International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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3. . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . 5. . . . 5. . . . . . . . . . . . . .2. . . 5. . . . . . . . . . .1.8 A Critique of PERT and CPM . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . .1.6.3. . . .2 Build and Staff the Organization . . . . . . . . . . . . Strategy Development and Implementation . . . . .5 Slack Time and Identifying the Critical Path . . . . . . .2 A Seven Step Forecasting System . .1. . . . . . . . . . . . . . . . .2 Network Diagrams . . . . . . . . .2 Project Scheduling . . . . . . . . . 6. . . 5. . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . .1 Types of Forecasts . . . . . . . . . . . . . . . . . . .4 3. .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . 4. . . . . 5. . . . . . . . 5. . . . . .2 Preconditions . . . . 4. . . . . . . . 4. . . . . . . . . . . . .1 Product Life Cycles . . . . . . .4. . . .5 Seasonal Variations in Data . . . . . . . 6.3. . . . . .2 The Work Breakdown Structure . . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . . .3.1 PERT and CPM . . . . . .2. . . 3. . . . . . . CONTENTS . . . 3. . . . . . . . . . .2. . . . . . . . . . . . . . 4. . . . .3 Product-by-Value Analysis . . .2 The Strategic Importance of Forecasting 5. . . . . . . 6 Design of Goods and Services 6. . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . .1 Project Planning . . . . 4. . 4. . . .2 Focus Forecasting . . . . 5. . .1. . . . . . . . . . . . . . .3 Measuring Forecast Error . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . . .3. . . . . . .1 Research .4 4 Project Management 4. . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . . . . . . . . . . . . . . .1 Goods and Services Selection . . .1 What is Forecasting? . . . . . . . . . . . . . .3.1 Identify Critical Success Factors . . . 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. . . . . . . .3. . .4 Determining the Project Schedule . . . . .3 Dynamics . . . . . . . . . . . . . . . . . .1 The Project Manager . . . . . . 4. . . . . . . 5. . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . .1 Qualitative Forecasting Methods . . . . . . . . . . .3. . . .2 Life Cycle and Strategy . . . 3. . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . .6 Variability in Activity Times . . .1 Probability of Project Completion . . .3 Forecasting Approaches . . . . . . . . . 4. . . . .3. . . . . . . .1. . . . . . . . . 4. . . . . . . . . . . .3 3. 3. . . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . 4. . 3. . .4 Adjusting for Trend . . . . . . . . . . . .6 Associative Models . 6. . 4. 5.

.3 Some Style Points 11. . . . . . . . .3 Generating New Products . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . 6. . . . .3 Setting Goals . . 111 10. .5 Take Notes . . . . . .2 Quality Function Deployment (QFD) . . . . .2. . . . .2 Some Suggestions . . 12.3. . . . . . . . . . . .2 Research Methods . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 6. . . . . . . . . . . . . . . . . . . . . . . 6. . .2. . 95 8 Finding an Idea 97 8.1. .1 Preparing to Put the Plan 11. . . . . . . . . .1. . . 94 7. . . . . . . . . . . . . . . . . . . .3. . . . . . . 104 10 Market Research 109 10. .4 The First Minute is the Most Important . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Your Audience . Now What? . .2. . . . .2. . . . . .1. . . . . . . . . . . . . . . . . . .1 Sources of Secondary Research . . .2 Look and Feel . . . . . . . . . . . . . 12. 104 9. . .2 Are You Ready? . . . Product Development . . . . . . . . . . . . . . .3. . . .2 The Plan Contents . . . . . . . . 92 7. . . . . . . . . . . .2 Redefining and Expanding Your Niche . . . . . . . . . 110 10. . . . . . . .1 Characteristics of the Successful Entrepreneur . . . .2. . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . .2. . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . 11. . . . . . . . . 12 Presenting the Plan 12. . 12. . . . .6 So What? . 12. . 6. . . .1 Finding Your Niche . . . . . . . . . . .1 What Am I Researching. . . . . . . . 12. . . . . . . Exactly? . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . 11. . . . . . . .1 Importance of New Products . .1 The Presentation . . . . . . . . . . . .1 Do It Until You Get It Right . . . . . . . . . . . . . . . . . . 6. . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 The Mission Statement . . . . 12. . . . . . . .CONTENTS 6. . . . . . . . . . . . . . . . . . . . . .1 Product Development System . . .2. . . . . . . . . . . . . .2 Know Your Outline Thoroughly . . . . .3 After the Presentation . . . . . . . . . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . 12. . 101 9. .3 Organizing for Product Development . . . . . . . . . . . . . . . . .

. .4. . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.1 Inventory and Cash Flow . . . . . . . . . . . . 14. . . . . . . . . . . . . .3. . . . .3 Computerized Inventory Control 13. . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.1 Inventory Turnover . . . . . . . . . .3 Advertising the Job 14. . . . . .2 Payment Plans . . . . . . . . . . . . . . . . . . . 13. . . 13. 13. . . .1. . . . . . . . .4 Finding People . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . .1 How to Hire . . . . . . . .5 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . .2 Tracking Inventory . . . . .1 Dealing with Suppliers . . . . . . . . 13. . . . . . . . . . . . . . . . .1 Job Analysis . . . . . . . . . . 14. . . . .2 Job Description . . . . . .5. . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Buying Inventory . . . 13. . . 13. . . . . . 14 Hiring Employees 14. .

Part I International Business Management 7 .


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

1. child labor was widely used. Why is corruption an important business issue? • See sidenote 1.2 Corporate Corruption Side Note 1.S.2.2.A. 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. This is something Chinese business people should be aware of. 3. Definition 1. Westerners rely more on contracts. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.S.2. Western business people may not initially trust their Chinese counterparts. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. • However.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 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. and Europe but a commonly accepted practice throughout the developing world.A. For example. 1. Prison labor is also considered improper in the U. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. • Because guanxi is less important in the West. • In general. Which brings us to the subject of this lecture: Ethics.A.1 (Ethics) The study of morality and standards of conduct. .10 CHAPTER 1. which are more strictly enforced in the West.. 2. • Because of this. 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. there is a perception in the West that Chinese are hard-working and smart.S. Easterners tend to trust people after observing a pattern of consistent behavior.

or other person in a position of trust.2 (Corruption) Corruption is of concern for business people because • It increases risk. reward. WorldCom. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. investors in the United States had to reevaluate the risk associated with owning stock. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) 2006. In the words of a Beijing correspondent for “The Economist” magazine.”[6] 1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived as least corrupt in the 2005 Transparency International Corruptions Perception Index. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. Side Note 1. Source: texttthttp://www.2. . which requires strict monitoring and verification of financial information. • Of course. Scandinavians are typically highly trustworthy1 but Italians are less so. and Tyco. – A bribe is a business expense that goes to no productive purpose and decreases profits. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. witness. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). – In the wake of Enron. there are few if any issues which affect and infuriate so many in China as corruption. . or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge.2 Though things are improving.1. 2006. September 20. gift. For example.2. 2 Source: http://www. • It increases the cost of doing business.dict. it is simply inefficient.2. “.transparency. China continues a battle against corruption. September 20. they must factor additional uncertainty into their calculations.1 (Bribe) A price. • On a macroeconomic research/surveys indices/cpi. Definition 1. voter. these are all generalizations and individuals may differ significantly from their cultural affiliations. .

and Tyco make it clear that even western developed economies have significant ethical shortcomings. a high value is placed on honesty and personal integrity.4 – Bernard Ebbers. the SarbanesOxley Act (SOX) was passed in the U. 2007. There is currently debate as to the effectiveness of the regulations relative to the costs.3. • Tyco – The CEO of Tyco. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.2. 3 Source: 4 Source: http://www. Qwest.S. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.htm.bankruptcydata. • Enron – In December Largest.3 – Several Enron executives have since been sentenced to jail for fraud and other charges.2 (Cultural Heritage in the U. history. See sidebar 1. • WorldCom – Following the Enron scandal.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. WorldCom declared bankruptcy in July 2002.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. was accused of looting the company to fund a lavish Largest. While western developed economies often cite a high ethical standard.S. Side Note 1. . – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.S.S. Parmalat. the former CEO of WorldCom. 2007. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. Dennis Kozlowski.12 CHAPTER 1. March 17.bankruptcydata..htm. succeeding Enron as the largest bankruptcy in U.3 The United States The United States has recently been rocked by a number of scandals in the business community. Side Note 1. In Scandinavia. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. was convicted of fraud and conspiracy and sentenced to 25 years in jail. Worldcom. including a $2 million birthday party for his wife. http://www. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.3. scandals such as Enron. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. March 17.1.

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

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

particularly in upper in an extended sense.4. 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. politicians.dict.5 1. men are disproportionately represented in management positions. 7 Source: http://www. yes or no. Side Note 1. at 40.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.S.5.S.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.3 Lobbying by Japan Japan spends more money lobbying in the U.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. with the purpose to influence their votes.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1..S.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. their attitudes towards bribery when working in foreign markets differs from that of the U. .4. Although women have entered the workforce in large numbers in recent decades. with most in the top 20 among over 150 countries included in the survey.5.5. to try to influence decision-makers in any circumstance. EUROPE 15 1.5. than any other. Side Note 1.4.1. 1. there seems to be a glass ceiling due to social factors. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. Definition 1. Hodgetts et al. is the notable exception).7 Note that lobbyists do not have any formal power. They only have the power of persuasion.

though compensation is limited relative to lawsuits filed in the U. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.5. For those students who think so. 8 Source: http://careerplanning.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. 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. ..2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. • Discrimination lawsuits are more commonplace in Great Britian.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.16 CHAPTER 1. • More British companies have actively sought to recruit and promote women into management. 8 Side Note 1.5. 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition but there is a perception that there are risks and ethical considerations.S. 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.about. Side Note 1.5. yes or no.

