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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. . . . . . . . . . . . . . . .3. . . . CONTENTS . .1. 4. . . .1. . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3.4 3. . . . . . . . . . . . . . . . . . . . . . . . . . . .4. . . . . . .3 Measuring Forecast Error . . . . . . . . . . . . . . 4. . . . . . . . . . . . 3. .3 Forecasting Approaches . . . . . . . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . 6. . . . . .3 Product-by-Value Analysis . . . . . . .2. . . . .3. . . . .1 PERT and CPM . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . .3. . . . . . .1 Research . . . . . . .2 A Seven Step Forecasting System . . . . . . . 4. . . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . 3. . . . . . . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. .3. . . .4 4 Project Management 4. . 5. . .1 What is Forecasting? . . . . . . . . .1. . . . . . . . .6 Associative Models . . . . . . . . . . . .3. . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . .2 Preconditions . . . . . . . . . . . .4 Determining the Project Schedule . . .1. . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . .1 Project Planning . . . 3. . . .3 Dynamics . . . . . . .3. . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . .2 Network Diagrams . . . . . . 4. . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . 4. . . . .7 Cost-Time Trade-Offs and Project Crashing .3 Project Controlling .1. . . . . . . . . . . . . . . . . . 5. 4. . . . . . . . . . . . . . . . . . . . . .3 3. . . . . . 5. . . . . . . . . . . . . . . . .2 The Work Breakdown Structure . . . . . 4. . . . . . .1 Types of Forecasts . . . . . . . . Strategy Development and Implementation . . . . .2 Project Scheduling . . . . . . . . . . . . 4. . . . . . . . . . . .3. . . . . . . . . . . . . .3. . . .2 Life Cycle and Strategy . . .1 Probability of Project Completion . . . . . . . . . . . . . . 6. . . . . . . . 3. .2. . . . . . . . . . . . 5. . . . . . . . . . . . . . 4. .1 Identify Critical Success Factors . . . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . . . . . . .1. . . . . .5 Seasonal Variations in Data . . . . . . . . . . . . . . . . . . . . .2 Focus Forecasting . . . 4. . 6. 5. . .2 Quantitative Forecasting Methods . . . . .3. . . .2 Build and Staff the Organization . . . . . 5. . . 4. . . . . . . . . . . . .1. 5. . . . 6 Design of Goods and Services 6. . . . . . .1 The Project Manager . . . . . .8 A Critique of PERT and CPM . . . . . . . . .4 Adjusting for Trend . . . . . .3. . . . . . . . . . . . . . . . . . . . . .2.6.1 Goods and Services Selection . .4. . . . . .1 Qualitative Forecasting Methods . . 5. . . . . . . . . . . . . .1 Adaptive Smooting . . 5. . . . . . . . . . . . . 5. . . 4. . . . . . . .

. . . . . . . . 12 Presenting the Plan 12. . . . .3 Be Familiar With All Equipment to be Used 12. . 92 7. . . .1 The Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Characteristics of the Successful Entrepreneur . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together .2. . . .2 6. . . . . .3 After the Presentation . . . . . . . . . . . . Exactly? . . .3 The Mission Statement . . . . Product Development . . . . . 111 11 The Business Plan 11.3. . . . . . 104 10 Market Research 109 10. . . . . . . . . . . 101 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CONTENTS 6. . . . . .2 Quality Function Deployment (QFD) . .2. .2 Know Your Outline Thoroughly . . . . . . . .2.3. .5 Take Notes . . . . . . . . . . 12.2 Are You Ready? . . . . . .3 Setting Goals . . . . . 6. . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . . . . . . . . . . .2 Look and Feel . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . . . . . . .4 The First Minute is the Most Important . . . . . . . . . . 6. . . . . . . .3 Generating New Products . 104 9. . . . . . . .1 Product Development System . . . . . . . . . . . 6. . . . . . . . . . .2. . . . . . . . 12. .2 Redefining and Expanding Your Niche . . 11. . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . .1 Importance of New Products . . . . . . . . . . . . . .2. . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . . . . . . 94 7. . . . . . . . 95 8 Finding an Idea 97 8. .1. . . . . . . . . .2. . . . . .1 Finding Your Niche . . . . . . . . . 12. . .2 The Plan Contents .3 Organizing for Product Development . .4 Manufacturability and Value Engineering . . . . . . . . . . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. . . . . . . . . . . . . . . . . . 12. . . . . . . . . . . . .3. . . . 12. . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . .1 What Am I Researching. . . . 11. . . . . . . . . . . . . . . . . . . . . . . . . . . 110 10. . .1. . . . . . . . . . . . . . . . . . . .6 So What? . . . . . . .1 Sources of Secondary Research . . . . . . . . . 12. . . . . . . . . . .2 Some Suggestions . . . . . . . . . . . . . . . . 6.2 Research Methods . . . . . .1 Do It Until You Get It Right . 111 10. . . . . . . . . . Now What? . . . . . . . . . . . . . . . . . . .1 Your Audience . . .2. .1. . . . . . . . . . . .3 Some Style Points 11.

2 Job Description .2 Payment Plans . . . . . . . . . . . . 13.6 13 Inventory Control 13. .1. . 14. . . . . 14.3. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Advertising the Job 14. . . . . . . . . . . . . . . . . . . . . . . 13. . . . . 13. 13. . . . . . . . . . 13. . . . . . .1. . .5 Suppliers . . . . . . . . . . . .1. . . .4 Finding People . . . .1 Inventory Turnover . . . . . 13. . . . .1. . . . . . . . . .1 How to Hire . . . . . . . . . . . .2 Tracking Inventory . 13. . . .4. . . . . . .5. . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Computerized Inventory Control 13. . . . . . . . . 14 Hiring Employees 14. . . . . . . . . . . . .1 Dealing with Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5. CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . . . . . . . . . . . .1 Job Analysis . . . . . . . . . . . . . . . . . . . . . .1 Inventory and Cash Flow . . . . . . . .1 Buying Inventory . .

Part I International Business Management 7 .

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

• Because guanxi is less important in the West. and Europe but a commonly accepted practice throughout the developing world.1. For example.A. • In general. Prison labor is also considered improper in the U.2.2 Corporate Corruption Side Note 1. Definition 1.S.A.S. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. .A.2. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. Note that during the industrialization of the U. Easterners tend to trust people after observing a pattern of consistent behavior. Western business people may not initially trust their Chinese counterparts. 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. 2. Westerners rely more on contracts. • However.. 1.1 (Ethics) The study of morality and standards of conduct. Why is corruption an important business issue? • See sidenote 1. which are more strictly enforced in the West.2. child labor was widely used. there is a perception in the West that Chinese are hard-working and smart.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. 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.10 CHAPTER 1. 3. 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. This is something Chinese business people should be aware of.S. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. Which brings us to the subject of this lecture: Ethics. • Because of this.

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

Parmalat.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. was convicted of fraud and conspiracy and sentenced to 25 years in jail. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.htm.com/Research/15 Largest.1.3. including a $2 million birthday party for his wife.htm. Qwest. March 17. history. In Scandinavia. 2007.. and Tyco make it clear that even western developed economies have significant ethical shortcomings.S. was accused of looting the company to fund a lavish lifestyle. succeeding Enron as the largest bankruptcy in U. There is currently debate as to the effectiveness of the regulations relative to the costs. http://www. scandals such as Enron. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. 3 Source: 4 Source: http://www. March 17.com/Research/15 Largest.3.2 (Cultural Heritage in the U. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements.bankruptcydata. Side Note 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.bankruptcydata. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. Side Note 1.2. Dennis Kozlowski. a high value is placed on honesty and personal integrity.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. • Tyco – The CEO of Tyco.S. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. 2007. See sidebar 1. While western developed economies often cite a high ethical standard. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.3 The United States The United States has recently been rocked by a number of scandals in the business community. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.12 CHAPTER 1. • WorldCom – Following the Enron scandal. .4 – Bernard Ebbers.S. the SarbanesOxley Act (SOX) was passed in the U. WorldCom declared bankruptcy in July 2002. • Enron – In December 2001.S. Worldcom. the former CEO of WorldCom.

. 58]. The government was compelled to provide public money to bail out the institutions.4. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. • Many men do not understand why sexual harassment constitutes a problem.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals.S.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. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. . Hodgetts et al. and as a result made high risk investments in the late 1980s and early 1990s.S. Better known is the case of Japanese banks. Likewise. Moreover.4.4 1. JAPAN 13 1. with many men of the opinion that women were just biding their time until they marry and have children. with many women finding their employment opportunities constrained.4.fdic. 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. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. 5 1. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Side Note 1. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. Savings and loan institutions.1 (The U.gov/bank/analytical/banking/2000dec/brv13n2 2. p.4. Side Note 1. were not as highly regulated as banks.4.1. women have a difficult time being taken seriously.pdf. the political scandals do not appear to have been fully acknowledged and addressed. also known as thrifts and which function like banks. This resulted in several banks being technically bankrupt [5. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.2 Women in the Workplace Sexual harassment has also become an issue in Japan.

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

with the purpose to influence their votes.1.5. EUROPE 15 1. there seems to be a glass ceiling due to social factors. than any other.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. particularly in upper management. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.5. Hodgetts et al. yes or no.S..7 Note that lobbyists do not have any formal power.4. to try to influence decision-makers in any circumstance.org.5. 7 Source: http://www. Side Note 1. in an extended sense. 1.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.5 1. at 40. with most in the top 20 among over 150 countries included in the survey. men are disproportionately represented in management positions. 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.4. They only have the power of persuasion.S.S. their attitudes towards bribery when working in foreign markets differs from that of the U. Definition 1.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. . Although women have entered the workforce in large numbers in recent decades.4.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.dict.3 Lobbying by Japan Japan spends more money lobbying in the U.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.5. Side Note 1. is the notable exception). politicians.

