International Business Management and Entrepreneurship Lecture Notes [2] | Sexual Harassment | Harassment

International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . . . . . . .4 3. . . . . . . . . 3. . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . Strategy Development and Implementation . . . . . . . . .3 Forecasting Approaches . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . . . . . . . 5. . .4 Adjusting for Trend . . . . . . . . .2 Build and Staff the Organization . . . . . 4. . . .3 Project Controlling .4. . . . . . . . . . . . 6 Design of Goods and Services 6. . . . . . . 4. . CONTENTS . . . . . . . . . . . . . . . .1 Identify Critical Success Factors . . . . . 5. 5. . . . . . . . . . . . . .2 Preconditions . . . 4. . . . . . . . . . . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . . . . . . . . . . . . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . .6 Variability in Activity Times . . . . . . 4. . . . . . . . . .1. . 4. .4. . 3. . . . . . . . .1. . . . . . . . . 5. . 5. . . .3. .1 Product Life Cycles . . . . . .3. . . . . . . . . . . . . . . . . . . . . 6.1 Project Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 The Project Manager .1. . . . . . . . . 3. .1. . . . . . . . . 5. . . . . .3. . . . . . . . . . . . . . . . 4. . . . . . .8 A Critique of PERT and CPM . . .3 3. 4. . . 4. . .2 Focus Forecasting . . . . . . . . . . .6. . . . . . . . . . . . . . . . . . .3. . . . .3.7 Cost-Time Trade-Offs and Project Crashing . .1. . . . . . .2 Life Cycle and Strategy . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . . . . . . . . . .2. . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . 3. .4 Determining the Project Schedule . . . . . . . . .2 Project Scheduling . .1 Qualitative Forecasting Methods . . . . . . . . . .1 PERT and CPM . . . 5. . . 5. . . . . . 4. . . . . . . . . . . . . . . . . . . . . .1 Research . . . . . . . . . . . . . . . . . 5. . . . . . 4.3.9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . .6 Associative Models . . . .4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . . . . .1. .1 Types of Forecasts . . . . . . . . . . . . . . . . . .2 The Work Breakdown Structure .3 Product-by-Value Analysis . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . 5. . . . . .5 Seasonal Variations in Data . 4. . . .1. . . 4. . . . . . . . . .1 Goods and Services Selection . . . . . . . . . . . . . . . . . . 3. . . . . . . . . . . 5. . . . . . . . .1 What is Forecasting? . .2. . . . .1 Probability of Project Completion . . . . . . . . . . .3 Measuring Forecast Error . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . .3. . . . . . . . . . 6. . . . . . .3. . . . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . . 4.3 Dynamics . .2.3.2 The Strategic Importance of Forecasting 5. . .3. . . . . . . . . .2 Network Diagrams . . . . . . .

. . . .3. .2 Research Methods . . . 95 8 Finding an Idea 97 8. .2. .2 Look and Feel . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.1 Importance of New Products . . . .1 What Am I Researching. . . . . . . . . . . . . .3. . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . Product Development . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . 12. . . . . . . . .2. .2.1. .3 Be Familiar With All Equipment to be Used 12. . . . .3 Setting Goals . . . . . . . . . . . . . . 94 7. 101 9. . .2 6. . . . . . Now What? . .1 You’ve Got an Idea. . . . . . . 12. . . . . . .CONTENTS 6. . . . . . . . 11. . . .3 Organizing for Product Development . . .5 Take Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Know Your Outline Thoroughly . . . 12 Presenting the Plan 12. . . . . . . . . .3 After the Presentation . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. .1. . . 104 10 Market Research 109 10. . . . .1 Preparing to Put the Plan 11. . . . . . . 111 10. . . . . . . . . . . . . . . . . . 110 10. . . . . . . . . . . . . . . . . . . . . . . . 6. . .3. . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . . .2. . . . . 12. . . . .4 Manufacturability and Value Engineering . . . . . . 12. . . 99 9 Defining Your Market 101 9. . 12. 92 7. 6. . .3 The Mission Statement . . . . . . . . . . . . .1 Do It Until You Get It Right . .1 Characteristics of the Successful Entrepreneur . . . . . .3 Some Style Points 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . 111 11 The Business Plan 11. .1. . . .1 The Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exactly? . . . . . . . . . . . . . . . . . . . .1 Finding Your Niche . . 12.2 The Plan Contents . . . . . . . . 6. . . .1 Product Development System . . . . 11. .2 Redefining and Expanding Your Niche . . . . . . . . . .3 Generating New Products . . . . . . . . . .1 Your Audience . . . .6 So What? . . . . 104 9. . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . .2. . . . . . . . . . .2 Some Suggestions . . . . . . . . . . . . . .1 Sources of Secondary Research . . . . . . . . . . . .2 Are You Ready? . . . . . . . . . . . . .4 The First Minute is the Most Important . . . . .

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

Part I International Business Management 7 .

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

Easterners tend to trust people after observing a pattern of consistent behavior.S.S. • Because guanxi is less important in the West. which are more strictly enforced in the West. • In general. 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. 2. Western business people may not initially trust their Chinese counterparts. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways. Which brings us to the subject of this lecture: Ethics. Definition 1. Why is corruption an important business issue? • See sidenote 1.A.A. • However.2. 3. there is a perception in the West that Chinese are hard-working and smart.1 (Ethics) The study of morality and standards of conduct. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. and Europe but a commonly accepted practice throughout the developing world. business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. Westerners rely more on contracts. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. This is something Chinese business people should be aware of. child labor was widely used. . Note that during the industrialization of the U.2..A.2 Corporate Corruption Side Note 1.2.S. • Because of this. 1.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.10 CHAPTER 1. For example. Prison labor is also considered improper in the U.1.

it is simply inefficient. 2006.2.org/policy research/surveys indices/cpi. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). For example. . – A bribe is a business expense that goes to no productive purpose and decreases profits. these are all generalizations and individuals may differ significantly from their cultural affiliations. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. they must factor additional uncertainty into their calculations. and Tyco. • On a macroeconomic level. In the words of a Beijing correspondent for “The Economist” magazine.2 (Corruption) Corruption is of concern for business people because • It increases risk. China continues a battle against corruption. Source: texttthttp://www.2. Side Note 1. which requires strict monitoring and verification of financial information. there are few if any issues which affect and infuriate so many in China as corruption. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.1 (Bribe) A price. • Of course. Definition 1.dict.transparency. witness.”[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. September 20.2. • It increases the cost of doing business. or other person in a position of trust. . September 20. reward.2 Though things are improving. 2 Source: http://www. . – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. WorldCom.org. investors in the United States had to reevaluate the risk associated with owning stock.1. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. 2006. “. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. gift. voter. – In the wake of Enron. Scandinavians are typically highly trustworthy1 but Italians are less so.

3 Source: 4 Source: http://www..2. was convicted of fraud and conspiracy and sentenced to 25 years in jail. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. and Tyco make it clear that even western developed economies have significant ethical shortcomings. succeeding Enron as the largest bankruptcy in U. 2007. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. WorldCom declared bankruptcy in July 2002. 2007.S.com/Research/15 Largest.2 (Cultural Heritage in the U. including a $2 million birthday party for his wife.S.3. Dennis Kozlowski.3.bankruptcydata. • WorldCom – Following the Enron scandal. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. In Scandinavia.1. . There is currently debate as to the effectiveness of the regulations relative to the costs.12 CHAPTER 1. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.4 – Bernard Ebbers. Side Note 1.S. While western developed economies often cite a high ethical standard. http://www. Qwest.htm. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. March 17.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. scandals such as Enron. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. was accused of looting the company to fund a lavish lifestyle. • Enron – In December 2001. the former CEO of WorldCom. Worldcom.bankruptcydata. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. See sidebar 1.htm.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Parmalat. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. • Tyco – The CEO of Tyco.S. the SarbanesOxley Act (SOX) was passed in the U. Side Note 1. March 17. a high value is placed on honesty and personal integrity.com/Research/15 Largest.3 The United States The United States has recently been rocked by a number of scandals in the business community. history.

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

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

EUROPE 15 1.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. than any other. Definition 1.4.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany.5 1. their attitudes towards bribery when working in foreign markets differs from that of the U.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. yes or no.S. particularly in upper management.7 Note that lobbyists do not have any formal power. at 40. Hodgetts et al. men are disproportionately represented in management positions. Side Note 1. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.S.4.4. with most in the top 20 among over 150 countries included in the survey.3 Lobbying by Japan Japan spends more money lobbying in the U. is the notable exception).dict.5.1..1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.5. there seems to be a glass ceiling due to social factors.5. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts. to try to influence decision-makers in any circumstance.5.org. They only have the power of persuasion. Although women have entered the workforce in large numbers in recent decades. 7 Source: http://www. politicians.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.S. . Side Note 1. 1. in an extended sense. with the purpose to influence their votes.

5. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian.com/library/glossary/bldef-glassceiling.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. • More British companies have actively sought to recruit and promote women into management. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.S. though compensation is limited relative to lawsuits filed in the U.5.5. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. Side Note 1..about.htm. yes or no. but there is a perception that there are risks and ethical considerations.16 CHAPTER 1.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. • 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. 1. 8 Source: http://careerplanning. . 8 Side Note 1. For those students who think so. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization.

6.3 (Corporate Spying) Hodgetts et al. Ethical considerations include 1. Child labor. 2. International corporate spying problems. An increase in crime and illegal business activities. pp. • Note that for every corporate spy that is caught. Bribery and other forms of corruption. An opaque legal system. p.6. company in Boulder was stolen and sold to a Chinese company. 64]. 6. Piracy and counterfeiting (see sidenote below). 5. Side Note 1. 7.S.1. Side Note 1.6. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. • Yet another case in which software from a U. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.5 billion in sales annually.2 (Piracy and Counterfeiting) Present sidenote at [5.1 (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. Prison labor. 4. Often.6. executives. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign firms.S. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 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. • A relatively stable government. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. there are undoubtedly many others that get away with it. 3. . and • A recent history of rapid economic development. [5.

education. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.S.2. provide relief in the event of humanitarian disasters.2 (Nongovernmental Organizations (NGOs)) Private.3 (Nongovernmental Organizations (NGOs)) Private.com/our company/our mission/index. 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.cfm for more detail. “. . In the words of a Beijing correspondent for “The Economist” magazine. and the environment.18 CHAPTER 1. Definition 1. China continues a battle against corruption.7. health. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. such as education and health care. and economic issues such as poverty. social justice. • CARE (promotes community development. political.benjerry. . and the environment. a grocery chain. health.7. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). there are few if any issues which affect and infuriate so many in China as corruption. Other companies. education.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. and promotion of social equity). BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.7 Corporate Social Responsibility Definition 1. and emergency relief in the event of humanitarian disasters). social justice. Side Note 1.. and economic issues such as poverty. . such as Whole Foods.4 (Corruption) Though things are improving.7.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. 1. political. Definition 1. not-for-profit organizations that seek to serve society’s interest by focusing on social.2. See http://www.7. not-for-profit organizations that seek to serve society’s interest by focusing on social.”[6] See also sidenote 1. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.

but does not outlaw payments to political party leaders. • And. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. as it gives the U. firms a reason to refuse to pay bribes.1 Corruption and the FCPA Revisited Hodgetts et al. Side Note 1. firms are constrained by the FCPA with regards to bribery and other corrupt practices. with a score of 3. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. MNCs do not appear to have been significantly impacted. as executives of publicly traded companies are ultimately responsible to their shareholders. • Conservation International (promotes environmental conservation). • To prevent a boycott or other consumer defections.000 and $125. Both political groups and businesses are influenced by NGOs. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. In 2005.9 U.S. 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.S. many feel that it has had a net benefit.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising.2. last but note least.S. note that while U.7. Side Note 1. Executives are people.7. In fact.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. For example. . executives may actually feel that it is the right thing to do. too.7. China ranked 78 out of 158. – Even socially responsible executives would consider the “bottom line” when making decisions.7.1. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). and • Rainforest Action Network (RAN).000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. 1.