3 (Corporate Spying) Hodgetts et al. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1.6. p.2 (Piracy and Counterfeiting) Present sidenote at [5. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. International corporate spying problems.S. 6. • Yet another case in which software from a U.6. 64]. 2. there are undoubtedly many others that get away with it. pp. Prison labor.6.1. executives.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets. [5. An increase in crime and illegal business activities. Child labor. An opaque legal system. Side Note 1. 5. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. 4. • Note that for every corporate spy that is caught. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. ETHICAL CONCERNS IN CHINA 17 Side Note 1.S.5 billion in sales annually.6. 7. and • A recent history of rapid economic development. . Often. 3. company in Boulder was stolen and sold to a Chinese company. Side Note 1. Bribery and other forms of corruption. Ethical considerations include 1. • A relatively stable government. 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. Piracy and counterfeiting (see sidenote below).

and the environment. “. social justice. there are few if any issues which affect and infuriate so many in China as corruption. .7. In the words of a Beijing correspondent for “The Economist” magazine. Definition 1.cfm for more detail.7. . not-for-profit organizations that seek to serve society’s interest by focusing on social. political. education. political.3 (Nongovernmental Organizations (NGOs)) Private.benjerry. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). Other companies.S. not-for-profit organizations that seek to serve society’s interest by focusing on social. health.18 CHAPTER 1. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. Definition 1. Side Note 1.2. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. • CARE (promotes community development.2 (Nongovernmental Organizations (NGOs)) Private. and promotion of social equity). education. 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. provide relief in the event of humanitarian disasters. and emergency relief in the event of humanitarian disasters). and the environment. company/our mission/index. .”[6] See also sidenote 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. and economic issues such as poverty.. a grocery chain.7. such as education and health care. social justice.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. health.6.1 (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. such as Whole Foods. China continues a battle against corruption.2.4 (Corruption) Though things are improving.7. See http://www. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. and economic issues such as poverty.7 Corporate Social Responsibility Definition 1.

A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. Both political groups and businesses are influenced by NGOs.S. Side Note 1. • Conservation International (promotes environmental conservation). .S. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. but does not outlaw payments to political party leaders. – Even socially responsible executives would consider the “bottom line” when making decisions. In fact. executives may actually feel that it is the right thing to do.1 Corruption and the FCPA Revisited Hodgetts et al. with a score of 3. many feel that it has had a net benefit.7. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. last but note least.7. In 2005.7.2. firms are constrained by the FCPA with regards to bribery and other corrupt practices. too.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. firms a reason to refuse to pay bribes. and • Rainforest Action Network (RAN). 1. as it gives the U. China ranked 78 out of 158.000 and $125. MNCs do not appear to have been significantly impacted. as executives of publicly traded companies are ultimately responsible to their shareholders. For example. • To prevent a boycott or other consumer defections. Executives are people.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.7.1. 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. note that while U.S. • And. Side Note 1.9 U.

with a score of 8.infoplease.7. slightly better than Sweden. 5. societies. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.S. malfeasance and diversion of corporate funds becomes increasingly difficult. the United States and Europe have recently been rocked by corporate corruption. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.10 Corruption is certainly not endemic to Asia. and not based on hard data. Tyco. and the environment.7. Important: Although it is widely cited. With greater financial transparency. It cannot be considered to be based on a scientific survey. with scandals such as Enron. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. It is a difficult problem to solve. Commitments that many MNCs have signed on to. WorldCom. Global Compact. With more disciplined corporate governance. Scandinavian countries are at the top of the list. As more state-owned businesses become privatized and the size of the middle class increases. Hong Kong is number 15. 1.4. better than the U. 4. Moreover. 2.5 (Table 3-1: Principles of the Global Compact) The U. Side Note 1. I think corruption will diminish as China economically develops for several reasons: 1. Singapore is number 5 with a score of 9. such as the U. and Parmalat resulting in investors losing billions of dollars. 3.N.7. The government recognizes that it is an issue and is taking action.6 and 8. July 1.4 (Some Opinions) Personally. specify standards and codes of conduct in domestic and global operations. more Chinese will own stock in CHAPTER 1.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. 2006. and Germany at 7. Global Compact specifies 10 principles which MNCs should abide by: 1.html. The government is actively addressing the issue of corruption. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. Side Note 1. 10 http://www. Support and respect the protection of international human rights.2 respectively.0 is considered to be the borderline at which countries are considered to have a problem.N.3. but most important first step is to recognize that there is a problem. .

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


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

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

Staffing. Side Note 2. supply-chain management. OM decisions have been divided into ten categories by Heizer [1. pp. 6–7].2. Planning.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. quality. p.” • Every organization with more than a few employees has an organization chart. location selection. inventory. scheduling. operations managers make decisions. process design. 7]. place in the heirarchy.1. particularly when job titles are not clear. 5]. Side Note 2. 1. Definition 2.2. as the org chart determines executives’ authority and.S. . known commonly in the U.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1.2. To accomplish these functions. Controlling. and maintenance. WHAT OPERATIONS MANAGERS DO 25 4. human resources and job design. 2. • They are often sources of conflict among management.2. 2. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. Organizing. OM is one of the most costly aspects of an organization. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. 3. and 4.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. more generally. p. business community as “org charts. 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. layout design.

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

the firm could deplete inventory and cause customer service issues. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs. This saves warehouse space and costs. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. 8]. such as the presence or absence of a part on a shelf. or Kanban.1 Side Note 2. quality.3 “Significant Events in Operations Management” [1.2. • Frederick W. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. • Reliability and stability of systems depends on well-planned maintenance schedules. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. 9].wikipedia.2. and efficiency. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety In Time %28business%29. Kanban are usually simple visual signals. p.2 (A Little History) Review Heizer figure 1. – Providing proper work methods and tools. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. p. – Providing the proper training. . 2007. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. He also believed that management is responsible for – Matching employees to the right job. New stock is ordered when stock reaches the re-order level. Definition 2. and 1 Source: http://en.2. • Eli Whitney (1800) is credited for popularizing interchangeable parts. that tell production processes to make the next part. However. WHAT OPERATIONS MANAGERS DO 27 10.2 (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. When implemented correctly. which relied upon standardization and quality control. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. If demand rises above the historical average planning duration demand. The process is driven by a series of signals.2. one drawback of the JIT system is that the re-order level is determined by historical demand. February 14.

In the U.3. • Recently. • Transportation. for others professional occupations. Today. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.3. 11]. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. Definition 2.2. 2 The average national private industry wage. The U. the economy transitioned from agriculture to manufacturing around 1900.S. However. 2.5 [1.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food.. the services sector is by far the largest employer. • Food and lodging. and other essentials for its citizens. • Insurance. such as retail.1 (Services) Those economic activities that typically produce an intangible product. services account for over 70% of U. average wages are below average2 in the U.3 (Information Sciences) The systematic processing of data to yield information. Manufacturing was dominant until about 1950 or so.S.1 (Development of the Service Economy) Present Heizer figure 1. • In some service industries. Definition 2.28 CHAPTER 2.. services become increasingly important.S. economic output. 9] • Repair and maintenance. p. Bureau of Labor Statistics defines services to include [1. . • In most western economies.S. • Trade. p. the wages are considerably above average. major contributions have come from the field of information sciences. such as the legal profession or computer services in the financial industry. shelter. Side Note 2. • Government.

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

13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. or recyclable products or to minimize packaging and other wasteful production steps. 2. capital. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output. operations managers are increasingly responsible for innovations that move ideas. reusable. • 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. Definition 2. p.2. • 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. the next step in product development involves customizing products according to the customer’s preferences. • Mass customization – With increases in technical capabilities and customerlevel information management. Operations managers are being challenged to produce biodegradable.5. operations managers are responding by moving decision making to the individual employee. wherever and whenever needed. • Empowered employees – With the rise of services and knowledge products. Globalization has been having a dramatic impact on operations management and in the future. and finished goods rapidly. or management).5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. brought about in part by the internet. parts. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. . OPERATIONS AND PRODUCTIVITY 2.2. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. Trends that Heizer and Render identify [1.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. it will continue to strongly impact the field.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2.30 CHAPTER 2.

5.2. Side Note 2.4 (Total Factor Productivity) See definition 2.0077 titles per labor-hour = 0.5. Definition 2.3.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. p.5.5.5. Consider today’s computers versus those from the 1970s. Also known as total factor productivity.4375 titles per labor-hour = 0. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). THE PRODUCTIVITY CHALLENGE 31 Definition 2. Side Note 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. 15].25 titles per labor-hour = 0.97 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. but overhead is no $800/day.5. Definition 2. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. In order to improve productivity.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). .

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

Which of the following is true about 84% of 100? 4 When presenting this question. and • Healthier workers as well as • A shorter work week. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.8 [1. Diet of the labor force. . draw the rectangle on the blackboard. Social overhead that makes labor available. writing. and 4. maintaining and enhancing the skills of labor. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. and math.2. THE PRODUCTIVITY CHALLENGE • Better-nourished. and 33 3..) Present Heizer figure 1. In developed nations. 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. there is considerable concern over teaching of basic skills such as mathematics to grade school children.S.5. The primary variables for improving labor productivity include 1. “About Half of 17-Year-Olds in the U. such as transportation and sanitation. Side Note 2. p.5. Cannot Correctly Answer Questions of This Type.3 (The State of Education in the U.” In the U. 16]. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. What is the area of a 4 × 6 meter rectangle. 2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.S.S.

in the U. Developed economies (also known as post-industrial economies) require trained. has increased at about an average of 1.4 Productivity and the Service Sector Historically.S. 2. and the cost of capital depends on interest rates. are utilized effectively. and knowledge.5. 17].2 Capital Capital investment in the U.4 (Management as an Input) Because this is a course in business management. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Definition 2. U. 2.. however.5. productivity in the service sector has not increased as rapidly as with the production of goods. Note that in classic economic analysis and other areas of business.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. graduate programs and the students they produce remain the best in the world.5. education.S.5.S. educated. Note that there is a trade-off between capital and labor in most industries. According to Heizer [1.5% after allowances for depreciation. management is not always identified separately from labor as an input.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.34 CHAPTER 2.5. Side Note 2. as well as capital. management is considered as a separate input. Difficulties arise because service-sector work is . 2. and knowledgeable employees and operations managers are responsible for ensuring that technology. p.