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

p. 5. .S.6. 64]. 4. executives. Child labor. Prison labor.5 billion in sales annually. Side Note 1. 6.1. Piracy and counterfeiting (see sidenote below). 3. 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.6. International corporate spying problems.3 (Corporate Spying) Hodgetts et al. there are undoubtedly many others that get away with it. An opaque legal system.2 (Piracy and Counterfeiting) Present sidenote at [5. 2. ETHICAL CONCERNS IN CHINA 17 Side Note 1. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. • A relatively stable government. • Note that for every corporate spy that is caught. Ethical considerations include 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. pp. Often.6.1 (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. Side Note 1. company in Boulder was stolen and sold to a Chinese company. • Yet another case in which software from a U. 7. An increase in crime and illegal business activities. and • A recent history of rapid economic development. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. [5.S. Bribery and other forms of corruption. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U.6.

In the words of a Beijing correspondent for “The Economist” magazine. and emergency relief in the event of humanitarian disasters).7. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. such as education and health care.6. . social justice.2 (Nongovernmental Organizations (NGOs)) Private. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.2.7. Other companies.7. a grocery chain.”[6] See also sidenote 1. political.7.3 (Nongovernmental Organizations (NGOs)) Private..1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.cfm for more detail.4 (Corruption) Though things are improving. and economic issues such as poverty. and economic issues such as poverty. there are few if any issues which affect and infuriate so many in China as corruption.com/our company/our mission/index. “.S. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). political. and the environment. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. and promotion of social equity). and the environment. Definition 1. . social justice.2. such as Whole Foods. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. provide relief in the event of humanitarian disasters. Side Note 1. education. health. health.7 Corporate Social Responsibility Definition 1. China continues a battle against corruption.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. See http://www. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.18 CHAPTER 1. not-for-profit organizations that seek to serve society’s interest by focusing on social. 1. not-for-profit organizations that seek to serve society’s interest by focusing on social.benjerry. education. • CARE (promotes community development. Definition 1. .

9 U. note that while U.7.S. as it gives the U. In 2005. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. MNCs do not appear to have been significantly impacted. too. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.7. . – Even socially responsible executives would consider the “bottom line” when making decisions. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. firms a reason to refuse to pay bribes.7. firms are constrained by the FCPA with regards to bribery and other corrupt practices. but does not outlaw payments to political party leaders. 1. Side Note 1. China ranked 78 out of 158. • To prevent a boycott or other consumer defections.1 Corruption and the FCPA Revisited Hodgetts et al. For example. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. Side Note 1. In fact. Executives are people.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.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.S. with a score of 3. as executives of publicly traded companies are ultimately responsible to their shareholders. last but note least.7. • And.1. • Conservation International (promotes environmental conservation). executives may actually feel that it is the right thing to do.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.000 and $125. Both political groups and businesses are influenced by NGOs. many feel that it has had a net benefit. and • Rainforest Action Network (RAN).

7. Scandinavian countries are at the top of the list. 2006. I think corruption will diminish as China economically develops for several reasons: 1. Moreover. Hong Kong is number 15. The government recognizes that it is an issue and is taking action. and not based on hard data. the United States and Europe have recently been rocked by corporate corruption. It cannot be considered to be based on a scientific survey.0 is considered to be the borderline at which countries are considered to have a problem.3. July 1. and Parmalat resulting in investors losing billions of dollars.7. 5. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. with a score of 8. more Chinese will own stock in companies. WorldCom. such as the U.infoplease. Global Compact specifies 10 principles which MNCs should abide by: 1. Global Compact. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.4. Singapore is number 5 with a score of 9.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. societies.10 Corruption is certainly not endemic to Asia.2 respectively. With more disciplined corporate governance. 4. with scandals such as Enron. The government is actively addressing the issue of corruption. It is a difficult problem to solve. Support and respect the protection of international human rights. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks.5 (Table 3-1: Principles of the Global Compact) The U. Important: Although it is widely cited. better than the U. Commitments that many MNCs have signed on to.20 CHAPTER 1. Side Note 1.S. 1. . Tyco. and Germany at 7. As more state-owned businesses become privatized and the size of the middle class increases. and the environment.N. slightly better than Sweden. malfeasance and diversion of corporate funds becomes increasingly difficult. With greater financial transparency. specify standards and codes of conduct in domestic and global operations. 3.com/ipa/A0781359. 2. Side Note 1.4 (Some Opinions) Personally.7.6 and 8.N. but most important first step is to recognize that there is a problem. 10 http://www.html. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.

Freedom of association and recognition of the right of collective bargaining (i. 6. Elimination of child labor. 21 3. A precautionary approach to environmental challenges. 4. Encourage development and dissemination of environmentally friendly technologies.1.7. . including extortion and bribery. the right for unions to exist). Business should work against all forms of corruption. 9. Undertake initiatives to promote greater environmental responsibility. 7. Elimination of all forms of forced and compulsory labor. Elimination of discrimination with respect to employment and occupation.e. 8. Ensure that MNCs are not complicit in human rights abuses. and 10. 5.. CORPORATE SOCIAL RESPONSIBILITY 2.

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

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

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

Kanban are usually simple visual signals. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester.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. – Providing proper work methods and tools. 8]. such as the presence or absence of a part on a shelf. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. The process is driven by a series of signals. • Eli Whitney (1800) is credited for popularizing interchangeable parts. WHAT OPERATIONS MANAGERS DO 27 10.2.org/wiki/Just In Time %28business%29. • Frederick W.1 Side Note 2. February 14.2. one drawback of the JIT system is that the re-order level is determined by historical demand. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. 2007.wikipedia. He also believed that management is responsible for – Matching employees to the right job. • Reliability and stability of systems depends on well-planned maintenance schedules. If demand rises above the historical average planning duration demand. or Kanban.3 “Significant Events in Operations Management” [1. However. and efficiency. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. and 1 Source: http://en. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide.2 (A Little History) Review Heizer figure 1.2. This saves warehouse space and costs. which relied upon standardization and quality control. – Providing the proper training. . Definition 2. When implemented correctly. quality.2. 9]. p. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. the firm could deplete inventory and cause customer service issues. New stock is ordered when stock reaches the re-order level. that tell production processes to make the next part. 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. p.

• Recently. Definition 2.1 (Services) Those economic activities that typically produce an intangible product. • Insurance. average wages are below average2 in the U. 2 The average national private industry wage. 2. economic output. Today. major contributions have come from the field of information sciences. • In some service industries.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. • Government. 9] • Repair and maintenance. Definition 2. • Transportation.2.. • In most western economies. and other essentials for its citizens.3.28 CHAPTER 2. • Trade.3. the economy transitioned from agriculture to manufacturing around 1900.S. However.5 [1.S.3 (Information Sciences) The systematic processing of data to yield information. . OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. the services sector is by far the largest employer. services account for over 70% of U..1 (Development of the Service Economy) Present Heizer figure 1. The U. the wages are considerably above average. Manufacturing was dominant until about 1950 or so. • Food and lodging. In the U. such as retail. p. such as the legal profession or computer services in the financial industry. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. Side Note 2.S. Bureau of Labor Statistics defines services to include [1. services become increasingly important. shelter. for others professional occupations. p. 11].S.

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

2. brought about in part by the internet. reusable. wherever and whenever needed. Definition 2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor.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. • Mass customization – With increases in technical capabilities and customerlevel information management. • 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. Trends that Heizer and Render identify [1. 2. . • Empowered employees – With the rise of services and knowledge products. or management). Globalization has been having a dramatic impact on operations management and in the future. Operations managers are being challenged to produce biodegradable. capital. it will continue to strongly impact the field. or recyclable products or to minimize packaging and other wasteful production steps. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output.30 CHAPTER 2.5. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. p. operations managers are responding by moving decision making to the individual employee. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. parts. OPERATIONS AND PRODUCTIVITY 2.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. and finished goods rapidly. operations managers are increasingly responsible for innovations that move ideas. the next step in product development involves customizing products according to the customer’s preferences. • 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.

Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5.3.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Definition 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.0077 titles per labor-hour = 0. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. . but overhead is no $800/day. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.5.4 (Total Factor Productivity) See definition 2.5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).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. 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. 15]. p. Also known as total factor productivity. Definition 2.4375 titles per labor-hour = 0.5.5. Consider today’s computers versus those from the 1970s.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.25 titles per labor-hour = 0.5. In order to improve productivity.2. THE PRODUCTIVITY CHALLENGE 31 Definition 2.5.

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

and math. What is the area of a 4 × 6 meter rectangle.8 [1.S. such as transportation and sanitation. Cannot Correctly Answer Questions of This Type. writing.5. Side Note 2. and 33 3.3 (The State of Education in the U. Diet of the labor force. and 4. maintaining and enhancing the skills of labor. Which of the following is true about 84% of 100? 4 When presenting this question. there is considerable concern over teaching of basic skills such as mathematics to grade school children. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. .S. “About Half of 17-Year-Olds in the U. Basic education appropraite for an effective labor force.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.5. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.” In the U. Social overhead that makes labor available.2. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. p.. THE PRODUCTIVITY CHALLENGE • Better-nourished.) Present Heizer figure 1. draw the rectangle on the blackboard. The primary variables for improving labor productivity include 1. and • Healthier workers as well as • A shorter work week. 2. 16]. In developed nations.S.

however. and knowledge. 2.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.. as well as capital. Note that there is a trade-off between capital and labor in most industries.34 CHAPTER 2.5% after allowances for depreciation. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.4 Productivity and the Service Sector Historically.S. p. Definition 2.4 (Management as an Input) Because this is a course in business management. educated. graduate programs and the students they produce remain the best in the world. and the cost of capital depends on interest rates. According to Heizer [1. and knowledgeable employees and operations managers are responsible for ensuring that technology.5. Difficulties arise because service-sector work is . Side Note 2. 2. Developed economies (also known as post-industrial economies) require trained. has increased at about an average of 1.2 Capital Capital investment in the U.5. productivity in the service sector has not increased as rapidly as with the production of goods.S.5. Note that in classic economic analysis and other areas of business. in the U. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.5. 17].6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. management is not always identified separately from labor as an input. management is considered as a separate input.S. 2.5. education. U. are utilized effectively. and because the author of the textbook is writing about operations management.

