not only at the company-wide level.3: “Sample Missions for a Company. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. See http://www. Side Note 3. • Training. 3.1. Differentiation – They make their product better.3 (Competitive Advantage) In operations management.40CHAPTER 3.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

3. 2.6 [1. Increase productivity. those activities or factors that are key to achieving competitive advantage. Side Note 3. Definition 3. Implement an OM strategy. and Threats) analysis to develop strategies.44CHAPTER 3. 37]. Provide competitive advantage.1 (Strategy Development Process) Present Heizer figure 2. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. in particular.1 (SWOT Analysis) In operations management. The operations manager’s job is a three-step process: 1. if the firm has a competitive advantage in these things) and where failures are most likely. Weakness.3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. . p. Opportunities. then • Form a Strategy. and 3.3. Staff the organization with personnel that will get the job done. • Determine Corporate Mission. “Strategy Development Process. Definition 3. 2.2 (Critical Success Factors) In operations management. then determine whether the organization does these things well (and.3.3.” The process of developing a strategy involves the following steps: • Environmental Analysis. and 3. determining internal strengths and weaknesses and external opportunities and threats. The purpose of this process is to 1. These critical success factors are used to develop a competitive advantage.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Identify a strategy and critical success factors. Group the necessary activities into an organizational structure.

3. an activity map can be used to link an organization’s competitive advantage to the CSFs.3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3. Southwest Airlines has a competitive advantage in providing low-cost airfares.6 3.3. • Red arrows – critical success factors • Blue arrows – support activities 3. Side Note 3. 5 Management 6 Human Information Systems Resources.4.2 as examples of how firms organize their activities.3 (Activity Map) In operations management.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. finance.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3 Integrate OM With Other Activities In order to achieve its strategy. Recall the “org charts” in sidenote 2. CSFs. OM activities are most productive when they are integrated with other activities such as marketing. MIS.2. and supporting activities.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3.1. Once CSFs are determined. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. 39]. .3. p.1 as a checklist to determine critical success factors. Definition 3. a graphical link of competitive advantage.5 and HR.3.

4. Definition 3. or joint ventures with substantial independence. Global strategy – Not characterized by local responsiveness.3 (International Strategy) In operations management.4.4. 4.3. wine in France. but a good strategy for cost reduction when products do not need to be adapted locally.4. Definition 3. Although e it is legally Swiss. In the semiconductor industry.4. See definition 3. franchises.5 (Global Strategy) In operations management. and hamburgers without beef in India. Definition 3. • Texas Instruments is an example of a country with a global strategy. 42] Definition 3. . Typically characterized by subsidiaries. • McDonald’s is an example of a country with a multidomestic strategy. a strategy that uses exports and licenses to penetrate the global arena. • Nestl´ is an example of a country with a transnational strategy.5.4. 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. 2.4 (Multidomestic Strategy) In operations management. p. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. 95% of its assets and 98% of its sales are made outside Switzerland. 3.1 (International Business) A firm that engages in cross-border transactions. Only 10% of its work force is Swiss. Definition 3.4. [1.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. See definition 3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4. owning or controlling facilities in more than one country. with beer on the menu in Germany.4. Usually does not confer a cost advantage.46CHAPTER 3. Also one of the least profitable due to transport costs and little local responsiveness. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. See definition 3.4. See definition 3. as exports require little change in operations and licenses often leave risk with the licensee.6. International strategy – Often the easiest strategy. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. products do not need to be localized. Its menu reflects the country in which it operates.

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 . GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3..4.4.S. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. Side Note 3.4. 6].3.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. p.6 (Transnational Strategy) In operations management.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

Even Microsoft. pp. Plans are also revised to meet changes in time and cost demands.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. Project management involves three phases: 1. 49]. 49 .3 (Project Planning. money. Controlling – Monitoring of resources.0.0. Planning – Goal setting.1 [1. quality. p. 46–47]. the largest software company in the world. and budgets. and supplies are tasked to specific activities and activities are related to each other. 3. The profile highlights the importance of project management in achieving competitive advantage. costs. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. Side Note 4. and Controlling) Present Heizer figure 3. and team organization. Scheduling – People. 2. Side Note 4. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Scheduling. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.0.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. defining the project.Chapter 4 Project Management Side Note 4.

Moreover. 3.5. it is very obvious and can be very costly. However. The job is unique or somewhat unfamiliar to the existing organization. If you become a project manager on projects of significant complexity.1.0. In a sense. p. See also Heizer sidenote “Project Management and Software Development. The project is temporary but critical to the organization. p.” [1.1 Project Planning While many projects are run within an existing organization.5 (Personal Advice on Project Management) Project management is a tricky profession. PROJECT MANAGEMENT However. it is also an area in which there will continue to be high demand for qualified people. 4. The responsibilities of project managers are to make sure that . 48] 1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. Definition 4. often times. you should always expect the unexpected. Side Note 4. People will not come through with what they promised. if things go wrong. a temporary project organization is formed to address a specific project. 69]. 4. and you will be forced to improvise. you will be confronted with a daunting task. Work can be defined with a specific goal and deadline.0. Project organizations work best when [1.1 The Project Manager As alluded to in sidenote 4.50 CHAPTER 4. Your job is to make things go smoothly and according to plan. The work contains complex interrelated tasks requiring specialized skills.1. things you thought were certain turn out not to be. you are doing your job well if noone notices the project management. You may be managing resources far in excess of your individual salary. project managers are highly visible in a firm and have significant responsibilities. 4. The project cuts across organizational lines. 2. and/or 5.

1. In a project that includes allowing a user to enter personal information on a web page. a task that should only take a day or so. Side Note 4. you have divided the tasks too finely.1.2 (Work Breakdown Structure (WBS)) In operations management. dividing a project into more and more detailed components. Complete software architecture for user account input web page functionality 5. When dividing a project into tasks. Review software architecture for user account input web page functionality 6. and 4. Review graphic design for user account input web page 3. 51 4. 3.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. a web page takes about a day to build for an experienced team. Complete graphic design for user account input web page 2. in a software engineering project. All projects come in on time. • Build the user account input web page is a much better task division than 1.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). People receive motivation and information necessary to do their jobs. 2. The project meets its quality goals.1. Approve graphic design for user account input web page 4. Approve software architecture for user account input web page functionality .4. The project is on or under budget.1. PROJECT PLANNING 1. 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. For example. Definition 4.

Identify precedence relationships among activities 3. Write software for user account input confirmation page functionality 9. Activities (also known as “work packages”) to be completed Side Note 4.2 (Work Breakdown Structure) Present Heizer figure 3. you should also take note of time and cost estimates given by your technical staff.1. Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1. At the time you are creating the work breakdown structure. 4. Scheduling serves to 1.3 [1.3 (Reality Check: WBS) In reality.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. p. Encourage realistic time and cost estimates for each activity . PROJECT MANAGEMENT 7. Project 2. The actual WBS for Windows XP would.2. the work breakdown structure is not something you go to your office to do in isolation. Subtasks in major tasks 4. Show the relationship between each activity to others and to the whole project 2. fill hundreds if not thousands of pages. Write software for user account input web page functionality 8.52 CHAPTER 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. They will be useful for project scheduling. of course. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.1. Major tasks in the project 3. Side Note 4. which we will discuss next in section 4.