Often an intellectual task performed by professionals (e. Frequently individually processed (e. legislation protects shopkeepers from discount retailers. Low-productivity activities. SOCIAL RESPONSIBILITY 1.2.S. a haircut). investment advice). These challenges include such issues as • Maintaining a clean environment. government agencies. and child care.S. teaching). and • The U. but from customers. medical diagnosis). banking system is about 33% more productive than Germany’s.g. and 5.S.5.. and other stakeholders. food preparation.5 (Service Productivity in the U.S.g. 35 3. is twice as productive as in Japan.. p. Heizer notes [1. 2. Side Note 2.6 Social Responsibility As discussed in chapter 1. Often difficult to automate (e. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.6.. Typically labor-intensive (e. in both overall and service productivity. telephone industry is twice as productive as Germany’s. 5 In Japan. laundry service.g.g. • Keeping the workplace safe. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. 4.5 • The U.S. the performance of a law firm). 18] • Retailing in the U. Difficult to evaluate for quality (e..) Productivity is highest in the U. such as cleaning.. 2. .g. We will discuss this challenge in more detail throughout the course. • General ethical behavior concerning issues such as child labor and corruption. watchdog groups such as NGOs. These demands come not only from the manager’s personal ethic.


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

3. 3.2 [1. Definition 3. Attract and Retain Global Talent – By offering more employment opportunities. I recommend that all companies draft a mission statement.1.1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. positive control of each package will be maintained utilizing real time electronic tracking and tracing . 3. competitively superior. FedEx. Equally important. Side Note 3. Missions state the rationale for an organization’s existence. and • Increase sales. 4. global organizations can attract and retain better employees.38CHAPTER 3. global air-ground transportation of high-priority goods and documents that require rapid. time-certain delivery.1. We will produce outstanding financial returns by providing totally reliable.1 Mission Whether large or small. 6. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. 28] which includes mission statements for three multinational companies: 1.1 (Mission Statements for Three Organizations) Review Heizer figure 2. an understanding of cultural differences in preferences is needed to best meet customer needs. Provide Better Goods and Services – For companies doing business in an international setting. p. • Provide additional insights and opportunities.1 (Mission) The purpose or 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. France. 5. FedEx is committed to our People-Service-Profit philosophy. • Perfumers tend to concentrate in Grasse.

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

1.3 (Sample Mission Statements) Present Heizer’s figure 2. but can be used at the department level and even at the project level.1. • Training. be it • Product features.3 (Competitive Advantage) In operations management. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.” Note that mission statements are used not only at the company-wide level.2 (Strategy) How an organization expects to achieve its missions and goals.cfm for more detail. See http://www. Responsiveness – By providing timelier. the Operations Function.1.3: “Sample Missions for a Company. . the creation of a unique advantage over competitors. • The “look and feel” of the company/our mission/index. Cost leadership – Providing cheaper products. • Interoperability with other products.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. more responsive products or services. 3. Differentiation can arise from anything that the customer may value about a product or a services. 2.40CHAPTER 3. • Availability of complementary products. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Differentiation – They make their product better. Side Note 3. Definition 3. Definition 3. 3.benjerry.1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. and Major Departments in an Operations Function.

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


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.


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.





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



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



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

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

3. Weakness.44CHAPTER 3. Staff the organization with personnel that will get the job done.1 (Strategy Development Process) Present Heizer figure 2.3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. Opportunities. The purpose of this process is to 1. Group the necessary activities into an organizational structure. 3.3.3.” The process of developing a strategy involves the following steps: • Environmental Analysis. if the firm has a competitive advantage in these things) and where failures are most likely. 37].3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Identify a strategy and critical success factors. those activities or factors that are key to achieving competitive advantage. “Strategy Development Process. and 3. Definition 3. Increase productivity.1 (SWOT Analysis) In operations management. • Determine Corporate Mission. The operations manager’s job is a three-step process: 1. These critical success factors are used to develop a competitive advantage. in particular. then • Form a Strategy. . 2. and Threats) analysis to develop strategies. Definition 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. and 3.6 [1. p. Side Note 3. 2. Implement an OM strategy. then determine whether the organization does these things well (and.2 (Critical Success Factors) In operations management. Provide competitive advantage. determining internal strengths and weaknesses and external opportunities and threats.

2 as examples of how firms organize their activities. Recall the “org charts” in sidenote 2. OM activities are most productive when they are integrated with other activities such as marketing.3 (Activity Map) In operations management.3. an activity map can be used to link an organization’s competitive advantage to the CSFs.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3. 3. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.2. and supporting activities. 5 Management 6 Human Information Systems Resources.1 as a checklist to determine critical success factors. • Red arrows – critical success factors • Blue arrows – support activities 3. p. Once CSFs are determined. Southwest Airlines has a competitive advantage in providing low-cost airfares.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.6 3. a graphical link of competitive advantage.3.3. CSFs. 39]. finance.4. .3.3.5 and HR.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. MIS. Side Note 3.1.3 Integrate OM With Other Activities In order to achieve its strategy. Definition 3.

3. 4. and hamburgers without beef in India. • Texas Instruments is an example of a country with a global strategy. 95% of its assets and 98% of its sales are made outside Switzerland. See definition 3. [1. 42] Definition 3. 2. Definition 3.4. wine in France.4. Definition 3. Definition 3. a strategy that uses exports and licenses to penetrate the global arena. Although e it is legally Swiss. See definition 3.3 (International Strategy) In operations management.4 (Multidomestic Strategy) In operations management. Usually does not confer a cost advantage.4.4.4. • McDonald’s is an example of a country with a multidomestic strategy.5. See definition 3. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. Global strategy – Not characterized by local responsiveness.4. International strategy – Often the easiest strategy. See definition 3.1 (International Business) A firm that engages in cross-border transactions. with beer on the menu in Germany. .4. Definition 3. Typically characterized by subsidiaries. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1.5 (Global Strategy) In operations management. Its menu reflects the country in which it operates. products do not need to be localized.4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. 3. Only 10% of its work force is Swiss. p. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. • Nestl´ is an example of a country with a transnational strategy. Also one of the least profitable due to transport costs and little local responsiveness.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. owning or controlling facilities in more than one country.46CHAPTER 3.4.6. franchises. In the semiconductor industry. but a good strategy for cost reduction when products do not need to be adapted locally. or joint ventures with substantial independence. 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. as exports require little change in operations and licenses often leave risk with the licensee.4.

4. 6].1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.6 (Transnational Strategy) In operations management.4. p.3.4. 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 . a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.S.. Side Note 3.


0. Plans are also revised to meet changes in time and cost demands. quality. Project management involves three phases: 1.3 (Project Planning. the largest software company in the world. 49 . 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. and budgets. and Controlling) Present Heizer figure 3. money. Even Microsoft. The profile highlights the importance of project management in achieving competitive advantage.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. 49]. and supplies are tasked to specific activities and activities are related to each other. p. 2. and team organization. 3.0. pp. costs.0. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.1 [1. Side Note 4. Controlling – Monitoring of resources. Scheduling. Planning – Goal setting. Scheduling – People. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. defining the project. Side Note 4. 46–47].Chapter 4 Project Management Side Note 4.

project managers are highly visible in a firm and have significant responsibilities. 48] 1. you will be confronted with a daunting task. In a sense. PROJECT MANAGEMENT However. Side Note 4. 69]. The responsibilities of project managers are to make sure that . it is also an area in which there will continue to be high demand for qualified people. See also Heizer sidenote “Project Management and Software Development.1. Project organizations work best when [1.50 CHAPTER 4. things you thought were certain turn out not to be. 4. a temporary project organization is formed to address a specific project.1 Project Planning While many projects are run within an existing organization. People will not come through with what they promised. You may be managing resources far in excess of your individual salary. Definition 4. p. often times. The project is temporary but critical to the organization. Moreover. and you will be forced to improvise. The project cuts across organizational lines. you are doing your job well if noone notices the project management. p. 2.1 The Project Manager As alluded to in sidenote 4.0.1. If you become a project manager on projects of significant complexity. Work can be defined with a specific goal and deadline.” [1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. 4.5. However. if things go wrong. The job is unique or somewhat unfamiliar to the existing organization.5 (Personal Advice on Project Management) Project management is a tricky profession. Your job is to make things go smoothly and according to plan.0. The work contains complex interrelated tasks requiring specialized skills. it is very obvious and can be very costly. 4. you should always expect the unexpected. and/or 5. 3.

The project meets its quality goals. in a software engineering project. a task that should only take a day or so. Approve software architecture for user account input web page functionality . People receive motivation and information necessary to do their jobs.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.1. Review software architecture for user account input web page functionality 6. Definition 4. a web page takes about a day to build for an experienced team. Complete software architecture for user account input web page functionality 5. 3. In a project that includes allowing a user to enter personal information on a web page. Approve graphic design for user account input web page 4.2 (Work Breakdown Structure (WBS)) In operations management.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). 51 4. For example. All projects come in on time. 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. 2. and 4. The project is on or under budget.1. • Build the user account input web page is a much better task division than 1. When dividing a project into tasks. Complete graphic design for user account input web page 2. Side Note 4. you have divided the tasks too finely. dividing a project into more and more detailed components. PROJECT PLANNING 1.1. Review graphic design for user account input web page 3.4.

At the time you are creating the work breakdown structure.3 [1. Write software for user account input web page functionality 8.52 CHAPTER 4. Write software for user account input confirmation page functionality 9. Side Note 4. Identify precedence relationships among activities 3. Scheduling serves to 1. PROJECT MANAGEMENT 7. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. you should also take note of time and cost estimates given by your technical staff. Encourage realistic time and cost estimates for each activity . 4. the work breakdown structure is not something you go to your office to do in isolation. Project 2.3 (Reality Check: WBS) In reality. Subtasks in major tasks 4. 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. of course. which we will discuss next in section 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. They will be useful for project scheduling. p.1.2 (Work Breakdown Structure) Present Heizer figure 3. Show the relationship between each activity to others and to the whole project 2.2. fill hundreds if not thousands of pages. Activities (also known as “work packages”) to be completed Side Note 4. The actual WBS for Windows XP would.1.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Major tasks in the project 3.