Moreover.com/ipa/A0781359.N. Global Compact specifies 10 principles which MNCs should abide by: 1. 1.0 is considered to be the borderline at which countries are considered to have a problem.7. but most important first step is to recognize that there is a problem. more Chinese will own stock in companies. WorldCom. slightly better than Sweden. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.7. the United States and Europe have recently been rocked by corporate corruption. with a score of 8.html.infoplease.4 (Some Opinions) Personally. better than the U. Hong Kong is number 15. and Parmalat resulting in investors losing billions of dollars.3. and not based on hard data. With more disciplined corporate governance. Tyco. Important: Although it is widely cited. July 1. Global Compact. The government is actively addressing the issue of corruption. 2. 5. I think corruption will diminish as China economically develops for several reasons: 1. With greater financial transparency. Singapore is number 5 with a score of 9.10 Corruption is certainly not endemic to Asia. Scandinavian countries are at the top of the list. Side Note 1. and Germany at 7. It is a difficult problem to solve. such as the U. 10 http://www.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. 4.5 (Table 3-1: Principles of the Global Compact) The U.20 CHAPTER 1. Commitments that many MNCs have signed on to. Side Note 1. As more state-owned businesses become privatized and the size of the middle class increases. malfeasance and diversion of corporate funds becomes increasingly difficult. . and the environment. societies.6 and 8.N. Support and respect the protection of international human rights.4. The government recognizes that it is an issue and is taking action. with scandals such as Enron. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. 2006.S.7. It cannot be considered to be based on a scientific survey. specify standards and codes of conduct in domestic and global operations.2 respectively. 3.

. 21 3. Ensure that MNCs are not complicit in human rights abuses. Undertake initiatives to promote greater environmental responsibility. 9.1. CORPORATE SOCIAL RESPONSIBILITY 2. 6. . 8. Elimination of discrimination with respect to employment and occupation. Encourage development and dissemination of environmentally friendly technologies. A precautionary approach to environmental challenges. and 10. Freedom of association and recognition of the right of collective bargaining (i. Elimination of all forms of forced and compulsory labor. Elimination of child labor.e. 5. Business should work against all forms of corruption. 4. the right for unions to exist). including extortion and bribery. 7.7.

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

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

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

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

p. • Government. 11]. the services sector is by far the largest employer. • In most western economies. for others professional occupations. • Food and lodging. economic output. Today.3. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. Definition 2. 9] • Repair and maintenance. major contributions have come from the field of information sciences. 2 The average national private industry wage. Manufacturing was dominant until about 1950 or so.3.S. and other essentials for its citizens. the economy transitioned from agriculture to manufacturing around 1900. such as the legal profession or computer services in the financial industry.2. • In some service industries.3 (Information Sciences) The systematic processing of data to yield information.S.S. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. 2. such as retail.. • Insurance. Bureau of Labor Statistics defines services to include [1. the wages are considerably above average.28 CHAPTER 2.5 [1. shelter. In the U.S. • Transportation.1 (Services) Those economic activities that typically produce an intangible product.1 (Development of the Service Economy) Present Heizer figure 1. • Recently. services become increasingly important. However.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. The U. Side Note 2. services account for over 70% of U. Definition 2. .. • Trade. p. average wages are below average2 in the U.

. used in your treatment. 29 Side Note 2. • Services are often produced and consumed simultaneously.3. • Services have inconsistent product definition. • Real estate. • Education. the purchase price may include installation services. • Services are often dispersed. Legal advice is rarely identical for two clients.2. • Legal. This is important insofar as there is no inventory. THE SERVICE SECTOR • Financial. • Services have a high consumer interaction.2 (Pure Service) A service that does not include a tangible product. Note that many goods include services and many services include goods. Definition 2. • Services are typically intangible. • Medical. • Services are more often unique.3. Customers seek services through local intermediaries.3. • Entertainment. Consumers interact with those providing the service. • Services are often knowledge-based. when going to a restaurant. When buying a computer. Therefore it is difficult to automate.2.3.3 That is. See definition 2. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. • Other professional occupations.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. 3 Services that do not include a good as a component are called pure services. such as pharmaceuticals or medical supplies. a support contract in case you have problems or training to familiarize you with the features of the computer. Hospital care includes both health services and goods.

reusable. .1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. p. wherever and whenever needed. brought about in part by the internet. Trends that Heizer and Render identify [1. 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.5. OPERATIONS AND PRODUCTIVITY 2. • Empowered employees – With the rise of services and knowledge products. parts. or recyclable products or to minimize packaging and other wasteful production steps. • Mass customization – With increases in technical capabilities and customerlevel information management. Globalization has been having a dramatic impact on operations management and in the future.30 CHAPTER 2.2.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. or management). • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. Operations managers are being challenged to produce biodegradable. Definition 2. the next step in product development involves customizing products according to the customer’s preferences. • 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. operations managers are increasingly responsible for innovations that move ideas. it will continue to strongly impact the field.2. operations managers are responding by moving decision making to the individual employee. 2. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. and finished goods rapidly. capital.

Side Note 2.2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Definition 2.5. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). . The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. p.4 (Total Factor Productivity) See definition 2.5. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. but overhead is no $800/day.25 titles per labor-hour = 0. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.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. Also known as total factor productivity. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Side Note 2.5.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.3. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Consider today’s computers versus those from the 1970s. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5. 15].0077 titles per labor-hour = 0. In order to improve productivity.5.5.4375 titles per labor-hour = 0. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Definition 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.5.

• Units of measure – There may not be appropriate units of measure.S. Labor In the U. – This can be a particular problem in the service industry. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. of course. – Not all cars are the same. it may improve productivity. 3. spreadsheets. Capital.) The screen had only one color. where quality and other factors vary widely or the level of service provision includes items difficult to measure.32 CHAPTER 2.5. capital. and the arts and science of management.. If the public electricity provision increases in quality. A Toyota Corolla is a much different car than a Porsche 911 Turbo. the public provision of electricity is highly variable. Management.5 (Productivity Variables) In operations management. Labor.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. you had to write a program from scratch. 2. green. such as convenience or safety. – For example. about 10% of the annual improvement in productivity is due to increases in labor productivity. (It used audio tapes for memory storage. Definition 2. or other commercial software available. no word processors. in Cambodia. If you wanted the computer to do something. . The electricity often goes out in the middle of the day and the current may vary in strength. and was about the size of my hand. Labor productivity has increased due to • Better-educated. the three factors critical to productivity improvement – labor. • 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. There were. 2.5.

and 33 3. there is considerable concern over teaching of basic skills such as mathematics to grade school children.S. 16]. draw the rectangle on the blackboard. Social overhead that makes labor available. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. maintaining and enhancing the skills of labor.5. What is the area of a 4 × 6 meter rectangle. In developed nations. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.. Side Note 2. “About Half of 17-Year-Olds in the U. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. and math. such as transportation and sanitation. Cannot Correctly Answer Questions of This Type.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. 2. p. Which of the following is true about 84% of 100? 4 When presenting this question. . Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.S. The primary variables for improving labor productivity include 1.5.” In the U. writing.2. Diet of the labor force.S. and 4.3 (The State of Education in the U.8 [1. and • Healthier workers as well as • A shorter work week.) Present Heizer figure 1. THE PRODUCTIVITY CHALLENGE • Better-nourished. Basic education appropraite for an effective labor force.

however. and knowledgeable employees and operations managers are responsible for ensuring that technology..4 (Management as an Input) Because this is a course in business management.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.S.5. According to Heizer [1. productivity in the service sector has not increased as rapidly as with the production of goods. are utilized effectively. and knowledge. 2.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.S. management is considered as a separate input. educated. as well as capital. Developed economies (also known as post-industrial economies) require trained. and because the author of the textbook is writing about operations management. Definition 2.5.5.S. p. Note that there is a trade-off between capital and labor in most industries. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. 2. in the U. graduate programs and the students they produce remain the best in the world. 17].5.34 CHAPTER 2.5% after allowances for depreciation. U. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Side Note 2.5. Note that in classic economic analysis and other areas of business. has increased at about an average of 1. Difficulties arise because service-sector work is .2 Capital Capital investment in the U.4 Productivity and the Service Sector Historically. management is not always identified separately from labor as an input. education. and the cost of capital depends on interest rates. 2.

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

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

p. • Provide additional insights and opportunities.1 Mission Whether large or small. FedEx. FedEx is committed to our People-Service-Profit philosophy. Definition 3. We will produce outstanding financial returns by providing totally reliable. global organizations can attract and retain better employees. Missions state the rationale for an organization’s existence. competitively superior. an understanding of cultural differences in preferences is needed to best meet customer needs. and • Increase sales. 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. time-certain delivery. Side Note 3.1 (Mission Statements for Three Organizations) Review Heizer figure 2.38CHAPTER 3.2 [1.1. 28] which includes mission statements for three multinational companies: 1. 4. France.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.1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. 3. global air-ground transportation of high-priority goods and documents that require rapid. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1. 3. Attract and Retain Global Talent – By offering more employment opportunities. 6. Provide Better Goods and Services – For companies doing business in an international setting.1 (Mission) The purpose or rationale for an organization’s existence. Equally important. I recommend that all companies draft a mission statement. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. • Perfumers tend to concentrate in Grasse. 5.

