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

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . . . . . . . . . . . .4 Adjusting for Trend . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . . . .3. . . .2 Build and Staff the Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . 3. . . .1 Identify Critical Success Factors . 4. 3. . . . . . . . . . . . . 5. . . 5. . . . . . .1 Product Life Cycles . .1. . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . 4. . . . . . . 6. . . . . . . . 4. . . . . .3. . . . . . . .1. . . . . . .1 What is Forecasting? . . . . . . . .3 Measuring Forecast Error .3. . . . . .6 Variability in Activity Times . . . 4. . . . . . . . .3. .8 A Critique of PERT and CPM . .7 Cost-Time Trade-Offs and Project Crashing . . . . . 5. .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . . . . . . . 4. . . . . .3 Forecasting Approaches . . 3. . . . . . . . . . 4. . . . . . . 4. . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. .4 4 Project Management 4. . . . . . . . . .2. . 4. . . . .2 A Seven Step Forecasting System . . . . .1. . . . 5. . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . 4. .1. . . . 4. . . . . . . . . . . . .5 Seasonal Variations in Data . . CONTENTS . . .6. . .5 Slack Time and Identifying the Critical Path . . . . . . . . .1 Adaptive Smooting . . . . . . . . .1 Research . .4.1 PERT and CPM . . . .1 Qualitative Forecasting Methods . . . . . . . .3 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . . . . . . .4 3.1 Types of Forecasts .3. . . . . . .3. . . . . . . . . . . . .2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models . . . . . . . . .1. . . Strategy Development and Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . .2 The Work Breakdown Structure . . . . . . . . . . . . . . . 3. . . . . . . . . . . . . . . 5.2 Preconditions . .3 Dynamics . . . . . . . . 6 Design of Goods and Services 6. . .4. . . . . . .1 Goods and Services Selection . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . 5. 4. . . . . . . . . . .1 Project Planning . . . . . . . . . . . . . . .2 Network Diagrams . . . . . . . . . . . . . . . 5. .1 Probability of Project Completion . . . . . .3 Project Controlling . . .3. . . . . . . . . . . .2 Project Scheduling . . . . .1. .1 The Project Manager . . . 5. 5. . . . 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. . . . . . . . . . . . . . .2 Focus Forecasting . . . . .3. . . . . 6. . . . . . . . . .3. . 5. . . .3 Product-by-Value Analysis . . 4. . . . . . . . . . . . . 6. . . . . . . . .4 Determining the Project Schedule . . 4. . . . . .

. . . 6. . . . . . . . . . .3 After the Presentation . . .6 So What? . . . . . 12. Exactly? .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . .2 The Plan Contents . . . . . . . . . . .3 The Mission Statement . . . . Product Development . . . .1 Importance of New Products .2 Some Suggestions . . . . . . 12. . . . . . . 104 9. . . . . . . 94 7. . . . . . .3.4 The First Minute is the Most Important . . 12. . . . . . . .1 What Am I Researching. . . . . . . . . .1. . . . . . . . . . .2. . . . . . . . . .1 Finding Your Niche . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 10. .1 Sources of Secondary Research . . . . . . . . . . . .3 Generating New Products . . . . . . . . . . . . 12.2. . . . . . . . . .5 Take Notes . . . . . . . . . . . . .2. . . . . . . . . 11. . . . . .3. . . . . . . . . . . . . . . . . . . . . 111 11 The Business Plan 11. . . .1 Product Development System . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . .3 Some Style Points 11. . . . . 11. . . . . . . . . . . . 92 7. . . . . .1 The Presentation . . . . .3 Organizing for Product Development . . . . . . . . . . .3. . .1 Your Audience . . . . . . . . . . . . . . 6. . . . . . . . . .1 Preparing to Put the Plan 11. . .2 6. . . . .1. . . 12 Presenting the Plan 12. . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. . . 101 9. . . . .2 Research Methods . . . . . .2. . Now What? . . . . . . . . . . . . . . . . . . .3. . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . .1 Do It Until You Get It Right .1 Characteristics of the Successful Entrepreneur . .CONTENTS 6. . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . . . .2.4 Manufacturability and Value Engineering . . 6. . . . . . . .2 Redefining and Expanding Your Niche . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . . 12. . . . . . . . . . . . 12. . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . .2 Are You Ready? . . . . .2 Look and Feel . . . . . . . . . . .3 Setting Goals . . . . . . 12. . . . .2 Know Your Outline Thoroughly . . . . . . . . . . . . 110 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . .2. . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . .

. . . . . .3 Computerized Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . .2 Tracking Inventory . . . . . . 14. . . . . . . . . . . . . . . . . . 14 Hiring Employees 14. . . . . . . . . . . . . . . . . . .1 Buying Inventory . . . . 14. . . . . . . . 13.6 13 Inventory Control 13. . . . . . . . . . . . .2 Job Description . . . . . . . . . . . . . . . . . . . . . .5 Suppliers . . . . . . . 13. . . . 14. . . . .3.4. . . . . . . . . .2 Payment Plans . . . . . . . . . . . .1. . . . . . .3 Advertising the Job 14. . . 13. .5. . . . . . . . . . . .1 Inventory Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . 13. . . . . . . . . . . . . .1 Dealing with Suppliers . . . .1. . . . . . . . .4 Finding People . . . . . . . . . . . . . . . . .1. . . . . . . . . . . .1. . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . .1 Inventory and Cash Flow . . . .4 Inventory Accounting . . . . . . . . .5. .1 How to Hire . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . .1 Job Analysis . .

Part I International Business Management 7 .

.

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

2. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. Western business people may not initially trust their Chinese counterparts. 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.S.10 CHAPTER 1. 3.1. 2. Westerners rely more on contracts. Note that during the industrialization of the U. 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.S.1 (Ethics) The study of morality and standards of conduct. Why is corruption an important business issue? • See sidenote 1. This is something Chinese business people should be aware of. • However. Which brings us to the subject of this lecture: Ethics. For example. • Because of this. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.A.A. • Because guanxi is less important in the West. and Europe but a commonly accepted practice throughout the developing world. Easterners tend to trust people after observing a pattern of consistent behavior.2. .2 Corporate Corruption Side Note 1. 1. 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. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. which are more strictly enforced in the West. Prison labor is also considered improper in the U.. • In general. Definition 1. child labor was widely used. there is a perception in the West that Chinese are hard-working and smart.S.2.A.

1 (Bribe) A price.org/policy research/surveys indices/cpi. . gift. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. and Tyco. – 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). . Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. • It increases the cost of doing business. September 20. there are few if any issues which affect and infuriate so many in China as corruption.dict. September 20. • On a macroeconomic level.2. • Of course. reward.org. voter. 2006.1. Definition 1. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. . these are all generalizations and individuals may differ significantly from their cultural affiliations. – A bribe is a business expense that goes to no productive purpose and decreases profits. 2006. investors in the United States had to reevaluate the risk associated with owning stock.2 Though things are improving.2. In the words of a Beijing correspondent for “The Economist” magazine. it is simply inefficient. they must factor additional uncertainty into their calculations. witness.2. China continues a battle against corruption. For example. 2 Source: http://www. WorldCom. which requires strict monitoring and verification of financial information.transparency. “. Side Note 1. Scandinavians are typically highly trustworthy1 but Italians are less so. – In the wake of Enron.2 (Corruption) Corruption is of concern for business people because • It increases risk. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders.”[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. Source: texttthttp://www. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. or other person in a position of trust.

Dennis Kozlowski. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. 2007. 3 Source: 4 Source: http://www. • Tyco – The CEO of Tyco. WorldCom declared bankruptcy in July 2002. a high value is placed on honesty and personal integrity. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.bankruptcydata. • Enron – In December 2001. Worldcom. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. • WorldCom – Following the Enron scandal.S.S. the former CEO of WorldCom. See sidebar 1. http://www.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. the SarbanesOxley Act (SOX) was passed in the U. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.com/Research/15 Largest. including a $2 million birthday party for his wife.. was convicted of fraud and conspiracy and sentenced to 25 years in jail. Qwest.3. was accused of looting the company to fund a lavish lifestyle. Parmalat. Side Note 1. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. scandals such as Enron.bankruptcydata.3 The United States The United States has recently been rocked by a number of scandals in the business community. While western developed economies often cite a high ethical standard.3 – Several Enron executives have since been sentenced to jail for fraud and other charges.S. In Scandinavia.2 (Cultural Heritage in the U. There is currently debate as to the effectiveness of the regulations relative to the costs.12 CHAPTER 1.1.2. . succeeding Enron as the largest bankruptcy in U. 2007.S.htm. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. history.4 – Bernard Ebbers.3.com/Research/15 Largest. March 17. Side Note 1.htm. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. March 17. and Tyco make it clear that even western developed economies have significant ethical shortcomings.

4. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. Hodgetts et al. with many men of the opinion that women were just biding their time until they marry and have children.pdf. • Many men do not understand why sexual harassment constitutes a problem.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. The government was compelled to provide public money to bail out the institutions. This resulted in several banks being technically bankrupt [5. 58]. cite the example of the chief prosecutor in Tokyo who was transfered to a remote city after an investigation into exhorbitant entertainment spending by private firms on public officials.4. also known as thrifts and which function like banks. with many women finding their employment opportunities constrained. and as a result made high risk investments in the late 1980s and early 1990s. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. were not as highly regulated as banks. Side Note 1.2 Women in the Workplace Sexual harassment has also become an issue in Japan. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. p. Side Note 1.4.1.4.S. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.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.fdic.. .gov/bank/analytical/banking/2000dec/brv13n2 2. JAPAN 13 1. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. Likewise. 5 1. Savings and loan institutions.4 1. the political scandals do not appear to have been fully acknowledged and addressed. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Better known is the case of Japanese banks. women have a difficult time being taken seriously.1 (The U. Moreover.S.4.

g. Side Note 1. • The harasser can be the victim’s supervisor. and for most public institutions and many large corporations. gender. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. requests for sexual favors. 6 Source: http://www. The victim does not have to be of the opposite sex. a co-worker. Definition 1.4. yes or no. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct.de2..S. Are women with equal qualifications as men given equal pay and position? Take a show of hands. sexual harassment lawsuits result in significant penalties (e. or other issues. cite two cases in which foreign firms operating in the U. It is considered a very serious issue. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace.psu. an agent of the employer. Furthermore. have paid substantial penalties as a result of sexual harassment or discrimination based on race. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. a supervisor in another area. . or a non-employee. including but not limited to the following: • The victim as well as the harasser may be a woman or a man.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States.edu/harassment/legal. in the millions of dollars) to those who are successfully prosecuted. • The harasser’s conduct must be unwelcome. hostile or offensive work environment. unreasonably interferes with an individual’s work performance or creates an intimidating. 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. Hodgetts et al.14 CHAPTER 1.4.