4 [1. PERT and other formal documents. these should be considered merely tools to be used when they are useful by saving time or energy. as. The order of performance is accounted for. Derives from the typical shape of a bottle. All activities are planned for. moeny. and CPM tools for every project management activity. cost estimates.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. and material resources by identifying critical bottlenecks in the project Side Note 4. Definition 4. PROJECT SCHEDULING 53 4. Overall project time is developed. Perhaps they imagine that they are not doing their jobs professionally if they are not.2.2. right by the bridge. and 4. which becomes narrower as one approaches the neck of the bottle. It can actually be quite time consuming to create and maintain Gantt charts. PERT and CPM help answer questions such as • When will the entire project be completed? . and other values to each activity. 2. Side Note 4.2. Activity time estimates are recorded. Gantt charts are perhaps the most widely used tool for ensuring that 1. 51]. 3.2.4. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. – said of roads. PERT. and CPM) Inexperienced project managers often feel the need to use Gantt.2 (Using Gantt. Make better use of people.” This will give the class an idea of the look and feel of a typical Gantt chart. However. I have found that simple spreadsheets or even just writing things down on a notepad (I typically use a separate notepad for each project to keep organized) is more productive than using Gantt . PERT.2.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. For smaller projects. p. MS Project’s Gantt chart functions demand you assign employees. Definition 4. the road bottlenecks.

is the project on schedule. 2. behind schedule. Time analysis reports. were developed in the 1950s for project control. Functional cost and hour summaries. 5. . 6. or ahead of schedule? • On any given date. Definition 4. and 8. which activities will delay the entire project if they are late? • Which are the noncritical activities – the ones that can run late without delaying the whole project’s completion? • What is the probability that the project will be completed by a specific date? • At any particular date. PERT and CPM. Work status reports. Cost breakdowns for each task. and budgets of projects. 4. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. 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. 7. costs. 3. Variance reports. what is the best way to accomplish this goal at the least cost? 4. is the money spent equal to. quality. Control programs typically produce reports detailing 1.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity.3.54 CHAPTER 4. Cost distribution tables. Raw material and expenditure forecasts. 4. less than.3.1 PERT and CPM Two methods.3 Project Controlling Project control involves monitoring resources.

5. AON associates the activity with the node whereas AOA associates the activity with the arrow.3. schedule.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3. Activity on Arrow (AOA). monitor.3 (Critical Path) The computed longest time path through a network. through the network.3. and ontrol the project. Side Note 4. See also definition 4.3. Side Note 4. p. They both follow six steps: 1.3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. See also definition 4. 53]. Define the project and prepare the WBS.3. it will do for you automatically much of what we will go through manually in this class. 6. Assign time and/or cost estimates to each activity.3. Personally. Definition 4. PROJECT CONTROLLING 55 Definition 4. Compute the longest time path. Also. in my experience. 4. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.4. Moreover. As the names describe. Draw the network connecting all of the activities.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. or the critical path.2 (Example: AON and AOA) Present Heizer’s figure 3. Activity on Node (AON) and 2.3.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set.3.2. . Develop the relationships among activities. Gantt charts are the “go to” visualization method for even very complex projects. 2.5 [1. 3. Use the network to help plan. 4.

We do this with a critical path analysis with involves a 2-step procedure. 2. . ES = max{EF of all immediate predecessors}. its LF equals its LS of the activity that immediately follows it. Follow with example 3 and figure 3. In other words. that is. 54–55].1 gives sufficient information to describe the network. – If an activity is an immediate predecessor to more than one activity. we must use time estimates of each activity to determine the overall schedule for the project. analysis used to determine the project schedule. its LF is the minimum of all LS values of all activities that immediately follow it. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. that is. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. 56]. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.9 [1.3. their dependencies. LF = min{LS of all immediate following activities}. LS = LF − Activity time. 4. • Table 3. 1.3. EF = ES + Activity time. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.56 CHAPTER 4.4.1 (Critical Path Analysis) In project management. p.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. PROJECT MANAGEMENT Side Note 4. that is. Definition 4. See also definition 4. pp. 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. – If an activity has multiple immediate predecessors. its ES is the maximum of all EF values of its predecessors.3.4 Determining the Project Schedule Once we have identified all of our activities. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.8 [1.6–3.

1.10 [1. E. Definition 4.4. we cannot complete the project in 15 weeks.1).1.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.5.4.1 (Slack Time) In project scheduling. the time shared among more than one activity. p. the time associated with a single activity. Definition 4.2 (Total Slack) In project scheduling. 57]. we may delay the project as a whole. and H have no slack time and cannot be delayed without delaying the entire project. • Terminates at the last. it is said to have free slack. Definition 4. the time devoted to one of these activities must also be reduced. p.5. Also notable is that if the total time of the project needs to be reduced. they share total slack. or the amount of time an activity can be delayed without delaying the entire project. .” Then complete Heizer example 7 figure 3. 4. Side Note 4. 1 For example. 2 For example.3 [1. if we delay activities B and D by one week each. in the example in sidenote 4.3 and Heizer figure 3.4.4. C. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.5. and • Includes only critical activities (see sidenote 4. 60]. “Notation Used in Nodes for Forward and Backward Pass. Note that activities A. the step that identifies all the earliest times that activities can be completed.5. Note also that if we delay each activity by the amount of slack that activity has. G. p.3 (Free Slack) In project scheduling.4.4. activity F in sidenote 4. These are called critical activities. the free time for an activity.13 [1.2 (Forward Pass) In project management scheduling. The critical path is one that • Begins at the first activity in the project.3. Slack time is just Slack = LS − ES or Slack = LF − EF .1 When several noncritical activities appear successively in a path. 61] based on table 3.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. If an activity2 does not impact the slack time of any other activity.

2 and 4. In reality.6. the “best” activity completion time that could be obtained in a PERT network. The beta distribution is used as a prior distribution for binomial proportions in . Definition 4. Beta distributions have two free parameters. technical considerations that were unknown at the time the project schedule was drawn up. three time estimates are used: 1. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.58 CHAPTER 4. Definition 4. The usual definition calls these alpha and beta.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.6.6.2 (Pessimistic Time) In project scheduling.6. the most probable activity completion time that could be obtained in a PERT network.1 and 4. In PERT. However.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.3 (Most Likely Time) In project scheduling. we do not.6. See also definitions 4. unexpected complexities. See also definitions 4. See also definitions 4.6. the time required to complete an activity is often uncertain due to supply problems. Definition 4. Most likely time – The most realistic estimate of the time required to complete an activity. etc. and the other uses β = β − 1 and α = α − 1 .6. which are labeled according to one of two notational conventions. in most cases..3. PROJECT MANAGEMENT 4.1 (Optimistic Time) In project scheduling.6. the project manager pulls the number “out of the air” based on their experience managing related activities.6. Side Note and 4.2.6. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. Definition 4. the “worst” activity completion time that could be obtained in a PERT network. Effectively.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.

Activity times are statistically independent 3 Source: http://mathworld. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. The above plots are for various values of (α week. 63] for activity F based on optimistic. 4 See definition 4. β) Γ(α)Γ(β) P (x) = (4. and pessimistic times of 1. and 9 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. February 21. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α.6. q) = (4. p. Total project completion times follow a normal probability distribution and 2.25 to 3.6.html.wolfram.β) with α = 1 and β ranging from 0. and 7. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.wolfram. Probability of Project Completion If we assume that 1. 4.html http://mathworld.4. most likely. 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 = 1.78 6 6 36 7 4 weeks. and .1) where B(p. 4.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. 2007. most likely.00. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.6. and pessimistic times of 1. The variance of the activity time is Variance = [(b − a)/6]2 .1]. Side Note 4.78 weeks.3 The domain is [0. The expected activity time for activity F is 3 weeks5 and the variance is 1. 8 1. p.6. 62].

6. Side Note 4.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. .3 (Example: Project Variance) Review Heizer example 9 [1.5. See also 4. 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. and within 3 standard deviations approximately 99.76 weeks approximately 16% of the time.7% of the time.6.6. 65] and figure 3. two standard deviations approximately 95% of the time.6.6. Note that the standard deviation of 1. commonly also N written σ 2 . p.6. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. the population variance var(X).60 CHAPTER 4.” Review Heizer example 10 [ weeks implies that the project will exceed the expected completion time by more than 1.6. 64].10 Determining Project Completion Time for a Given Confidence Interval A common question is.6 (Standard Deviation) The standard deviation is the square root of the variance.wolfram.html. A2– A3] “Normal Curve Areas.6.16.3) Definition 4. See definition 4. definition 4. 9 For 10 See more information. Side Note 4. p.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.4 (Using the Normal Table) Pass out Heizer Appendix I [1. see http://mathworld. pp. Definition 4.6.1.

11 Definition 4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. crash time is the shortest duration of an activity.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. Crashing a project involves a four step process: 1. • The shortened durations will actually enable us to finish the project on time. the crash cost is typically higher than the normal cost. and if you become a project manager. Project crashing is the name given to the process of rushing a project to completion. in fact.2 (Crash Time) In project management. Since activity completion times are typically shortened by adding resources. we want to do so in the least cost mannger possible. 4.1.3 (Crash Cost) In project management.7. When crashing a project.7. it may result in the project being delayed. See definition 4. crash cost is the cost required to complete an activity in the shortest time possible. Definition 4. . if certain activities off the critical path take the pessimistic time estimate or more to complete.7. See definition 4. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.7. Definition 4. we need to ensure • The amount by which an activity is crashed is.7.7. Assuming linear costs.1.4. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. permissible and realistic. you will doubtless experience one or both of these eventualities many times in your career. and • The total cost of crashing is as small as possible.4) 11 Since crashing a project often involves adding additional resources to activities. Step 1 – Compute the crash cost per week.1 (Crashing) In project management.

stop.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. as the negative impact on your career of tactfully pushing back against management is usually much less than the negative impact of a significant project delay or cost overrun. If not. Note that one activity may be on several critical paths. Step 2 – Find the critical path(s) in the project network.18–3.62 CHAPTER 4. PROJECT MANAGEMENT 2. 3. 4. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. As a project manager. Step 3 – If there is only one critical path.19. If you accept the challenge and try to rush the project to please upper management. If you find yourself needing to rush a project. you should be very wary of such pressure.7. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. 67–69] including table 3. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.2 (Example: Crashing a Project) Present Heizer example 12 [1. 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.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.7. • Advantages – Especially useful for large projects . pp. go to step 2. Step 4 – Update all activity times. Side Note 4. Side Note 4. If there is more than one critical path. the advice given in this section should be helpful. Then crash each activity by one period. If the due date has been reached. At times this may be politically infeasible. 4.5 and figures 3. Crash this activity by one period.

wikipedia.gnome. Note that most project management textbooks refer to MS Project as the software of choice for project management. 4. Information on Achievo can be found at It is perhaps the most widely known and featureful project management software Information on dotProject can be found at http://www.9 Using Microsoft Project for Managing Projects Present programs 3. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths. You may also refer to http://en.9.4.7. it is relatively expensive and the features are so numerous and complex. including open source software that is free. 70–74] with figures demonstrating MS Project USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined.achievo. Noncritical paths should be closely monitored as well. independent. they are often overkill for small. Starkweather about his impression of various alternatives.1–3. .org/wiki/List of project management software for a list of project management software or ask Dr. Information on Planner can be found at http://live.1. There are a variety of alternatives.7 [1. mediumsized projects. 12 Recall sidenote 4. However.