Often an intellectual task performed by professionals (e. in both overall and service productivity. p.S.g. but from customers. 4. . and • The U. We will discuss this challenge in more detail throughout the course.S.6. watchdog groups such as NGOs.. and child care. the performance of a law firm).2.5 (Service Productivity in the U. laundry service. 2. Difficult to evaluate for quality (e.S.5 • The U.6 Social Responsibility As discussed in chapter 1.. • Keeping the workplace safe. and other stakeholders.g. and 5.S. legislation protects shopkeepers from discount retailers. is twice as productive as in Japan. food preparation. Heizer notes [1.. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. medical diagnosis)..5. investment advice). government agencies. banking system is about 33% more productive than Germany’s. 35 3. telephone industry is twice as productive as Germany’s. 18] • Retailing in the U.g. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.g. Low-productivity activities.S. teaching). 5 In Japan. Often difficult to automate (e.) Productivity is highest in the U.. a haircut). Typically labor-intensive (e. • General ethical behavior concerning issues such as child labor and corruption. such as cleaning. These demands come not only from the manager’s personal ethic. SOCIAL RESPONSIBILITY 1. 2. These challenges include such issues as • Maintaining a clean environment.g. Side Note 2. Frequently individually processed (e.

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. time-certain delivery.1. 28] which includes mission statements for three multinational companies: 1. Attract and Retain Global Talent – By offering more employment opportunities. 5. Definition 3. • Provide additional insights and opportunities. global organizations can attract and retain better employees. an understanding of cultural differences in preferences is needed to best meet customer needs. • Perfumers tend to concentrate in Grasse. 3.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there. Provide Better Goods and Services – For companies doing business in an international setting. and • Increase sales.1 Mission Whether large or small. global air-ground transportation of high-priority goods and documents that require rapid. FedEx.1. 3.1. 3. 4. positive control of each package will be maintained utilizing real time electronic tracking and tracing . I recommend that all companies draft a mission statement. Equally important.38CHAPTER 3.1 (Mission Statements for Three Organizations) Review Heizer figure 2. FedEx is committed to our People-Service-Profit philosophy. France. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. Side Note 3.2 [1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. competitively superior. We will produce outstanding financial returns by providing totally reliable. 6. Missions state the rationale for an organization’s existence. p.1 (Mission) The purpose or rationale for an organization’s existence.

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

1.3 (Sample Mission Statements) Present Heizer’s figure 2.3: “Sample Missions for a Company. Differentiation can arise from anything that the customer may value about a product or a services.40CHAPTER 3. more responsive products or services. Responsiveness – By providing timelier.2 (Strategy) How an organization expects to achieve its missions and goals.1.1. 2. the creation of a unique advantage over competitors.benjerry. be it • Product features.1. 3. Cost leadership – Providing cheaper products. 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. Definition 3. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. • Availability of complementary products. Definition 3. Side Note 3.” Note that mission statements are used not only at the company-wide level. but can be used at the department level and even at the project level. 3. See http://www. Differentiation – They make their product better. • Training. • Interoperability with other products. and Major Departments in an Operations Function. • The “look and feel” of the product. . the Operations Function.com/our company/our mission/index. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.cfm for more detail.3 (Competitive Advantage) In operations management.

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.

determining internal strengths and weaknesses and external opportunities and threats.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.3. 2. in particular.1 (Strategy Development Process) Present Heizer figure 2.6 [1. Implement an OM strategy. p.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. if the firm has a competitive advantage in these things) and where failures are most likely.3. those activities or factors that are key to achieving competitive advantage.1 (SWOT Analysis) In operations management.3. then • Form a Strategy. . 3. then determine whether the organization does these things well (and. “Strategy Development Process. 2. Provide competitive advantage. Group the necessary activities into an organizational structure. Side Note 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. The purpose of this process is to 1. and 3. and Threats) analysis to develop strategies. The operations manager’s job is a three-step process: 1. Definition 3. and 3.44CHAPTER 3. Identify a strategy and critical success factors.” The process of developing a strategy involves the following steps: • Environmental Analysis. Opportunities.2 (Critical Success Factors) In operations management. Definition 3. Staff the organization with personnel that will get the job done.3. 37]. These critical success factors are used to develop a competitive advantage. • Determine Corporate Mission. Increase productivity. Weakness.

Definition 3.3. and supporting activities. a graphical link of competitive advantage.4.6 3.3 Integrate OM With Other Activities In order to achieve its strategy. Southwest Airlines has a competitive advantage in providing low-cost airfares. Recall the “org charts” in sidenote 2.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. .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.1. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. • Red arrows – critical success factors • Blue arrows – support activities 3. finance.3. an activity map can be used to link an organization’s competitive advantage to the CSFs. CSFs.3 (Activity Map) In operations management. OM activities are most productive when they are integrated with other activities such as marketing. 39].3.3.5 and HR.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. MIS. p.1 as a checklist to determine critical success factors.3. Side Note 3. Once CSFs are determined. 3. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. 5 Management 6 Human Information Systems Resources.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.2 as examples of how firms organize their activities.3.2.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. Typically characterized by subsidiaries. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. 95% of its assets and 98% of its sales are made outside Switzerland. Usually does not confer a cost advantage. franchises.4. Only 10% of its work force is Swiss. owning or controlling facilities in more than one country.4.4. International strategy – Often the easiest strategy.4. [1. and hamburgers without beef in India. Definition 3. Also one of the least profitable due to transport costs and little local responsiveness. See definition 3.4 (Multidomestic Strategy) In operations management. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.46CHAPTER 3.4.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. • Nestl´ is an example of a country with a transnational strategy.4. .5 (Global Strategy) In operations management.4.4. or joint ventures with substantial independence. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. • McDonald’s is an example of a country with a multidomestic strategy. Definition 3. See definition 3. 3.1 (International Business) A firm that engages in cross-border transactions.4. products do not need to be localized. Definition 3. See definition 3.3. 4.3 (International Strategy) In operations management.6. with beer on the menu in Germany. but a good strategy for cost reduction when products do not need to be adapted locally. See definition 3.4. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. a strategy that uses exports and licenses to penetrate the global arena. 2. In the semiconductor industry. p. Global strategy – Not characterized by local responsiveness.5. Definition 3. Although e it is legally Swiss. Its menu reflects the country in which it operates. 42] Definition 3. as exports require little change in operations and licenses often leave risk with the licensee. • Texas Instruments is an example of a country with a global strategy. wine in France.

6].6 (Transnational Strategy) In operations management.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.S. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.4. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox . Note that many companies that are well-known American brands are now making more money overseas than they do in the U.4.3.. p. Side Note 3.4.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

and budgets. and Controlling) Present Heizer figure 3. The profile highlights the importance of project management in achieving competitive advantage.3 (Project Planning. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Project management involves three phases: 1. 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. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Side Note 4. costs.0. Side Note 4. 49 . Scheduling – People.0. the largest software company in the world. Controlling – Monitoring of resources. and team organization. Plans are also revised to meet changes in time and cost demands. defining the project.0. pp. and supplies are tasked to specific activities and activities are related to each other. 46–47]. p.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1.1 [1. Even Microsoft.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. 3. 2.Chapter 4 Project Management Side Note 4. money. Scheduling. quality. 49]. Planning – Goal setting.

1. The work contains complex interrelated tasks requiring specialized skills. Project organizations work best when [1. 4.1. 4. Your job is to make things go smoothly and according to plan. The responsibilities of project managers are to make sure that .0. Side Note 4. it is very obvious and can be very costly. p. Moreover. you should always expect the unexpected. The project is temporary but critical to the organization. The job is unique or somewhat unfamiliar to the existing organization. and you will be forced to improvise. 2.5. p. it is also an area in which there will continue to be high demand for qualified people. if things go wrong. People will not come through with what they promised.1 The Project Manager As alluded to in sidenote 4.50 CHAPTER 4. you are doing your job well if noone notices the project management.1 Project Planning While many projects are run within an existing organization. things you thought were certain turn out not to be. 3. 4. If you become a project manager on projects of significant complexity. Definition 4. often times. 48] 1.0. you will be confronted with a daunting task.” [1. You may be managing resources far in excess of your individual salary. PROJECT MANAGEMENT However. a temporary project organization is formed to address a specific project. 69]. The project cuts across organizational lines. and/or 5.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. However. In a sense.5 (Personal Advice on Project Management) Project management is a tricky profession. Work can be defined with a specific goal and deadline. project managers are highly visible in a firm and have significant responsibilities. See also Heizer sidenote “Project Management and Software Development.

you have divided the tasks too finely. dividing a project into more and more detailed components. 3. 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. and 4. Side Note 4.4.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS).1. 2. • Build the user account input web page is a much better task division than 1. When dividing a project into tasks. Complete software architecture for user account input web page functionality 5.2 (Work Breakdown Structure (WBS)) In operations management. in a software engineering project. All projects come in on time.1.1. Complete graphic design for user account input web page 2. Review graphic design for user account input web page 3. Review software architecture for user account input web page functionality 6. Approve graphic design for user account input web page 4. The project meets its quality goals. In a project that includes allowing a user to enter personal information on a web page. a web page takes about a day to build for an experienced team. For example.1. PROJECT PLANNING 1. People receive motivation and information necessary to do their jobs.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. 51 4. The project is on or under budget. Definition 4. a task that should only take a day or so. Approve software architecture for user account input web page functionality .

At the time you are creating the work breakdown structure.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Subtasks in major tasks 4. Encourage realistic time and cost estimates for each activity . Scheduling serves to 1. Project 2. Activities (also known as “work packages”) to be completed Side Note 4. of course. Show the relationship between each activity to others and to the whole project 2. 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: 1.3 (Reality Check: WBS) In reality.52 CHAPTER 4. Side Note 4. They will be useful for project scheduling. Identify precedence relationships among activities 3.1. which we will discuss next in section 4. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.1. 4. the work breakdown structure is not something you go to your office to do in isolation. Write software for user account input web page functionality 8. you should also take note of time and cost estimates given by your technical staff. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Major tasks in the project 3. p. fill hundreds if not thousands of pages. PROJECT MANAGEMENT 7. The actual WBS for Windows XP would.3 [1.2.2 (Work Breakdown Structure) Present Heizer figure 3. Write software for user account input confirmation page functionality 9.