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

Side Note 3.2 (Strategy) How an organization expects to achieve its missions and goals. See http://www.” Note that mission statements are used not only at the company-wide level. 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.benjerry. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. but can be used at the department level and even at the project level. more responsive products or services.cfm for more detail. • Availability of complementary products. 2. • The “look and feel” of the product. the Operations Function.1. Cost leadership – Providing cheaper products. Differentiation – They make their product better. Definition 3.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.1. • Training.3 (Sample Mission Statements) Present Heizer’s figure 2.1.1. Differentiation can arise from anything that the customer may value about a product or a services. the creation of a unique advantage over competitors. be it • Product features. . and Major Departments in an Operations Function.com/our company/our mission/index. Responsiveness – By providing timelier. Definition 3. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.40CHAPTER 3. • Interoperability with other products. 3.3 (Competitive Advantage) In operations management.3: “Sample Missions for a Company. 3.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

Definition 3. The purpose of this process is to 1.2 (Critical Success Factors) In operations management. The operations manager’s job is a three-step process: 1. Identify a strategy and critical success factors. “Strategy Development Process. those activities or factors that are key to achieving competitive advantage. and Threats) analysis to develop strategies. Definition 3. 37]. . Increase productivity. then • Form a Strategy. Staff the organization with personnel that will get the job done. and 3. 3. Opportunities. and 3. Weakness. then determine whether the organization does these things well (and. • Determine Corporate Mission. 2.3. determining internal strengths and weaknesses and external opportunities and threats. p. 2. Provide competitive advantage.1 (SWOT Analysis) In operations management.3. if the firm has a competitive advantage in these things) and where failures are most likely.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.1 (Strategy Development Process) Present Heizer figure 2. in particular.3.6 [1.44CHAPTER 3. Implement an OM strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Side Note 3.3. These critical success factors are used to develop a competitive advantage.” The process of developing a strategy involves the following steps: • Environmental Analysis. Group the necessary activities into an organizational structure.

MIS. finance.3. 5 Management 6 Human Information Systems Resources. Definition 3. Southwest Airlines has a competitive advantage in providing low-cost airfares. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.3 (Activity Map) In operations management. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. p.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.1 as a checklist to determine critical success factors. an activity map can be used to link an organization’s competitive advantage to the CSFs.6 3. and supporting activities.2. OM activities are most productive when they are integrated with other activities such as marketing.4. CSFs. .5 and HR.1. Side Note 3. Recall the “org charts” in sidenote 2. Once CSFs are determined.3 Integrate OM With Other Activities In order to achieve its strategy. • Red arrows – critical success factors • Blue arrows – support activities 3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. 39].3. 3. a graphical link of competitive advantage.3.3.2 as examples of how firms organize their activities.3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.

4. See definition 3. or joint ventures with substantial independence. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.3 (International Strategy) In operations management. 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. • Texas Instruments is an example of a country with a global strategy.5 (Global Strategy) In operations management.3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4. a strategy that uses exports and licenses to penetrate the global arena. but a good strategy for cost reduction when products do not need to be adapted locally. Only 10% of its work force is Swiss. International strategy – Often the easiest strategy. with beer on the menu in Germany. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. Definition 3. Also one of the least profitable due to transport costs and little local responsiveness. Global strategy – Not characterized by local responsiveness.4. In the semiconductor industry. Its menu reflects the country in which it operates.4 (Multidomestic Strategy) In operations management. Although e it is legally Swiss. 2. .4. 95% of its assets and 98% of its sales are made outside Switzerland. franchises.46CHAPTER 3.4.4.4. and hamburgers without beef in India.4. Definition 3. 42] Definition 3. See definition 3. wine in France. See definition 3. 3.1 (International Business) A firm that engages in cross-border transactions. • Nestl´ is an example of a country with a transnational strategy. p.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. products do not need to be localized.4. as exports require little change in operations and licenses often leave risk with the licensee.5. Definition 3. owning or controlling facilities in more than one country. [1. Usually does not confer a cost advantage. Definition 3.4. Typically characterized by subsidiaries.4. • McDonald’s is an example of a country with a multidomestic strategy.6. See definition 3.

Note that many companies that are well-known American brands are now making more money overseas than they do in the U.4.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.6 (Transnational Strategy) In operations management. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.4..S. Side Note 3. 6]. 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 .4. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.3. p.

48CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .

Scheduling.1 [1. p. Scheduling – People. 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.Chapter 4 Project Management Side Note 4. Even Microsoft. quality. Controlling – Monitoring of resources. costs. the largest software company in the world.0. and Controlling) Present Heizer figure 3. 49]. pp. Plans are also revised to meet changes in time and cost demands. Side Note 4. and budgets.3 (Project Planning. 49 . 46–47]. 2. and supplies are tasked to specific activities and activities are related to each other.0.0.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Project management involves three phases: 1. The profile highlights the importance of project management in achieving competitive advantage. 3. Planning – Goal setting.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. defining the project. Side Note 4. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. money. and team organization.

The project cuts across organizational lines. 4. 4.5 (Personal Advice on Project Management) Project management is a tricky profession. If you become a project manager on projects of significant complexity. 3. you will be confronted with a daunting task. Moreover. PROJECT MANAGEMENT However. The responsibilities of project managers are to make sure that . you should always expect the unexpected. 2. The work contains complex interrelated tasks requiring specialized skills. See also Heizer sidenote “Project Management and Software Development.” [1.1 Project Planning While many projects are run within an existing organization. p.1 The Project Manager As alluded to in sidenote 4. Work can be defined with a specific goal and deadline. it is also an area in which there will continue to be high demand for qualified people.0. p. you are doing your job well if noone notices the project management. Definition 4. Your job is to make things go smoothly and according to plan. You may be managing resources far in excess of your individual salary. and/or 5.0. it is very obvious and can be very costly. Project organizations work best when [1. 69]. However.1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. The job is unique or somewhat unfamiliar to the existing organization. The project is temporary but critical to the organization.5.1. often times. a temporary project organization is formed to address a specific project. project managers are highly visible in a firm and have significant responsibilities. 4. and you will be forced to improvise. Side Note 4. In a sense. 48] 1. things you thought were certain turn out not to be.50 CHAPTER 4. People will not come through with what they promised. if things go wrong.

Approve software architecture for user account input web page functionality . a web page takes about a day to build for an experienced team. Approve graphic design for user account input web page 4. dividing a project into more and more detailed components. The project meets its quality goals. Review software architecture for user account input web page functionality 6.1.1. Complete software architecture for user account input web page functionality 5.1.2 (Work Breakdown Structure (WBS)) In operations management. in a software engineering project. All projects come in on time.1. When dividing a project into tasks. Complete graphic design for user account input web page 2. 2. you have divided the tasks too finely.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. 51 4. In a project that includes allowing a user to enter personal information on a web page. 3.2 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).4. Review graphic design for user account input web page 3. Side Note 4. For example. a task that should only take a day or so. The project is on or under budget. Definition 4. People receive motivation and information necessary to do their jobs. PROJECT PLANNING 1. and 4. • Build the user account input web page is a much better task division than 1. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.

3 [1.2. which we will discuss next in section 4. Show the relationship between each activity to others and to the whole project 2.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Activities (also known as “work packages”) to be completed Side Note 4. At the time you are creating the work breakdown structure. Side Note 4. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. fill hundreds if not thousands of pages. 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. you should also take note of time and cost estimates given by your technical staff. Identify precedence relationships among activities 3. of course. Scheduling serves to 1. Write software for user account input confirmation page functionality 9. p. it is time to assign people and materials and estimate the time and perhaps the cost of various activities.2 (Work Breakdown Structure) Present Heizer figure 3. Project 2.52 CHAPTER 4. Subtasks in major tasks 4. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. They will be useful for project scheduling. Encourage realistic time and cost estimates for each activity . The actual WBS for Windows XP would. Write software for user account input web page functionality 8.1.1. the work breakdown structure is not something you go to your office to do in isolation. Major tasks in the project 3. 4.3 (Reality Check: WBS) In reality. PROJECT MANAGEMENT 7.

Activity time estimates are recorded. However.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. PROJECT SCHEDULING 53 4. All activities are planned for. and other values to each activity. Side Note 4. and 4.” This will give the class an idea of the look and feel of a typical Gantt chart. cost estimates. and CPM) Inexperienced project managers often feel the need to use Gantt.2.2 (Using Gantt. 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 . Perhaps they imagine that they are not doing their jobs professionally if they are not. Derives from the typical shape of a bottle. PERT.2. PERT and CPM help answer questions such as • When will the entire project be completed? . Make better use of people. 51]. right by the bridge. and material resources by identifying critical bottlenecks in the project Side Note 4. Definition 4. PERT.2. The order of performance is accounted for. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. For smaller projects.2. Gantt charts are perhaps the most widely used tool for ensuring that 1. as. – said of roads. Definition 4.4 [1. which becomes narrower as one approaches the neck of the bottle. these should be considered merely tools to be used when they are useful by saving time or energy. Overall project time is developed. It can actually be quite time consuming to create and maintain Gantt charts.2. the road bottlenecks. PERT and other formal documents. 2. and CPM tools for every project management activity.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. 3. p.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. moeny.4. MS Project’s Gantt chart functions demand you assign employees.

7. Work status reports. less than. Definition 4. 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. or ahead of schedule? • On any given date. is the project on schedule.3 Project Controlling Project control involves monitoring resources.1 PERT and CPM Two methods. Cost breakdowns for each task. Functional cost and hour summaries. Time analysis reports. quality. Total program labor curves. is the money spent equal to.3. and 8.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. 6. Cost distribution tables. Raw material and expenditure forecasts. behind schedule. Control programs typically produce reports detailing 1. 2. costs. 4. 5. 4. and budgets of projects. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. PERT and CPM. 3.3. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.54 CHAPTER 4. what is the best way to accomplish this goal at the least cost? 4. . Variance reports. were developed in the 1950s for project control.

it will do for you automatically much of what we will go through manually in this class. 4. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. schedule. through the network.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. Personally. Use the network to help plan.3.3 (Critical Path) The computed longest time path through a network. Activity on Arrow (AOA). See also definition 4. Gantt charts are the “go to” visualization method for even very complex projects. Assign time and/or cost estimates to each activity. Define the project and prepare the WBS. AON associates the activity with the node whereas AOA associates the activity with the arrow.3. and ontrol the project.3. or the critical path.5 [1. Activity on Node (AON) and 2.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. Draw the network connecting all of the activities.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3. Compute the longest time path.2. They both follow six steps: 1. monitor. 53]. Definition 4. Develop the relationships among activities. .3.4. See also definition 4. Moreover. p.2 (Example: AON and AOA) Present Heizer’s figure 3. 6. 2. As the names describe. 4. 3.3. Also.3. 5. Side Note 4. in my experience. Side Note 4.3. PROJECT CONTROLLING 55 Definition 4.