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

Maturity. housing long-range forecasts. Introduction. See also definitions 5. • Technological forecasts.4. CHAPTER 5.1. Generally deals with more comprehensive issues than short-range forecasts. Facility locations or expansion.2 (Economic Forecasts) In operations management.2 and 5.3 and 5. FORECASTING • Long-range forecasts – Generally more than 3 years. Capital expenditures.1.1. Useful for – – – – Planning for new products. which impacts purchases of new plant and equipment as well as development of new products. longer forecasts are needed. These concern rates of technological progress.1. These may include inflation rates. Definition 5.4. and Analyzing various operating plans. Cash budgeting. 2. and 4. money supply. Decline. and Research and development. 3. planning indicators valuable in helping organizations prepare medium. Production planning and budgeting.66 – – – – Sales forecasting. In the first two stages. Growth. Product life cycles tend to follow four stages: 1.3 (Technological Forecasts) In operations management.1 Types of Forecasts Organizations typically use • Economic forecasts. 5. and other economic indicators.1. Definition 5.1.1. long-term forecasts concerned with the rates of technological progress. and • Demand forecasts. See also definitions 5. .

Determine the time horizon of the forecast. marketing. 5. . 3.4 (Demand Forecasts) In operations management. 7.1. Gather the data needed to make the forecast.2. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 3.1. 4. 5. Validate and implement the results. Capacity – Underestimating demand can result in • Undependable delivery. Select the forecasting models. these drive a company’s production.3. capacity.1. • Loss of customers. 2. projections of a company’s sales for each time period in the planning horizon.1. Determine the use of the forecast.5.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. 5. 6. Also called sales forecasts.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. 2. • Training. and • Loss of market share. and scheduling decisions and serve as inputs to financial. and personnel planning. and • Layoffs. See also definitions 5. Make the forecast.2 and 5. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Select the items to be forecasted. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.

track the actual outcomes and compare them to the forecasts. – If someone challenges your forecast and you do not have supporting logic or documentation. – Many people try to apply ordinary least squares (OLS) regression techniques. Any quantitative approach should be complemented with a qualitative “reality check. 5. statisticians) embarrassed in front of a room full of people when presenting numerical results that don’t actually make sense based on some simple logic checks. – After making a forecast.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. – In one case. – You should be able to explain how and why you arrived at each and every number that you forecast. FORECASTING Side Note 5. ask yourself if they make sense. to inherently nonlinear systems. • Using models that are more sophisticated than the user’s understanding.2.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach.1 (The Most Common Errors in Forecasting Methodology) In my experience. based on a linear model. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. – On a number of occasions.68 CHAPTER 5. In practice.D. use something simpler. • Lack of support for the forecasts. I have seen otherwise competent people (including Ph. . you will be unable to defend your numbers. – If they do not match. figure out whether an improvement to the forecasting methodology can be made. – Before you show your numbers to others. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. • Lack of sanity checking. it is a bit of an art that mixes both. • Lack of follow-up. – If you do not truly understand the mathematics.

and · Respondents. 3. . · Staff personnel. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. 2. say. for example. · See definition 5.8. they will do so. and if they perceive there is an incentive to exaggerate.5. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. ∗ The more independent your decision makers are from economic. Moving averages require more past data to work with than. · There are three problems with moving averages 1. the more likely it is your results will be accurate. · Useful as a starting point or sanity check for more sophisticated methods. ∗ Moving averages · Simple. useful method if we can assume that market demands will stay fairly steady over time. Moving averages cannot pick out trends very well. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages.9. the naive approach.3. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. political. – Sales force composite ∗ You would be surprised how accurate your sales force can be.3. · The simplest and easiest way to estimate demand. or other incentives to over or understate demand. ∗ However. Sales people typically respond to incentives. · Requires less past data than moving averages. · See definition 5. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. be sure that the sales force is clear that their incentive is to be as accurate as possible.3.

1 Qualitative Forecasting Methods Definition 5. See also definitions (Jury of Executive Opinion) In operations management.3.3. Definition 5. and 5.5.4 (Delphi Method) In operations management.3. and 5.4. . Definition and 5.3.3. 5.3.3. See also definition 5.3.3. See also definitions 5. a forecasting technique based on salespersons estimates of expected sales. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.4. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. See also definitions 5. emotions.3.3. Definition 5. and 5.3. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.6 (Consumer Market Survey) In operations management. personal experiences.6. 5. and value system.3. 5. a forecasting technique using a group process that allows experts to make forecasts.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. · See definition 5.3. See also definition 5. 5.6.3. Definition 5.3.70 CHAPTER 5.5 (Sales Force Composite) In operations management. See also definitions 5.3. 5.

See also definitions 5.3. and are appropriate to use when the underlying average . Higher values give more weight to recent data.1) n • Weighted Moving Average – Mathematically. a simple moving average is given by demand in previous n periods Moving average = ( to 0. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.3. Mathematically.5.3. generally ranges from 0.2) See also definition 5. Definition 5. and 5. 5.3.2 Quantitative Forecasting Methods Definition 5.3.7. Definition 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. 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. That is.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3. • Simple Moving Average – Mathematically.3. Moving averages can be either simple or weighted.11. 5.3) The smoothing constant.3.10.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.3.3. FORECASTING APPROACHES 71 5. α. See also definition

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. When α = 1. Definition 5. 5. 1 See |actual − forecast| n (5. Three popular measures are 1. Mean squared error (MSE).72 CHAPTER 5.3.3 Measuring Forecast Error Once a forecast is made. Mean absolute percent error (MAPE).3.3.13). 5.4) definition 5. Definition Definition 5.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts. and 5.3. such as the mean absolute deviation (see definition 5. See also definition 5.3. exponential smoothing is equivalent to naive forecasting.3. it is good practice to compare the estimated value with the actual value as actual values become available.14.3. 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. and are appropriate to use when the underlying average is relatively stable.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. while lower values give more weight to past data.7.3. .3.12. FORECASTING is likely to change. Mean absolute deviation (MAD). 3.12).15. See also definition 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.13.3.

8) With smoothing constants α for the average and β for the trend.5) |actuali − forecasti |/actuali n (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5. MSE is given by MSE = See also definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. 100 n i=1 (forecast errors)2 n (5.3.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Definition 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. FORECASTING APPROACHES 73 Definition 5.12.3. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.11) . expressed as a percent of actual values.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.12.6) or F ITt = Ft + Tt (5. Mathematically. Mathematically.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. MAPE is given by MAPE = See also definition 5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.

1.12. Ordinary Least Squares Regression analysis is also useful for predicting trends. Compute the smoothed trend. by the formula F ITt = Ft + Tt . Compute Ft .14) . It is also commonly called linear regression analysis. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Tt with equation 5.74 or CHAPTER 5. time) (5.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. 3.10. the emponentially smoothed forecast for period t using equation 5. Calculate the forecast including trend. F ITt . The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 2.

1. Compute the average demand over all months. 5. Although there are many methods to accomodate seasonal demand.3.13 assumes a linear relationship. 3. Recall that the equation 5. 5. Find the average historical demand for each season. then multiply it by the seasonal index for that month. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. . Estimate next year’s total annual demand. during the summer months when it is common to take a vacation. Divide this estimate of total annual demand by the number of seasons. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. Deviations around the least squares line are assumed to be random. to account for seasonal changes in demand in our forecasting. Definition 5. 2. 4. such as cars and washing machines. 3. consumers often make fewer purchases of durable goods.5 Seasonal Variations in Data In most businesses.3. In the U. 2. the multiplicative seasonal model. This provides the seasonal forecast.5. we will examine one model.3. ¯ x The least squares method has several drawbacks. Most businesses experience a surge in sales around Christmas. the more uncertain it is. 1. We do that with a 5-step process..16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. demand is seasonal.S. The first step is to calculate the seasonal forecast. Compute a seasonal index for each season by dividing the historical demand by average demand.

x = (5.g.76 CHAPTER 5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.16 is y2 − a y − b n−2 xy Sy. pp.g.15) Side Note 5.16) 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 5.3.. Note that making predictions of future demand involves also making predictions about the independent variable x.17) . mathematically.g.1 (Example: Using OLS) Present Heizer example 12 [1.4. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. but x will be something other than time. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. FORECASTING 5. is given by (y − yc )2 n−2 Sy. if you are uncertain about predictions of x.. whatever uncertainties you may have transfer to your predicition of y. However. 106– 107]. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. We will use the same technique.. average local salary) (5. If there are published estimates you can cite (e. It is also called the standard deviation of the regression and.3.x = (5.3.