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

quality.3. 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. what is the best way to accomplish this goal at the least cost? 4. Cost distribution tables. is the money spent equal to. behind schedule. and budgets of projects. Functional cost and hour summaries.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. less than. PERT and CPM. 6.3 Project Controlling Project control involves monitoring resources. costs.3. is the project on schedule. Time analysis reports. 4. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Work status reports. Total program labor curves. Raw material and expenditure forecasts.54 CHAPTER 4.1 PERT and CPM Two methods. 5. Definition 4. 7. 2. and 8. Variance reports. 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. 3. 4. or ahead of schedule? • On any given date. Cost breakdowns for each task. Control programs typically produce reports detailing 1. . were developed in the 1950s for project control.

Side Note 4. or the critical path. AON associates the activity with the node whereas AOA associates the activity with the arrow. 2. Assign time and/or cost estimates to each activity.3. Activity on Arrow (AOA). in my experience. As the names describe. 4.3. through the network.4. They both follow six steps: 1. schedule.5 [1. Personally.2. Side Note 4. 6.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Moreover.3.3.3.2 (Example: AON and AOA) Present Heizer’s figure 3. and ontrol the project. Develop the relationships among activities. Compute the longest time path.3.2 Network Diagrams There are two approaches to visualizing activity networks: 1. Use the network to help plan. Also. Definition 4. 4.1 (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. Activity on Node (AON) and 2.3 (Critical Path) The computed longest time path through a network. Define the project and prepare the WBS. 5.3. p. Draw the network connecting all of the activities. monitor. See also definition 4. See also definition 4. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.3. 53]. PROJECT CONTROLLING 55 Definition 4. 3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. Gantt charts are the “go to” visualization method for even very complex projects.3. it will do for you automatically much of what we will go through manually in this class. .

ES = max{EF of all immediate predecessors}. – If an activity has multiple immediate predecessors.4. its ES is the maximum of all EF values of its predecessors. that is. that is. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. PROJECT MANAGEMENT Side Note 4.3. that is. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor.3. 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. Follow with example 3 and figure 3. its LF is the minimum of all LS values of all activities that immediately follow it. 56].3.8 [1.1 gives sufficient information to describe the network. 4.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. . 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.1 (Critical Path Analysis) In project management. EF = ES + Activity time. 2. analysis used to determine the project schedule. LF = min{LS of all immediate following activities}. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. pp. • Table 3. their dependencies.56 CHAPTER 4. Definition 4. we must use time estimates of each activity to determine the overall schedule for the project.6–3.4 Determining the Project Schedule Once we have identified all of our activities. p. See also definition 4.9 [1. – If an activity is an immediate predecessor to more than one activity. In other words. 1. 54–55]. LS = LF − Activity time.

C.4. If an activity2 does not impact the slack time of any other activity. G.3 and Heizer figure 3.3 (Free Slack) In project scheduling. Note also that if we delay each activity by the amount of slack that activity has.4. the time associated with a single activity. E.4.13 [1. in the example in sidenote 4. Definition 4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.10 [1. 57].1. and H have no slack time and cannot be delayed without delaying the entire project. we cannot complete the project in 15 weeks. Also notable is that if the total time of the project needs to be reduced. These are called critical activities. we may delay the project as a whole.5. 4.4.1). and • Includes only critical activities (see sidenote 4. 2 For example. activity F in sidenote 4.5. it is said to have free slack. Side Note 4. 60]. The critical path is one that • Begins at the first activity in the project.1 (Slack Time) In project scheduling. • Terminates at the last.5. p. “Notation Used in Nodes for Forward and Backward Pass. the time shared among more than one activity. or the amount of time an activity can be delayed without delaying the entire project. Slack time is just Slack = LS − ES or Slack = LF − EF . 1 For example.2 (Forward Pass) In project management scheduling.4. p.4.3. the step that identifies all the earliest times that activities can be completed. Note that activities A.2 (Total Slack) In project scheduling. Definition 4.1. . the free time for an activity. the time devoted to one of these activities must also be reduced. they share total slack.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.” Then complete Heizer example 7 figure 3. Definition 4. p. if we delay activities B and D by one week each. 61] based on table 3.5.1 When several noncritical activities appear successively in a path.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.3 [1.

etc. which are labeled according to one of two notational conventions. Definition 4.6.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. In reality.2.6.2 and 4. Side Note 4.6. Beta distributions have two free parameters. we do not.2 (Pessimistic Time) In project scheduling. the project manager pulls the number “out of the air” based on their experience managing related activities. The usual definition calls these alpha and beta.3 (Most Likely Time) In project scheduling. the time required to complete an activity is often uncertain due to supply problems.1 (Optimistic Time) In project scheduling.6.6.3. See also definitions 4. the most probable activity completion time that could be obtained in a PERT network.3. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. unexpected complexities. The beta distribution is used as a prior distribution for binomial proportions in . the “best” activity completion time that could be obtained in a PERT network.58 CHAPTER 4. three time estimates are used: 1. Definition 4. Effectively.6. Most likely time – The most realistic estimate of the time required to complete an activity. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. See also definitions 4. the “worst” activity completion time that could be obtained in a PERT network. PROJECT MANAGEMENT 4.1 and 4.6..1 and 4. Definition 4.6. See also definitions 4.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. However. Definition 4. and the other uses β = β − 1 and α = α − 1 .6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.6. technical considerations that were unknown at the time the project schedule was drawn up. in most cases. In PERT.6.

and 7. 8 1.html http://mathworld.1) where B(p. most likely. β) Γ(α)Γ(β) P (x) = (4.com/BetaDistribution. p.6.4. 62]. and . The above plots are for various values of (α.1 Probability of Project Completion If we assume that 1. and 9 weeks. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. February 21.4.6.78 6 6 36 7 4 weeks. and pessimistic times of 1. 4. Total project completion times follow a normal probability distribution and 2.25 to 3.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. 2007. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1.78 weeks. p. 63] for activity F based on optimistic. most likely.com/BetaFunction.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.html. Side Note 4. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. q) = (4.wolfram.1].00.3 The domain is [0. The expected activity time for activity F is 3 weeks5 and the variance is 1. 2.wolfram. and pessimistic times of 1. The variance of the activity time is Variance = [(b − a)/6]2 .β) with α = 1 and β ranging from 0.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Activity times are statistically independent 3 Source: http://mathworld.6.00 week.6. 4. 4 See definition 4. 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.

Side Note 4.” Review Heizer example 10 [1.4 (Using the Normal Table) Pass out Heizer Appendix I [1.6. .3) Definition 4. Note that the standard deviation of 1. “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. commonly also N written σ 2 .6.6. See also 4.76 weeks approximately 16% of the time. see http://mathworld. 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. See definition 4.7% of the time.10 Determining Project Completion Time for a Given Confidence Interval A common question is. p.5. and within 3 standard deviations approximately 99. p.html.1. 64].wolfram.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4.6.16. Side Note 4. pp. the population variance var(X).60 CHAPTER 4.6.6. A2– A3] “Normal Curve Areas. definition 4.6 (Standard Deviation) The standard deviation is the square root of the variance.6. two standard deviations approximately 95% of the time.3 (Example: Project Variance) Review Heizer example 9 [1.6.6. Definition 4.com/StandardDeviation. 9 For 10 See more information.76 weeks implies that the project will exceed the expected completion time by more than 1. 65] and figure 3.6.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.

crash time is the shortest duration of an activity.7.7. Project crashing is the name given to the process of rushing a project to completion. . COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.2 (Crash Time) In project management.1. if certain activities off the critical path take the pessimistic time estimate or more to complete.7. 4.3 (Crash Cost) In project management.11 Definition 4. we need to ensure • The amount by which an activity is crashed is. it may result in the project being delayed. we want to do so in the least cost mannger possible.4. permissible and realistic. Definition 4. Crashing a project involves a four step process: 1. and if you become a project manager. and • The total cost of crashing is as small as possible. When crashing a project. See definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. • The shortened durations will actually enable us to finish the project on time.1 (Crashing) In project management.1. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.7. crash cost is the cost required to complete an activity in the shortest time possible. the crash cost is typically higher than the normal cost. Assuming linear costs.4) 11 Since crashing a project often involves adding additional resources to activities. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. you will doubtless experience one or both of these eventualities many times in your career. Definition 4. Since activity completion times are typically shortened by adding resources. See definition 4.7. in fact. Step 1 – Compute the crash cost per week.7.

7. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. • Advantages – Especially useful for large projects .19. 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. If not. pp. 67–69] including table 3. As a project manager. If you accept the challenge and try to rush the project to please upper management. If the due date has been reached. 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. Side Note 4.2 (Example: Crashing a Project) Present Heizer example 12 [1. 4.7. the advice given in this section should be helpful. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. Step 4 – Update all activity times.62 CHAPTER 4. Then crash each activity by one period.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates. At times this may be politically infeasible. you should be very wary of such pressure. go to step 2. Side Note 4. Crash this activity by one period. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.5 and figures 3. PROJECT MANAGEMENT 2.18–3. stop. Note that one activity may be on several critical paths.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If there is more than one critical path. Step 3 – If there is only one critical path. If you find yourself needing to rush a project. 3. 4. Step 2 – Find the critical path(s) in the project network.

achievo.org/wiki/List of project management software for a list of project management software or ask Dr.org.net. Information on Planner can be found at http://live. they are often overkill for small.wikipedia. . 4.1. Information on Achievo can be found at http://www. including open source software that is free. independent. 12 Recall sidenote 4.9. However.1–3. it is relatively expensive and the features are so numerous and complex.gnome. There are a variety of alternatives.7 [1.org/Planner. Starkweather about his impression of various alternatives.9 Using Microsoft Project for Managing Projects Present programs 3. 70–74] with figures demonstrating MS Project functionality. Note that most project management textbooks refer to MS Project as the software of choice for project management. You may also refer to http://en. It is perhaps the most widely known and featureful project management software available.4.to mediumsized projects. 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. 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.7.dotproject. Information on dotProject can be found at http://www. Noncritical paths should be closely monitored as well. pp.