1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. 2. right by the bridge. 3. Definition 4. p. MS Project’s Gantt chart functions demand you assign employees.2 (Using Gantt. Side Note 4.4. and material resources by identifying critical bottlenecks in the project Side Note 4. and CPM tools for every project management activity. which becomes narrower as one approaches the neck of the bottle. PERT and other formal documents. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. the road bottlenecks.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. It can actually be quite time consuming to create and maintain Gantt charts. – said of roads. All activities are planned for.2. PERT. Derives from the typical shape of a bottle.2. these should be considered merely tools to be used when they are useful by saving time or energy.4 [1. 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 . However. as. For smaller projects. Make better use of people. PERT.” This will give the class an idea of the look and feel of a typical Gantt chart.2.2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. Perhaps they imagine that they are not doing their jobs professionally if they are not. Activity time estimates are recorded. and other values to each activity. and 4.2. and CPM) Inexperienced project managers often feel the need to use Gantt. 51]. Definition 4. Gantt charts are perhaps the most widely used tool for ensuring that 1. The order of performance is accounted for. PERT and CPM help answer questions such as • When will the entire project be completed? . moeny. Overall project time is developed. cost estimates. PROJECT SCHEDULING 53 4.

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. Variance reports. 4. Total program labor curves. costs. behind schedule. what is the best way to accomplish this goal at the least cost? 4. is the money spent equal to.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Work status reports. Cost distribution tables. Functional cost and hour summaries. Definition 4. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. quality. 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.54 CHAPTER 4. or ahead of schedule? • On any given date.3. 2.3 Project Controlling Project control involves monitoring resources. is the project on schedule. and 8. . 4. Cost breakdowns for each task. Control programs typically produce reports detailing 1. were developed in the 1950s for project control. Time analysis reports. Raw material and expenditure forecasts. and budgets of projects. 5. 3. less than. 6.1 PERT and CPM Two methods. PERT and CPM. 7.3.

Personally. See also definition 4. 6. PROJECT CONTROLLING 55 Definition 4.5 [1. 3. They both follow six steps: 1.3.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3 (Critical Path) The computed longest time path through a network.3. Gantt charts are the “go to” visualization method for even very complex projects.3.4.3. Develop the relationships among activities. through the network. schedule. See also definition 4. and ontrol the project. 4.3. it will do for you automatically much of what we will go through manually in this class. Side Note 4. .3. Draw the network connecting all of the activities. As the names describe. in my experience.2 (Example: AON and AOA) Present Heizer’s figure 3. p. 4. Definition 4. or the critical path. Side Note 4. 5. Define the project and prepare the WBS. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.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. AON associates the activity with the node whereas AOA associates the activity with the arrow.2.3.2 Network Diagrams There are two approaches to visualizing activity networks: 1. 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. Use the network to help plan. Activity on Node (AON) and 2. 2.3. monitor. Moreover. Activity on Arrow (AOA).3. Assign time and/or cost estimates to each activity. Also. Compute the longest time path. 53].

2.8 [1.3. – If an activity has multiple immediate predecessors. analysis used to determine the project schedule. its LF equals its LS of the activity that immediately follows it. p. 54–55].4. In other words.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. – If an activity is an immediate predecessor to more than one activity. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.4 Determining the Project Schedule Once we have identified all of our activities.56 CHAPTER 4. pp. Follow with example 3 and figure 3. We do this with a critical path analysis with involves a 2-step procedure.1 (Critical Path Analysis) In project management. LF = min{LS of all immediate following activities}.3. that is. 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. . See also definition 4. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. its LF is the minimum of all LS values of all activities that immediately follow it. its ES is the maximum of all EF values of its predecessors. that is. their dependencies. 4. LS = LF − Activity time.9 [1. we must use time estimates of each activity to determine the overall schedule for the project. EF = ES + Activity time. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.1 gives sufficient information to describe the network.3. Definition 4.6–3. • Table 3. ES = max{EF of all immediate predecessors}. that is. PROJECT MANAGEMENT Side Note 4. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. 56]. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 1.

2 (Forward Pass) In project management scheduling. p. 61] based on table 3.13 [1. the step that identifies all the earliest times that activities can be completed. Note that activities A.3 and Heizer figure 3. if we delay activities B and D by one week each. the time shared among more than one activity. 57]. Definition 4. Definition 4.5. we cannot complete the project in 15 weeks. The critical path is one that • Begins at the first activity in the project.5. 1 For example.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. 2 For example.1 (Slack Time) In project scheduling. • Terminates at the last. or the amount of time an activity can be delayed without delaying the entire project. 4. it is said to have free slack. Slack time is just Slack = LS − ES or Slack = LF − EF . Side Note 4. .3.3 (Free Slack) In project scheduling. the time associated with a single activity.5. we may delay the project as a whole. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. the free time for an activity. in the example in sidenote 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. Note also that if we delay each activity by the amount of slack that activity has. and • Includes only critical activities (see sidenote 4.10 [1. These are called critical activities. 60]. C.5. G.4.” Then complete Heizer example 7 figure 3.1).1. E.4. activity F in sidenote 4. If an activity2 does not impact the slack time of any other activity.1. they share total slack.4.4.3 [1. and H have no slack time and cannot be delayed without delaying the entire project. the time devoted to one of these activities must also be reduced.1 When several noncritical activities appear successively in a path.4. “Notation Used in Nodes for Forward and Backward Pass. p. Definition 4.4. Also notable is that if the total time of the project needs to be reduced.2 (Total Slack) In project scheduling. p.

. the project manager pulls the number “out of the air” based on their experience managing related activities. unexpected complexities. Definition 4. The beta distribution is used as a prior distribution for binomial proportions in . Effectively. See also definitions 4. Definition 4. PROJECT MANAGEMENT 4.1 (Optimistic Time) In project scheduling. Definition 4.3. Most likely time – The most realistic estimate of the time required to complete an activity.58 CHAPTER 4.6.6.1 and 4. etc.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.6. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. technical considerations that were unknown at the time the project schedule was drawn up. See also definitions 4. and the other uses β = β − 1 and α = α − 1 . The usual definition calls these alpha and beta.2.2 and 4.6. the most probable activity completion time that could be obtained in a PERT network. However. the time required to complete an activity is often uncertain due to supply problems.2 (Pessimistic Time) In project scheduling.1 and 4.6. Beta distributions have two free parameters. Definition 4.3 (Most Likely Time) In project scheduling.6.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. Side Note 4.6.6.6. in most cases.6. In reality.3. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.6. we do not. In PERT. the “worst” activity completion time that could be obtained in a PERT network. the “best” activity completion time that could be obtained in a PERT network.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. three time estimates are used: 1. See also definitions 4. which are labeled according to one of two notational conventions.