3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. It does not imply causation one way or the other.S. Correlation) Correlation merely means that the values of two variables are historically related. 108]. February 28. Since 1935. which is divided into two “conferences. is monopolized by the NFL. The correlation coefficient of variables x and y is given by r= See also definition 5. pp.2 with stock prices generally rising as skirts rise.9 [1. but the relationship is coincidental. football in the U. Correlation Coefficients for Regression Lines Definition 5.S. p.4 (Causation vs. Certainly.” the AFL (American Football Conference) and the NFC (National Football Conference). in all but one Year of the Pig. stock market.S. has risen.time. nor does it imply that they will continue to be related.3. Other interesting correlations that have been identified over the years include banana prices and “Four Values of the Correlation Coefficient.4 . the average length of a woman’s skirt and stock market prices in the U. have been correlated.3 and the U. the note in the margin accompanying Heizer example 14 [1. p. or National Football League. Historically.3.10 [1. Even the Year of the Pig correlates strongly with the U. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. “Distribution about the Point Estimate of $600 Million Payroll.S.3.3. 4 Source: http://www.00.html?xid=sitecnn-partner. 2007.3.S.3 (Examples of Correlation Coefficients) Present Heizer figure 4. stock market prices as well as the winner of the Super Bowl. stock markets. the U.3.S. FORECASTING APPROACHES 77 Side Note 5.18) .18. Side Note 5.1594488.” Side Note 5.3. leading stock indexes. 107].5.2 (Distribution About the Point Estimate) Present Heizer figure 4. Definition 5. changes in skirt lengths don’t cause stock market prices to rise and vice versa. 109].18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation.S.” Note that the regression assumes a standard normal distribution about the estimate.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. Dow Jones Industrial Average and Standard and Poor 500. a football game played between two football conferences in the U.8599.

if they are indeed related to the dependent variable. = the dependent variable (e. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. b1 . . p.78 CHAPTER 5.3. It is commonly simply called “R squared. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . etc. 110]. we discussed a means by which we can attempt to predict the value of one variable using the value of another. results in additional predictive accuracy as measured by r2 . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. . . . p. often the most difficult part of building a multiple regression model is to pick the independent variables. . Side Note 5. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.” For example. b2 . .3. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. 110]. In practice.. The same technique can be applied to use several independent variables to predict the value of a dependent variable.3. you would use statistics software to calculate these values. .6. b 2 .15 is given by y = a + b1 x1 + b2 x2 + .19 (Multiple Regression) A causal forecasting method with more than one independent variable.17. 5 See definition 5.18 and Heizer example 15 [1.3. The multiple regression equivalent of equation 5.g. .19) Determining the values of a. Adding additional independent variables as predictors. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. b1 .” As the sidebar points out.3. (See definition 5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. .5 Definition 5. x2 .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.

Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. In other words.8 standard deviations. and 4 M ADs to 3.4. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). MONITORING AND CONTROLLING FORECASTS 79 5. This means that the observed value should be within 2 M ADs abut 89% of the time.5.2.6 standard deviations.4 standard deviations.4. 6 Recall definition 4. three M ADs about 98% of the time.1 (A Plot of Tracking Signals) Review Heizer figure 4. .6. These limits are typically based on M ADs. Definition 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.4. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .6 One M AD is equivalent to 0.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. The tracking signals should also be compared as they are generated against limits. and within 4 M ADs about 99. p.2 standard deviations. 111].20) A good tracking signal has about as much positive as negative error. though large errors may be a problem as well even if the positive and negative errors balance. which correspond roughly to standard deviations.1.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.9% of the time. Tracking signals are typically used monitor forecasts.4. two M ADs to 1. the forecasting methodology needs to be modified.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. one of the most common problems with forecasting is a lack of follow-up. Definition 5. Side Note 5.6.11 [1.forecast| n where M AD = (5. If the tracking signals violate upper or lower limits. three M ADs to 2.

Sophisticated forecasting models are not always better than simple ones.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. you must make your own decision as to how you select the forecasting models that you use. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. which selects a model based on goodness-of-fit to a data set. is based on two principles: 1.4. changes need to be check with human eyeballs to ensure that the adjustments make sense.” .3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. you should be aware of the criticism of focus forecasting. There is no single technique that should be used for all products or services. Definition 5.10) is automatically changed to keep errors to a minimum. Definition 5. there has been much criticism of the approach to using models based on thier fit to the data. p.4. “Summary of Forecasting Formulas. Side Note 5. 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Note that even with computer monitoring.2 Focus Forecasting Focus forecasting.4.3.4. 2. 114]. α in definition 5.4.2 [1. Side Note 5. In your career. FORECASTING 5. 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.g.80 CHAPTER 5. However.4..

as an intangible. For example. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. Referring to services as products is common in the service industry.5 (Product Decision) The selection. and design of products. which will be discussed in detail later in the semester. is a service.128] • Investment and cash flow.0. 2 Recall sidenote 2. definition. pp. and • The organization’s capabilities. 1 In this chapter.1 Side Note 6. insurance companies often refer to their policies.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. as products.1 . 122–123].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. Definition 6. time permitting.2. They also use just-in-time production techniques.0. the word “product” will refer to both goods and services. Product strategy2 defines the breadth of the product line and links product decisions to [1. which. 81 . • Market share and dynamics. pp. 124. • Product life cycle.

• Introductory phase – In the introductory phase. • Growth phase – Effective capacity forecasting is necessary. Introduction. Decline.g. Life cycles can be in the days or weeks (e.g.82 CHAPTER 6.1.. • Maturity phase – Competitors have entered or are entering the market. years (e. Growth.. 6. . months (e. often ruthlessly. low-cost. products expenses are often high for – Research and development. restaurants or nightclubs).2 Life Cycle and Strategy Strategies change as products move through their life cycle. DESIGN OF GOODS AND SERVICES 6. Product strategy involves determining the best strategy for each product based on its position in the life cycle. YouTube videos). – Process modification and enhancement. and 4. • Decline phase – Investment needs to be minimized and resources need to be redeployed.. so high volume. 2.1.1 Product Life Cycles Product life cycles can be divided into four phases: 1. 3.g. and innovative production is appropriate. clothing fashions).1 Goods and Services Selection Product decisions focus on creating a competitive advantage via • Differentiation – Offering distinctly unique or high-quality products • Low cost – Providing quality goods and services at a lower cost than competitors • Rapid response – Executing rapid design and product development to respond to changing consumer demand 6. or even decades. and – Supplier development. Maturity.

1.2. 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.2. and if a company is to survive. example. the development of cellular telephone technology or the internet.3 Product-by-Value Analysis For firms with many products. Definition 6.3 • Political and legal change can also bring about business opportunities.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. as well as the total annual dollar contribution of the product. such as consumer incomes. are tied to product demand. • Economic factors.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.4 Side Note 6. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1 (Example: Brainstorming) Lead the class in a brainstorming session.000 yuan.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. 4 For 3 For . Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. Ideas are not reviewed until after the brainstorming session. it must regularly redesign existing products or bring new products to market. example. Definition 6. • Technological change often drives product innovation.2. • Sociological and demographic change is also tied to product demand.1.2.6. 6.500 or 100. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. GENERATING NEW PRODUCTS 83 6.2 Generating New Products Most products have a limited life cycle. 6.

128]. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Side Note 6.3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. DESIGN OF GOODS AND SERVICES For example.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.2 [1.3.3 [1. 129].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. Translates customer desires into a product design. Definition 6.3. Definition 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Determines what will satisfy the customer and 2. 6. Each stage should have an accompanying review to determine whether to progress or not.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. . DuPont estimates that it takes 250 ideas to yield one marketable product [1.3. and the organization’s capabilities. Side Note 6. 128].3.84 CHAPTER 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. the product life cycle. Many successful companies rely on sales from products introduced within the past five years. p. p.2. market dynamics.3 6. p. 6.

3. p. 3. design engineering. create the columns of the house in sidenote 6.2. 2.2.g. manufacturing engineering.2 (Example: House of Quality) Present Heizer example 1 [1.10 Side Note 6. An organization is divided into departments. Note that it is not free or open source. See http://www.9. e. Identify relationships between the firm’s hows. • Fixed duties exist. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.2..qfdcapture.9 6.3.3. with product features. which can be an advantage. • Perhaps the most popular approach in the U.3. there are three popular methods by which organizations undertake product development. 10 The right-hand columns of the house in sidenote 6. Evaluate competing products. Identify how the good or service satisfies customer wants.3.3.8 5.S. In other words.3 Organizing for Product Development In the West. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. Relate customer wants to product for more information. 2.2. Product development is done by teams.7 4.3. 8 These are given on the roof of the house in sidenote 6. PRODUCT DEVELOPMENT 85 Side Note 6.3. Identify customer wants.6 3. a research & development. bureaucratic companies and organizations. 6.6.. . and production departments.2. identify the rows of the house in sidenote 6. as was the software described in section 4. 1. 7 In other words.” 6 For example. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. Building the house of quality involves six steps: 1.3. • Effective communication and coordination between separate departments can be problematic. 130]. Develop importance ratings. • More common in large.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.

Some teams even include representatives from vendors. organizations are less structured and typically not divided into research and development. engineering.11 In Japan. because their fate is tied to a product.4 (Concurrent Engineering) In project development. and use.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. Side Note 6. and production stages of product development.86 CHAPTER 6. Definition 6. engineering. My experience may not be indicative of management practices in general in the U.3. However. Definition 6.3.3. use of participating teams in design and engineering activities. but my personal impression is that formal QFD practices are not widespread in practice. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. production. 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. manufacturing.4. it can also be problematic because teams. These teams often include representatives from marketing. purchasing. and field service personnel.S.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. The goals of manufacturability and value engineering are 11 See definition 6. .S..3. production.3.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. maintainability.. Side Note 6. development. etc.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.3. Definition 6. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. will often advocate for continuation of their project past the point that it is profitable for the company. quality assurance..3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. design.3. 6.

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


Part II Entrepreneurship 89 .