64 CHAPTER 4. PROJECT MANAGEMENT .

However. – Workforce levels. Part of good decision-making comes from years of experience. – Job assignments. Also uses different methodology. primarily mathematical techniques.Chapter 5 Forecasting 5. Part of the job for business leaders is to make good decisions with limited information. Side Note 5. Tend to be more accurate than medium. 82–83]. – Job scheduling. Useful for 65 .1 What is Forecasting? Business is inherently unpredictable.1. even the best and most experienced managers need to use mathematical forecasts to supplement their intuition. and – Production levels. • Medium-range forecasts – Generally between 3 months and 3 years. Definition 5.1 (Heizer Company Profile: Tupperware) Review Heizer’s company profile of the Tupperware [1. pp. Forecasts are classified by the future time horizon it concerns: • Short-range forecasts – Generally less than 3 months.or long-range forecasts. Useful for – Purchasing.1.1 (Forecasting) The art and science of predicting future events.

which impacts purchases of new plant and equipment as well as development of new products.1 Types of Forecasts Organizations typically use • Economic forecasts.1. These concern rates of technological progress. Cash budgeting. See also definitions 5. Production planning and budgeting.3 and 5. Generally deals with more comprehensive issues than short-range forecasts. housing starts. Maturity.1. • Technological forecasts. 3.1. Definition 5. CHAPTER 5. FORECASTING • Long-range forecasts – Generally more than 3 years. and 4.to long-range forecasts.1. planning indicators valuable in helping organizations prepare medium. Growth. Product life cycles tend to follow four stages: 1. Facility locations or expansion. These may include inflation rates. and other economic indicators.3 (Technological Forecasts) In operations management.4. Capital expenditures.1.2 (Economic Forecasts) In operations management.2 and 5. and • Demand forecasts.1. 5. See also definitions 5. longer forecasts are needed. money supply. 2. In the first two stages. Useful for – – – – Planning for new products.1. and Analyzing various operating plans. Decline. .66 – – – – Sales forecasting. Introduction. long-term forecasts concerned with the rates of technological progress. Definition 5. and Research and development.4.

5. Human resources – Anticipated demand is needed to estimate the need for • Hiring.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. marketing. 5. Gather the data needed to make the forecast.1. 7. 6. 5. • Loss of customers. and • Layoffs.3. projections of a company’s sales for each time period in the planning horizon.2 and 5. Determine the use of the forecast. Make the forecast. and • Loss of market share. . Determine the time horizon of the forecast.1. 5. Select the forecasting models. 2. and scheduling decisions and serve as inputs to financial. 3. Validate and implement the results.4 (Demand Forecasts) In operations management. 4. Capacity – Underestimating demand can result in • Undependable delivery.2.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Select the items to be forecasted. and personnel planning. capacity.1. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. 3. 2. • Training. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. these drive a company’s production. Also called sales forecasts. See also definitions 5.

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

3. 2.3. · The simplest and easiest way to estimate demand. the naive approach. and · Respondents. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. Moving averages cannot pick out trends very well.9. say. ∗ Moving averages · Simple.5. be sure that the sales force is clear that their incentive is to be as accurate as possible. for example. · Requires less past data than moving averages. the more likely it is your results will be accurate. and if they perceive there is an incentive to exaggerate. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · See definition 5. political. · Useful as a starting point or sanity check for more sophisticated methods. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ The more independent your decision makers are from economic. Sales people typically respond to incentives. Moving averages require more past data to work with than. ∗ However.8. . 3. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. or other incentives to over or understate demand. useful method if we can assume that market demands will stay fairly steady over time. · There are three problems with moving averages 1. · See definition 5. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages.3. they will do so. · Staff personnel. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers.

a forecasting technique using a group process that allows experts to make forecasts. and 5. 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. Definition 5. 5.3.3.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.1 Qualitative Forecasting Methods Definition 5. · See definition 5.4. Definition 5. See also definition 5. personal experiences.3. See also definitions 5.3.70 CHAPTER 5.3.3.4. Definition 5.3.3.3.3. and 5.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. See also definitions 5.10. and 5.3 (Jury of Executive Opinion) In operations management.5. a forecasting technique based on salespersons estimates of expected sales. emotions. See also definitions 5.5 (Sales Force Composite) In operations management.6 (Consumer Market Survey) In operations management.6. 5.3.3.3.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.3.3. See also definitions 5.3.3.3.4.6. and value system. 5.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.5.3. Definition 5.4 (Delphi Method) In operations management. . and 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. See also definition 5.2.6. 5.1.

7.3.3. • Simple Moving Average – Mathematically.7.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.3.1) n • Weighted Moving Average – Mathematically.5. 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. generally ranges from 0.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. FORECASTING APPROACHES 71 5. a simple moving average is given by demand in previous n periods Moving average = (5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.2 Quantitative Forecasting Methods Definition 5. Higher values give more weight to recent data. and 5. Mathematically.10. See also definitions 5. 5.05 to 0.3) The smoothing constant. Moving averages can be either simple or weighted.11.3. Definition 5. α.3. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. See also definition 5.8. and are appropriate to use when the underlying average .3. Definition 5.2) See also definition 5.3.9. That is.3. Definition 5.3.3.5.3. 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.

exponential smoothing is equivalent to naive forecasting. 5.3. 5. Mean absolute deviation (MAD).3.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.13).3. See also definition 5.3. 3.3.72 CHAPTER 5. Definition 5.3. Mean absolute percent error (MAPE).0.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.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. FORECASTING is likely to change.4) definition 5.13.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.12). Three popular measures are 1. and 5.15.8. 2. 1 See |actual − forecast| n (5.12. and are appropriate to use when the underlying average is relatively stable. while lower values give more weight to past data.3. it is good practice to compare the estimated value with the actual value as actual values become available.3 Measuring Forecast Error Once a forecast is made.14. Definition 5. Mean squared error (MSE). When α = 1. .3.3.3. such as the mean absolute deviation (see definition 5.7.7. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.3.3. Definition 5. See also definition 5.

3. MAPE is given by MAPE = See also definition 5.3.8) With smoothing constants α for the average and β for the trend.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5. Mathematically.3.6) 5.5) |actuali − forecasti |/actuali n (5. Mathematically.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.12.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values. 100 n i=1 (forecast errors)2 n (5.12.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.5. FORECASTING APPROACHES 73 Definition 5.3.11) . Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. expressed as a percent of actual values. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. Definition 5.7) or F ITt = Ft + Tt (5. MSE is given by MSE = See also definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.

12.12) = 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. Calculate the forecast including trend. Tt with equation 5. Ordinary Least Squares Regression analysis is also useful for predicting trends. the emponentially smoothed forecast for period t using equation 5. 2.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Compute Ft . time) (5. 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.10. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Compute the smoothed trend. It is also commonly called linear regression analysis. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.14) . by the formula F ITt = Ft + Tt .74 or CHAPTER 5. 1. F ITt . 3.

demand is seasonal. 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¯. Recall that the equation 5. 3. Although there are many methods to accomodate seasonal demand.3. .16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Estimate next year’s total annual demand.3. We do that with a 5-step process. Most businesses experience a surge in sales around Christmas. 2. consumers often make fewer purchases of durable goods. In the U. ¯ x The least squares method has several drawbacks. 2. 4. we will examine one model. Definition 5. then multiply it by the seasonal index for that month. Find the average historical demand for each season.3. 5. 3. to account for seasonal changes in demand in our forecasting. the more uncertain it is. Deviations around the least squares line are assumed to be random. such as cars and washing machines. Divide this estimate of total annual demand by the number of seasons.13 assumes a linear relationship.S. 1. the multiplicative seasonal model. This provides the seasonal forecast. 5. Compute a seasonal index for each season by dividing the historical demand by average demand. The first step is to calculate the seasonal forecast.5. 1.5 Seasonal Variations in Data In most businesses. during the summer months when it is common to take a vacation. Compute the average demand over all months. It cannot be used to predict too many periods into the future as the further into the future the prediction is made..

3. We will use the same technique.. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful..g.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.g. 106– 107]. FORECASTING 5. but x will be something other than time. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.17) .x = (5.4.g. pp. It is also called the standard deviation of the regression and. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. Note that making predictions of future demand involves also making predictions about the independent variable x. mathematically.3. if you are uncertain about predictions of x. However.1 (Example: Using OLS) Present Heizer example 12 [1. is given by (y − yc )2 n−2 Sy.x = (5.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.76 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.. average local salary) (5.16 is y2 − a y − b n−2 xy Sy. whatever uncertainties you may have transfer to your predicition of y.3.15) Side Note 5. If there are published estimates you can cite (e.

3 and the U. FORECASTING APPROACHES 77 Side Note 5. It does not imply causation one way or the other. 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.2 with stock prices generally rising as skirts rise.3.4 (Causation vs. Correlation Coefficients for Regression Lines Definition 5. 109].S.S. which is divided into two “conferences. in all but one Year of the Pig. or National Football League. “Distribution about the Point Estimate of $600 Million Payroll. Since 1935.S. stock markets.3 (Examples of Correlation Coefficients) Present Heizer figure 4.00.com/time/business/article/0. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. Side Note 5.9 [1. Other interesting correlations that have been identified over the years include banana prices and U. stock market. a football game played between two football conferences in the U.S. 2007. 108]. leading stock indexes.” the AFL (American Football Conference) and the NFC (National Football Conference).3.html?xid=sitecnn-partner. Dow Jones Industrial Average and Standard and Poor 500.5. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. pp.3. Certainly.18.4 . 107]. the note in the margin accompanying Heizer example 14 [1.1594488. Correlation) Correlation merely means that the values of two variables are historically related. football in the U. Even the Year of the Pig correlates strongly with the U. Historically.3.3. 4 Source: http://www. February 28.8599.2 (Distribution About the Point Estimate) Present Heizer figure 4. stock market prices as well as the winner of the Super Bowl.time. changes in skirt lengths don’t cause stock market prices to rise and vice versa. p.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.” Side Note 5. is monopolized by the NFL. nor does it imply that they will continue to be related.S. have been correlated.S.S.10 [1.3. but the relationship is coincidental.” Note that the regression assumes a standard normal distribution about the estimate. The correlation coefficient of variables x and y is given by r= See also definition 5.3. Definition 5. the U.18) . “Four Values of the Correlation Coefficient. has risen. the average length of a woman’s skirt and stock market prices in the U.

ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . In practice.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. . . p.5 Definition 5.6. you would use statistics software to calculate these values. . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. (See definition 5. p. b 2 . 110]. = the dependent variable (e.78 CHAPTER 5.3. etc. 110].” As the sidebar points out. b1 . It is commonly simply called “R squared.. .19) Determining the values of a. results in additional predictive accuracy as measured by r2 .) It measures the percent of variation in the dependent variable (y) explained by the regression equation. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.g.3.3. b2 . Side Note 5. .3. The multiple regression equivalent of equation 5. b1 .” For example. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. Adding additional independent variables as predictors. we discussed a means by which we can attempt to predict the value of one variable using the value of another. x2 . . . “What was the R squared of your regression?” Multiple Regression Analysis In section 5. if they are indeed related to the dependent variable. often the most difficult part of building a multiple regression model is to pick the independent variables. .17. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. .15 is given by y = a + b1 x1 + b2 x2 + .18 and Heizer example 15 [1. 5 See definition 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable.19 (Multiple Regression) A causal forecasting method with more than one independent variable.3.

This means that the observed value should be within 2 M ADs abut 89% of the time.6 One M AD is equivalent to 0. though large errors may be a problem as well even if the positive and negative errors balance. Tracking signals are typically used monitor forecasts. p.1.4. and within 4 M ADs about 99.forecast| n where M AD = (5.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.4. the forecasting methodology needs to be modified. In other words.5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series.6. Side Note 5. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6. three M ADs to 2. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .2. . MONITORING AND CONTROLLING FORECASTS 79 5. and 4 M ADs to 3. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD). 111].1 (A Plot of Tracking Signals) Review Heizer figure 4. 6 Recall definition 4.6 standard deviations. three M ADs about 98% of the time. The tracking signals should also be compared as they are generated against limits. which correspond roughly to standard deviations.4.2 standard deviations. one of the most common problems with forecasting is a lack of follow-up. Definition 5.8 standard deviations.4. two M ADs to 1. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. Definition 5.20) A good tracking signal has about as much positive as negative error. These limits are typically based on M ADs.11 [1.4 standard deviations. If the tracking signals violate upper or lower limits.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.9% of the time.

80 CHAPTER 5. 114].10) is automatically changed to keep errors to a minimum. α in definition 5.4. you should be aware of the criticism of focus forecasting. 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. However. In your career. you must make your own decision as to how you select the forecasting models that you use. Side Note 5. Definition 5.” .2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.g.2 [1. Sophisticated forecasting models are not always better than simple ones.4.4. FORECASTING 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. p.3.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.4. 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Side Note 5.2 Focus Forecasting Focus forecasting. “Summary of Forecasting Formulas.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Definition 5. 2.. changes need to be check with human eyeballs to ensure that the adjustments make sense. which selects a model based on goodness-of-fit to a data set. there has been much criticism of the approach to using models based on thier fit to the data. is based on two principles: 1. There is no single technique that should be used for all products or services. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.4.4. Note that even with computer monitoring.

as an intangible. is a service.0. • Product life cycle. Definition 6. insurance companies often refer to their policies. They also use just-in-time production techniques.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. pp. 124. 1 In this chapter.0. the word “product” will refer to both goods and services.1 Side Note 6.1 .5 (Product Decision) The selection. 81 . Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches.128] • Investment and cash flow. definition. time permitting.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. Product strategy2 defines the breadth of the product line and links product decisions to [1. • Market share and dynamics. as products. and design of products. For example.2. 122–123]. and • The organization’s capabilities. 2 Recall sidenote 2. pp. which will be discussed in detail later in the semester. which. Referring to services as products is common in the service industry.

g. Introduction.2 Life Cycle and Strategy Strategies change as products move through their life cycle. and 4. Maturity. • Growth phase – Effective capacity forecasting is necessary. • Introductory phase – In the introductory phase. clothing fashions). – Process modification and enhancement.1 Product Life Cycles Product life cycles can be divided into four phases: 1.g.. products expenses are often high for – Research and development. YouTube videos). • Maturity phase – Competitors have entered or are entering the market.g. . years (e. restaurants or nightclubs). and innovative production is appropriate. Life cycles can be in the days or weeks (e.82 CHAPTER 6. 2. or even decades.1. Product strategy involves determining the best strategy for each product based on its position in the life cycle. DESIGN OF GOODS AND SERVICES 6.1... and – Supplier development. often ruthlessly. • Decline phase – Investment needs to be minimized and resources need to be redeployed. low-cost. Growth. Decline. 6. 3. so high volume.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. months (e.

6.2.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. example. GENERATING NEW PRODUCTS 83 6. example.000 yuan.2.2 Generating New Products Most products have a limited life cycle. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.4 Side Note 6. 4 For 3 For .3 • Political and legal change can also bring about business opportunities.2. the development of cellular telephone technology or the internet. are tied to product demand. • Technological change often drives product innovation. Definition 6. Ideas are not reviewed until after the brainstorming session.500 or 100. 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. • Economic factors. such as consumer incomes.2. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. 6.6. Definition 6. • Sociological and demographic change is also tied to product demand.1. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. it must regularly redesign existing products or bring new products to market.3 Product-by-Value Analysis For firms with many products.1. as well as the total annual dollar contribution of the product.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1 (Example: Brainstorming) Lead the class in a brainstorming session. and if a company is to survive.

the product life cycle.3.1 (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.1 (Product Development Stages) Present Heizer figure 5. 128].3. . Determines what will satisfy the customer and 2.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. p.3 6.3. market dynamics.2. 6.3. 128]. Translates customer desires into a product design.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. Definition 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. and the organization’s capabilities. 6.3.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 129]. Each stage should have an accompanying review to determine whether to progress or not. p.84 CHAPTER 6.3 [1. Many successful companies rely on sales from products introduced within the past five years. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Definition 6. p. 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. Side Note 6. DESIGN OF GOODS AND SERVICES For example.2 [1. Side Note 6. The house of quality is a graphic technique for defining the relationship between customer desires and a product.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.

there are three popular methods by which organizations undertake product development. .7 4. • More common in large. 3.2. a research & development. and production departments. Identify customer wants.S.2 (Example: House of Quality) Present Heizer example 1 [1. with product features. 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. create the columns of the house in sidenote 6. 7 In other words.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.8 5.9 6. e.qfdcapture. 130]. Note that it is not free or open source. Relate customer wants to product hows.. Identify relationships between the firm’s hows. 10 The right-hand columns of the house in sidenote 6. 6. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6..3.3 Organizing for Product Development In the West. Product development is done by teams. In other words.9. which can be an advantage. See http://www. design engineering. Building the house of quality involves six steps: 1.g.3. identify the rows of the house in sidenote 6. Identify how the good or service satisfies customer wants.” 6 For example.2.3.2. 2.3. PRODUCT DEVELOPMENT 85 Side Note 6. 1. • Perhaps the most popular approach in the U. manufacturing engineering.3.com for more information. • Fixed duties exist. Evaluate competing products.3.6.3.2. p.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. bureaucratic companies and organizations. Develop importance ratings. • Effective communication and coordination between separate departments can be problematic. An organization is divided into departments. as was the software described in section 4.6 3.3. 2.2.10 Side Note 6.

. organizations are less structured and typically not divided into research and development.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. development. and field service personnel. However. . etc. My experience may not be indicative of management practices in general in the U.S.3. Some teams even include representatives from vendors.3. These teams often include representatives from marketing.3.3. 6.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. and production stages of product development. maintainability. because their fate is tied to a product. it can also be problematic because teams. but my personal impression is that formal QFD practices are not widespread in practice.3. quality assurance. purchasing.4.S. engineering.3.3. production. production.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. will often advocate for continuation of their project past the point that it is profitable for the company. use of participating teams in design and engineering activities.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.11 In Japan. and use.. Side Note 6. The goals of manufacturability and value engineering are 11 See definition 6. Definition 6.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. Side Note 6. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. engineering. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product. manufacturing.4 (Concurrent Engineering) In project development. Definition 6.3.. Definition 6. design.86 CHAPTER 6.

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

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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0. doing it is simple. then another. Side Note 7. must begin with a single step. As a Chinese philosopher once said. . Matt McAdams. Side Note 7.0. In fact. However.” However. . “Every journey .” At its core.6 (Business Failures) A friend and former colleague. that is. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . but also realistic. you should be confident. While it is important to be realistic about risks when starting a business. See also sidenote 7. but the humor in the statement lay in the fact that there is some truth to it. Realism) Most people perceive those who start businesses as risk-takers. Most businesses fail within the first 18 months. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. who has started two businesses and been CEO of three startups once told me. people who can tolerate a high degree of risk. ultimately. taking that first step can be extremely daunting. difficult undertaking.7 (Confidence vs. then taking another step. starting a business simply involves taking the first step. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge. fear of failure and other insecurities dissuade most people from ever starting a business.” He was joking. If you start a small business.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex.7. you will have to decide that you have done as much as you can do and simply take action.0.

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

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

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

Move on to larger goals once the small goals have been met.3. your goal may not be realistic. Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. . Like parents. it helps to set goals. ask yourself the following questions: • Income – How much do you want to earn.7. ask other entrepreneurs.000 yuan by July 1” is a much better goal than “raise money. Consider at least a five-year time horizon. Side Note 7.” • Be optimistic. • Be specific. • Set both short-term goals and long-term goals.3 Setting Goals With any major endeavor. if not more important. • Analyze Your Professional Attributes – Be aware of where you need help. SETTING GOALS 95 If you are not a “people person.3. marketing. 10. Learning from failure is as important.” • Be realistic. If your goal is to raise 1. than learning from success. – Short-term goals are those that can be accomplished within a year.” you may not want to start a business that focuses on customer relationships. or 20 years to accomplish. advertising.1 (What’s It Really Like?) If you wonder what running a business is really like. “Raise 100. “Achieve financial independence” is much better than “pay the bills. try to figure out why they were not successful. When setting goals. When I talk to those who I know who have started businesses. 7. and administration. – Long-term goals are those that may take 5.000 yuan and you’ve never had a job before. When setting goals. even the successful ones will probably focus on the negative. – Start with small goals. although the successful ones generally view their experiences as positive on the whole. such as sales. If you talk to an entrepreneur who has not been successful.000. it is common to exchange “war stories” about the difficult times and sacrifices.

pp. Side Note 7. 20.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. and – Investment of personal assets. The reasons given for adding or subtracting points are as interesting as the ultimate score. 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. Many people want to start their own business for ego gratification.3. pp. – Geographic location. How much is your ego worth? Side Note 7.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. Eliminate question 1 and substract one point from the scoring given on p. • 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. 21].3. Acknowledge this fact and factor it into your decisionmaking. 18–20]. – Hours of work. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic.