8 1.html http://mathworld. Activity times are statistically independent 3 Source: http://mathworld.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.6.1) where B(p. p. 62].html. and 9 weeks. The above plots are for various values of (α.com/BetaFunction.1 Probability of Project Completion If we assume that 1. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α.4.4. most likely.3 The domain is [0.78 6 6 36 7 4 weeks. q) = (4.00. 2007. 63] for activity F based on optimistic. Side Note 4. and 7. p.com/BetaDistribution.78 weeks. The variance of the activity time is Variance = [(b − a)/6]2 . most likely. and pessimistic times of 1.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.6. and pessimistic times of 1. 4.1]. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. Total project completion times follow a normal probability distribution and 2. and .β) with α = 1 and β ranging from 0.6.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.wolfram.wolfram.25 to 3. 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. β) Γ(α)Γ(β) P (x) = (4. 2. The expected activity time for activity F is 3 weeks5 and the variance is 1. 4 See definition 4. 4.00 week. February 21. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.6.

two standard deviations approximately 95% of the time. A2– A3] “Normal Curve Areas.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1.10 Determining Project Completion Time for a Given Confidence Interval A common question is. see http://mathworld.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.60 CHAPTER 4.3) Definition 4.1.3 (Example: Project Variance) Review Heizer example 9 [1.6.76 weeks implies that the project will exceed the expected completion time by more than 1.” Review Heizer example 10 [1.7% of the time. 64]. Definition 4.16.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. Note that the standard deviation of 1.6.com/StandardDeviation. 65] and figure 3.6. See definition 4. pp. .6.html. Side Note 4. p. the population variance var(X).76 weeks approximately 16% of the time. commonly also N written σ 2 .6 (Standard Deviation) The standard deviation is the square root of the variance.6. p. definition 4.wolfram. See also 4.6. Side Note 4. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. and within 3 standard deviations approximately 99. 9 For 10 See more information.6.5.6. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4.6.

4. you will doubtless experience one or both of these eventualities many times in your career. Project crashing is the name given to the process of rushing a project to completion. • The shortened durations will actually enable us to finish the project on time.7. crash time is the shortest duration of an activity. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. in fact. we need to ensure • The amount by which an activity is crashed is. Since activity completion times are typically shortened by adding resources.2 (Crash Time) In project management.4) 11 Since crashing a project often involves adding additional resources to activities.1.7. Step 1 – Compute the crash cost per week. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.7. . and • The total cost of crashing is as small as possible. See definition 4.3 (Crash Cost) In project management.1 (Crashing) In project management. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.1.7. When crashing a project. the crash cost is typically higher than the normal cost. and if you become a project manager.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. See definition 4. we want to do so in the least cost mannger possible. Assuming linear costs. if certain activities off the critical path take the pessimistic time estimate or more to complete. permissible and realistic. Definition 4.7.7. Definition 4. 4. crash cost is the cost required to complete an activity in the shortest time possible. Crashing a project involves a four step process: 1. it may result in the project being delayed.11 Definition 4.

7.2 (Example: Crashing a Project) Present Heizer example 12 [1.18–3. go to step 2. Step 4 – Update all activity times. Then crash each activity by one period. If you accept the challenge and try to rush the project to please upper management. If not. you should be very wary of such pressure. If the due date has been reached. • Advantages – Especially useful for large projects . Step 2 – Find the critical path(s) in the project network. 3. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per 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. Note that one activity may be on several critical paths. PROJECT MANAGEMENT 2.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. 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.19. 4. the advice given in this section should be helpful. Side Note 4. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. Crash this activity by one period. At times this may be politically infeasible.7.5 and figures 3. 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. 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. stop. As a project manager. If you find yourself needing to rush a project. pp. Side Note 4. Step 3 – If there is only one critical path. 67–69] including table 3.62 CHAPTER 4. If there is more than one critical path.

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

64 CHAPTER 4. PROJECT MANAGEMENT .

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

1. Maturity. and other economic indicators. Facility locations or expansion.1. long-term forecasts concerned with the rates of technological progress. Growth. 3.1. and Research and development. . Product life cycles tend to follow four stages: 1. Generally deals with more comprehensive issues than short-range forecasts. Cash budgeting.3 (Technological Forecasts) In operations management.66 – – – – Sales forecasting.1. CHAPTER 5.4. and 4. 5. which impacts purchases of new plant and equipment as well as development of new products. These may include inflation rates. These concern rates of technological progress. Useful for – – – – Planning for new products.1.4. Decline.1 Types of Forecasts Organizations typically use • Economic forecasts. and Analyzing various operating plans.to long-range forecasts. See also definitions 5.2 (Economic Forecasts) In operations management.3 and 5. See also definitions 5.2 and 5. and • Demand forecasts. money supply.1.1. planning indicators valuable in helping organizations prepare medium. Definition 5. • Technological forecasts. Capital expenditures. longer forecasts are needed. Production planning and budgeting. housing starts. Introduction. In the first two stages. Definition 5. 2. FORECASTING • Long-range forecasts – Generally more than 3 years.

A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. • Training. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Select the forecasting models. projections of a company’s sales for each time period in the planning horizon. Gather the data needed to make the forecast. marketing.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. .2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.2. 2. Capacity – Underestimating demand can result in • Undependable delivery. 4. 7.1. • Loss of customers.4 (Demand Forecasts) In operations management. Select the items to be forecasted. Determine the use of the forecast. Human resources – Anticipated demand is needed to estimate the need for • Hiring. and personnel planning. 2.1. these drive a company’s production. 3. and • Loss of market share. and • Layoffs. 5.5. 3. Validate and implement the results. Also called sales forecasts.2 and 5. and scheduling decisions and serve as inputs to financial.1. See also definitions 5.3. capacity. Make the forecast. 5. 6. Determine the time horizon of the forecast.1. 5.

– You should be able to explain how and why you arrived at each and every number that you forecast.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. – Before you show your numbers to others.1 (The Most Common Errors in Forecasting Methodology) In my experience. . track the actual outcomes and compare them to the forecasts. – After making a forecast. – On a number of occasions. • Lack of sanity checking. ask yourself if they make sense. Any quantitative approach should be complemented with a qualitative “reality check.2.68 CHAPTER 5. you will be unable to defend your numbers. In practice. • Lack of support for the forecasts. – If they do not match. – If you do not truly understand the mathematics. • Using models that are more sophisticated than the user’s understanding.D. – If someone challenges your forecast and you do not have supporting logic or documentation. FORECASTING Side Note 5. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. use something simpler. it is a bit of an art that mixes both. based on a linear model. • Lack of follow-up. figure out whether an improvement to the forecasting methodology can be made.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. – In one case. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. I have seen otherwise competent people (including Ph. 5. – Many people try to apply ordinary least squares (OLS) regression techniques. 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. to inherently nonlinear systems.