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

asp?NewsID=5324. you will maximize your chance of success. successful entrepreneurs know how to raise money.php?id=2018 http://www. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. pp. • Surveys and research indicates that the most common personality trait is self-confidence.92 CHAPTER 7.1 Characteristics of the Successful Entrepreneur What are the qualities that lead people to start businesses? • Most entrepreneurs feel a sense of urgency that made starting a business seem like a necessity [4. 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. Hopefully. jewelry. make lots of money quickly and with little effort. you have to convince others to believe in you. If • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. everyone would say that they want to be thier own boss. 12–13]. but a series of frustrations. March I mean believe in you enough to give you money. And by believe in you. See.1 In our discussion of entrepreneurship. for example. 2007.”’ • According to experts who have studied entrepreneurs. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. – You not only have to believe in yourself. http://wistechnology. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. – We will discuss techniques for raising money in detail later in the course. • Finally. INTRODUCTION TO ENTREPRENEURSHIP about their They may not have a realistic assessment of the risks they are undertaking when they start their businesses.ccer. and . we will discuss how to prepare to start a small business as well as manage a business early in its life. 7.

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

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

1 (What’s It Really Like?) If you wonder what running a business is really like. ask other entrepreneurs. marketing. your goal may not be realistic. Like parents.3 Setting Goals With any major endeavor. it is common to exchange “war stories” about the difficult times and sacrifices. Side Note 7. ask yourself the following questions: • Income – How much do you want to earn.” • Be realistic. When setting goals.7. and administration. or 20 years to accomplish. If you talk to an entrepreneur who has not been successful. 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. – Short-term goals are those that can be accomplished within a year. .000 yuan by July 1” is a much better goal than “raise money. try to figure out why they were not successful. • Be specific. Move on to larger goals once the small goals have been met.000 yuan and you’ve never had a job before. • Set both short-term goals and long-term goals. If your goal is to raise 1.3. “Achieve financial independence” is much better than “pay the bills.” you may not want to start a business that focuses on customer relationships. such as sales. it helps to set goals. than learning from success.” • Be optimistic. Learning from failure is as important. • Analyze Your Professional Attributes – Be aware of where you need help. advertising. “Raise 100. – Start with small goals. Consider at least a five-year time horizon. 10. When setting goals. even the successful ones will probably focus on the negative. SETTING GOALS 95 If you are not a “people person. – Long-term goals are those that may take 5. 7.000.3. if not more important. 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.

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

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

Side Note 8. Those with nose piercings would not need to remove the piercing and risk it closing. The tube could be made unobtrusive enough that it would not need to be removed for work. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. I continue to generate business ideas as a matter of habit. • They require more financing than the entrepreneur has access to. • The business would involve too much risk. It sounds silly. • They require expertise that the entrepreneur does not have. • They require business relationships that the entrepreneur does not have. most ideas are not feasible because • They would not be profitable enough. However.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. however. but it is a major complaint for female rock climbers.. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself.. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. Side Note 8. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. hollow tube. pp. people have to remove nose piercings for work or social occasions. • The ideas are easily copied and would be quickly appropriated by more able competitors. • An escrow service that arbitrages the differences in contract enforcement practices and business ethics between Scandinavia and other nations such as those which are not as highly placed on Transparency International’s Corruption Perceptions Index. . • Etc. Often times.0. • A nose piercing that consists of a small. often one or more a day.98 CHAPTER 8. 28–29]. business ideas come at a rapid rate.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4.0. etc.

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. A well-known phrase in English. it is too risky. February 17. the business took such as your family. or are otherwise discouraged. to be truly self-motivated and persistent in the way you need to succeed.1 You’ve Got an Idea. Entrepreneurs are often told their idea is flawed. or health. in the wake of 9/11. 33]. . 2007. p.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. Now What? The number one trait needed by successful entrepreneurs is perseverance. You should be realistic about risks. home. computer-controlled security cameras. His sales are now in the millions of dollars per year and the business is very profitable. 2 http://www. making just enough to get by but not much more.” That is. used as the title of at least 12 movies and television shows. 35]. 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 that they will never make it. Finally. 8. And you should not risk anything you can’t afford to lose.1. Side Note 8. “Never say die.8. Have students fill out the form on their own time. you should not let it dissuade you. Side Note 8. while you should listen to criticism that others give. However. he would never succeed. People thought he was going nowhere and generally dimissed his business.” Side Note 8. you will be spending years of your life trying to make the idea work.1.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. After all.2 is.1. thinking that if he did not succeed after a couple of years. Warnings about risk are perhaps the criticism you should consider most carefully. YOU’VE GOT AN IDEA.1. you should have “thick skin. Have students come up with examples of products that meet various criteria on the checklist. He ran the business as a one-man operation for years.


” or business-to-consumer ventures. There are two broad categories of markets: 1.Chapter 9 Defining Your Market After coming up with your idea. 9. When trying to identify your niche market. Definition 9. but you should try to target your market as specifically as possible.1. your next step is to do some market research. 101 . Businesses.0. See also 9.” or business-to-business ventures. go through the following 7 steps: 1. Consumers and 2.0.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0.0. See also 9.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Definition 9.2.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Not only do you need to decide whether you are marketing to businesses or consumers.

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

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

Falkenstein states. Side Note 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.1.” [4. The mission statement should • Be succinct. • Convey the essence of your business’s goals and philosophies. Every six months or so. you should. DEFINING YOUR MARKET 9.2 Redefining and Expanding Your Niche Lynda C. create a mission statement.3 The Mission Statement Once you have a niche. “Creating a niche is the difference between being in business and not being in business.1 (Mission Statements for Three Organizations) Review Heizer figure 2. 28] which includes mission statements for three multinational companies: 1 See section 9. p.2 [1. Falkenstein1 advises that you regularly reevaluate your niche. a few sentences at most.104 CHAPTER 9. . 79] 9. p. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business.3.

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

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

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


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




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.




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.


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.


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 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 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.

2.” [4. pp.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.10. 102–103] The questionnaire supposes that someone is going to open an interior decoration business. . RESEARCH METHODS 113 Side Note 10.2.


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

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

Determine the financial structure of the plan. but not too good. i. Determine the characteristics of the venture and its industry. Note that less than a minute on average is devoted to each step.1. not ostentatious. bear in mind that once the plan is advanced to the next stage of financing. – Binding and printing should not be sloppy. p. 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. 11.. 2 Do not underestimate the importance of this step. Determine the quality of the entrepreneurs. If you cannot impress the financier with these three steps. 2.1. or spendthrift. 6. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Read the latest balance sheet. Read the plan over casually.11. p.2 5.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. other financing professionals may spend more time analyzing the details of the plan. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. the trash can. 4. Establish the unique details of this venture. including debt or equity financing required. Kuratko suggests the following [3. 301]: • Appearance – It should look good. . While the initial read-through might be only a five-minute perusal. They will want to see something that reflects that you are neat.e. 3.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. 1. pretentious. thorough and careful. 300]. you will not even get your foot in the door and be invited to present your plan to investors. but should not be too lavish.

7. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time.3 Some Style Points Kuratko also recommends that you [3. 6. THE BUSINESS PLAN – It should be no more than 50 pages. The venture’s objectives in 3 to 5 years. 11. 2. – Inside the front cover should be a title page repeating the cover information. If you write to much. a number should be in a corner5 indicating the copy number. 5. 5 I suggest the lower-right corner. The financial forecasts. they will not read it. • The Executive Summary – Two or three pages immediately following the title page. The company’s current status. – On the title page. the date of the plan. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. 3 Note that for this class. 3. – It is worth repeating: Keep it down to at most two or three pages.3 • The Cover and Title Page – The cover should have the name of the company. The benefits to customers. Its products or services. though you should not put it in the same corner as page numbers appear. The amount of financing needed. 4 Phone number. – 40 pages is ideal. and/or web site. p. 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. address. e-mail address.118 CHAPTER 11. – It should explain 1. 4. You should use this to keep track of who has which copy. and How investors will benefit. and full contact information4 for the company.1. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. .

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

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

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


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

Adobe Reader. “How can you tell when a lawyer is lying?” The answer. they may have another version of PowerPoint. I had given it over a dozen times. of course.2. PRESENTING THE PLAN times.2. 12. • Bring paper copies3 of your presentation in case all else fails.1 (The Job Talk) Every Ph. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. You don’t want to try to figure out other people’s equipment. and even if you can figure it out. Guy Kawasaki likes to tell a different version of an old joke. By the time I gave my job talk to my eventual employer.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. Most Ph.2. In retrospect. and you don’t want something as silly as a burned-out light bulb to cost you an investor.D. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving.”2 [2. the lawyer joke. I don’t think it was quite right until somewhere between the 8th and 10th time. • Bring your own laptop. “His lips are moving. • Test the equipment the day before. p.124 CHAPTER 12.D. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. 12. There will always be glitches. Most graduates get between 5 and 15 interviews when they graduate. 2 This originally comes from an American classic. is. The original joke goes. Lexecon. Bring at least twice as many as you expect there to be people in the room. • Bring a backup thumb drive with your presentation on it. 44] Side Note 12.2 Know Your Outline Thoroughly It often helps to include key words in the outline that will help you recall examples and other details during the presentation.” 3 Color copies! . Post a copy of your presentation in a secure location on your homepage just in case. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation.

Guy Kawasaki recommends you set a timer [2. It is easy for things to get lost in the heat of the moment. it is quite the opposite. Everyone. You should be prepared for the unexpected. They may ask you something that makes you want to change your presentation. If they cannot explain it clearly. where some of the smartest people in the world worked. I always bring a pen and paper to meetings. Give your presentation to friends or family. and although you go into each presentation . you are not presenting it well. At my company in Chicago.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.2.6 So What? When you are planning your presentation. 12. AFTER THE PRESENTATION 125 Side Note 12.3 After the Presentation Each presentation will be different.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation.2. Much of the material required use of the internet. “So what?” If you cannot answer this question simply and easily. 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.2. 12. • Taking notes also makes you look conscientious. • Your audience may ask you several questions at once. 45]. 12. and each investor will respond differently.2. In general. so write things down to make sure you don’t forget. p. ask yourself after every statement you make.5 Take Notes Have a pen and paper ready and take notes during the pitch. everyone brought a pen and paper.12. 12. but in reality. Ask them what your company will do. you need to change or eliminate the statement. Stop when it goes off.3. Many people feel as if taking notes makes them look stupid.