– If an activity is an immediate predecessor to more than one activity.3. ES = max{EF of all immediate predecessors}. analysis used to determine the project schedule. that is. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. PROJECT MANAGEMENT Side Note 4.3. we must use time estimates of each activity to determine the overall schedule for the project.56 CHAPTER 4.3.9 [1.4 Determining the Project Schedule Once we have identified all of our activities. In other words. We do this with a critical path analysis with involves a 2-step procedure. its LF equals its LS of the activity that immediately follows it. LS = LF − Activity time. • Table 3. Definition 4. .3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. 56]. p. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. that is. its LF is the minimum of all LS values of all activities that immediately follow it. 2.4. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 1. EF = ES + Activity time.1 gives sufficient information to describe the network.1 (Critical Path Analysis) In project management. – If an activity has multiple immediate predecessors. its ES is the maximum of all EF values of its predecessors. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. See also definition 4. 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. 4.8 [1. LF = min{LS of all immediate following activities}. 54–55]. Follow with example 3 and figure 3. that is. their dependencies.6–3.

4. Note that activities A.2 (Forward Pass) In project management scheduling. The critical path is one that • Begins at the first activity in the project.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.4.1 (Slack Time) In project scheduling. p.2 (Total Slack) In project scheduling.3 [1.5. activity F in sidenote 4.5.4. we cannot complete the project in 15 weeks. G. p. the free time for an activity. 57]. Note also that if we delay each activity by the amount of slack that activity has.3. These are called critical activities. or the amount of time an activity can be delayed without delaying the entire project.4. “Notation Used in Nodes for Forward and Backward Pass. 1 For example.1.5.5.1.4. If an activity2 does not impact the slack time of any other activity. . 4.3 (Free Slack) In project scheduling. Also notable is that if the total time of the project needs to be reduced. • Terminates at the last.1 When several noncritical activities appear successively in a path. the time associated with a single activity. we may delay the project as a whole. Slack time is just Slack = LS − ES or Slack = LF − EF . and • Includes only critical activities (see sidenote 4. it is said to have free slack.3 and Heizer figure 3.10 [1. 61] based on table 3.1). 60].1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.13 [1.4. and H have no slack time and cannot be delayed without delaying the entire project. 2 For example. C. Definition 4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. the time shared among more than one activity. Side Note 4.” Then complete Heizer example 7 figure 3. they share total slack. the step that identifies all the earliest times that activities can be completed. E. p. Definition 4. Definition 4. the time devoted to one of these activities must also be reduced. in the example in sidenote 4. if we delay activities B and D by one week each.

1 (Optimistic Time) In project scheduling.3.3. Definition 4. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. In PERT.1 and 4. the most probable activity completion time that could be obtained in a PERT network. which are labeled according to one of two notational conventions. Beta distributions have two free parameters. the time required to complete an activity is often uncertain due to supply problems. Definition 4.6.6. we do not. Most likely time – The most realistic estimate of the time required to complete an activity. Effectively. etc.1 and 4. See also definitions 4.6. Side Note 4. However.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. In reality. the “best” activity completion time that could be obtained in a PERT network. unexpected complexities. The beta distribution is used as a prior distribution for binomial proportions in .6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. Definition 4.6.6. in most cases.6. PROJECT MANAGEMENT 4.2 (Pessimistic Time) In project scheduling. and the other uses β = β − 1 and α = α − 1 .6. The usual definition calls these alpha and beta. the project manager pulls the number “out of the air” based on their experience managing related activities.58 CHAPTER 4. See also definitions 4.. technical considerations that were unknown at the time the project schedule was drawn up. the “worst” activity completion time that could be obtained in a PERT network.6.6. Definition 4.6. three time estimates are used: 1. See also definitions 4.6.2 and 4.2.3 (Most Likely Time) In project scheduling.

25 to 3. 2.00 week. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. p.1) where B(p.6.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.html. most likely.3 The domain is [0.6.78 6 6 36 7 4 weeks. The variance of the activity time is Variance = [(b − a)/6]2 . 4 See definition 4. most likely.1]. and . and 7. 2007.78 weeks. and 9 weeks. 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.com/BetaFunction. 4. 62]. β) Γ(α)Γ(β) P (x) = (4. 8 1. Activity times are statistically independent 3 Source: http://mathworld.4. q) = (4. and pessimistic times of 1.4. and pessimistic times of 1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.com/BetaDistribution. The expected activity time for activity F is 3 weeks5 and the variance is 1.β) with α = 1 and β ranging from 0. February 21. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. p. 63] for activity F based on optimistic.6.1 Probability of Project Completion If we assume that 1.6. Total project completion times follow a normal probability distribution and 2. 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.html http://mathworld. Side Note 4. 4.00. The above plots are for various values of (α.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.wolfram.wolfram.

76 weeks approximately 16% of the time.6 (Standard Deviation) The standard deviation is the square root of the variance. pp. See also 4.3) Definition 4.5.6.9 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. Side Note 4.76 weeks implies that the project will exceed the expected completion time by more than 1.wolfram. see http://mathworld. A2– A3] “Normal Curve Areas.16.6. commonly also N written σ 2 .com/StandardDeviation. 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.6.60 CHAPTER 4.6. “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 4.1.6.6. Side Note 4. p. Definition 4. 65] and figure 3.6.” Review Heizer example 10 [1. . 64]. p. See definition 4.6. and within 3 standard deviations approximately 99. Note that the standard deviation of 1.6. definition 4.6. two standard deviations approximately 95% of the time. the population variance var(X).4 (Using the Normal Table) Pass out Heizer Appendix I [1.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.10 Determining Project Completion Time for a Given Confidence Interval A common question is. 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. 9 For 10 See more information.7% of the time.html.

7. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. crash cost is the cost required to complete an activity in the shortest time possible. Step 1 – Compute the crash cost per week. we want to do so in the least cost mannger possible.11 Definition 4. and if you become a project manager.4. Definition 4. you will doubtless experience one or both of these eventualities many times in your career.7.3 (Crash Cost) In project management. Crashing a project involves a four step process: 1. Project crashing is the name given to the process of rushing a project to completion.7.7. if certain activities off the critical path take the pessimistic time estimate or more to complete. Since activity completion times are typically shortened by adding resources. Definition 4. See definition 4. crash time is the shortest duration of an activity.2 (Crash Time) In project management.1 (Crashing) In project management. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. in fact.7. and • The total cost of crashing is as small as possible.7. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. it may result in the project being delayed.1. See definition 4. .4) 11 Since crashing a project often involves adding additional resources to activities. the crash cost is typically higher than the normal cost. permissible and realistic. 4. • The shortened durations will actually enable us to finish the project on time.1. When crashing a project. Assuming linear costs. we need to ensure • The amount by which an activity is crashed is.

pp. If the due date has been reached. If there is more than one critical path.62 CHAPTER 4. 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.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. 3.18–3. Note that one activity may be on several critical paths.19.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates. 4. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. go to step 2. Then crash each activity by one period. If not.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. At times this may be politically infeasible. Step 2 – Find the critical path(s) in the project network. Step 3 – If there is only one critical path. stop. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. • Advantages – Especially useful for large projects . 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. the advice given in this section should be helpful.7. PROJECT MANAGEMENT 2.5 and figures 3. Side Note 4. Step 4 – Update all activity times. If you accept the challenge and try to rush the project to please upper management. 4. 67–69] including table 3. If you find yourself needing to rush a project. Side Note 4. Crash this activity by one period. As a project manager. you should be very wary of such pressure.2 (Example: Crashing a Project) Present Heizer example 12 [1.

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

PROJECT MANAGEMENT .64 CHAPTER 4.

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

Maturity. Capital expenditures.2 and 5. and • Demand forecasts. 5.to long-range forecasts. • Technological forecasts.1. and 4. longer forecasts are needed. and Analyzing various operating plans. CHAPTER 5.3 and 5. Useful for – – – – Planning for new products.3 (Technological Forecasts) In operations management. Cash budgeting.4. Product life cycles tend to follow four stages: 1. 2. FORECASTING • Long-range forecasts – Generally more than 3 years. Generally deals with more comprehensive issues than short-range forecasts. planning indicators valuable in helping organizations prepare medium. Production planning and budgeting. housing starts. See also definitions 5. Definition 5. In the first two stages. These concern rates of technological progress. long-term forecasts concerned with the rates of technological progress. and Research and development. .1. See also definitions 5. Decline.1.2 (Economic Forecasts) In operations management.1. Definition 5. These may include inflation rates.1. Facility locations or expansion.1 Types of Forecasts Organizations typically use • Economic forecasts. 3.66 – – – – Sales forecasting. Growth. money supply. which impacts purchases of new plant and equipment as well as development of new products. Introduction.1. and other economic indicators.1.4.

See also definitions 5.2 and 5. 6. Determine the time horizon of the forecast.1. 5.5. and personnel planning. Gather the data needed to make the forecast. 5. Select the items to be forecasted. • Loss of customers.1. marketing. projections of a company’s sales for each time period in the planning horizon. 4. 2. Validate and implement the results. Select the forecasting models. capacity. and • Loss of market share. Determine the use of the forecast. and • Layoffs. 2.2. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 7.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.3.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Make the forecast. 3.4 (Demand Forecasts) In operations management.1. Human resources – Anticipated demand is needed to estimate the need for • Hiring. and scheduling decisions and serve as inputs to financial. these drive a company’s production. • Training. 3. Also called sales forecasts.1. 5. Capacity – Underestimating demand can result in • Undependable delivery. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. .

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

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

3.3.3 (Jury of Executive Opinion) In operations management. a forecasting technique based on salespersons estimates of expected sales.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. and 5.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.10.5.3. and 5. · See 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. 5. See also definitions 5. See also definitions 5. and 5. See also definition 5. 5. and value system.70 CHAPTER 5.5 (Sales Force Composite) In operations management.5.4. emotions.4 (Delphi Method) In operations management. Definition 5.4.3.6. a forecasting technique using a group process that allows experts to make forecasts. See also definitions 5.2.3.3.4. 5. See also definitions 5.3.3.3. Definition 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.6. .1 Qualitative Forecasting Methods Definition 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.3.5.3.3. personal experiences.6 (Consumer Market Survey) In operations management. 5. See also definition 5. 5.1.3.3.3.3. Definition 5.3.3.3.3.3. Definition 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.6.

Higher values give more weight to recent data.11.3. 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. Mathematically.5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.5.7.3. See also definitions 5.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.10. 5. α.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. Definition 5.3. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.9. FORECASTING APPROACHES 71 5. Definition 5.1) n • Weighted Moving Average – Mathematically.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.05 to 0.3.3. a simple moving average is given by demand in previous n periods Moving average = (5. Moving averages can be either simple or weighted. and are appropriate to use when the underlying average .3.3. and 5.3.3. Definition 5.7. • Simple Moving Average – Mathematically. generally ranges from 0. See also definition 5.3.2 Quantitative Forecasting Methods Definition 5.3.3) The smoothing constant.8.2) See also definition 5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. That is.