S.5.2 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.5 1. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts. with most in the top 20 among over 150 countries included in the survey.dict. yes or no.4.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. Definition 1..2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. is the notable exception). They only have the power of persuasion.org. Hodgetts et al. particularly in upper management.5.4. than any other.5. to try to influence decision-makers in any circumstance.4. with the purpose to influence their votes. EUROPE 15 1. Side Note 1.3 Lobbying by Japan Japan spends more money lobbying in the U. 7 Source: http://www.5. there seems to be a glass ceiling due to social factors. Side Note 1. 1. men are disproportionately represented in management positions.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.7 Note that lobbyists do not have any formal power.S. their attitudes towards bribery when working in foreign markets differs from that of the U.1. politicians. at 40.1 (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. Although women have entered the workforce in large numbers in recent decades. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. in an extended sense.S. .

Side Note 1.5.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. • More British companies have actively sought to recruit and promote women into management. yes or no.htm. • Discrimination lawsuits are more commonplace in Great Britian. though compensation is limited relative to lawsuits filed in the U.5.. For those students who think so.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. . BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.S.16 CHAPTER 1.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 8 Side Note 1. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 8 Source: http://careerplanning. 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.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. but there is a perception that there are risks and ethical considerations.about. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian.com/library/glossary/bldef-glassceiling.5. 1.

3 (Corporate Spying) Hodgetts et al. Child labor. [5. and • A recent history of rapid economic development. An opaque legal system.6. • A relatively stable government. Side Note 1.2 (Piracy and Counterfeiting) Present sidenote at [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. Prison labor. 5. Ethical considerations include 1.5 billion in sales annually. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. 3. • Yet another case in which software from a U. Often. p.S. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign firms. company in Boulder was stolen and sold to a Chinese company. . ETHICAL CONCERNS IN CHINA 17 Side Note 1.1. An increase in crime and illegal business activities. executives. Bribery and other forms of corruption. 64]. 7. Side Note 1. 4. pp. International corporate spying problems. • Note that for every corporate spy that is caught.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets.S.6.6. Piracy and counterfeiting (see sidenote below).6. 2. there are undoubtedly many others that get away with it. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. 6.

com/our company/our mission/index. health. provide relief in the event of humanitarian disasters. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. there are few if any issues which affect and infuriate so many in China as corruption. . and promotion of social equity). not-for-profit organizations that seek to serve society’s interest by focusing on social. political.. social justice. and the environment. .7. and economic issues such as poverty. a grocery chain. “.4 (Corruption) Though things are improving.benjerry. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. China continues a battle against corruption. Side Note 1.2. and emergency relief in the event of humanitarian disasters). . political. education. such as Whole Foods.7. Definition 1. social justice.7 Corporate Social Responsibility Definition 1. Other companies. not-for-profit organizations that seek to serve society’s interest by focusing on social. education. Definition 1.6.”[6] See also sidenote 1.7.18 CHAPTER 1. and the environment. 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.2 (Nongovernmental Organizations (NGOs)) Private.S. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). such as education and health care. and economic issues such as poverty. health.3 (Nongovernmental Organizations (NGOs)) Private.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. • CARE (promotes community development. In the words of a Beijing correspondent for “The Economist” magazine.cfm for more detail.2. See http://www.7.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm. 1.

In fact.7. In 2005. China ranked 78 out of 158. For example.7. many feel that it has had a net benefit. MNCs do not appear to have been significantly impacted. 1. note that while U. and • Rainforest Action Network (RAN). last but note least.000 and $125. • Conservation International (promotes environmental conservation). • And. Side Note 1. with a score of 3. as executives of publicly traded companies are ultimately responsible to their shareholders.S. as it gives the U.1. Executives are people. but does not outlaw payments to political party leaders. • To prevent a boycott or other consumer defections.1 Corruption and the FCPA Revisited Hodgetts et al.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). executives may actually feel that it is the right thing to do.2. too.7. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.S.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. Both political groups and businesses are influenced by NGOs. Side Note 1.S. firms a reason to refuse to pay bribes.7. – Even socially responsible executives would consider the “bottom line” when making decisions. . firms are constrained by the FCPA with regards to bribery and other corrupt practices. 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.9 U. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.

note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. Side Note 1. Tyco.5 (Table 3-1: Principles of the Global Compact) The U.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. Side Note 1. Hong Kong is number 15.N. As more state-owned businesses become privatized and the size of the middle class increases. It is a difficult problem to solve. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. more Chinese will own stock in companies. such as the U. 5. Scandinavian countries are at the top of the list.6 and 8.7. With more disciplined corporate governance.html.N. slightly better than Sweden. malfeasance and diversion of corporate funds becomes increasingly difficult. Singapore is number 5 with a score of 9. societies. and the environment. Support and respect the protection of international human rights.S.7. 4. Global Compact. 2006. . better than the U.7. and not based on hard data. and Germany at 7. Important: Although it is widely cited. WorldCom.20 CHAPTER 1. The government is actively addressing the issue of corruption. 10 http://www.2 respectively. specify standards and codes of conduct in domestic and global operations.10 Corruption is certainly not endemic to Asia. Commitments that many MNCs have signed on to. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. With greater financial transparency.infoplease. July 1.4 (Some Opinions) Personally.com/ipa/A0781359. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. with scandals such as Enron. Moreover. 2. the United States and Europe have recently been rocked by corporate corruption. 1. The government recognizes that it is an issue and is taking action. Global Compact specifies 10 principles which MNCs should abide by: 1. but most important first step is to recognize that there is a problem.4. 3. with a score of 8.0 is considered to be the borderline at which countries are considered to have a problem. and Parmalat resulting in investors losing billions of dollars. I think corruption will diminish as China economically develops for several reasons: 1. It cannot be considered to be based on a scientific survey.3.

. 7.. Freedom of association and recognition of the right of collective bargaining (i.7. Business should work against all forms of corruption. 4. Elimination of child labor. Elimination of discrimination with respect to employment and occupation. Elimination of all forms of forced and compulsory labor. 8.e. A precautionary approach to environmental challenges. Ensure that MNCs are not complicit in human rights abuses. 5. and 10. 9. Undertake initiatives to promote greater environmental responsibility. 6. Encourage development and dissemination of environmentally friendly technologies. the right for unions to exist). including extortion and bribery.1. CORPORATE SOCIAL RESPONSIBILITY 2. 21 3.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

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

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

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

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

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

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

Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.25 titles per labor-hour = 0. 15]. but overhead is no $800/day. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Side Note 2. In order to improve productivity.0077 titles per labor-hour = 0.3.5. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.4 (Total Factor Productivity) See definition 2.97 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.5.5. Definition 2.5. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.4375 titles per labor-hour = 0. p.2. 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. Also known as total factor productivity.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Consider today’s computers versus those from the 1970s. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. .2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5.5.5.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Side Note 2.

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

5. THE PRODUCTIVITY CHALLENGE • Better-nourished. “About Half of 17-Year-Olds in the U. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. What is the area of a 4 × 6 meter rectangle.S. writing. and 4. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. Which of the following is true about 84% of 100? 4 When presenting this question. maintaining and enhancing the skills of labor. p. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. . Basic education appropraite for an effective labor force.” In the U. In developed nations. 2.8 [1.. draw the rectangle on the blackboard. Cannot Correctly Answer Questions of This Type. and math. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.) Present Heizer figure 1. and • Healthier workers as well as • A shorter work week. The primary variables for improving labor productivity include 1. Side Note 2. 16]. there is considerable concern over teaching of basic skills such as mathematics to grade school children.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.3 (The State of Education in the U. and 33 3.S. Social overhead that makes labor available.2.5.S. such as transportation and sanitation. Diet of the labor force.

p.5.S. and the cost of capital depends on interest rates. are utilized effectively. and knowledgeable employees and operations managers are responsible for ensuring that technology. Note that there is a trade-off between capital and labor in most industries. has increased at about an average of 1. Side Note 2.5% after allowances for depreciation.5.S. Difficulties arise because service-sector work is .S. and knowledge. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. however.5. Definition 2. 2. According to Heizer [1.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. 17].2 Capital Capital investment in the U. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Note that in classic economic analysis and other areas of business. management is not always identified separately from labor as an input.4 Productivity and the Service Sector Historically.4 (Management as an Input) Because this is a course in business management.5. Developed economies (also known as post-industrial economies) require trained. management is considered as a separate input. graduate programs and the students they produce remain the best in the world. 2.5. educated.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. and because the author of the textbook is writing about operations management. education. in the U. U. productivity in the service sector has not increased as rapidly as with the production of goods.34 CHAPTER 2.. as well as capital. 2.