3. Moving averages cannot pick out trends very well. useful method if we can assume that market demands will stay fairly steady over time. Sales people typically respond to incentives. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.8. · The simplest and easiest way to estimate demand. 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. . political. ∗ However. and · Respondents.9. · See definition 5. · Useful as a starting point or sanity check for more sophisticated methods. ∗ The more independent your decision makers are from economic. say. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · See definition 5. the naive approach.3. · There are three problems with moving averages 1.5. and if they perceive there is an incentive to exaggerate. ∗ Moving averages · Simple.3. Moving averages require more past data to work with than. · Requires less past data than moving averages. or other incentives to over or understate demand. · Staff personnel.3. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. 2. be sure that the sales force is clear that their incentive is to be as accurate as possible. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. they will do so. for example. the more likely it is your results will be accurate. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period.

3. Definition 5. 5.70 CHAPTER 5.3.1 Qualitative Forecasting Methods Definition 5.3.3.3.3.1. Definition 5.3. and 5. 5.6.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.3 (Jury of Executive Opinion) In operations management.4.3.3. See also definitions 5.3.5 (Sales Force Composite) In operations management.10.5.3.3. and 5.3. and 5. 5. See also definitions 5.3.6 (Consumer Market Survey) In operations management.3. Definition 5.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.6. and 5. 5. See also definition 5. personal experiences. · See definition 5.6.3. a forecasting technique using a group process that allows experts to make forecasts. 5. See also definitions 5.4.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.5.3.4 (Delphi Method) In operations management.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3. emotions. See also definition 5.4. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.2.5. Definition 5.3. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3. See also definitions 5. . and value system.3. a forecasting technique based on salespersons estimates of expected sales.

3. Higher values give more weight to recent data. and 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. 5.3. a simple moving average is given by demand in previous n periods Moving average = (5.9.11.3) The smoothing constant.10. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. Definition 5.3.3.3.3. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. and are appropriate to use when the underlying average .3.3. That is.5.7. Definition 5.3. 5.1) n • Weighted Moving Average – Mathematically.2 Quantitative Forecasting Methods Definition 5. FORECASTING APPROACHES 71 5.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. See also definition 5. • Simple Moving Average – Mathematically. See also definitions 5.05 to 0. Mathematically. generally ranges from 0.5.3. Definition 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. α.2) See also definition 5.7.8.3. Moving averages can be either simple or weighted.

such as the mean absolute deviation (see definition 5.3.8.3.72 CHAPTER 5.3. and 5.4) definition 5.3. Definition 5.15. and are appropriate to use when the underlying average is relatively stable. Definition 5.0. See also definition 5.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. 5.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3. FORECASTING is likely to change. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. 3.12).7.14.12. Definition 5.7.3.3. while lower values give more weight to past data. 1 See |actual − forecast| n (5.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5. 5. When α = 1.3.3 Measuring Forecast Error Once a forecast is made. Three popular measures are 1.13). Mean squared error (MSE). Mean absolute deviation (MAD).3. .1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3.3. exponential smoothing is equivalent to naive forecasting. Mean absolute percent error (MAPE).3. it is good practice to compare the estimated value with the actual value as actual values become available.3. See also definition 5.13. 2.

5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. 100 n i=1 (forecast errors)2 n (5.3.4 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 5.6) 5.3. MAPE is given by MAPE = See also definition 5.3.8) With smoothing constants α for the average and β for the trend. Mathematically. MSE is given by MSE = See also definition 5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.11) . Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.3.12.7) or F ITt = Ft + Tt (5.3. Mathematically. FORECASTING APPROACHES 73 Definition 5. expressed as a percent of actual values.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.5) |actuali − forecasti |/actuali n (5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3.12.3.

Ordinary Least Squares Regression analysis is also useful for predicting trends.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.10. It is also commonly called linear regression analysis. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case.12. by the formula F ITt = Ft + Tt . FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.14) . Compute the smoothed trend. 2. F ITt .74 or CHAPTER 5. the emponentially smoothed forecast for period t using equation 5. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Calculate the forecast including trend. Compute Ft .13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 1. Tt with equation 5. time) (5. 3.

then multiply it by the seasonal index for that month. we will examine one model. such as cars and washing machines. 2. Compute a seasonal index for each season by dividing the historical demand by average demand. Divide this estimate of total annual demand by the number of seasons. The first step is to calculate the seasonal forecast. Find the average historical demand for each season. 3.3. Definition 5. . 1. 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¯.S. during the summer months when it is common to take a vacation. 1. 4. 5. Recall that the equation 5. 3. 5. Deviations around the least squares line are assumed to be random.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events.5. ¯ x The least squares method has several drawbacks. We do that with a 5-step process.5 Seasonal Variations in Data In most businesses. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. Estimate next year’s total annual demand. the more uncertain it is. Compute the average demand over all months. the multiplicative seasonal model.13 assumes a linear relationship. 2. demand is seasonal. to account for seasonal changes in demand in our forecasting. consumers often make fewer purchases of durable goods.3. In the U. Although there are many methods to accomodate seasonal demand.. This provides the seasonal forecast. Most businesses experience a surge in sales around Christmas.3.

3. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.15) Side Note 5. if you are uncertain about predictions of x.1 (Example: Using OLS) Present Heizer example 12 [1. 106– 107].x = (5.3.. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.g. However. average local salary) (5. pp. mathematically. If there are published estimates you can cite (e.17) .3. It is also called the standard deviation of the regression and. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. We will use the same technique..g. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model. but x will be something other than time.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.16 is y2 − a y − b n−2 xy Sy.x = (5. FORECASTING 5.76 CHAPTER 5.4. whatever uncertainties you may have transfer to your predicition of y.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.g.. is given by (y − yc )2 n−2 Sy. Note that making predictions of future demand involves also making predictions about the independent variable x.

9 [1.3.18.S. Even the Year of the Pig correlates strongly with the U. or National Football League.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. FORECASTING APPROACHES 77 Side Note 5.18) . a football game played between two football conferences in the U. stock market.3.00.4 . stock markets.html?xid=sitecnn-partner.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.3. which is divided into two “conferences. pp.” the AFL (American Football Conference) and the NFC (National Football Conference).time. stock market prices as well as the winner of the Super Bowl. the U. The correlation coefficient of variables x and y is given by r= See also definition 5. is monopolized by the NFL. the note in the margin accompanying Heizer example 14 [1. but the relationship is coincidental. in all but one Year of the Pig. Definition 5.S. p. February 28. changes in skirt lengths don’t cause stock market prices to rise and vice versa. Correlation Coefficients for Regression Lines Definition 5. 4 Source: http://www. the average length of a woman’s skirt and stock market prices in the U. leading stock indexes.3 (Examples of Correlation Coefficients) Present Heizer figure 4.2 with stock prices generally rising as skirts rise.S. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. It does not imply causation one way or the other. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. have been correlated. Other interesting correlations that have been identified over the years include banana prices and U. 2007. 109].2 (Distribution About the Point Estimate) Present Heizer figure 4.8599. Dow Jones Industrial Average and Standard and Poor 500. has risen.S.S.” Side Note 5.5.com/time/business/article/0.” Note that the regression assumes a standard normal distribution about the estimate.3.3. Since 1935. “Four Values of the Correlation Coefficient. nor does it imply that they will continue to be related. Correlation) Correlation merely means that the values of two variables are historically related.10 [1.S.3. Historically. p.4 (Causation vs.1594488. 107]. Side Note 5. Certainly.S. football in the U.3.3 and the U. “Distribution about the Point Estimate of $600 Million Payroll. 108].