13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.8.12.3.13. . Mean squared error (MSE). exponential smoothing is equivalent to naive forecasting. See also definition 5. Definition 5.3.7.3.3 Measuring Forecast Error Once a forecast is made. 5.0.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3.7.3.3. Definition 5. 5.15. while lower values give more weight to past data.3.13). See also definition 5. Mean absolute percent error (MAPE). and are appropriate to use when the underlying average is relatively stable. Mean absolute deviation (MAD).3. Definition 5. When α = 1. Three popular measures are 1. 2.3. 1 See |actual − forecast| n (5.14. 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. it is good practice to compare the estimated value with the actual value as actual values become available. 3.3. and 5. FORECASTING is likely to change.12).72 CHAPTER 5. such as the mean absolute deviation (see definition 5.4) definition 5.3.3.11 (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.

expressed as a percent of actual values. FORECASTING APPROACHES 73 Definition 5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.3. Definition 5. 100 n i=1 (forecast errors)2 n (5. MAPE is given by MAPE = See also definition 5.3. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.5.8) With smoothing constants α for the average and β for the trend.3.12. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.3. Mathematically. MSE is given by MSE = See also definition 5.12. Mathematically.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.7) or F ITt = Ft + Tt (5.5) |actuali − forecasti |/actuali n (5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.6) 5.3.3.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.11) .

The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. 3.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Tt with equation 5. Ordinary Least Squares Regression analysis is also useful for predicting trends. Compute the smoothed trend.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. time) (5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Calculate the forecast including trend. 1. 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. It is also commonly called linear regression analysis. Compute Ft . F ITt .10. by the formula F ITt = Ft + Tt .74 or CHAPTER 5.14) . the emponentially smoothed forecast for period t using equation 5. 2.12.

5 Seasonal Variations in Data In most businesses. This provides the seasonal forecast. 2. Most businesses experience a surge in sales around Christmas. Compute the average demand over all months. Divide this estimate of total annual demand by the number of seasons. such as cars and washing machines.3. 1.13 assumes a linear relationship.3. demand is seasonal. to account for seasonal changes in demand in our forecasting. 4. Estimate next year’s total annual demand.3.S. We do that with a 5-step process.5. In the U. The first step is to calculate the seasonal forecast. Although there are many methods to accomodate seasonal demand. we will examine one model. the multiplicative seasonal model. 1. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. during the summer months when it is common to take a vacation. 5.. . consumers often make fewer purchases of durable goods. Definition 5. 5. 3. Compute a seasonal index for each season by dividing the historical demand by average demand. Deviations around the least squares line are assumed to be random. 3. Find the average historical demand for each season.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. the more uncertain it is. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. ¯ x The least squares method has several drawbacks. then multiply it by the seasonal index for that month. 2. Recall that the equation 5.

If there are published estimates you can cite (e.17) .. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.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.. is given by (y − yc )2 n−2 Sy. if you are uncertain about predictions of x. However. average local salary) (5.4.x = (5. Note that making predictions of future demand involves also making predictions about the independent variable x. but x will be something other than time.16 is y2 − a y − b n−2 xy Sy. It is also called the standard deviation of the regression and.. pp.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.76 CHAPTER 5. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model.3. We will use the same technique.3.g. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. mathematically. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.g. 106– 107].g. whatever uncertainties you may have transfer to your predicition of y.1 (Example: Using OLS) Present Heizer example 12 [1. FORECASTING 5.3.15) Side Note 5.x = (5.

” Note that the regression assumes a standard normal distribution about the estimate.time.00.3 and the U. leading stock indexes.S. p.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. changes in skirt lengths don’t cause stock market prices to rise and vice versa. Other interesting correlations that have been identified over the years include banana prices and U.” the AFL (American Football Conference) and the NFC (National Football Conference). football in the U.4 (Causation vs. Correlation) Correlation merely means that the values of two variables are historically related. the average length of a woman’s skirt and stock market prices in the U.9 [1.html?xid=sitecnn-partner.S.3 (Examples of Correlation Coefficients) Present Heizer figure 4. February 28. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. nor does it imply that they will continue to be related.5. in all but one Year of the Pig. a football game played between two football conferences in the U.3.3. the U. 2007. “Four Values of the Correlation Coefficient. 108].3. FORECASTING APPROACHES 77 Side Note 5. Correlation Coefficients for Regression Lines Definition 5. “Distribution about the Point Estimate of $600 Million Payroll. Side Note 5.3. Historically. stock market.S. pp. or National Football League. have been correlated. which is divided into two “conferences.8599.18. Definition 5.3. It does not imply causation one way or the other. the note in the margin accompanying Heizer example 14 [1.3.3. 109].18) .17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.S.2 with stock prices generally rising as skirts rise.4 .10 [1. Since 1935. has risen. but the relationship is coincidental. Dow Jones Industrial Average and Standard and Poor 500. p. is monopolized by the NFL. stock markets. stock market prices as well as the winner of the Super Bowl. Even the Year of the Pig correlates strongly with the U.S.S.2 (Distribution About the Point Estimate) Present Heizer figure 4. The correlation coefficient of variables x and y is given by r= See also definition 5. Certainly.S. 107]. 4 Source: http://www.” Side Note 5.1594488.com/time/business/article/0.

110]. Adding additional independent variables as predictors. = the dependent variable (e. It is commonly simply called “R squared.19) Determining the values of a. In practice.3. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. (See definition 5.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. . “What was the R squared of your regression?” Multiple Regression Analysis In section 5. etc.5 Definition 5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. . often the most difficult part of building a multiple regression model is to pick the independent variables. 5 See definition 5.15 is given by y = a + b1 x1 + b2 x2 + .3.3.6.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. The same technique can be applied to use several independent variables to predict the value of a dependent variable. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. x2 . .g. b 2 .” For example. 110]. . b2 . b1 . ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . . . . b1 . p.18 and Heizer example 15 [1.3. .17.19 (Multiple Regression) A causal forecasting method with more than one independent variable. results in additional predictive accuracy as measured by r2 . if they are indeed related to the dependent variable.” As the sidebar points out. Side Note 5. p. ..78 CHAPTER 5.3. you would use statistics software to calculate these values. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. The multiple regression equivalent of equation 5. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.

1.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. If the tracking signals violate upper or lower limits. Tracking signals are typically used monitor forecasts.6.8 standard deviations. one of the most common problems with forecasting is a lack of follow-up. though large errors may be a problem as well even if the positive and negative errors balance.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. This means that the observed value should be within 2 M ADs abut 89% of the time. In other words. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .2.5. 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. two M ADs to 1. 6 Recall definition 4.6. and 4 M ADs to 3.6 standard deviations.4.forecast| n where M AD = (5.2 standard deviations. These limits are typically based on M ADs.6 One M AD is equivalent to 0.4. . Definition 5. 111].4 standard deviations. and within 4 M ADs about 99.4. MONITORING AND CONTROLLING FORECASTS 79 5.20) A good tracking signal has about as much positive as negative error.9% of the time. p. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. which correspond roughly to standard deviations.11 [1. the forecasting methodology needs to be modified.1 (A Plot of Tracking Signals) Review Heizer figure 4. three M ADs about 98% of the time. three M ADs to 2.4. The tracking signals should also be compared as they are generated against limits. Side Note 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).

4.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.10) is automatically changed to keep errors to a minimum.. There is no single technique that should be used for all products or services.g. In your career.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. changes need to be check with human eyeballs to ensure that the adjustments make sense.2 Focus Forecasting Focus forecasting.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4. 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. p.4. α in definition 5. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. you should be aware of the criticism of focus forecasting. FORECASTING 5. there has been much criticism of the approach to using models based on thier fit to the data.2 [1.4. Side Note 5.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Note that even with computer monitoring. Definition 5. 114].80 CHAPTER 5. 2.4.” . 5. However. Side Note 5. is based on two principles: 1. which selects a model based on goodness-of-fit to a data set. “Summary of Forecasting Formulas. Definition 5.4.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. Sophisticated forecasting models are not always better than simple ones.3. you must make your own decision as to how you select the forecasting models that you use.

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. which. • Product life cycle. • Market share and dynamics.2. Product strategy2 defines the breadth of the product line and links product decisions to [1.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. 2 Recall sidenote 2. For example. the word “product” will refer to both goods and services. which will be discussed in detail later in the semester. 122–123]. and design of products. Definition 6.128] • Investment and cash flow. insurance companies often refer to their policies.0. and • The organization’s capabilities. is a service. as products. time permitting. pp. Referring to services as products is common in the service industry. 81 .0.1 Side Note 6.5 (Product Decision) The selection.1 . as an intangible. They also use just-in-time production techniques. 124. 1 In this chapter. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. definition. pp.

1. Decline.. or even decades. Maturity. 6.g.g. • Maturity phase – Competitors have entered or are entering the market. years (e. low-cost. restaurants or nightclubs). • Introductory phase – In the introductory phase. YouTube videos). 3. clothing fashions)..g..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. Product strategy involves determining the best strategy for each product based on its position in the life cycle. • Decline phase – Investment needs to be minimized and resources need to be redeployed.2 Life Cycle and Strategy Strategies change as products move through their life cycle.82 CHAPTER 6. • Growth phase – Effective capacity forecasting is necessary.1 Product Life Cycles Product life cycles can be divided into four phases: 1.1. months (e. often ruthlessly. Introduction. . 2. Life cycles can be in the days or weeks (e. and – Supplier development. so high volume. and 4. Growth. DESIGN OF GOODS AND SERVICES 6. products expenses are often high for – Research and development. and innovative production is appropriate. – Process modification and enhancement.

2. Definition 6.3 • Political and legal change can also bring about business opportunities. • Economic factors. • Sociological and demographic change is also tied to product demand. as well as the total annual dollar contribution of the product.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. 6.2. • Technological change often drives product innovation.3 Product-by-Value Analysis For firms with many products. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.500 or 100. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.2 Generating New Products Most products have a limited life cycle. 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. are tied to product demand. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.6. 6.2.2. GENERATING NEW PRODUCTS 83 6. Ideas are not reviewed until after the brainstorming session. and if a company is to survive.000 yuan. Definition 6. example.1 (Example: Brainstorming) Lead the class in a brainstorming session. 4 For 3 For .4 Side Note 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. it must regularly redesign existing products or bring new products to market. the development of cellular telephone technology or the internet.1. example. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. such as consumer incomes.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1.

and the organization’s capabilities.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. 128]. p. 128].2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.3. Determines what will satisfy the customer and 2. 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. Each stage should have an accompanying review to determine whether to progress or not.1 (Product Development Stages) Present Heizer figure 5. Definition 6.3. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Side Note 6. p.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. 6. the product life cycle. 129].3.2. Many successful companies rely on sales from products introduced within the past five years. .3 [1. DESIGN OF GOODS AND SERVICES For example. market dynamics. Definition 6.3.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Translates customer desires into a product design. Side Note 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.84 CHAPTER 6. 6.3 6. DuPont estimates that it takes 250 ideas to yield one marketable product [1.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on.3. p.2 [1.