These demands come not only from the manager’s personal ethic. Side Note 2. 18] • Retailing in the U. watchdog groups such as NGOs. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.. medical diagnosis).S.6. 5 In Japan.g.g. telephone industry is twice as productive as Germany’s. legislation protects shopkeepers from discount retailers.6 Social Responsibility As discussed in chapter 1. such as cleaning. but from customers. the performance of a law firm). a haircut). Low-productivity activities. Difficult to evaluate for quality (e. and 5. in both overall and service productivity... have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.5 (Service Productivity in the U.S. • Keeping the workplace safe. These challenges include such issues as • Maintaining a clean environment. investment advice). teaching). Often an intellectual task performed by professionals (e.g. SOCIAL RESPONSIBILITY 1. We will discuss this challenge in more detail throughout the course. .g. and other stakeholders. • General ethical behavior concerning issues such as child labor and corruption. 4.5 • The U.2. and child care.S. p. and • The U.. 35 3.S.) Productivity is highest in the U. government agencies. Typically labor-intensive (e. food preparation.g. Frequently individually processed (e.S. 2. laundry service. Often difficult to automate (e. 2. banking system is about 33% more productive than Germany’s. is twice as productive as in Japan.. Heizer notes [1.5.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

Equally important. We will produce outstanding financial returns by providing totally reliable. FedEx is committed to our People-Service-Profit philosophy.1. 6.38CHAPTER 3. • Provide additional insights and opportunities. and • Increase sales. Definition 3. Missions state the rationale for an organization’s existence.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there. I recommend that all companies draft a mission statement. Attract and Retain Global Talent – By offering more employment opportunities. 4.1 (Mission Statements for Three Organizations) Review Heizer figure 2. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. 3. 3. • Perfumers tend to concentrate in Grasse. France. p.1 (Mission) The purpose or rationale for an organization’s existence. an understanding of cultural differences in preferences is needed to best meet customer needs. 3. time-certain delivery. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. Side Note 3.2 [1.1. 5. 28] which includes mission statements for three multinational companies: 1. FedEx. global air-ground transportation of high-priority goods and documents that require rapid. Provide Better Goods and Services – For companies doing business in an international setting. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1. global organizations can attract and retain better employees.1 Mission Whether large or small. competitively superior. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.

We will strive to have a completely satisfied customer at the end of each transaction.1. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. We are committed to being an important.3. 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.S. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. contributing member of our community and offering the Hard Rock family a fun. natural ingredients and promoting business practices that respect the Earth and the Environment. courteous. 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. 3. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . DEVELOPING MISSIONS AND STRATEGIES systems. • 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. Our mission consists of 3 interrelated parts: • Product Mission – To make. The Hard Rock Caf´. a grocery chain. and professional to each other and the public. Other companies. and nurturing work environment while ensuring our long-term success. nationally & internationally. 39 Side Note 3.1. healthy.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. Merck. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. such as Whole Foods. We will be helpful. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. A complete record of each shipment and delivery will be presented with our request for payment..

• Availability of complementary products.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. the creation of a unique advantage over competitors.40CHAPTER 3.cfm for more detail. Definition 3.1.3 (Sample Mission Statements) Present Heizer’s figure 2.3: “Sample Missions for a Company. Side Note 3. • Training.3 (Competitive Advantage) In operations management. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Differentiation can arise from anything that the customer may value about a product or a services. Cost leadership – Providing cheaper products.1. . but can be used at the department level and even at the project level. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. See http://www.benjerry. be it • Product features. 3. Responsiveness – By providing timelier.com/our company/our mission/index. Differentiation – They make their product better. 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. and Major Departments in an Operations Function. more responsive products or services. the Operations Function.” Note that mission statements are used not only at the company-wide level.1.2 (Strategy) How an organization expects to achieve its missions and goals. • Interoperability with other products. 3. 2. • The “look and feel” of the product.1. Definition 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.

44CHAPTER 3. . Weakness.6 [1. These critical success factors are used to develop a competitive advantage. and Threats) analysis to develop strategies. Provide competitive advantage. Definition 3.3. Side Note 3. Implement an OM strategy. if the firm has a competitive advantage in these things) and where failures are most likely. Increase productivity.1 (Strategy Development Process) Present Heizer figure 2. then • Form a Strategy. “Strategy Development Process.3. 37]. then determine whether the organization does these things well (and. 3. and 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.” The process of developing a strategy involves the following steps: • Environmental Analysis.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Group the necessary activities into an organizational structure. Identify a strategy and critical success factors. Staff the organization with personnel that will get the job done. Opportunities. and 3. The purpose of this process is to 1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.3. • Determine Corporate Mission. in particular. The operations manager’s job is a three-step process: 1.3.2 (Critical Success Factors) In operations management. Definition 3. 2. determining internal strengths and weaknesses and external opportunities and threats. 2.1 (SWOT Analysis) In operations management. p. those activities or factors that are key to achieving competitive advantage.

3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.4.6 3.3. CSFs. Recall the “org charts” in sidenote 2. Definition 3. • Red arrows – critical success factors • Blue arrows – support activities 3. .3 Integrate OM With Other Activities In order to achieve its strategy. an activity map can be used to link an organization’s competitive advantage to the CSFs. Side Note 3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.2. 39].3. Once CSFs are determined.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. MIS.1.1 as a checklist to determine critical success factors. 5 Management 6 Human Information Systems Resources. and supporting activities. a graphical link of competitive advantage.5 and HR.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. finance. 3.2 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.2 as examples of how firms organize their activities. OM activities are most productive when they are integrated with other activities such as marketing. p.3.3 (Activity Map) In operations management.3.3. Southwest Airlines has a competitive advantage in providing low-cost airfares. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.

p. Its menu reflects the country in which it operates. 42] Definition 3. Global strategy – Not characterized by local responsiveness.4.6. See definition 3. 3.1 (International Business) A firm that engages in cross-border transactions. Usually does not confer a cost advantage. 2. • Nestl´ is an example of a country with a transnational strategy.4. Also one of the least profitable due to transport costs and little local responsiveness.4 (Multidomestic Strategy) In operations management. • McDonald’s is an example of a country with a multidomestic strategy. [1.4. a strategy that uses exports and licenses to penetrate the global arena.4.4. and hamburgers without beef in India.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business.5. . Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.4. products do not need to be localized. Definition 3. Only 10% of its work force is Swiss. franchises.46CHAPTER 3.4. Definition 3. See definition 3. Although e it is legally Swiss.3 (International Strategy) In operations management.4. Definition 3.5 (Global Strategy) In operations management. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. See definition 3. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.4. 95% of its assets and 98% of its sales are made outside Switzerland. Definition 3. Typically characterized by subsidiaries. as exports require little change in operations and licenses often leave risk with the licensee. In the semiconductor industry. See definition 3. 4. International strategy – Often the easiest strategy. or joint ventures with substantial independence. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. • Texas Instruments is an example of a country with a global strategy.3.4. with beer on the menu in Germany. owning or controlling facilities in more than one country. wine in France. but a good strategy for cost reduction when products do not need to be adapted locally.

4. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.4.S. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.3. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .6 (Transnational Strategy) In operations management.. p.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. 6]. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Side Note 3.

48CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .

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

The project is temporary but critical to the organization. if things go wrong.1 The Project Manager As alluded to in sidenote 4. often times. you will be confronted with a daunting task. See also Heizer sidenote “Project Management and Software Development. p. a temporary project organization is formed to address a specific project.5 (Personal Advice on Project Management) Project management is a tricky profession. You may be managing resources far in excess of your individual salary. Project organizations work best when [1. Work can be defined with a specific goal and deadline. Your job is to make things go smoothly and according to plan. In a sense. The responsibilities of project managers are to make sure that .” [1.5. Side Note 4. People will not come through with what they promised. and/or 5. Definition 4. 4. and you will be forced to improvise. 2. Moreover. 3. 48] 1. 69]. p. it is also an area in which there will continue to be high demand for qualified people.50 CHAPTER 4. If you become a project manager on projects of significant complexity. The work contains complex interrelated tasks requiring specialized skills. However.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. 4. The job is unique or somewhat unfamiliar to the existing organization.1 Project Planning While many projects are run within an existing organization. project managers are highly visible in a firm and have significant responsibilities. you are doing your job well if noone notices the project management.1.1. you should always expect the unexpected. 4. things you thought were certain turn out not to be. The project cuts across organizational lines. PROJECT MANAGEMENT However.0.0. it is very obvious and can be very costly.

In a project that includes allowing a user to enter personal information on a web page. • Build the user account input web page is a much better task division than 1. PROJECT PLANNING 1. dividing a project into more and more detailed components. The project is on or under budget. Review graphic design for user account input web page 3. Definition 4.1. Review software architecture for user account input web page functionality 6. When dividing a project into tasks. All projects come in on time. 2. a web page takes about a day to build for an experienced team. Approve software architecture for user account input web page functionality . Approve graphic design for user account input web page 4.1.4.2 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).1. in a software engineering project. you have divided the tasks too finely.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. 3. Complete software architecture for user account input web page functionality 5. Complete graphic design for user account input web page 2. Side Note 4. For example. a task that should only take a day or so.2 (Work Breakdown Structure (WBS)) In operations management. 51 4. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.1. People receive motivation and information necessary to do their jobs. and 4. The project meets its quality goals.

They will be useful for project scheduling. Encourage realistic time and cost estimates for each activity . it is time to assign people and materials and estimate the time and perhaps the cost of various activities.2. Side Note 4. you should also take note of time and cost estimates given by your technical staff. The actual WBS for Windows XP would. of course. Subtasks in major tasks 4.1. Write software for user account input confirmation page functionality 9. Activities (also known as “work packages”) to be completed Side Note 4. the work breakdown structure is not something you go to your office to do in isolation.3 [1. 4.3 (Reality Check: WBS) In reality. fill hundreds if not thousands of pages. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Identify precedence relationships among activities 3.52 CHAPTER 4. PROJECT MANAGEMENT 7. which we will discuss next in section 4. Project 2. Scheduling serves to 1. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. At the time you are creating the work breakdown structure. p.1. Write software for user account input web page functionality 8. Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Major tasks in the project 3.2 (Work Breakdown Structure) Present Heizer figure 3. Show the relationship between each activity to others and to the whole project 2.

Perhaps they imagine that they are not doing their jobs professionally if they are not.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. Definition 4. PERT. PERT and CPM help answer questions such as • When will the entire project be completed? . cost estimates. Definition 4. as. 2. and material resources by identifying critical bottlenecks in the project Side Note 4. It can actually be quite time consuming to create and maintain Gantt charts. All activities are planned for. p. and 4. 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. 51].2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. Make better use of people. Derives from the typical shape of a bottle. moeny. right by the bridge.2. and CPM tools for every project management activity. PROJECT SCHEDULING 53 4. Side Note 4.2. The order of performance is accounted for.2 (Using Gantt. 3. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. Activity time estimates are recorded. which becomes narrower as one approaches the neck of the bottle.4 [1. PERT and other formal documents. MS Project’s Gantt chart functions demand you assign employees.2. PERT. For smaller projects. the road bottlenecks. Overall project time is developed. and CPM) Inexperienced project managers often feel the need to use Gantt. Gantt charts are perhaps the most widely used tool for ensuring that 1.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.4. – said of roads. and other values to each activity.2.” This will give the class an idea of the look and feel of a typical Gantt chart. these should be considered merely tools to be used when they are useful by saving time or energy.