Side Note 12. you should also realize that most most comments will be negative and most presentations are rejected. 321]: “What to do when a venture capitalist turns you down: Ten questions. Remember that persistence is the most important character trait of entrepreneurs.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Each time your are rejected improves your future opportunities.3. Be prepared for rejection and do not consider it the end of the road.126 CHAPTER 12.5 [3. p. PRESENTING THE PLAN with only success on your mind. Each negative comment gives you an opportunity to change an investor’s opinion.” .

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




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.


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


– “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.


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.

work with suppliers to improve delivery times and count inventory more often. these systems should automatically update inventory and accounting records. CHAPTER 13.1 (Turnover) When you have replaced 100% of your original inventory. the delivery cycle is the amount of time between placing an order and receiving it. • Security – To prevent theft.3. Definition 13.3 (Count Cycle) In inventory management. Definition 13. a high inventory turnover is a mark of a well-managed inventory system. the count cycle is the amount of time between counting inventory.3. Definition 13. For example.3.130 • Maintain a sales history. Definition 13.2 (Order Cycle) In inventory management. INVENTORY CONTROL When considering the purchase of a POS. • Updating product information – At the time a sale is entered. . • 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. your count cycle is 12 weeks.1 Inventory Turnover Typically.4 (Delivery Cycle) In inventory management. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item. the order cycle is the amount of time it takes to process paperwork and place orders.3.3. if you perform an inventory count four times a year. such as for volume discounts for preferred customers. be sure it’s not easy to “hack” the system. you have “turned over” your inventory. 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. To improve efficiency of inventory control. and • Improve pricing accuracy. 13.

3. 13. LIFO and FIFO are two accounting methods used to do this.13.3. it values your remaining inventory based on the prices of the least recently purchased items. See definitions 13. If there is inflation.S.4.2.4. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. Calculate your sales per square meter once per month.1. you must estimate your inventory value when you file your taxes.S.3.2 See also 13. which may result in higher taxes. The author is unfamiliar with Chinese tax codes.3..4.S. the needs period is the sum of the count cycle. If there is inflation. 13.5 (Needs Period) In inventory management. You should know how many sales per square meter per year you need to survive. Many businesses also measure turnover by measuring sales per square foot (or square meter). 2 At 3 At least this is true in the U. and 13. INVENTORY ACCOUNTING 131 Definition 13. which allows you to pay less taxes on your inventory. it values your remaining inventory based on the prices of the most recently purchased items.2. In deciding which to use.1 Buying Inventory In the process of putting together your business plan. In other words. . and delivery cycle. In the U. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. but you should at least know about LIFO and FIFO.1 (LIFO (Last In. After you have been in business your inventory control system should give you a better idea of stocking levels. first out) assumes that you sell the most recently purchased inventory first. First Out)) LIFO (last in. Definition 13.3 See also 13. order cycle.4. first out) assumes that you sell the least recently purchased inventory first.4.3. Definition 13.4. The author is unfamiliar with Chinese tax codes. least this is true in the U.4. 13. follow the recommendation of your accountant.4 Inventory Accounting Your accountant will typically handle inventory accounting.2 (FIFO (First In. First Out)) FIFO (first in.

4. three or four months. Manufacturers – Note that some manufacturers refuse to fill small orders. – The minimum may be higher for first orders to cover the cost of setting up a new account. brokers or jobbers. 13.actual inventory . • Some suppliers demand a minimum number of items per order. INVENTORY CONTROL Definition 13. and they will respond in kind.1 Dealing with Suppliers The most important thing about a supplier is reliability. Their prices are higher than a manufacturers.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. Rieva Lesonsky. Import sources – They operate like domestic wholesalers. usually one. courteous and firm with your suppliers. 2.5. Independent craftspeople 4. “Be open. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. 3.132 CHAPTER 13.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands.” . says. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . author of Start Your Own Business.5 Suppliers Suppliers can be divided into four categories: 1. 13. Distributors – Also known as wholesalers. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise.

1 (COD (or c..5.S. • Sometimes if an order is large enough. I regularly had to deal with food vendors. the supplier will pay for freight.5.13. Suppliers sometimes try to complicate pricing to their advantage. . personal interaction can work wonders. SUPPLIERS 133 13.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. If a supplier is uncertain about you. 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. do not falsify or misrepresent your financial statements. • Discounts. you should know who is liable for damage to goods in transit. At least in the U. 2.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. 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.d.5. Side Note 13.d. Ask about the freight policy before ordering. • For items being shipped. basis until you have proven yourself reliable. Definition 13. Be sure to add up • Costs. You can also present your financial statements and prospects for success.5. customers may be required to pay upon receipt of goods.o. they will put you on a c. If a supplier does not extend credit.)) Cash on delivery. and • Allowances before you make a decision. Discuss • Their negotiating technique when discussing pricing. Tips for dealing with suppliers: 1.o. Whatever you do. and • The need to be firm but fair. it is considered a felony. If you are dealing with a reticent large supplier.

INVENTORY CONTROL • Depending on whether the supplier pays frieght. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.roadway.3. 3. Seattle” to indicate that an item being shipped from Seattle is free on 6 Source: http://www. 7 Source: http://en. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.5. 5 FOB Destination changes the location where title and risk This differs from a forward order where stock is available but delivery is postponed for other reasons. 2007.html.)) Free on board. Destination)) Free on board destination.5.7 4 Source: 5 Source: http://www.5. May 19.wikipedia.b. people often say something like “f. May 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.2.html.6 See also definition 13. May 19.134 CHAPTER 13. 2007.5.3 (FOB Destination (or f. Be aware of your supplier’s priorities. 2007. Under this arrangement.5.2 (FOB (or f. See also definition 13. Definition 13.abcsmallbiz. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. . May 19. The FOB term requires the seller to clear the goods for export. Specify a cancellation date on your order forms.b. 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. As opposed to FOB. 5. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. Definition 13.o.o.o. http://www.b. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. Definition efg. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.

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

and recruiting.2 Job Description Side Note 14.1. an employee with an inflated job title may expect an inflated severance package. Side Note 14.1.1 (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. • If you have do terminate the employee. you have nothing to offer. by the time you hire your 40th employee.1 Job Analysis Before creating a job description. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed.1. etc. writing reports. . creating a job description. 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. Not only education and skills. Cleaning.1.1 How to Hire Hiring involves analyzing the job requirements. you will likely find that they will come to you at some point to demand a vice president’s salary. then want to hire someone else later at a position above them in the company. lifting. 14. they will soon expect compensation commensurate with their job title. programming. this can create several problems: • Even if the employee is grateful to have an inflated job title at first.136 CHAPTER 14.2 (Tip: Job Title Inflation) Inexperienced employers are often tempted to inflate the job title of the position they are trying to hire in an attempt to lure candidates. If you call someone a Vice President but don’t compensate them as such. • How the job will be done. However. selling. but personality traits. HIRING EMPLOYEES 14. 14. you need to consider • The physical or mental tasks involved. If you give someone a job as Vice President.. • You may not leave enough buffer above the employee. you’ll be grateful to have spent the time to go through a more formal process.

Part of retaining quality employees is the prospect of advancement.1. . then they go on to a Director position at another company. you may find they are tempted to leverage that job title to seek employment elsewhere. and • Job summary with major and minor duties. If you hire someone at the highest level of their competency. It also includes • Any educational requirements. and • Any occupational hazards. • Benefits. and • A summary description of the position. • The position of that employee in the corporate heirarchy. • Who the person reports to. Definition 14. • If you give someone an inflated job title but do not offer a salary commensurate with the title.1. • Physical or other special requirements associated with the job. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career.1. • Specialized skills or knowledge.1) and should include the personal requirements expected of an employee [4. you hire someone as Director who is not qualified to be a director.14.1. p.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. • A salary range.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4.1. p. Like a job description. 339]. you may find it difficult to give them a promotion later. • Desired experience. HOW TO HIRE 137 • There is little room for advancement. Side Note 14. If. Definition 14. 338].1 (Job Description) Job descriptions should include • A job title. it includes • The job title. for example. You may actually be doing your employee a disservice by inflating their job title.

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

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

pp.1. I have some personal recommendations: • Always check Side Note 14.6 (Hiring at Active. phone number.5 (Job Application) Present Lesonsky’s sample job application [4. if a person survives downsizing or other major changes at their former employers. • Educational background. CHAPTER 14. Due to this. If an applicant indicated they were an expert with too many technologies. • Rely on your intuition. 344–345]. this indicated to us that the applicant was not being truthful. that is a very good sign that they are a survivor. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. listed expertise in too many subject areas. and • References. so many resumes came in that an administrative assistant was asked to perform the first screening. 4 It takes time to become an expert with any sufficiently compex technology.1.140 • Look for patterns in their career. Side Note 14. Applications should ask for things such as • Name. or were too experienced. address. That typically indicates that someone cannot supply enough positive references. From the hiring process at Active. . I learned that people lie on their resumes all the time. • Special skills. did not match our requirements closely enough. She simply passed along resumes that contained certain keywords that we were looking for. • On the other we tossed those that had spelling or grammatical In the hiring process at Active. • Don’t necessarily discard resumes with some gaps.4 were not experienced enough. and e-mail address. • Work experience – As for salary information when asking about work experience • Availability. including when an applicant can work and the hours they can work. Of those we looked at.

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

“bowling. Begin with some small talk. Good candidates will do their best to put their best foot forward. First impressions are the most important.” Don’t ask yes-or-no questions. You want the candidate to talk enough to give you a detailed impression.1.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. He got the job. such as “Tell me about your last position. Hopefully they will be neat and clean. Curiously.142 CHAPTER 14. a recent debate. Then ask them about their skills and background. 349]. so much so that it is almost a clich´. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. 8 In 7 Taken . Be sure to ask open-ended questions. Discuss the job and the company. 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.” or “Tell me about a problem that you solved at your last job and the way you solved it. Side Note 14. only one of them answered.” The interviewer laughed out loud. He answered. p. and demonstrate good communication skills. friendly. Texas.” 9 This is a very typical job interview question in the United States. You should do the same. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. It is as important to get the candidate excited about your company as you want to be about them. “President of the United States.

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

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

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

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