17. . .” For example. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3.19) Determining the values of a. b1 .3. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.3. x2 ..3. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. 110]. Adding additional independent variables as predictors.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. .18 and Heizer example 15 [1. p. 5 See definition 5.78 CHAPTER 5. b 2 . you would use statistics software to calculate these values. b1 . (See definition 5. . In practice.15 is given by y = a + b1 x1 + b2 x2 + . etc.19 (Multiple Regression) A causal forecasting method with more than one independent variable. The same technique can be applied to use several independent variables to predict the value of a dependent variable. . often the most difficult part of building a multiple regression model is to pick the independent variables. .” As the sidebar points out. = the dependent variable (e.6. b2 .g. results in additional predictive accuracy as measured by r2 . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. Side Note 5. .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.5 Definition 5. p.3. . It is commonly simply called “R squared. The multiple regression equivalent of equation 5. if they are indeed related to the dependent variable. . in a multiple regression analysis involves a complex formula which is beyond the scope of this class. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. 110].

4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.20) A good tracking signal has about as much positive as negative error. If the tracking signals violate upper or lower limits.9% of the time.4.6 standard deviations. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .6 One M AD is equivalent to 0. which correspond roughly to standard deviations.2. Definition 5.2 standard deviations.6. The tracking signals should also be compared as they are generated against limits. This means that the observed value should be within 2 M ADs abut 89% of the time. .6. two M ADs to 1. Tracking signals are typically used monitor forecasts. though large errors may be a problem as well even if the positive and negative errors balance. the forecasting methodology needs to be modified.4.8 standard deviations.4.1. In other words. three M ADs about 98% of the time.4. 111].1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.forecast| n where M AD = (5. Definition 5. and within 4 M ADs about 99.1 (A Plot of Tracking Signals) Review Heizer figure 4.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. one of the most common problems with forecasting is a lack of follow-up. These limits are typically based on M ADs. three M ADs to 2. p.5.4 standard deviations. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. MONITORING AND CONTROLLING FORECASTS 79 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.11 [1. and 4 M ADs to 3. Side Note 5. 6 Recall definition 4.

4. Definition 5. “Summary of Forecasting Formulas. There is no single technique that should be used for all products or services. Sophisticated forecasting models are not always better than simple ones.4. Side Note 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.4.g.4. 5. 114]. 2.10) is automatically changed to keep errors to a minimum.3. α in definition 5..” .3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.4. changes need to be check with human eyeballs to ensure that the adjustments make sense.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.2 [1.4. p. However. there has been much criticism of the approach to using models based on thier fit to the data. which selects a model based on goodness-of-fit to a data set. In your career. 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. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.80 CHAPTER 5. FORECASTING 5. Note that even with computer monitoring. Definition 5. you should be aware of the criticism of focus forecasting.2 Focus Forecasting Focus forecasting. is based on two principles: 1.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. Side Note 5. you must make your own decision as to how you select the forecasting models that you use.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.

pp. 81 . as an intangible.0. as products. • Market share and dynamics. 1 In this chapter.128] • Investment and cash flow.5 (Product Decision) The selection. which. Definition 6. definition. Product strategy2 defines the breadth of the product line and links product decisions to [1. They also use just-in-time production techniques. • Product life cycle. which will be discussed in detail later in the semester. time permitting. 124.0. 122–123]. pp.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. is a service. For example. insurance companies often refer to their policies. Referring to services as products is common in the service industry.2. and • The organization’s capabilities. and design of products. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. the word “product” will refer to both goods and services.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.1 Side Note 6.1 . 2 Recall sidenote 2.

and innovative production is appropriate. YouTube videos). . low-cost. • Maturity phase – Competitors have entered or are entering the market. • Introductory phase – In the introductory phase. and 4. DESIGN OF GOODS AND SERVICES 6. 2.2 Life Cycle and Strategy Strategies change as products move through their life cycle..82 CHAPTER 6.. Life cycles can be in the days or weeks (e. so high volume. 6. months (e. 3. years (e. often ruthlessly.1. Maturity. or even decades.1. clothing fashions).. products expenses are often high for – Research and development.1 Product Life Cycles Product life cycles can be divided into four phases: 1.g.g. Introduction. restaurants or nightclubs). Growth. – Process modification and enhancement.g. Product strategy involves determining the best strategy for each product based on its position in the life cycle. • Growth phase – Effective capacity forecasting is necessary. and – Supplier development. Decline. • Decline phase – Investment needs to be minimized and resources need to be redeployed.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.

2 Generating New Products Most products have a limited life cycle.3 Product-by-Value Analysis For firms with many products. it must regularly redesign existing products or bring new products to market. and if a company is to survive. • Technological change often drives product innovation. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. • Sociological and demographic change is also tied to product demand.1 (Example: Brainstorming) Lead the class in a brainstorming session.500 or 100.6. 6. example. 6. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. • Economic factors. 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. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.3 • Political and legal change can also bring about business opportunities.1.1.4 Side Note 6. Definition 6. Definition 6. Ideas are not reviewed until after the brainstorming session.2.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.2.000 yuan. example. GENERATING NEW PRODUCTS 83 6. are tied to product demand. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. such as consumer incomes. 4 For 3 For . the development of cellular telephone technology or the internet.2.2. as well as the total annual dollar contribution of the product.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.

A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. 128]. market dynamics. 128]. p. 6. 129].84 CHAPTER 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. p.3 [1.1 (Product Development Stages) Present Heizer figure 5.3. Side Note 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. the product life cycle. Many successful companies rely on sales from products introduced within the past five years.3 6.2 [1.1 (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. 6.2.3. . DESIGN OF GOODS AND SERVICES For example. DuPont estimates that it takes 250 ideas to yield one marketable product [1. and the organization’s capabilities. Determines what will satisfy the customer and 2. Side Note 6. Translates customer desires into a product design.3. Definition 6.2 (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.3.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. p.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.3. Each stage should have an accompanying review to determine whether to progress or not. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Definition 6.

1.com for more information.S. e. • Fixed duties exist. with product features. design engineering.2.3 Organizing for Product Development In the West. PRODUCT DEVELOPMENT 85 Side Note 6.3. as was the software described in section 4. In other words. Develop importance ratings. Note that it is not free or open source.9 6. • More common in large. Building the house of quality involves six steps: 1. An organization is divided into departments.” 6 For example. 3. See http://www.8 5. Identify how the good or service satisfies customer wants.7 4. 7 In other words. which can be an advantage. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.3.. p. Evaluate competing products.2. 10 The right-hand columns of the house in sidenote 6.3.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.3.2 (Example: House of Quality) Present Heizer example 1 [1.3. 2.9. identify the rows of the house in sidenote 6. bureaucratic companies and organizations. Relate customer wants to product hows. Identify relationships between the firm’s hows.3. 130].g. and production departments.6 3. 6.3. create the columns of the house in sidenote 6.2. there are three popular methods by which organizations undertake product development.2.2. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. Product development is done by teams.3. 8 These are given on the roof of the house in sidenote 6.. Identify customer wants.10 Side Note 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. • Effective communication and coordination between separate departments can be problematic. manufacturing engineering. a research & development.3.qfdcapture. 2.6. • Perhaps the most popular approach in the U. .