Variance reports. less than. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. 2.3 Project Controlling Project control involves monitoring resources. Work status reports. Cost distribution tables.3. 4. is the money spent equal to. 6. 5. Time analysis reports. Cost breakdowns for each task.3. and budgets of projects. Raw material and expenditure forecasts. were developed in the 1950s for project control.1 PERT and CPM Two methods. and 8. behind schedule. Definition 4. costs. 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. PERT and CPM. . 4. is the project on schedule. quality. Functional cost and hour summaries. Control programs typically produce reports detailing 1. Total program labor curves. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. or ahead of schedule? • On any given date. 3. what is the best way to accomplish this goal at the least cost? 4. 7.

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. Develop the relationships among activities.2 (Example: AON and AOA) Present Heizer’s figure 3. Side Note 4. it will do for you automatically much of what we will go through manually in this class. Moreover. Definition 4. 3. monitor. Also.3. PROJECT CONTROLLING 55 Definition 4. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. 2.5 [1.3.3. 6. schedule. See also definition 4.4. Gantt charts are the “go to” visualization method for even very complex projects. p.3.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3. Side Note 4.3.3. See also definition 4. Define the project and prepare the WBS.2. 5. . They both follow six steps: 1. Assign time and/or cost estimates to each activity. or the critical path. 53]. 4. Draw the network connecting all of the activities. through the network.3. Activity on Arrow (AOA). Activity on Node (AON) and 2. and ontrol the project. 4. in my experience.3 (Critical Path) The computed longest time path through a network. AON associates the activity with the node whereas AOA associates the activity with the arrow. Personally. Use the network to help plan.3. As the names describe. Compute the longest time path.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.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.

LF = min{LS of all immediate following activities}. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor.3. pp. 54–55]. – If an activity has multiple immediate predecessors. – If an activity is an immediate predecessor to more than one activity. p. their dependencies. 2. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. We do this with a critical path analysis with involves a 2-step procedure. • Table 3. Follow with example 3 and figure 3. ES = max{EF of all immediate predecessors}.1 (Critical Path Analysis) In project management. EF = ES + Activity time.4.1 gives sufficient information to describe the network. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.8 [1. its LF equals its LS of the activity that immediately follows it. that is. analysis used to determine the project schedule. PROJECT MANAGEMENT Side Note 4. its LF is the minimum of all LS values of all activities that immediately follow it.6–3. See also definition 4. Definition 4.56 CHAPTER 4. 4. LS = LF − Activity time. that is.9 [1.3.4 Determining the Project Schedule Once we have identified all of our activities. In other words. . Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. that is. 1. its ES is the maximum of all EF values of its predecessors. Backward Pass – Uses the latest finish time (LF) rule and latest start time (LS) rule to determine the latest times that activities can be completed. 56]. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. we must use time estimates of each activity to determine the overall schedule for the project.3.

if we delay activities B and D by one week each. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.2 (Forward Pass) In project management scheduling. 61] based on table 3. or the amount of time an activity can be delayed without delaying the entire project. the time devoted to one of these activities must also be reduced.4. in the example in sidenote 4.2 (Total Slack) In project scheduling. 57]. and H have no slack time and cannot be delayed without delaying the entire project. Slack time is just Slack = LS − ES or Slack = LF − EF .4. and • Includes only critical activities (see sidenote 4. we cannot complete the project in 15 weeks. The critical path is one that • Begins at the first activity in the project. Definition 4. Note also that if we delay each activity by the amount of slack that activity has. p.1.” Then complete Heizer example 7 figure 3.10 [1. . “Notation Used in Nodes for Forward and Backward Pass.3 [1. the step that identifies all the earliest times that activities can be completed.4. 2 For example.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. we may delay the project as a whole.4. Definition 4. • Terminates at the last.1.1 When several noncritical activities appear successively in a path. If an activity2 does not impact the slack time of any other activity. p. p.5.13 [1. it is said to have free slack.3 (Free Slack) In project scheduling.3. These are called critical activities. Definition 4. the time associated with a single activity. E. the free time for an activity.4. 4. they share total slack. G. activity F in sidenote 4. 60]. 1 For example.5. Also notable is that if the total time of the project needs to be reduced. C.3 and Heizer figure 3. Note that activities A.1).1 (Slack Time) In project scheduling.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.5. Side Note 4. the time shared among more than one activity.5.4.

1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. the “best” activity completion time that could be obtained in a PERT network.6.6.6. we do not.1 and 4. However. See also definitions 4. in most cases. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.3.2.6. See also definitions 4. the time required to complete an activity is often uncertain due to supply problems.6. The usual definition calls these alpha and beta. Definition 4. which are labeled according to one of two notational conventions. See also definitions 4. three time estimates are used: 1. Definition 4.6.2 and 4. technical considerations that were unknown at the time the project schedule was drawn up. Side Note 4.2 (Pessimistic Time) In project scheduling. Definition 4.3. the “worst” activity completion time that could be obtained in a PERT network.6.6. In PERT.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Beta distributions have two free parameters. unexpected complexities.6.1 (Optimistic Time) In project scheduling. etc. the most probable activity completion time that could be obtained in a PERT network.3 (Most Likely Time) In project scheduling. and the other uses β = β − 1 and α = α − 1 . Most likely time – The most realistic estimate of the time required to complete an activity. The beta distribution is used as a prior distribution for binomial proportions in .6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. the project manager pulls the number “out of the air” based on their experience managing related activities. PROJECT MANAGEMENT 4. Definition 4.6.1 and 4. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.. In reality. Effectively.58 CHAPTER 4.

The expected activity time for activity F is 3 weeks5 and the variance is 1.html.4. 2007.wolfram. The above plots are for various values of (α.6.1].com/BetaFunction.1) where B(p.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. 4.4. and 7. 4 See definition 4. 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 = 1.25 to 3. and pessimistic times of 1.6. 62].6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.78 weeks. Total project completion times follow a normal probability distribution and 2. p. 4. 63] for activity F based on optimistic. most likely.html http://mathworld.78 6 6 36 7 4 weeks. q) = (4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. The variance of the activity time is Variance = [(b − a)/6]2 . and 9 weeks.00. 2.β) with α = 1 and β ranging from 0.1 Probability of Project Completion If we assume that 1. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.00 week. and . Side Note 4. Activity times are statistically independent 3 Source: http://mathworld.6. and pessimistic times of 1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. 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. p.com/BetaDistribution. February 21.wolfram. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. β) Γ(α)Γ(β) P (x) = (4.6. most likely. 8 1.3 The domain is [0.

pp. 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.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6. see http://mathworld.3 (Example: Project Variance) Review Heizer example 9 [1. Side Note 4. p. Side Note 4.6.6. two standard deviations approximately 95% of the time.1. .60 CHAPTER 4.6.76 weeks approximately 16% of the time.16. “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. 9 For 10 See more information.wolfram.html. commonly also N written σ 2 . 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. 64].6.6. Note that the standard deviation of 1. the population variance var(X).3) Definition 4.10 Determining Project Completion Time for a Given Confidence Interval A common question is.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. p.com/StandardDeviation.76 weeks implies that the project will exceed the expected completion time by more than 1. See also 4. 65] and figure 3.6.6.6.” Review Heizer example 10 [1. A2– A3] “Normal Curve Areas. definition 4. Definition 4.5.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1.7% of the time. See definition 4. and within 3 standard deviations approximately 99.6 (Standard Deviation) The standard deviation is the square root of the variance.

permissible and realistic. See definition 4. and if you become a project manager. When crashing a project. See definition 4.1 (Crashing) In project management.11 Definition 4. • The shortened durations will actually enable us to finish the project on time. crash time is the shortest duration of an activity.7.7. the crash cost is typically higher than the normal cost. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. Definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. crash cost is the cost required to complete an activity in the shortest time possible.1. Crashing a project involves a four step process: 1.4. if certain activities off the critical path take the pessimistic time estimate or more to complete. Definition 4.7. it may result in the project being delayed.2 (Crash Time) In project management. you will doubtless experience one or both of these eventualities many times in your career.7.7. . in fact. 4. Step 1 – Compute the crash cost per week. Assuming linear costs. we need to ensure • The amount by which an activity is crashed is. we want to do so in the least cost mannger possible. Since activity completion times are typically shortened by adding resources. and • The total cost of crashing is as small as possible. Project crashing is the name given to the process of rushing a project to completion.4) 11 Since crashing a project often involves adding additional resources to activities.3 (Crash Cost) In project management.7.1. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.

Step 4 – Update all activity times. go to step 2. Then crash each activity by one period. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. stop.7. If there is more than one critical path. you should be very wary of such pressure. 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. Note that one activity may be on several critical paths.19. If the due date has been reached. If not.62 CHAPTER 4. Step 3 – If there is only one critical path. the advice given in this section should be helpful. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. Step 2 – Find the critical path(s) in the project network.7. Crash this activity by one period. If you find yourself needing to rush a project.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. PROJECT MANAGEMENT 2. pp.18–3. 4.2 (Example: Crashing a Project) Present Heizer example 12 [1. 67–69] including table 3. 3. 4. If you accept the challenge and try to rush the project to please upper management.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Side Note 4. As a project manager.5 and figures 3. Side Note 4. At times this may be politically infeasible. 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. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. • Advantages – Especially useful for large projects .