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

Side Note 8.98 CHAPTER 8. Side Note 8. • Etc. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. However. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. • A nose piercing that consists of a small. business ideas come at a rapid rate. . • An escrow service that arbitrages the differences in contract enforcement practices and business ethics between Scandinavia and other nations such as those which are not as highly placed on Transparency International’s Corruption Perceptions Index. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. but it is a major complaint for female rock climbers. The tube could be made unobtrusive enough that it would not need to be removed for work. • The business would involve too much risk. • They require business relationships that the entrepreneur does not have. however.. people have to remove nose piercings for work or social occasions. • They require expertise that the entrepreneur does not have. hollow tube. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. most ideas are not feasible because • They would not be profitable enough.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. Often times. pp. • They require more financing than the entrepreneur has access to. Those with nose piercings would not need to remove the piercing and risk it closing. I continue to generate business ideas as a matter of habit.0. etc.. 28–29]. often one or more a day.0. It sounds silly. • The ideas are easily copied and would be quickly appropriated by more able competitors.

8.1. 35]. His sales are now in the millions of dollars per year and the business is very profitable.1.1.imdb. Finally. YOU’VE GOT AN IDEA.1. Side Note 8. “Never say die. to be truly self-motivated and persistent in the way you need to succeed. Side Note 8. you should not let it dissuade you. used as the title of at least 12 movies and television shows. After all. you should have “thick skin. making just enough to get by but not much more. However. Have students fill out the form on their own time. you will be spending years of your life trying to make the idea work.” Side Note 8. And you should not risk anything you can’t afford to lose. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. 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. it is too risky. People thought he was going nowhere and generally dimissed his business. such as your family. 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. Warnings about risk are perhaps the criticism you should consider most carefully. February 17. home. You should be realistic about risks. A well-known phrase in English.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.” That is. He ran the business as a one-man operation for years. thinking that if he did not succeed after a couple of years.2 is.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. the business took off. p. Entrepreneurs are often told their idea is flawed. 2007. or health. p. or are otherwise discouraged.1 You’ve Got an Idea.8. 2 http://www.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. 33]. that they will never make it. Now What? The number one trait needed by successful entrepreneurs is perseverance. Have students come up with examples of products that meet various criteria on the checklist. while you should listen to criticism that others give. . computer-controlled security cameras.com/find?s=all&q=never+say+die. he would never succeed. in the wake of 9/11.

100 CHAPTER 8. FINDING AN IDEA .

1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Businesses.2. 9. There are two broad categories of markets: 1. go through the following 7 steps: 1. When trying to identify your niche market. 101 . Consumers and 2.0.1.” or business-to-business ventures. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Not only do you need to decide whether you are marketing to businesses or consumers. See also 9.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. your next step is to do some market research.0.0. but you should try to target your market as specifically as possible. See also 9. Definition 9. Definition 9.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.Chapter 9 Defining Your Market After coming up with your idea.0.” or business-to-consumer ventures.

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

1 (Generational Marketing) Marketing to consumers based on age as well as social..1. life stage. For example. when many people were suffering from extreme poverty.1. As older people are more active than before. and 9.1.1.1. 9.3. many are choosing to start families later in life or even have children ten years or more apart. Likewise. in the U. and other Asian customers together. Marketing to demographic groups has become much more refined in the last few decades.1. Korean. you should be able to enter your niche market with confidence. demographic. New marketing techniques include generational. the more likely you are to score a hit. If you did your homework.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. Many Western companies make the mistake of lumping together Japanese. This can be offensive and serve to alienate rather than appeal to your customer.1. (See definitions 9. Side Note 9. etc. Chinese. for example.2.” That is. Side Note 9. the Depression-era cohort.S.S. you should practice extra caution to avoid stereotypes or other insensitive approaches. young adults in the Depression.9. many entrepreneurs make the mistake of being “all over the map. they try to satisfy all possible customers and end up trying to do too many things well. when the country was immersed in a war effort. Go for it! – Implement your idea. .1. economic. or retiring. It is better to do just one thing well than to do many things poorly. and cohort marketing..1. FINDING YOUR NICHE 103 7. and psychological factors. Definition 9.1 (Smaller is Bigger) When starting a business. but their behavior differs significantly due to the different influences in their youth..2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. This marketing technique has been widely used since the early 1980s in the U. such as having children. and the narrower your focus on your target. Definition 9. Definition 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.) Using these new marketing techniques can allow you to narrow your market. are similar in age to those who came of age in World War II. many Eastern companies make the mistake of lumping together American and European customers.1. buying a home. the World War II cohort.

2 [1.104 CHAPTER 9.1. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.3. DEFINING YOUR MARKET 9.3 The Mission Statement Once you have a niche. Falkenstein states. The mission statement should • Be succinct. p. Every six months or so. 28] which includes mission statements for three multinational companies: 1 See section 9.2 Redefining and Expanding Your Niche Lynda C. • Convey the essence of your business’s goals and philosophies. “Creating a niche is the difference between being in business and not being in business. p. create a mission statement. Side Note 9.1 (Mission Statements for Three Organizations) Review Heizer figure 2. • 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. a few sentences at most. .” [4. you should. 79] 9.

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

S.com/our company/our mission/index.. .106 CHAPTER 9. such as Whole Foods. 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. 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. processes. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed.benjerry. nationally & internationally. See http://www. a grocery chain. capital. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. challenges.cfm for more detail. so do your partners. and recognizes outstanding employees. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9.1. Other companies. DEFINING YOUR MARKET • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally.

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

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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.

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

114 CHAPTER 10. MARKET RESEARCH .

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

• The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. 11. • Research and development. • The business plan quantifies objectives. you will likely be giving your plan to read many business plans per day. • Critical risks.1.1 11. • Marketing. and while a business plan will not guarantee success. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. THE BUSINESS PLAN A business plan is also known as a venture plan. • Manufacturing. • The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. It provides a variety of other benefits. and • Milestones or a timetable. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. loan proposals.116 • The project. • Financing. They may spend no more than five .1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. • Management. allowing the entrepreneur to track results by measurable benchmarks. it will help you maximize your venture’s chances for success. CHAPTER 11. Failing in business is very costly. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure. or investment prospectus.

. 2 Do not underestimate the importance of this step. the trash can. Kuratko suggests the following [3. including debt or equity financing required. p. other financing professionals may spend more time analyzing the details of the plan. . • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. pretentious. 301]: • Appearance – It should look good.11.e. – Binding and printing should not be sloppy.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person.2 5. but not too good. PREPARING TO PUT THE PLAN TOGETHER 117 minutes with your business plan before deciding to give you an audience or place you in the “circular file. but should not be too lavish.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. Determine the characteristics of the venture and its industry. you will not even get your foot in the door and be invited to present your plan to investors. bear in mind that once the plan is advanced to the next stage of financing. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. 300]. p. Establish the unique details of this venture. 4. 2.1. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. thorough and careful. While the initial read-through might be only a five-minute perusal. They will want to see something that reflects that you are neat. Read the plan over casually.1. i. Read the latest balance sheet. Determine the quality of the entrepreneurs. 1. not ostentatious. 11. 3. or spendthrift. Note that less than a minute on average is devoted to each step. Determine the financial structure of the plan. If you cannot impress the financier with these three steps. 6.

Its products or services. 4 Phone number. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. and How investors will benefit. 3 Note that for this class. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. address. the date of the plan. THE BUSINESS PLAN – It should be no more than 50 pages. though you should not put it in the same corner as page numbers appear. 3. p. You should use this to keep track of who has which copy. – It should explain 1. The benefits to customers. 4. 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. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. – On the title page. 7. The amount of financing needed. .3 • The Cover and Title Page – The cover should have the name of the company. e-mail address. • The Executive Summary – Two or three pages immediately following the title page. 2. a number should be in a corner5 indicating the copy number. 5 I suggest the lower-right corner. – Inside the front cover should be a title page repeating the cover information. The financial forecasts. 11. If you write to much. 5.118 CHAPTER 11. 6. The venture’s objectives in 3 to 5 years. and/or web site. and full contact information4 for the company. – 40 pages is ideal.3 Some Style Points Kuratko also recommends that you [3.1. – It is worth repeating: Keep it down to at most two or three pages. The company’s current status. they will not read it.

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

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

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

THE BUSINESS PLAN .122 CHAPTER 11.

You will probably have to present it at least ten times before it is ready for the medium-sized fish. author of The Art of the Start. The presentation of your plan is an ongoing process. your business class. local business associations. 12. p.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. Present it to your friends.2. recommends twenty-five times [2.1 The Presentation Side Note 12. 51–56]. Your presentation should evolve over time as you listen to your audience and receive feedback. The first time you present your plan. This means that you should not count on presenting your plan to your most critical investor for the first time. Sales Prospect Pitch. 123 . Do not be dismayed.1 Do It Until You Get It Right This is perhaps the most important piece of advice.1 You will have to pitch to many medium-size fish before you are ready for the big fish. your family. Present it many 1 Guy Kawasaki. 12. pp. and Potential Partner Pitch [2. you will probably not do a good job. not a one-time event.Chapter 12 Presenting the Plan 12. your dog. 62].1.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. anyone who will listen.

124 CHAPTER 12.1 (The Job Talk) Every Ph. There will always be glitches. and you don’t want something as silly as a burned-out light bulb to cost you an investor. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. 44] Side Note 12.2. “His lips are moving. and even if you can figure it out.D. 12. The original joke goes. • Bring your own laptop. “How can you tell when a lawyer is lying?” The answer.” 3 Color copies! .”2 [2. I don’t think it was quite right until somewhere between the 8th and 10th time. PRESENTING THE PLAN times. is. Post a copy of your presentation in a secure location on your homepage just in case. the lawyer joke. Lexecon. Most graduates get between 5 and 15 interviews when they graduate.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to.2. • Test the equipment the day before. 2 This originally comes from an American classic. Bring at least twice as many as you expect there to be people in the room. I had given it over a dozen times. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. they may have another version of PowerPoint. By the time I gave my job talk to my eventual employer. Most Ph. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. of course. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. You don’t want to try to figure out other people’s equipment. In retrospect. • Bring paper copies3 of your presentation in case all else fails.2. Guy Kawasaki likes to tell a different version of an old joke.D. Adobe Reader. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. 12. p.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. • 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.