2. 130]. 2. Evaluate competing products.3. Building the house of quality involves six steps: 1. 8 These are given on the roof of the house in sidenote 6. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. PRODUCT DEVELOPMENT 85 Side Note 6. there are three popular methods by which organizations undertake product development.6. • Fixed duties exist. Develop importance ratings.2.3. 1. as was the software described in section 4. Product development is done by teams. bureaucratic companies and organizations. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.9 6.com for more information.3.3. 6. p.S.8 5. 7 In other words. Note that it is not free or open source. with product features. • More common in large.7 4.3. which can be an advantage.2. and production departments. e.3.2. Identify relationships between the firm’s hows.qfdcapture.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. In other words. a research & development. identify the rows of the house in sidenote 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.3.” 6 For example.6 3. . Identify how the good or service satisfies customer wants.9.. An organization is divided into departments. Identify customer wants. 3.3..2. • Effective communication and coordination between separate departments can be problematic. create the columns of the house in sidenote 6.10 Side Note 6. 10 The right-hand columns of the house in sidenote 6. • Perhaps the most popular approach in the U. design engineering.2 (Example: House of Quality) Present Heizer example 1 [1. 2. Relate customer wants to product hows.3 Organizing for Product Development In the West. See http://www. manufacturing engineering.g.3.

Definition 6. engineering. Side Note 6.86 CHAPTER 6.3. because their fate is tied to a product. design.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.3.3. organizations are less structured and typically not divided into research and development.1) was implicitly included in the product specification phase of operations management at the companies I have worked for.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. will often advocate for continuation of their project past the point that it is profitable for the company. . 6. production. etc. use of participating teams in design and engineering activities. manufacturing. Definition 6. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research..3. and production stages of product development. engineering. but my personal impression is that formal QFD practices are not widespread in practice.4.4 (Concurrent Engineering) In project development. Side Note 6. The goals of manufacturability and value engineering are 11 See definition 6..11 In Japan.3. quality assurance.S. Definition 6.3. and field service personnel.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. 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. My experience may not be indicative of management practices in general in the U. Some teams even include representatives from vendors. and use. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. purchasing. it can also be problematic because teams.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. However. maintainability.3. production.S. These teams often include representatives from marketing.. development.

and 7. Improvement of functional aspects of the product. Standardization of components.6.3. Robust design. Cost reduction. Improved job design and job safety. Improved maintainability (serviceability) of the product. Reduced complexity of the product. 87 . 3. 2. 5. 6. 4. PRODUCT DEVELOPMENT 1.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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While it is important to be realistic about risks when starting a business. starting a business simply involves taking the first step.6 (Business Failures) A friend and former colleague. Side Note 7.” However. then another. difficult undertaking. you will have to decide that you have done as much as you can do and simply take action.7. you should be confident. people who can tolerate a high degree of risk. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . must begin with a single step.0.7 (Confidence vs. See also sidenote 7. fear of failure and other insecurities dissuade most people from ever starting a business.” At its core.0. As a Chinese philosopher once said. that is. “Every journey . Most businesses fail within the first 18 months. doing it is simple.0. .Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. Side Note 7. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. However. but also realistic. but the humor in the statement lay in the fact that there is some truth to it. In fact. taking that first step can be extremely daunting. ultimately. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge.” He was joking. Matt McAdams. . who has started two businesses and been CEO of three startups once told me. If you start a small business. then taking another step. Realism) Most people perceive those who start businesses as risk-takers.

we will discuss how to prepare to start a small business as well as manage a business early in its life. March 6.asp?NewsID=5324. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve.cn/en/ReadNews. you will finish the course with the confidence that if you decide to start a small business.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 [4.92 CHAPTER 7. • Finally. If asked.edu. http://wistechnology. See. pp. you have to convince others to believe in you. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny.1 In our discussion of entrepreneurship. 12–13]. 1 There are a variety of studies that support this. everyone would say that they want to be thier own boss. you will maximize your chance of success. 2007. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship. I mean believe in you enough to give you money. jewelry. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house.”’ • According to experts who have studied entrepreneurs. for example. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. 7. And by believe in you. make lots of money quickly and with little effort. and . successful entrepreneurs know how to raise money.php?id=2018 http://www.com/article. but a series of frustrations. Hopefully. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur.ccer. • Surveys and research indicates that the most common personality trait is self-confidence. – You not only have to believe in yourself. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. – We will discuss techniques for raising money in detail later in the course.

at Active. we will discuss venture capital.com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7. but something you may need to do day after day. If after many long hours at work your family will be asking you. Putting in long hours is not something that is done once in a while. “When are you coming home for dinner?” or criticizing you for ignoring them. Discuss the impact of the demands of a startup on the marriages of Active. If you are not prepared to redefine relationships relative to your business life. Often.1.7. take note of this information. – For now. or angel investors. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. you may not be prepared to start a company.com. 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. friends and family are the most important concerns in their life. week after week. For many people. possibly even years at a time.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. Side Note 7.1. friends. – Additionally. starting a business will require the kind of effort that means you cannot spend sufficient time to maintain your personal relationships the way you are accustomed to. It may be useful later in your career. • Among the means by which you can to raise money. we suffered a database corruption that resulted in my practically living at work for three weeks .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. • Some of the information is intended for those who have an established career and real-world experience to draw upon. month after month. – However. it may be difficult to keep the necessary focus on the business. for example.com management and Jerry’s difficulty balancing work and family life. You may lose friends because you do not have the time to maintain the friendship. the use of venture capital will probably increase over time in China.1. Venture capital financing is common in the United States but is not yet a common means of financing in China.

we had to update the web site late at night when our customers were not using it in case something went wrong. • Create a Personal R´sum´ – List your personal and professional experiences. Try to realistically evaluate your own strengths and weaknesses. There were far more divorces that occured among management at Active. Do your skills. – At Active. INTRODUCTION TO ENTREPRENEURSHIP • Many all-nighters. interests. • During one “crunch time. and – Accomplishments that require expertise or special knowledge. – Educational background.com that at one point the landlord threatened to evict us since the lease specified that we were being leased a business rather than residential space The demands of a startup also had a dramatic impact on the marriages of Active.com. and experience match the kind of talents your business would require? • Analyze Your Personal Attributes – As yourself about yourself. This kind of event was not uncommon at Absolute Performance. might last four to six hours. We didn’t.94 CHAPTER 7.” there were so many engineers sleeping at the office at Active. The “code push” would often start at midnight and. the first thing you should do is look in the mirror.com management and the family life of the CEO of Absolute Performance. e e Include – Skills.com than average in the population at large. – Are you friendly and self-motivated? – Are you a hard worker? – Do you have common sense? . 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. – Hobbies. for example. depending on the complexity of the push. – The CEO of Absolute Performance once told a customer that the company’s product could parse XML files. 7.2 Are You Ready? If you are thinking about starting your own business.

If your goal is to raise 1.” • Be optimistic.3 Setting Goals With any major endeavor.000 yuan and you’ve never had a job before.” you may not want to start a business that focuses on customer relationships. If you talk to an entrepreneur who has not been successful. Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. ask other entrepreneurs. or 20 years to accomplish. 7. ask yourself the following questions: • Income – How much do you want to earn. When setting goals. although the successful ones generally view their experiences as positive on the whole. – Long-term goals are those that may take 5. if not more important. your goal may not be realistic.000 yuan by July 1” is a much better goal than “raise money. than learning from success. and administration.000. Like parents.1 (What’s It Really Like?) If you wonder what running a business is really like. • Be specific. it is common to exchange “war stories” about the difficult times and sacrifices. “Raise 100. even the successful ones will probably focus on the negative. Side Note 7. . – Short-term goals are those that can be accomplished within a year. such as sales. • Analyze Your Professional Attributes – Be aware of where you need help. Learning from failure is as important. “Achieve financial independence” is much better than “pay the bills. When I talk to those who I know who have started businesses. • Set both short-term goals and long-term goals. it helps to set goals. Consider at least a five-year time horizon.3. advertising.7.3. Move on to larger goals once the small goals have been met. try to figure out why they were not successful. 10. marketing. SETTING GOALS 95 If you are not a “people person. When setting goals. – Start with small goals.” • Be realistic.

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

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

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

com/find?s=all&q=never+say+die. computer-controlled security cameras.1. he would never succeed. And you should not risk anything you can’t afford to lose. “Never say die.2 is. while you should listen to criticism that others give. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. February 17. or are otherwise discouraged. such as your family. You should be realistic about risks. 35]. People thought he was going nowhere and generally dimissed his business. However. . home. 33]. You do not want all of that time to go to waste and potentially lose your personal investment and that of friends and relatives because you overlooked something. you should not let it dissuade you. He ran the business as a one-man operation for years. or health. Have students come up with examples of products that meet various criteria on the checklist. 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. it is too risky.1. p. Have students fill out the form on their own time. thinking that if he did not succeed after a couple of years. Now What? The number one trait needed by successful entrepreneurs is perseverance.8. Warnings about risk are perhaps the criticism you should consider most carefully.” That is. you should have “thick skin.1. Side Note 8.1 You’ve Got an Idea. 2 http://www. YOU’VE GOT AN IDEA. to be truly self-motivated and persistent in the way you need to succeed. used as the title of at least 12 movies and television shows.” Side Note 8. 8. you will be spending years of your life trying to make the idea work.imdb. that they will never make it. After all. 2007. in the wake of 9/11. Finally. p. making just enough to get by but not much more.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. the business took off. A well-known phrase in English. Side Note 8.1.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. Entrepreneurs are often told their idea is flawed.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. His sales are now in the millions of dollars per year and the business is very profitable.

FINDING AN IDEA .100 CHAPTER 8.

101 . When trying to identify your niche market. See also 9.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. See also 9.Chapter 9 Defining Your Market After coming up with your idea. Businesses. Not only do you need to decide whether you are marketing to businesses or consumers. Definition 9. your next step is to do some market research.0.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. 9.0. go through the following 7 steps: 1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.” or business-to-business ventures.0. but you should try to target your market as specifically as possible. Consumers and 2.1.2.” or business-to-consumer ventures. Definition 9. There are two broad categories of markets: 1.