3. Definition 6.3.4. Definition 6. These teams often include representatives from marketing. Definition 6.3. However.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. production. The goals of manufacturability and value engineering are 11 See definition 6. will often advocate for continuation of their project past the point that it is profitable for the company. engineering. and production stages of product development.11 In Japan.3. purchasing. development.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. use of participating teams in design and engineering activities. .5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. My experience may not be indicative of management practices in general in the U.3. 6.86 CHAPTER 6. Side Note 6. design..4 (Concurrent Engineering) In project development. it can also be problematic because teams.3.. Some teams even include representatives from vendors.3..4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.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. quality assurance. because their fate is tied to a product. Side Note 6. but my personal impression is that formal QFD practices are not widespread in practice. organizations are less structured and typically not divided into research and development. etc. production. maintainability. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. and field service personnel. manufacturing. engineering.S. and use.S.

Improvement of functional aspects of the product. Improved job design and job safety. PRODUCT DEVELOPMENT 1. Robust design. 3. Reduced complexity of the product. 4.3. Improved maintainability (serviceability) of the product. 6. 5. 2. 87 . Standardization of components. and 7. Cost reduction.6.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

.

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

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

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

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

7. try to figure out why they were not successful.000 yuan by July 1” is a much better goal than “raise money. 7. .” you may not want to start a business that focuses on customer relationships. 10. and administration. Move on to larger goals once the small goals have been met. – Long-term goals are those that may take 5. although the successful ones generally view their experiences as positive on the whole. “Achieve financial independence” is much better than “pay the bills. ask yourself the following questions: • Income – How much do you want to earn. if not more important. – Short-term goals are those that can be accomplished within a year. • Analyze Your Professional Attributes – Be aware of where you need help. When I talk to those who I know who have started businesses. Learning from failure is as important. such as sales. 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. Like parents. ask other entrepreneurs. When setting goals. – Start with small goals. When setting goals.000. than learning from success. or 20 years to accomplish. Side Note 7.” • Be realistic. even the successful ones will probably focus on the negative.000 yuan and you’ve never had a job before.3 Setting Goals With any major endeavor. it is common to exchange “war stories” about the difficult times and sacrifices. your goal may not be realistic. • Be specific. Consider at least a five-year time horizon. • Set both short-term goals and long-term goals. marketing. SETTING GOALS 95 If you are not a “people person. it helps to set goals. advertising.” • Be optimistic.3. If you talk to an entrepreneur who has not been successful. If your goal is to raise 1.3.1 (What’s It Really Like?) If you wonder what running a business is really like. “Raise 100.

Have the class write down their answers and evaluate their own EQ. – Geographic location. Eliminate question 1 and substract one point from the scoring given on p. 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.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. 20.3. Side Note 7. Acknowledge this fact and factor it into your decisionmaking. pp.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. – Hours of work. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. . How much is your ego worth? Side Note 7. 18–20]. 21]. Many people want to start their own business for ego gratification. and – Investment of personal assets.96 CHAPTER 7.3. The reasons given for adding or subtracting points are as interesting as the ultimate score. pp.

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

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

1. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. YOU’VE GOT AN IDEA. Entrepreneurs are often told their idea is flawed. home. 35]. p. However. 2007. Now What? The number one trait needed by successful entrepreneurs is perseverance. People thought he was going nowhere and generally dimissed his business. or health. the business took off. in the wake of 9/11. or are otherwise discouraged. p. such as your family. And you should not risk anything you can’t afford to lose.” Side Note 8.1. it is too risky. thinking that if he did not succeed after a couple of years. . You should be realistic about risks.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. February 17. used as the title of at least 12 movies and television shows. 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.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. you should not let it dissuade you. Side Note 8.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.1 You’ve Got an Idea.com/find?s=all&q=never+say+die.8. Side Note 8. that they will never make it. 2 http://www. 33]. making just enough to get by but not much more.1. while you should listen to criticism that others give. you should have “thick skin.” That is. Finally. Have students fill out the form on their own time. 8. “Never say die. His sales are now in the millions of dollars per year and the business is very profitable. he would never succeed. Warnings about risk are perhaps the criticism you should consider most carefully. you will be spending years of your life trying to make the idea work. computer-controlled security cameras. A well-known phrase in English. He ran the business as a one-man operation for years.imdb. You do not want all of that time to go to waste and potentially lose your personal investment and that of friends and relatives because you overlooked something. to be truly self-motivated and persistent in the way you need to succeed.2 is. After all.1. Have students come up with examples of products that meet various criteria on the checklist.

FINDING AN IDEA .100 CHAPTER 8.

There are two broad categories of markets: 1.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.1.” or business-to-business ventures.0.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. 101 .0. See also 9.2. See also 9.0. but you should try to target your market as specifically as possible. your next step is to do some market research.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Consumers and 2. go through the following 7 steps: 1.Chapter 9 Defining Your Market After coming up with your idea. Definition 9. Not only do you need to decide whether you are marketing to businesses or consumers. Businesses. 9. Definition 9. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0.” or business-to-consumer ventures. When trying to identify your niche market.

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

1. Many Western companies make the mistake of lumping together Japanese.1. such as having children.1. when the country was immersed in a war effort. FINDING YOUR NICHE 103 7. Definition 9. Side Note 9.S. For example.1. are similar in age to those who came of age in World War II. and other Asian customers together. Definition 9.1 (Generational Marketing) Marketing to consumers based on age as well as social. (See definitions 9. many are choosing to start families later in life or even have children ten years or more apart. Side Note 9.) Using these new marketing techniques can allow you to narrow your market. and cohort marketing. etc. New marketing techniques include generational. This marketing technique has been widely used since the early 1980s in the U.1. when many people were suffering from extreme poverty..1. 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. Likewise. .. you should be able to enter your niche market with confidence. many entrepreneurs make the mistake of being “all over the map. economic.. and psychological factors.1. but their behavior differs significantly due to the different influences in their youth. Marketing to demographic groups has become much more refined in the last few decades. life stage. If you did your homework.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. Go for it! – Implement your idea. for example. This can be offensive and serve to alienate rather than appeal to your customer. demographic. in the U. the Depression-era cohort.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. and the narrower your focus on your target. buying a home.1. the World War II cohort.9.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. Definition 9.” That is.1 (Smaller is Bigger) When starting a business.S. young adults in the Depression. you should practice extra caution to avoid stereotypes or other insensitive approaches. As older people are more active than before.1. many Eastern companies make the mistake of lumping together American and European customers. they try to satisfy all possible customers and end up trying to do too many things well. Chinese.3. 9. It is better to do just one thing well than to do many things poorly. the more likely you are to score a hit.2. and 9. or retiring. Korean.1.