Information on dotProject can be found at http://www. it is relatively expensive and the features are so numerous and complex.4. 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. 4. .to mediumsized projects. 12 Recall sidenote 4.7. they are often overkill for small. Information on Planner can be found at http://live.1–3.net.gnome. However. You may also refer to http://en. 70–74] with figures demonstrating MS Project functionality.wikipedia. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths. Starkweather about his impression of various alternatives. Note that most project management textbooks refer to MS Project as the software of choice for project management. including open source software that is free. independent.achievo. There are a variety of alternatives. pp.1.org/wiki/List of project management software for a list of project management software or ask Dr.9.dotproject.9 Using Microsoft Project for Managing Projects Present programs 3. It is perhaps the most widely known and featureful project management software available.org/Planner.org.7 [1. Noncritical paths should be closely monitored as well. Information on Achievo can be found at http://www.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

1. Cash budgeting. Capital expenditures. Useful for – – – – Planning for new products.1. In the first two stages. and Analyzing various operating plans. Facility locations or expansion. Definition 5. Growth.1. longer forecasts are needed. Decline. money supply. planning indicators valuable in helping organizations prepare medium.1.4. Introduction. 3. . and other economic indicators.to long-range forecasts. FORECASTING • Long-range forecasts – Generally more than 3 years. and 4. • Technological forecasts. These may include inflation rates. Generally deals with more comprehensive issues than short-range forecasts. 5. CHAPTER 5. which impacts purchases of new plant and equipment as well as development of new products.3 and 5. and Research and development. Production planning and budgeting. See also definitions 5. housing starts.1. Definition 5. 2.3 (Technological Forecasts) In operations management. Product life cycles tend to follow four stages: 1.66 – – – – Sales forecasting.1.2 (Economic Forecasts) In operations management. See also definitions 5. These concern rates of technological progress. Maturity. and • Demand forecasts.4.1 Types of Forecasts Organizations typically use • Economic forecasts.2 and 5. long-term forecasts concerned with the rates of technological progress.1.

5. Determine the time horizon of the forecast.2. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. Validate and implement the results. 2. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. 7. . • Loss of customers. 5.1.1. 2.1. Capacity – Underestimating demand can result in • Undependable delivery.4 (Demand Forecasts) In operations management. See also definitions 5. Human resources – Anticipated demand is needed to estimate the need for • Hiring. 3. 5.5. Select the items to be forecasted. Gather the data needed to make the forecast. and personnel planning. 4.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. and • Loss of market share. projections of a company’s sales for each time period in the planning horizon. marketing. and scheduling decisions and serve as inputs to financial.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. and • Layoffs. 3. capacity. Make the forecast.2 and 5.1. Also called sales forecasts. these drive a company’s production. Select the forecasting models. Determine the use of the forecast.3. 6. • Training.

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

9. · Useful as a starting point or sanity check for more sophisticated methods.3. ∗ However. be sure that the sales force is clear that their incentive is to be as accurate as possible. and · Respondents. · There are three problems with moving averages 1. political. and if they perceive there is an incentive to exaggerate. useful method if we can assume that market demands will stay fairly steady over time. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. · See definition 5. . Moving averages require more past data to work with than. Sales people typically respond to incentives.3.5. 3. the naive approach. for example. they will do so.3. 2. · Staff personnel. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ Moving averages · Simple. say. the more likely it is your results will be accurate. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data.8. ∗ The more independent your decision makers are from economic. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · See definition 5. Moving averages cannot pick out trends very well. · Requires less past data than moving averages. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. · The simplest and easiest way to estimate demand. or other incentives to over or understate demand. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.

Definition 5. and value system.4 (Delphi Method) In operations management.6 (Consumer Market Survey) In operations management.3.10.3.1. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. personal experiences. See also definitions 5. a forecasting technique based on salespersons estimates of expected sales. See also definition 5.3.3. See also definitions 5.3 (Jury of Executive Opinion) In operations management. · See definition 5. and 5. 5. 5.3.3.5.3.4.3.3.3. See also definition 5.70 CHAPTER 5. 5. See also definitions 5.6.3.1 Qualitative Forecasting Methods Definition 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3.3.6.3.6. Definition 5.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.5 (Sales Force Composite) In operations management.2.3. and 5. emotions.4. See also definitions 5.3.3.5. a forecasting technique using a group process that allows experts to make forecasts.5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. Definition 5. . ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3.3. and 5.4.3. 5.3.3. 5. Definition 5. and 5.3.

2) See also definition 5.11. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5. Definition 5.05 to 0. 5. a simple moving average is given by demand in previous n periods Moving average = (5.9.3.3.7. That is.5. and 5. Mathematically.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. generally ranges from 0. FORECASTING APPROACHES 71 5. See also definitions 5. 5.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. • Simple Moving Average – Mathematically.2 Quantitative Forecasting Methods Definition 5.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3. Moving averages can be either simple or weighted. Definition 5.3. and are appropriate to use when the underlying average . Definition 5.3.5.7.1) n • Weighted Moving Average – Mathematically.3.3.3. Higher values give more weight to recent data.3) The smoothing constant.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. α. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.8.10. See also definition 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.3.3.

1 See |actual − forecast| n (5.3.3.3.3.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5. 5.12). Three popular measures are 1.3.3. and 5. .3 Measuring Forecast Error Once a forecast is made. while lower values give more weight to past data. 2. exponential smoothing is equivalent to naive forecasting. Mean absolute deviation (MAD).15.3.3. FORECASTING is likely to change.13. Definition 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. 3.3.3. Definition 5. such as the mean absolute deviation (see definition 5.14. and are appropriate to use when the underlying average is relatively stable.8. See also definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. 5.3.3.7.11 (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.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. Definition 5.0. See also definition 5. Mean squared error (MSE).3.72 CHAPTER 5.4) definition 5. When α = 1.7. Mean absolute percent error (MAPE).13).13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.12.

Mathematically.3. Mathematically.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see 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. FORECASTING APPROACHES 73 Definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.5) |actuali − forecasti |/actuali n (5.3. Definition 5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.5.12. MSE is given by MSE = See also definition 5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.11) .9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.6) 5. 100 n i=1 (forecast errors)2 n (5. expressed as a percent of actual values. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.12.7) or F ITt = Ft + Tt (5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3. MAPE is given by MAPE = See also definition 5.8) With smoothing constants α for the average and β for the trend.3.3.

It is also commonly called linear regression analysis.74 or CHAPTER 5. 2. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Compute the smoothed trend. 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) = 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. by the formula F ITt = Ft + Tt . 1.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.10. Compute Ft . The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Tt with equation 5. F ITt . Calculate the forecast including trend. 3.12.14) . Ordinary Least Squares Regression analysis is also useful for predicting trends. time) (5. the emponentially smoothed forecast for period t using equation 5.

to account for seasonal changes in demand in our forecasting..3. Recall that the equation 5. 3. 1. 5. the multiplicative seasonal model. 4.13 assumes a linear relationship. during the summer months when it is common to take a vacation. such as cars and washing machines. the more uncertain it is.3.5. consumers often make fewer purchases of durable goods. 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¯. Definition 5. then multiply it by the seasonal index for that month.5 Seasonal Variations in Data In most businesses. 2. . 5. ¯ x The least squares method has several drawbacks. Find the average historical demand for each season. Although there are many methods to accomodate seasonal demand.S. In the U. 2.3. Divide this estimate of total annual demand by the number of seasons. The first step is to calculate the seasonal forecast. 1. Compute the average demand over all months. Most businesses experience a surge in sales around Christmas.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Deviations around the least squares line are assumed to be random. demand is seasonal. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 3. We do that with a 5-step process. This provides the seasonal forecast. Compute a seasonal index for each season by dividing the historical demand by average demand. Estimate next year’s total annual demand. we will examine one model.

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.16 is y2 − a y − b n−2 xy Sy.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.x = (5. whatever uncertainties you may have transfer to your predicition of y.15) Side Note 5.17) . but x will be something other than time. mathematically. If there are published estimates you can cite (e.3. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. FORECASTING 5. is given by (y − yc )2 n−2 Sy. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.1 (Example: Using OLS) Present Heizer example 12 [1.3. We will use the same technique.g. average local salary) (5.3. 106– 107].g.4. Note that making predictions of future demand involves also making predictions about the independent variable x...x = (5.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. However.76 CHAPTER 5.g. if you are uncertain about predictions of x. pp. 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.

4 . changes in skirt lengths don’t cause stock market prices to rise and vice versa.4 (Causation vs. pp.2 with stock prices generally rising as skirts rise.3 (Examples of Correlation Coefficients) Present Heizer figure 4.8599. February 28. 4 Source: http://www. p. has risen.10 [1.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.3.S.2 (Distribution About the Point Estimate) Present Heizer figure 4.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.00. “Four Values of the Correlation Coefficient.3.com/time/business/article/0. a football game played between two football conferences in the U.18. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. the U. 107].” Side Note 5. Other interesting correlations that have been identified over the years include banana prices and U.” the AFL (American Football Conference) and the NFC (National Football Conference). nor does it imply that they will continue to be related. but the relationship is coincidental. 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. the average length of a woman’s skirt and stock market prices in the U. Side Note 5. 108].time. 2007.S. p. The correlation coefficient of variables x and y is given by r= See also definition 5. Correlation) Correlation merely means that the values of two variables are historically related.18) . Certainly.3 and the U.5. stock markets.S.html?xid=sitecnn-partner.1594488.S. is monopolized by the NFL. Even the Year of the Pig correlates strongly with the U. “Distribution about the Point Estimate of $600 Million Payroll.S. have been correlated. the note in the margin accompanying Heizer example 14 [1. football in the U. Historically. 109]. stock market prices as well as the winner of the Super Bowl.3.3. Definition 5. or National Football League.” Note that the regression assumes a standard normal distribution about the estimate. in all but one Year of the Pig. which is divided into two “conferences. Dow Jones Industrial Average and Standard and Poor 500.3. stock market. Correlation Coefficients for Regression Lines Definition 5. Since 1935.9 [1.S. leading stock indexes.3.3. FORECASTING APPROACHES 77 Side Note 5.S.