Give your presentation to friends or family. everyone brought a pen and paper. ask yourself after every statement you make. Many people feel as if taking notes makes them look stupid. and although you go into each presentation .4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 12. where some of the smartest people in the world worked. Everyone. 12. and each investor will respond differently. They may ask you something you want to respond to in an e-mail later. If they cannot explain it clearly.2.2.3 After the Presentation Each presentation will be different.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. Ask them what your company will do. AFTER THE PRESENTATION 125 Side Note 12. “So what?” If you cannot answer this question simply and easily. 45]. you need to change or eliminate the statement. 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. • Your audience may ask you several questions at once. It is easy for things to get lost in the heat of the moment.12.5 Take Notes Have a pen and paper ready and take notes during the pitch. Guy Kawasaki recommends you set a timer [2. • Taking notes also makes you look conscientious. At my company in Chicago. 12.3.2. it is quite the opposite. I always bring a pen and paper to meetings.2. so write things down to make sure you don’t forget. They may ask you something that makes you want to change your presentation. Stop when it goes off. but in reality. p.6 So What? When you are planning your presentation. You should be prepared for the unexpected. you are not presenting it well. 12. Much of the material required use of the internet. In general.

1 (What to Do When You’re Turned Down) Present Kuratko table 10. 321]: “What to do when a venture capitalist turns you down: Ten questions. Each time your are rejected improves your future opportunities. you should also realize that most most comments will be negative and most presentations are rejected.126 CHAPTER 12.” . Each negative comment gives you an opportunity to change an investor’s opinion. PRESENTING THE PLAN with only success on your mind. Be prepared for rejection and do not consider it the end of the road. Remember that persistence is the most important character trait of entrepreneurs. p.3.5 [3. Side Note 12.

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

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– “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.

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

S. If there is inflation. first out) assumes that you sell the most recently purchased inventory first. . 13.4.4. The author is unfamiliar with Chinese tax codes. 13.3. First Out)) FIFO (first in.1. follow the recommendation of your accountant. and 13. you must estimate your inventory value when you file your taxes. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. In the U. which may result in higher taxes. The author is unfamiliar with Chinese tax codes.3. it values your remaining inventory based on the prices of the least recently purchased items. 13.2 See also 13. See definitions 13. In deciding which to use.3. After you have been in business your inventory control system should give you a better idea of stocking levels. First Out)) LIFO (last in. it values your remaining inventory based on the prices of the most recently purchased items. the needs period is the sum of the count cycle.3.S.3.4.4. first out) assumes that you sell the least recently purchased inventory first. which allows you to pay less taxes on your inventory.S.4. In other words.1 (LIFO (Last In.1 Buying Inventory In the process of putting together your business plan. Calculate your sales per square meter once per month. least this is true in the U. Definition 13.5 (Needs Period) In inventory management..2.4 Inventory Accounting Your accountant will typically handle inventory accounting. If there is inflation. 2 At 3 At least this is true in the U. order cycle.3 See also 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. Many businesses also measure turnover by measuring sales per square foot (or square meter).2. INVENTORY ACCOUNTING 131 Definition 13.4. and delivery cycle. LIFO and FIFO are two accounting methods used to do this.2 (FIFO (First In. Definition 13.13. You should know how many sales per square meter per year you need to survive.4. but you should at least know about LIFO and FIFO.

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

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

See also definition 13.o.6 See also definition 13. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. 2007. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.com/shippers/glossary. 7 Source: http://en. Under this arrangement. 2007. people often say something like “f.b.abcsmallbiz. . This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. Specify a cancellation date on your order forms.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.o. 2007. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.5. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. 5 FOB Destination changes the location where title and risk pass.o.roadway.epoi.org/wiki/Backorder. Definition 13. Definition 13. May 19.5. May 19.com/jargon.html.3 (FOB Destination (or f. May 19. As opposed to FOB. 3.5. Definition 13. http://www.2. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.7 4 Source: 5 Source: http://www.html.b. May 19.)) Free on board. 2007.b.5.4 Colloquially.wikipedia.134 CHAPTER 13. This differs from a forward order where stock is available but delivery is postponed for other reasons. 6 Source: http://www. Be aware of your supplier’s priorities.com/reference/glossary/glossary efg.3. The FOB term requires the seller to clear the goods for export.2 (FOB (or f. Destination)) Free on board destination.5. INVENTORY CONTROL • Depending on whether the supplier pays frieght. 5.html. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Seattle” to indicate that an item being shipped from Seattle is free on board.

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

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

338]. Definition 14. Definition 14. • Benefits.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4.1) and should include the personal requirements expected of an employee [4. then they go on to a Director position at another company. HOW TO HIRE 137 • There is little room for advancement. 339]. It also includes • Any educational requirements. for example.14. If you hire someone at the highest level of their competency.1. • Physical or other special requirements associated with the job.1. • Desired experience. p. • A salary range. you hire someone as Director who is not qualified to be a director.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. you may find it difficult to give them a promotion later. and • Job summary with major and minor duties. • If you give someone an inflated job title but do not offer a salary commensurate with the title. you may find they are tempted to leverage that job title to seek employment elsewhere.1. and • Any occupational hazards. You may actually be doing your employee a disservice by inflating their job title. Part of retaining quality employees is the prospect of advancement. it includes • The job title. p. • The position of that employee in the corporate heirarchy. Side Note 14. . • Who the person reports to.1. Like a job description.1.1 (Job Description) Job descriptions should include • A job title. and • A summary description of the position. • Specialized skills or knowledge. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. If.

1.S.5. • List the top 4 or 5 skills that are most essential to the job.138 CHAPTER 14. For example. companies.S. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. . HIRING EMPLOYEES 14.” or people who may not have them will just try to fake those personality traits in the interview. • Be sure to list appropriate contact information. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. – For professional positions.2 Side Note 14. 14. e-mail addresses have become perhaps the most popular way to get applicant information at U. With e-mail.. if you are looking for an accountant. Many American companies are no longer providing phone numbers.1. • Do not list requirements other than educational or experience-related ones. It also makes it easy to receive and process a large number of applications with a minimum of effort.1.1.4 Finding People There are many possible sources of applicants. due to the number of applicants for competitive positions. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. 2 See sidenote 14. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. • Do not ask for specific personality traits. such as “outgoing” or “detailoriented. particularly those that advertise on web sites. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.4 (Using an E-mail Address) For professional positions.3 Advertising the Job When you write an advertisement. – For other positions.

Searching on Monster. 2. not a science.14. 5.” 665 in “Internet/E-Commerce.S. 6. about 10 or so. In the U. You can evaluate their personality during the interview. 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. Try to perform a search on a job sites such as http://www. You narrow down the 10 candidates to 3. many positions are being filled online.314 listings in the “Computers.com with the keyword Java on May 19. most professional associations’ job banks are now online. 4. To “weed out” candidates.monster.dice.3 Generally. There were 4. but when looking at a resume. You narrow the number of resumes down to about 10. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. • Online – In the U. • Industry Publications – Most trade publications take ads for job openings. you will get several candidates for any job you are offering.” And 921 in “Engineering.com with the keyword “java” will demonstrate just how widely used online tools are. You interview the candidates. • Focus on the skills that a person can bring to your company. 2007 turned up more than 5.. be sure that a candidate can provide what you are looking for. You hire the preferred candidate. If you are lucky. You check references. Screening People Reviewing resumes and applications is an art. the hiring process proceeds as follows: 1. Software” category. 159 in “Financial Services.S. 3.com or http://www.. You conduct a second round of interviews with the remaining 3 candidates.1.000 hits searching just the “Information Technology” search category.” . for professional positions. particularly in the high-tech industry. For any job. 3 Java is a programming language.

She simply passed along resumes that contained certain keywords that we were looking for. and e-mail address.com) In the hiring process at Active. Side Note 14.1.4 were not experienced enough. or were too experienced.140 • Look for patterns in their career. From the hiring process at Active.1. If an applicant indicated they were an expert with too many technologies. . • On the other hand. so many resumes came in that an administrative assistant was asked to perform the first screening. if a person survives downsizing or other major changes at their former employers. address. I have some personal recommendations: • Always check references. phone number. listed expertise in too many subject areas. 344–345]. Side Note 14. that is a very good sign that they are a survivor. • Don’t necessarily discard resumes with some gaps. 4 It takes time to become an expert with any sufficiently compex technology.com. CHAPTER 14. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. we tossed those that had spelling or grammatical mistakes. • Work experience – As for salary information when asking about work experience • Availability.6 (Hiring at Active. Due to this. Of those we looked at. Applications should ask for things such as • Name. and • References. including when an applicant can work and the hours they can work. did not match our requirements closely enough. That typically indicates that someone cannot supply enough positive references.5 (Job Application) Present Lesonsky’s sample job application [4. • Educational background. • Rely on your intuition. this indicated to us that the applicant was not being truthful. pp.com. I learned that people lie on their resumes all the time. • Special skills.

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

Begin with some small talk. Side Note 14. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them.1.142 CHAPTER 14. and demonstrate good communication skills. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. only one of them answered. 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. “President of the United States. It is as important to get the candidate excited about your company as you want to be about them. “bowling. friendly. You want the candidate to talk enough to give you a detailed impression.” Don’t ask yes-or-no questions.” or “Tell me about a problem that you solved at your last job and the way you solved it. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. 349]. Be sure to ask open-ended questions. Then ask them about their skills and background.” The interviewer laughed out loud. 8 In 7 Taken . HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. so much so that it is almost a clich´. He answered. You should do the same.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. Good candidates will do their best to put their best foot forward. such as “Tell me about your last position. Hopefully they will be neat and clean. Texas. He got the job. a recent debate. p.” 9 This is a very typical job interview question in the United States. Curiously. Discuss the job and the company. First impressions are the most important.

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

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

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

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