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

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

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

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.

.10. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.2. pp. RESEARCH METHODS 113 Side Note 10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2.” [4.

MARKET RESEARCH .114 CHAPTER 10.

2. 5. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. and so should you be.Chapter 11 The Business Plan The business plan is an essential document not only to seek funding but to provide a sanity check and to give you a framework for developing your business. 3. No realistic goals – Your business plan should help you ascertain whether your goals are realistic.0. expected needs. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. 1.4 (Business Plan) A business plan is a written document that details a proposed venture. Your business plan should list obstacles that may arise and what will be done to address them. 4. In terms of sanity checking. Set up a timetable with specific steps to be accomplished in a specific period. Lack of demonstrated experience – Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. Every aspect of the venture should be covered. and projected results of the new business. Those who provide financing are aware of these pitfalls. including 115 . It must describe current status. Definition 11.

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

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

11. 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. though you should not put it in the same corner as page numbers appear. 5 I suggest the lower-right corner. – On the title page. The company’s current status.118 CHAPTER 11. The venture’s objectives in 3 to 5 years. – It is worth repeating: Keep it down to at most two or three pages. If you write to much. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. – 40 pages is ideal. THE BUSINESS PLAN – It should be no more than 50 pages. – It should explain 1. 2.3 Some Style Points Kuratko also recommends that you [3.3 • The Cover and Title Page – The cover should have the name of the company. e-mail address.1. they will not read it. and/or web site. Its products or services. p. . The benefits to customers. The amount of financing needed. 7. and How investors will benefit. 4 Phone number. address. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. a number should be in a corner5 indicating the copy number. the date of the plan. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 3. • The Executive Summary – Two or three pages immediately following the title page. The financial forecasts. You should use this to keep track of who has which copy. 6. 3 Note that for this class. – Inside the front cover should be a title page repeating the cover information. 5. and full contact information4 for the company. 4.

2 [3. p. Executive Summary – This should be the last thing you write.2 The Plan Contents Side Note 11.” or “us. Some details on each section of the business plan: 1. The executive summary gives readers their first impression. Use the spell checker on your word processor to check for spelling mistakes. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. which describes the 10 sections of a typical business plan. Your credibility is established in part by the credibility of your plan. or other special market advantages you have. • Keep the Plan Written in the Third Person – Do not use “I.6 Note any industry developments and describe the business thoroughly. use “he.1 (10 Sections of a Business Plan) Present Kuratko Table 10.2. and tell why it is named what it is. trademarks. copyrights. • Do Not Overdiversify – Don’t try to be all things to all people. be sure to include them in the business description. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.” Instead. is it based on a family name? Does it include technical terms you need to identify? .” or “them.” “we. 305]. • Identify the Target Market – Market research should support a focused customer niche. Include any pictures or designs that would be helpful.g. • If there are patents.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. so be sure the writing is finely crafted. but it is the first thing that your audience will read. Business Description – Name the business. 6 E..2. • Orient the Plant Toward the Future – Create an air of excitement. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. 11.11. Present a focused plan. 2.” “they. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed.

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

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

THE BUSINESS PLAN .122 CHAPTER 11.

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

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

Ask them what your company will do. 45]. 12. ask yourself after every statement you make. Many people feel as if taking notes makes them look stupid. 12. p. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access. Stop when it goes off. it is quite the opposite.3. I always bring a pen and paper to meetings. you need to change or eliminate the statement. 12. so write things down to make sure you don’t forget. • Taking notes also makes you look conscientious.5 Take Notes Have a pen and paper ready and take notes during the pitch. Everyone. Guy Kawasaki recommends you set a timer [2.12.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. 12. AFTER THE PRESENTATION 125 Side Note 12.2. but in reality.3 After the Presentation Each presentation will be different. “So what?” If you cannot answer this question simply and easily. If they cannot explain it clearly. where some of the smartest people in the world worked. It is easy for things to get lost in the heat of the moment. and although you go into each presentation .4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. and each investor will respond differently. Give your presentation to friends or family. Much of the material required use of the internet.2.2. everyone brought a pen and paper.6 So What? When you are planning your presentation. They may ask you something you want to respond to in an e-mail later. you are not presenting it well. • Your audience may ask you several questions at once. At my company in Chicago. You should be prepared for the unexpected. They may ask you something that makes you want to change your presentation.2. In general.

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

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

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

but you should at least know about LIFO and FIFO. 13.2. In the U.1 (LIFO (Last In.4. 13.4 Inventory Accounting Your accountant will typically handle inventory accounting.2.4. first out) assumes that you sell the most recently purchased inventory first.3. If there is inflation.4. Calculate your sales per square meter once per month. After you have been in business your inventory control system should give you a better idea of stocking levels. First Out)) LIFO (last in. Many businesses also measure turnover by measuring sales per square foot (or square meter).S. follow the recommendation of your accountant. 2 At 3 At least this is true in the U.4. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.S. which may result in higher taxes. Definition 13. The author is unfamiliar with Chinese tax codes. the needs period is the sum of the count cycle. In deciding which to use. it values your remaining inventory based on the prices of the least recently purchased items.3 See also 13. first out) assumes that you sell the least recently purchased inventory first. First Out)) FIFO (first in. you must estimate your inventory value when you file your taxes. which allows you to pay less taxes on your inventory.S. LIFO and FIFO are two accounting methods used to do this.3. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. You should know how many sales per square meter per year you need to survive.1 Buying Inventory In the process of putting together your business plan.4. INVENTORY ACCOUNTING 131 Definition 13.3.4. 13.3.2 See also 13. The author is unfamiliar with Chinese tax codes. See definitions 13.13. In other words.2 (FIFO (First In.1. If there is inflation. it values your remaining inventory based on the prices of the most recently purchased items. Definition 13.4. and 13. least this is true in the U. order cycle.3.5 (Needs Period) In inventory management. and delivery cycle. ..

“Be open. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. 13. Import sources – They operate like domestic wholesalers. Independent craftspeople 4. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Their prices are higher than a manufacturers.” . courteous and firm with your suppliers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. 3.4. Rieva Lesonsky. Distributors – Also known as wholesalers.5 Suppliers Suppliers can be divided into four categories: 1. – The minimum may be higher for first orders to cover the cost of setting up a new account. • Some suppliers demand a minimum number of items per order.1 Dealing with Suppliers The most important thing about a supplier is reliability. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. brokers or jobbers.132 CHAPTER 13.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. says. 2. three or four months.actual inventory . usually one. and they will respond in kind. INVENTORY CONTROL Definition 13. Manufacturers – Note that some manufacturers refuse to fill small orders.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. 13. author of Start Your Own Business.5.

personal interaction can work wonders.d. 2. basis until you have proven yourself reliable. do not falsify or misrepresent your financial statements. it is considered a felony. • For items being shipped. At least in the U. SUPPLIERS 133 13.5. Definition 13. Be sure to add up • Costs.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. If a supplier does not extend credit. I regularly had to deal with food vendors.5. If a supplier is uncertain about you. Suppliers sometimes try to complicate pricing to their advantage.5. and • Allowances before you make a decision. Whatever you do. they will put you on a c. the supplier will pay for freight. Side Note 13. You can also present your financial statements and prospects for success. If you don’t have trade references or a credit rating (as is the case with many starting businesses) you may find smaller suppliers more accomodating than large suppliers. If you are dealing with a reticent large supplier.13.d. 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. Discuss • Their negotiating technique when discussing pricing.S. and • The need to be firm but fair.1 (COD (or c. customers may be required to pay upon receipt of goods.. • Sometimes if an order is large enough.)) Cash on delivery. you should know who is liable for damage to goods in transit. .o.5. Ask about the freight policy before ordering. • Discounts. Tips for dealing with suppliers: 1.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.o.