3.5 Definition 5. p. In practice. 110].” For example. .) It measures the percent of variation in the dependent variable (y) explained by the regression equation. Adding additional independent variables as predictors. we discussed a means by which we can attempt to predict the value of one variable using the value of another. = the dependent variable (e. 5 See definition 5.3. often the most difficult part of building a multiple regression model is to pick the independent variables. p.3.g. . Side Note 5. . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. b1 . The multiple regression equivalent of equation 5. “What was the R squared of your regression?” Multiple Regression Analysis In section 5.3. b2 . in a multiple regression analysis involves a complex formula which is beyond the scope of this class.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.15 is given by y = a + b1 x1 + b2 x2 + . The same technique can be applied to use several independent variables to predict the value of a dependent variable.18 and Heizer example 15 [1. . results in additional predictive accuracy as measured by r2 . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. x2 .3. . .” As the sidebar points out. b 2 . b1 . etc. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . you would use statistics software to calculate these values. 110].19 (Multiple Regression) A causal forecasting method with more than one independent variable. if they are indeed related to the dependent variable. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.6.19) Determining the values of a. (See definition 5.17. . It is commonly simply called “R squared.78 CHAPTER 5.. . .

one of the most common problems with forecasting is a lack of follow-up. Definition 5.8 standard deviations.1.11 [1. three M ADs to 2. 6 Recall definition 4.4. which correspond roughly to standard deviations.2.20) A good tracking signal has about as much positive as negative error.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. This means that the observed value should be within 2 M ADs abut 89% of the time. three M ADs about 98% of the time. MONITORING AND CONTROLLING FORECASTS 79 5.6. two M ADs to 1. 111]. the forecasting methodology needs to be modified. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.forecast| n where M AD = (5. If the tracking signals violate upper or lower limits. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. Definition 5.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. .6 standard deviations.4.6. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .1 (A Plot of Tracking Signals) Review Heizer figure 4. Side Note 5.2 standard deviations. and within 4 M ADs about 99. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).4 standard deviations. These limits are typically based on M ADs. Tracking signals are typically used monitor forecasts.5. The tracking signals should also be compared as they are generated against limits.9% of the time. and 4 M ADs to 3. In other words.6 One M AD is equivalent to 0. though large errors may be a problem as well even if the positive and negative errors balance.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. p.4.

Sophisticated forecasting models are not always better than simple ones.4. 2.10) is automatically changed to keep errors to a minimum. In your career. which selects a model based on goodness-of-fit to a data set. 114]. changes need to be check with human eyeballs to ensure that the adjustments make sense. Note that even with computer monitoring.4. α in definition 5.3.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.4.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Side Note 5.80 CHAPTER 5. “Summary of Forecasting Formulas..3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. Definition 5.4.2 [1. However. 5.” . is based on two principles: 1. 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. FORECASTING 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. you must make your own decision as to how you select the forecasting models that you use.4. there has been much criticism of the approach to using models based on thier fit to the data. p.4.g.2 Focus Forecasting Focus forecasting. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. Side Note 5. There is no single technique that should be used for all products or services. you should be aware of the criticism of focus forecasting.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. Definition 5.

5 (Product Decision) The selection.0. 2 Recall sidenote 2. is a service.2. • Market share and dynamics. as an intangible. and design of products. pp. 81 . 1 In this chapter. • Product life cycle. insurance companies often refer to their policies. Referring to services as products is common in the service industry. pp. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. 124. 122–123]. the word “product” will refer to both goods and services.1 . definition.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.1 Side Note 6.128] • Investment and cash flow. Product strategy2 defines the breadth of the product line and links product decisions to [1. For example. as products. Definition 6. which will be discussed in detail later in the semester. time permitting.0.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. and • The organization’s capabilities. They also use just-in-time production techniques. which.

Product strategy involves determining the best strategy for each product based on its position in the life cycle. years (e. clothing fashions). Life cycles can be in the days or weeks (e. and 4. • Maturity phase – Competitors have entered or are entering the market. • Introductory phase – In the introductory phase. • Growth phase – Effective capacity forecasting is necessary. restaurants or nightclubs). and – Supplier development... 3. Maturity.. YouTube videos). Growth. products expenses are often high for – Research and development.1. often ruthlessly. • Decline phase – Investment needs to be minimized and resources need to be redeployed. 2. months (e. . low-cost.g.g.1.82 CHAPTER 6. 6. DESIGN OF GOODS AND SERVICES 6.1 Product Life Cycles Product life cycles can be divided into four phases: 1.g. so high volume.2 Life Cycle and Strategy Strategies change as products move through their life cycle. and innovative production is appropriate. Introduction. – Process modification and enhancement. or even decades.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. Decline.

2.000 yuan. • Economic factors. • Technological change often drives product innovation.2 Generating New Products Most products have a limited life cycle.3 Product-by-Value Analysis For firms with many products.2.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.4 Side Note 6. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted. such as consumer incomes. example. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. Definition 6. Definition 6.1. 4 For 3 For . Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.3 • Political and legal change can also bring about business opportunities.2. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. are tied to product demand.2. as well as the total annual dollar contribution of the product. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. 6. Ideas are not reviewed until after the brainstorming session.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.1. GENERATING NEW PRODUCTS 83 6.500 or 100.1 (Example: Brainstorming) Lead the class in a brainstorming session.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. it must regularly redesign existing products or bring new products to market. example. and if a company is to survive. the development of cellular telephone technology or the internet.6. • Sociological and demographic change is also tied to product demand. 6.

2.2 [1. Side Note 6. Definition 6.84 CHAPTER 6. .2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Many successful companies rely on sales from products introduced within the past five years. 128]. DESIGN OF GOODS AND SERVICES For example.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.3. Each stage should have an accompanying review to determine whether to progress or not.3. DuPont estimates that it takes 250 ideas to yield one marketable product [1.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.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. market dynamics. Translates customer desires into a product design. p.3 6. 6. 129].3. p.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. p. Definition 6. The house of quality is a graphic technique for defining the relationship between customer desires and a product. 128]. Determines what will satisfy the customer and 2. Side Note 6.3. 6. the product life cycle.1 (Product Development Stages) Present Heizer figure 5. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market.3. and the organization’s capabilities.3 [1.

Relate customer wants to product hows. PRODUCT DEVELOPMENT 85 Side Note 6. 6. Develop importance ratings.9. Identify relationships between the firm’s hows. Product development is done by teams. and production departments. design engineering. create the columns of the house in sidenote 6. manufacturing engineering.2 (Example: House of Quality) Present Heizer example 1 [1. identify the rows of the house in sidenote 6. 2.7 4. 1. See http://www.6 3.. 10 The right-hand columns of the house in sidenote 6.6.3. p.9 6. . Evaluate competing products.3.3. which can be an advantage.10 Side Note 6.2.g. Identify how the good or service satisfies customer wants. 7 In other words. bureaucratic companies and organizations.3. as was the software described in section 4. 3. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. An organization is divided into departments.2.2.3.8 5. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. • Effective communication and coordination between separate departments can be problematic.qfdcapture..3. e.S. a research & development. 2. • Fixed duties exist.2. • Perhaps the most popular approach in the U. In other words. Identify customer wants.3 Organizing for Product Development In the West. Note that it is not free or open source. 130].3. with product features. there are three popular methods by which organizations undertake product development. Building the house of quality involves six steps: 1.” 6 For example. 8 These are given on the roof of the house in sidenote 6. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. • More common in large.3.2.com for more information.3.

3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.3. 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.3.3.S. design. Some teams even include representatives from vendors. Definition 6. maintainability. but my personal impression is that formal QFD practices are not widespread in practice.86 CHAPTER 6.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.11 In Japan. manufacturing. etc.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.3. My experience may not be indicative of management practices in general in the U. The goals of manufacturability and value engineering are 11 See definition 6. use of participating teams in design and engineering activities.. will often advocate for continuation of their project past the point that it is profitable for the company.. Side Note 6. These teams often include representatives from marketing..4.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. purchasing. and production stages of product development. organizations are less structured and typically not divided into research and development. production. . Definition 6.4 (Concurrent Engineering) In project development. Side Note 6.S. engineering. production. 6. it can also be problematic because teams. development. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. Definition 6. engineering.3. and field service personnel.3. quality assurance. because their fate is tied to a product.3.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. However. and use.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.

Improved job design and job safety.6. 2. Robust design. 4. Reduced complexity of the product. Improvement of functional aspects of the product. PRODUCT DEVELOPMENT 1. 5. and 7. 87 . 6. 3.3. Cost reduction. Standardization of components. Improved maintainability (serviceability) of the product.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

.

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

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

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

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

or 20 years to accomplish.” • Be optimistic. Side Note 7. ask other entrepreneurs. – Long-term goals are those that may take 5.000 yuan and you’ve never had a job before. SETTING GOALS 95 If you are not a “people person.3. – Short-term goals are those that can be accomplished within a year.000.000 yuan by July 1” is a much better goal than “raise money.3. “Raise 100. marketing. Learning from failure is as important. your goal may not be realistic.1 (What’s It Really Like?) If you wonder what running a business is really like. When setting goals.” • Be realistic. • Analyze Your Professional Attributes – Be aware of where you need help.3 Setting Goals With any major endeavor. . When setting goals. 10. advertising. and administration. Consider at least a five-year time horizon. If you talk to an entrepreneur who has not been successful. than learning from success. ask yourself the following questions: • Income – How much do you want to earn.” you may not want to start a business that focuses on customer relationships. it is common to exchange “war stories” about the difficult times and sacrifices. • Be specific. • Set both short-term goals and long-term goals. If your goal is to raise 1. “Achieve financial independence” is much better than “pay the bills. even the successful ones will probably focus on the negative. 7.7. Like parents. – Start with small goals. it helps to set goals. Move on to larger goals once the small goals have been met. if not more important. such as sales. When I talk to those who I know who have started businesses. although the successful ones generally view their experiences as positive on the whole. try to figure out why they were not successful. 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.

96 CHAPTER 7.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. Acknowledge this fact and factor it into your decisionmaking. pp. The reasons given for adding or subtracting points are as interesting as the ultimate score. – Hours of work. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. 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. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. Eliminate question 1 and substract one point from the scoring given on p. 20. 21]. How much is your ego worth? Side Note 7. Many people want to start their own business for ego gratification. pp. Side Note 7.3.3. Have the class write down their answers and evaluate their own EQ. and – Investment of personal assets. – Geographic location.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. . 18–20].