6. Falkenstein. • A friend in Chicago.. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. give a seminar. A good niche has five qualities (a) It takes you where you want to go. the longer it will be until you make your first profit. Donna. discard the idea and move on to the next one. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. p. (b) Somebody else wants it. . That is. 75] 4. It should confirm to your long-term vision. • 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. She started by making a few samples and giving them to friends with dogs. Focus – Be specific.” 2. If it does not sufficiently meet the criteria. and other important demographics. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50.000 per year. it allows you to branch off into other niches as the business grows. (d) It’s one-of-a-kind. the longer you wait to go into business in earnest. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. there is not already alot of competition. 5. “Selling maternity clothes to executive women” is much better than “selling clothes. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves.” [4. Lynda C. Synthesize – Coalesce your ideas. Test – Offer samples. • If your initial test does not go well.” To focus your search for a niche. decided to start a business selling unique winter clothes for dogs. (e) It evolves. • Don’t spend alot of money. earnings. That is. (c) It’s carefully planned. But do test your product before you go ahead full speed. By someone else. After all. I mean customers. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. you need to stop and seriously reevaluate your plan. then asked them about customer reactions. Evaluation – Evaluate your niche against the criteria in step 4.102 CHAPTER 9. etc.

but their behavior differs significantly due to the different influences in their youth. and 9.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1.1. It is better to do just one thing well than to do many things poorly. (See definitions 9.1. Definition 9. the more likely you are to score a hit.1 (Generational Marketing) Marketing to consumers based on age as well as social. and cohort marketing.1. 9. Definition 9. This marketing technique has been widely used since the early 1980s in the U. or retiring. Marketing to demographic groups has become much more refined in the last few decades.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. you should practice extra caution to avoid stereotypes or other insensitive approaches. FINDING YOUR NICHE 103 7. Korean.1.1.) Using these new marketing techniques can allow you to narrow your market. demographic. young adults in the Depression. buying a home.3. As older people are more active than before.S.1.. Go for it! – Implement your idea. Chinese. etc.. . many entrepreneurs make the mistake of being “all over the map. many Eastern companies make the mistake of lumping together American and European customers. and the narrower your focus on your target.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.1.9. For example. such as having children. the World War II cohort.1. in the U. life stage.2. are similar in age to those who came of age in World War II. Side Note 9. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different.. and psychological factors. Many Western companies make the mistake of lumping together Japanese. the Depression-era cohort. they try to satisfy all possible customers and end up trying to do too many things well. If you did your homework. for example. you should be able to enter your niche market with confidence. when the country was immersed in a war effort.” That is. and other Asian customers together.1 (Smaller is Bigger) When starting a business.S. New marketing techniques include generational. Definition 9. This can be offensive and serve to alienate rather than appeal to your customer. economic. Likewise. many are choosing to start families later in life or even have children ten years or more apart. Side Note 9.1. when many people were suffering from extreme poverty.

The mission statement should • Be succinct. • Convey the essence of your business’s goals and philosophies. • 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. . Falkenstein1 advises that you regularly reevaluate your niche. you should.1. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. Falkenstein states.104 CHAPTER 9.3 The Mission Statement Once you have a niche. p. DEFINING YOUR MARKET 9.2 Redefining and Expanding Your Niche Lynda C. 28] which includes mission statements for three multinational companies: 1 See section 9. p.” [4. 79] 9.3. create a mission statement. Every six months or so. “Creating a niche is the difference between being in business and not being in business. a few sentences at most.2 [1. Side Note 9.1 (Mission Statements for Three Organizations) Review Heizer figure 2.

We will produce outstanding financial returns by providing totally reliable. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. time-certain delivery. healthy. We will strive to have a completely satisfied customer at the end of each transaction. global air-ground transportation of high-priority goods and documents that require rapid. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. 105 Side Note 9. 3.3. natural ingredients and promoting business practices that respect the Earth and the Environment. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. competitively superior. FedEx FedEx is committed to our People-Service-Profit philosophy. THE MISSION STATEMENT 1. . and professional to each other and the public. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. 2.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. courteous. Equally important. We are committed to being an important. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. Our mission consists of 3 interrelated parts: • Product Mission – To make. 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. We will be helpful. and nurturing work environment while ensuring our long-term success. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. contributing member of our community and offering the Hard Rock family a fun.3. A complete record of each shipment and delivery will be presented with our request for payment.9.

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

102–103] The questionnaire supposes that someone is going to open an interior decoration business. pp.” [4.10. RESEARCH METHODS 113 Side Note 10. .2.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2.

MARKET RESEARCH .114 CHAPTER 10.

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

It provides a variety of other benefits. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers.1 11. • Management.116 • The project. loan proposals. • The business plan quantifies objectives. you will likely be giving your plan to read many business plans per day. Failing in business is very costly. • Critical risks. and • Milestones or a timetable.1. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. or investment prospectus. and while a business plan will not guarantee success.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. • 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 . • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. • Financing. • Marketing. • Research and development. it will help you maximize your venture’s chances for success. 11. • Manufacturing. allowing the entrepreneur to track results by measurable benchmarks. CHAPTER 11. THE BUSINESS PLAN A business plan is also known as a venture plan. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure.

pretentious. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Establish the unique details of this venture. you will not even get your foot in the door and be invited to present your plan to investors. but not too good.1. Determine the financial structure of the plan. Determine the characteristics of the venture and its industry. but should not be too lavish. While the initial read-through might be only a five-minute perusal.2 5. They will want to see something that reflects that you are neat. 301]: • Appearance – It should look good. p.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. p. other financing professionals may spend more time analyzing the details of the plan.e. Kuratko suggests the following [3. . 11. Read the plan over casually. Read the latest balance sheet.11. If you cannot impress the financier with these three steps. 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.. – Binding and printing should not be sloppy. 1. Determine the quality of the entrepreneurs. 4. Note that less than a minute on average is devoted to each step. or spendthrift. 2. 300]. 6.1. 3.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. including debt or equity financing required. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. not ostentatious. 2 Do not underestimate the importance of this step. i. bear in mind that once the plan is advanced to the next stage of financing. thorough and careful. the trash can.

and How investors will benefit.1. 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. and full contact information4 for the company. 3. 5. p. – On the title page. 3 Note that for this class.3 • The Cover and Title Page – The cover should have the name of the company. – Inside the front cover should be a title page repeating the cover information. THE BUSINESS PLAN – It should be no more than 50 pages. 4 Phone number. – It is worth repeating: Keep it down to at most two or three pages. . they will not read it. 4. – 40 pages is ideal. 6. though you should not put it in the same corner as page numbers appear. Its products or services. and/or web site. The financial forecasts. e-mail address. The company’s current status. The venture’s objectives in 3 to 5 years. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 2. The amount of financing needed. 5 I suggest the lower-right corner. You should use this to keep track of who has which copy. • The Executive Summary – Two or three pages immediately following the title page. 11.3 Some Style Points Kuratko also recommends that you [3. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. the date of the plan. – It should explain 1. a number should be in a corner5 indicating the copy number. The benefits to customers. address. If you write to much. 7.118 CHAPTER 11. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section.

” “we.11. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. 6 E. trademarks.2 [3. • Keep the Plan Written in the Third Person – Do not use “I. Use the spell checker on your word processor to check for spelling mistakes. 2. The executive summary gives readers their first impression. so be sure the writing is finely crafted. 11.1 (10 Sections of a Business Plan) Present Kuratko Table 10.g. and tell why it is named what it is. Present a focused plan. is it based on a family name? Does it include technical terms you need to identify? .6 Note any industry developments and describe the business thoroughly. • Identify the Target Market – Market research should support a focused customer niche. be sure to include them in the business description. Some details on each section of the business plan: 1. • If there are patents. which describes the 10 sections of a typical business plan. copyrights. 305]. • Orient the Plant Toward the Future – Create an air of excitement.” “they. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed.2. • Do Not Overdiversify – Don’t try to be all things to all people.2 The Plan Contents Side Note 11..” or “them. Business Description – Name the business.” or “us. but it is the first thing that your audience will read. use “he. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.” Instead. Executive Summary – This should be the last thing you write.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. Include any pictures or designs that would be helpful. or other special market advantages you have. p.2. Your credibility is established in part by the credibility of your plan.

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

inventory turnover. Product display at trade shows. First sales and first deliveries. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. Completion of prototypes. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Appendix – If there are documents. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.2. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished.com) Discuss the growth of Active. (c) A cash-flow statement. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. etc. or more aware.com.11. and Payment of first accounts receivable. For example. Definition 11. detailing projected profits and losses. Difficulty purchasing parts or materials. 9. Critical-Risks Segment – Discuss business risks and the ways you might address them. 8. Unexpected competitions. (b) An income statement. working capital. detailing projected inflows and outflows. of the risks than you are. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. Costs exceeding estimates.2.2 (The Growth of Active. Receipt of first orders. . Try to be honest and realistic. current ratios. Risks might include • • • • • Negative industry trends.1 (Pro Forma) A latin term that means projected. Your investors are probably as aware. These might include • • • • • • • • • • Incorporation of the new venture. Side Note 11. which investors will use to estimate debt/equity ratios. Completion of design and development. Signing up distributors and dealers.2. Design or research difficulties.. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. 11. include an appendix. Hiring of sales representatives. a balance sheet containing projected balances is called a pro forma balance sheet. as opposed to actual. Ordering production quantities of materials.

122 CHAPTER 11. THE BUSINESS PLAN .

This means that you should not count on presenting your plan to your most critical investor for the first time. 12.1 You will have to pitch to many medium-size fish before you are ready for the big fish. p. 51–56]. recommends twenty-five times [2. your family. and Potential Partner Pitch [2. Sales Prospect Pitch. local business associations.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. Present it many 1 Guy Kawasaki. The first time you present your plan. your dog.1 The Presentation Side Note 12. 62].1.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches.2. author of The Art of the Start. Do not be dismayed. 12. Present it to your friends.Chapter 12 Presenting the Plan 12. not a one-time event. anyone who will listen. you will probably not do a good job.1 Do It Until You Get It Right This is perhaps the most important piece of advice. Your presentation should evolve over time as you listen to your audience and receive feedback. The presentation of your plan is an ongoing process. pp. You will probably have to present it at least ten times before it is ready for the medium-sized fish. your business class. 123 .

2. 12. • Bring paper copies3 of your presentation in case all else fails. Bring at least twice as many as you expect there to be people in the room. 44] Side Note 12.124 CHAPTER 12. Most graduates get between 5 and 15 interviews when they graduate. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. Adobe Reader. p.D.” 3 Color copies! . 2 This originally comes from an American classic. Guy Kawasaki likes to tell a different version of an old joke. You don’t want to try to figure out other people’s equipment. they may have another version of PowerPoint. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. • Bring your own laptop. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. • Bring a backup thumb drive with your presentation on it. “His lips are moving. I had given it over a dozen times. PRESENTING THE PLAN times. By the time I gave my job talk to my eventual employer. and you don’t want something as silly as a burned-out light bulb to cost you an investor. The original joke goes. Lexecon.D. “How can you tell when a lawyer is lying?” The answer. 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. of course.2. I don’t think it was quite right until somewhere between the 8th and 10th time. • Test the equipment the day before.1 (The Job Talk) Every Ph. 12.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. Most Ph. In retrospect.”2 [2.2. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. There will always be glitches. and even if you can figure it out. is.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. Post a copy of your presentation in a secure location on your homepage just in case. the lawyer joke.