)) Free on board.b. Definition 13.o. May 19.org/wiki/Backorder. http://www.2.b.7 4 Source: 5 Source: http://www. 5.5.5.5. 2007. . International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment. 5 FOB Destination changes the location where title and risk pass.4 Colloquially. INVENTORY CONTROL • Depending on whether the supplier pays frieght. May 19. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Under this arrangement.wikipedia.html.o. May 19. May 19. The FOB term requires the seller to clear the goods for export.5. 2007.o. people often say something like “f. Destination)) Free on board destination.roadway. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. 3.b.134 CHAPTER 13. 7 Source: http://en.6 See also definition 13. 2007.html.com/jargon. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.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.2 (FOB (or f.com/shippers/glossary.3. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. Definition 13.epoi. Definition 13. See also definition 13. Be aware of your supplier’s priorities. 6 Source: http://www.com/reference/glossary/glossary efg.abcsmallbiz. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. As opposed to FOB. Seattle” to indicate that an item being shipped from Seattle is free on board. This differs from a forward order where stock is available but delivery is postponed for other reasons. Specify a cancellation date on your order forms.5. 2007.3 (FOB Destination (or f.html.

This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). The benefits of finding the right person for a job cannot be overstated. • Part-time employees.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. 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. besides being bad for business. On the other hand. Side Note 14.0. p.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. • Temporary employees (temps). 337].3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. and • Independent contractors. Side Note 14. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. 135 . they are often emotionally draining for the manager as well as the employee involved. a bad hire.0.

. etc.1. lifting.2 Job Description Side Note 14. by the time you hire your 40th employee. you have nothing to offer.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.1 Job Analysis Before creating a job description. Side Note 14. an employee with an inflated job title may expect an inflated severance package. If you give someone a job as Vice President. 14.1 How to Hire Hiring involves analyzing the job requirements. creating a job description. then want to hire someone else later at a position above them in the company. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists. you need to consider • The physical or mental tasks involved. programming. Not only education and skills. you’ll be grateful to have spent the time to go through a more formal process. If you call someone a Vice President but don’t compensate them as such. 14. Cleaning.1. but personality traits. you will likely find that they will come to you at some point to demand a vice president’s salary.1.2 (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. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. they will soon expect compensation commensurate with their job title. HIRING EMPLOYEES 14. • You may not leave enough buffer above the employee. However. and recruiting. writing reports.136 CHAPTER 14. • If you have do terminate the employee. .1. selling. 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.

You may actually be doing your employee a disservice by inflating their job title.1 (Job Description) Job descriptions should include • A job title. • Who the person reports to. • The position of that employee in the corporate heirarchy.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. and • A summary description of the position. 339].1.1. you may find it difficult to give them a promotion later. • Desired experience. for example. It also includes • Any educational requirements. p. 338]. Part of retaining quality employees is the prospect of advancement. you may find they are tempted to leverage that job title to seek employment elsewhere. and • Any occupational hazards. Side Note 14. If you hire someone at the highest level of their competency. Definition 14.1.14.1) and should include the personal requirements expected of an employee [4. • Physical or other special requirements associated with the job. • Benefits. p. you hire someone as Director who is not qualified to be a director. • If you give someone an inflated job title but do not offer a salary commensurate with the title. • A salary range. then they go on to a Director position at another company. . HOW TO HIRE 137 • There is little room for advancement. it includes • The job title. and • Job summary with major and minor duties. • Specialized skills or knowledge.1. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. Definition 14. Like a job description.1. If.

1.4 Finding People There are many possible sources of applicants.1. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. With e-mail. – For professional positions.S. e-mail addresses have become perhaps the most popular way to get applicant information at U. • 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. . – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. It also makes it easy to receive and process a large number of applications with a minimum of effort. • Be sure to list appropriate contact information.3 Advertising the Job When you write an advertisement. • Do not ask for specific personality traits.” or people who may not have them will just try to fake those personality traits in the interview. • List the top 4 or 5 skills that are most essential to the job.1.S. 14.4 (Using an E-mail Address) For professional positions. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. For example. – For other positions. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. such as “outgoing” or “detailoriented. • Do not list requirements other than educational or experience-related ones.5. Many American companies are no longer providing phone numbers. HIRING EMPLOYEES 14. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. 2 See sidenote 14.2 Side Note 14.1. due to the number of applicants for competitive positions. if you are looking for an accountant. companies.. particularly those that advertise on web sites.138 CHAPTER 14.

You hire the preferred candidate. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. • Focus on the skills that a person can bring to your company.14. You conduct a second round of interviews with the remaining 3 candidates. the hiring process proceeds as follows: 1. many positions are being filled online. For any job. Screening People Reviewing resumes and applications is an art.S. 6. Software” category... HOW TO HIRE 139 • Senior Citizen Centers – Senior citizens who need extra income or retirees who want to make productive use of their time often make excellent employees • An Unemployment Agency – Contact government and private agencies who assist unemployed persons • Job Banks – Professional associations often have “job banks” where professionals who are looking for employment can supply their resumes. 4.” And 921 in “Engineering. You check references. You can evaluate their personality during the interview.” . about 10 or so.S. Searching on Monster.1.dice. be sure that a candidate can provide what you are looking for. You interview the candidates.com with the keyword “java” will demonstrate just how widely used online tools are. To “weed out” candidates. 3 Java is a programming language.com with the keyword Java on May 19. not a science. You narrow down the 10 candidates to 3.000 hits searching just the “Information Technology” search category.3 Generally. 2007 turned up more than 5. you will get several candidates for any job you are offering. If you are lucky. 5.com or http://www. You narrow the number of resumes down to about 10.” 665 in “Internet/E-Commerce. 159 in “Financial Services. particularly in the high-tech industry. Try to perform a search on a job sites such as http://www.314 listings in the “Computers. but when looking at a resume. 3. • Industry Publications – Most trade publications take ads for job openings. • Online – In the U. most professional associations’ job banks are now online. In the U. 2. for professional positions.monster. There were 4.

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

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

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

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

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

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

Sign up to vote on this title
UsefulNot useful

Master Your Semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master Your Semester with a Special Offer from Scribd & The New York Times

Cancel anytime.