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

. • They require more financing than the entrepreneur has access to.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent.0.0. often one or more a day. people have to remove nose piercings for work or social occasions. • They require expertise that the entrepreneur does not have. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online.98 CHAPTER 8. The tube could be made unobtrusive enough that it would not need to be removed for work. Those with nose piercings would not need to remove the piercing and risk it closing. • Etc.. • A nose piercing that consists of a small. hollow tube. however. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. • The business would involve too much risk. Often times. It sounds silly. pp.. 28–29]. business ideas come at a rapid rate. However. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. • 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. 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. etc. • The ideas are easily copied and would be quickly appropriated by more able competitors. Side Note 8. • They require business relationships that the entrepreneur does not have. I continue to generate business ideas as a matter of habit. Side Note 8. but it is a major complaint for female rock climbers. most ideas are not feasible because • They would not be profitable enough.

you will be spending years of your life trying to make the idea work. 8. to be truly self-motivated and persistent in the way you need to succeed. in the wake of 9/11. People thought he was going nowhere and generally dimissed his business. it is too risky. 2 http://www. home. Have students fill out the form on their own time.imdb. Side Note 8. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.” Side Note 8.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.1. Side Note 8. 2007.com/find?s=all&q=never+say+die.1 You’ve Got an Idea. computer-controlled security cameras. you should not let it dissuade you. Now What? The number one trait needed by successful entrepreneurs is perseverance. 33]. making just enough to get by but not much more. Warnings about risk are perhaps the criticism you should consider most carefully. His sales are now in the millions of dollars per year and the business is very profitable. February 17. Entrepreneurs are often told their idea is flawed. However. you should have “thick skin. thinking that if he did not succeed after a couple of years. he would never succeed. A well-known phrase in English. He ran the business as a one-man operation for years. such as your family.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. p. 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. or health. Finally. p. 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. .1. used as the title of at least 12 movies and television shows. the business took off.8. “Never say die. while you should listen to criticism that others give. YOU’VE GOT AN IDEA.2 is. You should be realistic about risks.” That is. And you should not risk anything you can’t afford to lose. 35].1.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. Have students come up with examples of products that meet various criteria on the checklist.1. or are otherwise discouraged. that they will never make it. After all.

FINDING AN IDEA .100 CHAPTER 8.

1 Finding Your Niche Finding a niche can be a more daunting task than you might think.0. Definition 9. There are two broad categories of markets: 1.0.1.0. See also 9. See also 9. Businesses.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. 9. your next step is to do some market research. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.” or business-to-business ventures. Definition 9.” or business-to-consumer ventures. 101 . Not only do you need to decide whether you are marketing to businesses or consumers. but you should try to target your market as specifically as possible.Chapter 9 Defining Your Market After coming up with your idea.2.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. When trying to identify your niche market. Consumers and 2. go through the following 7 steps: 1.

there is not already alot of competition. give a seminar. (d) It’s one-of-a-kind. “Selling maternity clothes to executive women” is much better than “selling clothes. discard the idea and move on to the next one. 75] 4. It should confirm to your long-term vision. (c) It’s carefully planned. (b) Somebody else wants it. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves.102 CHAPTER 9. • A friend in Chicago. earnings. decided to start a business selling unique winter clothes for dogs. 5. • Don’t spend alot of money.. and other important demographics. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50.000 per year. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. That is. Donna. Falkenstein. But do test your product before you go ahead full speed. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. then asked them about customer reactions. After all. Synthesize – Coalesce your ideas. 6. By someone else. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. She started by making a few samples and giving them to friends with dogs. A good niche has five qualities (a) It takes you where you want to go. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. • 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.” [4. If it does not sufficiently meet the criteria. it allows you to branch off into other niches as the business grows.” To focus your search for a niche. Lynda C. (e) It evolves. you need to stop and seriously reevaluate your plan. the longer you wait to go into business in earnest. etc.” 2. the longer it will be until you make your first profit. Test – Offer samples. Focus – Be specific. • If your initial test does not go well. Evaluation – Evaluate your niche against the criteria in step 4. That is. I mean customers. . p.

1 (Generational Marketing) Marketing to consumers based on age as well as social.1. are similar in age to those who came of age in World War II. etc. New marketing techniques include generational. 9.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.) Using these new marketing techniques can allow you to narrow your market. This can be offensive and serve to alienate rather than appeal to your customer. Definition 9.S. the more likely you are to score a hit. and other Asian customers together. when the country was immersed in a war effort. or retiring. (See definitions 9. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different.1..” That is.1. in the U.1. you should practice extra caution to avoid stereotypes or other insensitive approaches.1. you should be able to enter your niche market with confidence.1. Likewise. For example. Side Note 9. when many people were suffering from extreme poverty. If you did your homework. for example. and the narrower your focus on your target. the Depression-era cohort. Chinese. demographic.1 (Smaller is Bigger) When starting a business.S. many entrepreneurs make the mistake of being “all over the map. young adults in the Depression. such as having children. and psychological factors. This marketing technique has been widely used since the early 1980s in the U. and 9. Many Western companies make the mistake of lumping together Japanese. It is better to do just one thing well than to do many things poorly.3. but their behavior differs significantly due to the different influences in their youth.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. many are choosing to start families later in life or even have children ten years or more apart. economic. Definition 9.. FINDING YOUR NICHE 103 7. Definition 9.. many Eastern companies make the mistake of lumping together American and European customers. . buying a home.1. As older people are more active than before.9.1. Go for it! – Implement your idea. the World War II cohort.1. life stage.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. and cohort marketing.1. Side Note 9. they try to satisfy all possible customers and end up trying to do too many things well. Korean.2. Marketing to demographic groups has become much more refined in the last few decades.

create a mission statement. The mission statement should • Be succinct. “Creating a niche is the difference between being in business and not being in business. Every six months or so. p. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.2 Redefining and Expanding Your Niche Lynda C.” [4. • 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.1. a few sentences at most.3.3 The Mission Statement Once you have a niche. p. Falkenstein states. 79] 9. 28] which includes mission statements for three multinational companies: 1 See section 9.104 CHAPTER 9. .2 [1.1 (Mission Statements for Three Organizations) Review Heizer figure 2. • Convey the essence of your business’s goals and philosophies. you should. Falkenstein1 advises that you regularly reevaluate your niche. Side Note 9. DEFINING YOUR MARKET 9.

competitively superior. We will be helpful. We will produce outstanding financial returns by providing totally reliable. FedEx FedEx is committed to our People-Service-Profit philosophy. 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. . 3. and professional to each other and the public. and nurturing work environment while ensuring our long-term success. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. global air-ground transportation of high-priority goods and documents that require rapid.3. time-certain delivery.3. Our mission consists of 3 interrelated parts: • Product Mission – To make. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. 105 Side Note 9.9. courteous. healthy. THE MISSION STATEMENT 1. We are committed to being an important. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. A complete record of each shipment and delivery will be presented with our request for payment. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. 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. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We will strive to have a completely satisfied customer at the end of each transaction. 2. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. Equally important.

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

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.

pp. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.2.” [4.10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. . RESEARCH METHODS 113 Side Note 10.2.

114 CHAPTER 10. MARKET RESEARCH .

Your business plan should list obstacles that may arise and what will be done to address them. and projected results of the new business. 4. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. In terms of sanity checking. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. Those who provide financing are aware of these pitfalls. expected needs. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture.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. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. 1.4 (Business Plan) A business plan is a written document that details a proposed venture.0. Every aspect of the venture should be covered. 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. It must describe current status. and so should you be. 5. 2. including 115 . Definition 11. Set up a timetable with specific steps to be accomplished in a specific period. 3.

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

Kuratko suggests the following [3. While the initial read-through might be only a five-minute perusal. p. including debt or equity financing required.11. Determine the quality of the entrepreneurs. you will not even get your foot in the door and be invited to present your plan to investors.. They will want to see something that reflects that you are neat. Establish the unique details of this venture. 4. PREPARING TO PUT THE PLAN TOGETHER 117 minutes with your business plan before deciding to give you an audience or place you in the “circular file. . but not too good. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. Read the plan over casually. 1.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. Read the latest balance sheet. but should not be too lavish. 11. the trash can.1.1. Note that less than a minute on average is devoted to each step.2 5. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. 6. pretentious. bear in mind that once the plan is advanced to the next stage of financing. 2. If you cannot impress the financier with these three steps. other financing professionals may spend more time analyzing the details of the plan. 2 Do not underestimate the importance of this step. p.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. 301]: • Appearance – It should look good. Determine the financial structure of the plan. Determine the characteristics of the venture and its industry. 3. thorough and careful.e. or spendthrift. not ostentatious. – Binding and printing should not be sloppy. i. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. 300].

THE BUSINESS PLAN – It should be no more than 50 pages. The benefits to customers. – 40 pages is ideal. 6. The financial forecasts. – On the title page. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. • The Executive Summary – Two or three pages immediately following the title page. though you should not put it in the same corner as page numbers appear. e-mail address.3 • The Cover and Title Page – The cover should have the name of the company. 5. – Inside the front cover should be a title page repeating the cover information. – It is worth repeating: Keep it down to at most two or three pages. and How investors will benefit. 5 I suggest the lower-right corner. The amount of financing needed. 11.118 CHAPTER 11. 3 Note that for this class. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time.1. they will not read it. 4. 3. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. . – It should explain 1. and full contact information4 for the company. a number should be in a corner5 indicating the copy number. the date of the plan. Its products or services. If you write to much. The company’s current status. You should use this to keep track of who has which copy. and/or web site. address. 2. 7. p.3 Some Style Points Kuratko also recommends that you [3. The venture’s objectives in 3 to 5 years. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. 4 Phone number.

Present a focused plan.” “they. is it based on a family name? Does it include technical terms you need to identify? . use “he. and tell why it is named what it is. be sure to include them in the business description.2 The Plan Contents Side Note 11. copyrights. 2. so be sure the writing is finely crafted. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.2. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. which describes the 10 sections of a typical business plan. 6 E. Executive Summary – This should be the last thing you write. • Identify the Target Market – Market research should support a focused customer niche. or other special market advantages you have. • Avoid Exaggeration – Your sales and revenue estimates should be well researched.” or “us.” or “them.11. Include any pictures or designs that would be helpful. 305].1 (10 Sections of a Business Plan) Present Kuratko Table 10. The executive summary gives readers their first impression.2.6 Note any industry developments and describe the business thoroughly. Business Description – Name the business.” Instead.” “we. • Do Not Overdiversify – Don’t try to be all things to all people.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. trademarks. p. Your credibility is established in part by the credibility of your plan.2 [3. 11. Some details on each section of the business plan: 1. • If there are patents. • Orient the Plant Toward the Future – Create an air of excitement..g. 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. • Keep the Plan Written in the Third Person – Do not use “I. but it is the first thing that your audience will read.