12. AFTER THE PRESENTATION 125 Side Note 12. • Taking notes also makes you look conscientious. p. 12. it is quite the opposite.2.6 So What? When you are planning your presentation. They may ask you something that makes you want to change your presentation. “So what?” If you cannot answer this question simply and easily. At my company in Chicago. Stop when it goes off. Everyone. 12. Much of the material required use of the internet. you need to change or eliminate the statement.2. and each investor will respond differently. 12. and although you go into each presentation . I always bring a pen and paper to meetings.3. In general. They may ask you something you want to respond to in an e-mail later. If they cannot explain it clearly.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. but in reality.3 After the Presentation Each presentation will be different. 12.5 Take Notes Have a pen and paper ready and take notes during the pitch. 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. Many people feel as if taking notes makes them look stupid. Guy Kawasaki recommends you set a timer [2. where some of the smartest people in the world worked.2. Give your presentation to friends or family.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. so write things down to make sure you don’t forget. 45]. you are not presenting it well.2. • Your audience may ask you several questions at once. ask yourself after every statement you make. Ask them what your company will do. everyone brought a pen and paper. You should be prepared for the unexpected. It is easy for things to get lost in the heat of the moment.

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item.3 (Count Cycle) In inventory management. • 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. you have “turned over” your inventory. the delivery cycle is the amount of time between placing an order and receiving it. the count cycle is the amount of time between counting inventory. the order cycle is the amount of time it takes to process paperwork and place orders. these systems should automatically update inventory and accounting records. if you perform an inventory count four times a year. be sure it’s not easy to “hack” the system.3. INVENTORY CONTROL When considering the purchase of a POS. Definition 13.1 Inventory Turnover Typically. 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.1 (Turnover) When you have replaced 100% of your original inventory. CHAPTER 13. such as for volume discounts for preferred customers.3. Definition 13. Definition 13. 13. • Updating product information – At the time a sale is entered.130 • Maintain a sales history.3. your count cycle is 12 weeks. .2 (Order Cycle) In inventory management. and • Improve pricing accuracy. a high inventory turnover is a mark of a well-managed inventory system. • Security – To prevent theft. Definition 13.4 (Delivery Cycle) In inventory management.3. For example. work with suppliers to improve delivery times and count inventory more often.3.

follow the recommendation of your accountant. and delivery cycle. but you should at least know about LIFO and FIFO. Calculate your sales per square meter once per month. First Out)) FIFO (first in.4. See definitions 13.5 (Needs Period) In inventory management.S.2. After you have been in business your inventory control system should give you a better idea of stocking levels.4 Inventory Accounting Your accountant will typically handle inventory accounting.S. least this is true in the U. INVENTORY ACCOUNTING 131 Definition 13. it values your remaining inventory based on the prices of the most recently purchased items. If there is inflation. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.2 (FIFO (First In.2. order cycle.4. . 13. it values your remaining inventory based on the prices of the least recently purchased items. LIFO and FIFO are two accounting methods used to do this. 2 At 3 At least this is true in the U.3. In the U. If there is inflation. which may result in higher taxes.2 See also 13. Many businesses also measure turnover by measuring sales per square foot (or square meter). The author is unfamiliar with Chinese tax codes.. Definition 13.3.S. and 13. you must estimate your inventory value when you file your taxes. In other words. 13. First Out)) LIFO (last in. the needs period is the sum of the count cycle. You should know how many sales per square meter per year you need to survive.13. first out) assumes that you sell the least recently purchased inventory first. first out) assumes that you sell the most recently purchased inventory first.3. Definition 13.4.4. The author is unfamiliar with Chinese tax codes.4.1 Buying Inventory In the process of putting together your business plan.3.1. In deciding which to use.3. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.3 See also 13.4.4. which allows you to pay less taxes on your inventory.1 (LIFO (Last In. 13.

Their prices are higher than a manufacturers.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. and they will respond in kind. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . 2. 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. courteous and firm with your suppliers. usually one.132 CHAPTER 13.actual inventory . 13.” .stock on order = open-to-buy Note that formulas and computerized inventory control systems and other means to manage inventory don’t make up for a business owner’s intuition. – The minimum may be higher for first orders to cover the cost of setting up a new account. Manufacturers – Note that some manufacturers refuse to fill small orders. author of Start Your Own Business.5 Suppliers Suppliers can be divided into four categories: 1. three or four months. says. Distributors – Also known as wholesalers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. 13.1 Dealing with Suppliers The most important thing about a supplier is reliability.5. “Be open. INVENTORY CONTROL Definition 13. Import sources – They operate like domestic wholesalers. Rieva Lesonsky. Independent craftspeople 4. brokers or jobbers. • Some suppliers demand a minimum number of items per order.4.

. and • Allowances before you make a decision. Tips for dealing with suppliers: 1. they will put you on a c. If a supplier is uncertain about you.o.5. you should know who is liable for damage to goods in transit. Be sure to add up • Costs. Definition 13.5. customers may be required to pay upon receipt of goods. Suppliers sometimes try to complicate pricing to their advantage. it is considered a felony.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references.13. • For items being shipped.S. 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. the supplier will pay for freight. I regularly had to deal with food vendors.5. Ask about the freight policy before ordering. • Discounts.d. Whatever you do. Side Note 13. Discuss • Their negotiating technique when discussing pricing. • Sometimes if an order is large enough.o. do not falsify or misrepresent your financial statements.1 (COD (or c. SUPPLIERS 133 13. If you are dealing with a reticent large supplier.)) Cash on delivery. personal interaction can work wonders.d. and • The need to be firm but fair.. 2. You can also present your financial statements and prospects for success. basis until you have proven yourself reliable. If a supplier does not extend credit. At least in the U. 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.5.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.

2007.5. 2007. Definition 13. 2007.b. Be aware of your supplier’s priorities. http://www.b.abcsmallbiz. The FOB term requires the seller to clear the goods for export. See also definition 13.2. INVENTORY CONTROL • Depending on whether the supplier pays frieght. . people often say something like “f. Specify a cancellation date on your order forms.5. As opposed to FOB. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Under this arrangement.html. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.wikipedia. May 19.6 See also definition 13.roadway. 5 FOB Destination changes the location where title and risk pass. Seattle” to indicate that an item being shipped from Seattle is free on board. May 19.5. Definition 13.html.o.com/jargon.3 (FOB Destination (or f.epoi.o.com/reference/glossary/glossary efg.5. 5.org/wiki/Backorder.3.)) Free on board. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. 2007. May 19.com/shippers/glossary. This differs from a forward order where stock is available but delivery is postponed for other reasons.7 4 Source: 5 Source: http://www. 3.134 CHAPTER 13. 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.2 (FOB (or f. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.html.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. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.b. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.4 Colloquially.5. Destination)) Free on board destination.o. Definition 13. 6 Source: http://www. 7 Source: http://en. May 19.

This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. The benefits of finding the right person for a job cannot be overstated. and • Independent contractors. • Temporary employees (temps).Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. 337].0.2 (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. • Part-time employees. 135 . On the other hand. Side Note 14. they are often emotionally draining for the manager as well as the employee involved. can take a tremendous personal toll on the entrepreneur as he or she is faced with the prospect of stressful personnel management duties such firing the employee.0. p. besides being bad for business. a bad hire. Side Note 14. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions.

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

Side Note 14.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. Like a job description.1.1. and • A summary description of the position.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. Part of retaining quality employees is the prospect of advancement. you may find they are tempted to leverage that job title to seek employment elsewhere.1) and should include the personal requirements expected of an employee [4. • A salary range.1. • Desired experience. and • Any occupational hazards. p. p. it includes • The job title. If you hire someone at the highest level of their competency. you hire someone as Director who is not qualified to be a director. Definition 14.1. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. • The position of that employee in the corporate heirarchy. • If you give someone an inflated job title but do not offer a salary commensurate with the title. • Specialized skills or knowledge. • Physical or other special requirements associated with the job. 339]. then they go on to a Director position at another company. you may find it difficult to give them a promotion later. • Benefits.1. You may actually be doing your employee a disservice by inflating their job title. HOW TO HIRE 137 • There is little room for advancement. Definition 14. 338]. and • Job summary with major and minor duties. If.14. • Who the person reports to.1 (Job Description) Job descriptions should include • A job title. It also includes • Any educational requirements. for example. .

4 (Using an E-mail Address) For professional positions.S. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. such as “outgoing” or “detailoriented. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.138 CHAPTER 14.1. 14.1. if you are looking for an accountant. e-mail addresses have become perhaps the most popular way to get applicant information at U. HIRING EMPLOYEES 14. With e-mail. – For professional positions.5.3 Advertising the Job When you write an advertisement. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. .” or people who may not have them will just try to fake those personality traits in the interview. It also makes it easy to receive and process a large number of applications with a minimum of effort. particularly those that advertise on web sites. 2 See sidenote 14. • Do not list requirements other than educational or experience-related ones. Many American companies are no longer providing phone numbers.. companies. • Be sure to list appropriate contact information.1. • 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.4 Finding People There are many possible sources of applicants. For example. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. – For other positions.S.2 Side Note 14.1. due to the number of applicants for competitive positions. • List the top 4 or 5 skills that are most essential to the job. • Do not ask for specific personality traits.

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

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

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

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

the CTO liked to ask questions like you would find on an I. They were not hired. • 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. • Whether the candidate can think on their feet. how many handshakes are there? Checking References One thing that far too few employers do is check references. This has become popular recently in the U. and general tidiness in their appearance.S. 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. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized. Test) At Active. After your questions. such as their posture. Most supervisors.Q. I have interviewed people who looked great on paper. Finally. they will have questions about the company and the position.S.9 (The I. Be wary of answers that subtly indicate that there may have been a problem with the candidate.. give them time to ask you questions. attentiveness. • Things the candidate seems reluctant to talk about. • Have you hired people before? If so. do not give bad references to avoid potential lawsuits. after you finish the interview.1. but there references were poor. what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer.Q. Side Note 14. at least in the U. gave a strong interview.1.14. If the candidate is really interested in the position. with many companies like Google incorporating these kinds of questions into their standard interview process. 143 • The candidate’s general demeanor. Lesonsky tells of one supervisor who was asked about .com. test to see how employees solved problems. take a few minutes to write down your impressions..

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

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

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