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

Unexpected competitions. 8. These might include • • • • • • • • • • Incorporation of the new venture. (c) A cash-flow statement. 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. Product display at trade shows.. of the risks than you are. current ratios. include an appendix.2. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. Signing up distributors and dealers. Appendix – If there are documents.com. Design or research difficulties. Receipt of first orders. and Payment of first accounts receivable. Risks might include • • • • • Negative industry trends. detailing projected inflows and outflows.1 (Pro Forma) A latin term that means projected. or more aware. Completion of design and development. working capital. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. as opposed to actual. Critical-Risks Segment – Discuss business risks and the ways you might address them. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. inventory turnover.2.2. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. which investors will use to estimate debt/equity ratios. Costs exceeding estimates.11. Difficulty purchasing parts or materials. Your investors are probably as aware. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Hiring of sales representatives. detailing projected profits and losses.com) Discuss the growth of Active. First sales and first deliveries. Completion of prototypes. Ordering production quantities of materials. 11. a balance sheet containing projected balances is called a pro forma balance sheet. Try to be honest and realistic. For example. Definition 11. 9. etc.2 (The Growth of Active. (b) An income statement.

122 CHAPTER 11. THE BUSINESS PLAN .

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

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

12.5 Take Notes Have a pen and paper ready and take notes during the pitch.3 After the Presentation Each presentation will be different. 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. They may ask you something you want to respond to in an e-mail later. • Taking notes also makes you look conscientious. everyone brought a pen and paper.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.2. and each investor will respond differently. but in reality. Many people feel as if taking notes makes them look stupid. 45]. p. 12.6 So What? When you are planning your presentation.3. you need to change or eliminate the statement. Guy Kawasaki recommends you set a timer [2.12.2. At my company in Chicago. If they cannot explain it clearly. it is quite the opposite. AFTER THE PRESENTATION 125 Side Note 12. 12. Stop when it goes off. It is easy for things to get lost in the heat of the moment. In general. Give your presentation to friends or family. so write things down to make sure you don’t forget.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. you are not presenting it well. where some of the smartest people in the world worked. Ask them what your company will do. • Your audience may ask you several questions at once. You should be prepared for the unexpected. They may ask you something that makes you want to change your presentation. Everyone.2.2. I always bring a pen and paper to meetings. “So what?” If you cannot answer this question simply and easily. ask yourself after every statement you make. 12. Much of the material required use of the internet. and although you go into each presentation .

126 CHAPTER 12.” .5 [3.3. you should also realize that most most comments will be negative and most presentations are rejected. Be prepared for rejection and do not consider it the end of the road. PRESENTING THE PLAN with only success on your mind. Side Note 12.1 (What to Do When You’re Turned Down) Present Kuratko table 10. p. Each negative comment gives you an opportunity to change an investor’s opinion. Each time your are rejected improves your future opportunities. Remember that persistence is the most important character trait of entrepreneurs. 321]: “What to do when a venture capitalist turns you down: Ten questions.

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

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.

4 (Delivery Cycle) In inventory management. be sure it’s not easy to “hack” the system. the delivery cycle is the amount of time between placing an order and receiving it. CHAPTER 13. For example. .3. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons. 13. Definition 13. these systems should automatically update inventory and accounting records. Definition 13.3. work with suppliers to improve delivery times and count inventory more often.3.3 (Count Cycle) In inventory management.2 (Order Cycle) In inventory management. if you perform an inventory count four times a year. the count cycle is the amount of time between counting inventory. Definition 13.3. To improve efficiency of inventory control.1 (Turnover) When you have replaced 100% of your original inventory.130 • Maintain a sales history. you have “turned over” your inventory. your count cycle is 12 weeks.3. Definition 13.1 Inventory Turnover Typically. the order cycle is the amount of time it takes to process paperwork and place orders. and • Improve pricing accuracy. a high inventory turnover is a mark of a well-managed inventory system. • 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. • Security – To prevent theft. • Updating product information – At the time a sale is entered. INVENTORY CONTROL When considering the purchase of a POS. such as for volume discounts for preferred customers. 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.

which allows you to pay less taxes on your inventory. 2 At 3 At least this is true in the U. Definition 13. See definitions 13. In the U. The author is unfamiliar with Chinese tax codes. 13.3. The author is unfamiliar with Chinese tax codes. it values your remaining inventory based on the prices of the least recently purchased items.4.4 Inventory Accounting Your accountant will typically handle inventory accounting.4. it values your remaining inventory based on the prices of the most recently purchased items. First Out)) LIFO (last in. INVENTORY ACCOUNTING 131 Definition 13.1 Buying Inventory In the process of putting together your business plan. least this is true in the U.S. In other words.4.4. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.1 (LIFO (Last In.2. order cycle.2 (FIFO (First In. and delivery cycle.3 See also 13. After you have been in business your inventory control system should give you a better idea of stocking levels.4. follow the recommendation of your accountant. Many businesses also measure turnover by measuring sales per square foot (or square meter). first out) assumes that you sell the most recently purchased inventory first.4.3. which may result in higher taxes.2. If there is inflation. you must estimate your inventory value when you file your taxes. first out) assumes that you sell the least recently purchased inventory first.S. the needs period is the sum of the count cycle.3.3. In deciding which to use. If there is inflation.5 (Needs Period) In inventory management. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.13.2 See also 13.1.4. 13. LIFO and FIFO are two accounting methods used to do this. Calculate your sales per square meter once per month. 13. but you should at least know about LIFO and FIFO. and 13. First Out)) FIFO (first in. Definition 13.3. You should know how many sales per square meter per year you need to survive.S.. .

author of Start Your Own Business.1 Dealing with Suppliers The most important thing about a supplier is reliability. Independent craftspeople 4. • Some suppliers demand a minimum number of items per order.4. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Import sources – They operate like domestic wholesalers.stock on order = open-to-buy Note that formulas and computerized inventory control systems and other means to manage inventory don’t make up for a business owner’s intuition. Their prices are higher than a manufacturers. 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. 13.5 Suppliers Suppliers can be divided into four categories: 1.” . INVENTORY CONTROL Definition 13. says. brokers or jobbers. and they will respond in kind. Distributors – Also known as wholesalers. Rieva Lesonsky.132 CHAPTER 13. usually one. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. courteous and firm with your suppliers. three or four months.5. 13. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise.actual inventory . Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . “Be open. – The minimum may be higher for first orders to cover the cost of setting up a new account. 2. 3.

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

5. Specify a cancellation date on your order forms.com/shippers/glossary. people often say something like “f.org/wiki/Backorder. See also definition 13.roadway. Be aware of your supplier’s priorities.134 CHAPTER 13. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.o. 2007. May 19. As opposed to FOB. The FOB term requires the seller to clear the goods for export.)) Free on board. http://www. 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.b.html.5. INVENTORY CONTROL • Depending on whether the supplier pays frieght.2 (FOB (or f. May 19. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.abcsmallbiz. 2007. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.3 (FOB Destination (or f. 2007.b. Definition 13.4 Colloquially.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. 6 Source: http://www.5.html. Seattle” to indicate that an item being shipped from Seattle is free on board. .3.7 4 Source: 5 Source: http://www. Under this arrangement. 5 FOB Destination changes the location where title and risk pass. May 19. 5. 3. May 19. Definition 13.epoi. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.html. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. This differs from a forward order where stock is available but delivery is postponed for other reasons. Definition 13. Destination)) Free on board destination. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.wikipedia.b.6 See also definition 13.5. 7 Source: http://en.o.com/reference/glossary/glossary efg.2.o.com/jargon.

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

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

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

With e-mail. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.4 (Using an E-mail Address) For professional positions. e-mail addresses have become perhaps the most popular way to get applicant information at U.2 Side Note 14.138 CHAPTER 14. – For other positions.4 Finding People There are many possible sources of applicants. if you are looking for an accountant. particularly those that advertise on web sites. • Do not list requirements other than educational or experience-related ones. HIRING EMPLOYEES 14. – For professional positions.1.3 Advertising the Job When you write an advertisement. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.” or people who may not have them will just try to fake those personality traits in the interview.S. • Be sure to list appropriate contact information. For example. • 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. 14. . Many American companies are no longer providing phone numbers. • Do not ask for specific personality traits.. • List the top 4 or 5 skills that are most essential to the job. companies.1.1. 2 See sidenote 14.1.5. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. It also makes it easy to receive and process a large number of applications with a minimum of effort.S. such as “outgoing” or “detailoriented. due to the number of applicants for competitive positions.

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

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

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

HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. “President of the United States. what would you do? Why?8 • What kind of supervisor gets the best work out of you? • How would you describe your current supervisor? • How do you structure your time? • What are three things you like about your current job? • What were your three biggest accomplishments in your last job? In your career? • What can you do for our company that noone else can? • What are your strengths and weaknesses? • How far do you think you can go in the company? Why? • What do you expect to be doing in five years?9 from [4. Good candidates will do their best to put their best foot forward.” 9 This is a very typical job interview question in the United States.” Don’t ask yes-or-no questions.” The interviewer laughed out loud. “bowling. 349]. Hopefully they will be neat and clean.” or “Tell me about a problem that you solved at your last job and the way you solved it. Discuss the job and the company. friendly. Curiously. Be sure to ask open-ended questions. a recent debate. First impressions are the most important. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. p.142 CHAPTER 14.1.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. Begin with some small talk. You want the candidate to talk enough to give you a detailed impression. so much so that it is almost a clich´. You should do the same. Side Note 14. He answered. such as “Tell me about your last position. Then ask them about their skills and background. He got the job. only one of them answered. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Texas. and demonstrate good communication skills. 8 In 7 Taken . It is as important to get the candidate excited about your company as you want to be about them.

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

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

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

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.