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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. .2. . . . . . . . . . . . . . . . 3. . . . . . . . . . . . . . .6 Associative Models . .3. . . 5. . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Types of Forecasts . . . . . . . . . . . . . . . . . . .2. . . . . 3.3.2 Preconditions . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . . .1 Goods and Services Selection .1. . . . . . . . . . . . . . . . 5. . . . . . . 6. .5 Seasonal Variations in Data . . . . . . . 5. . . . . . . .4 3. Strategy Development and Implementation . . .2 Life Cycle and Strategy .3 Dynamics . . . . .1 Product Life Cycles . . . . . . . . .2 Network Diagrams . . . .3 3. . . . . 4. . . . . . . . . . . 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. . .7 Cost-Time Trade-Offs and Project Crashing . .4. .2 The Strategic Importance of Forecasting 5.1. . .2 Focus Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1.4. .2 The Work Breakdown Structure .3. . . .3. . . . . . . . . . . . 5. . . . . . . 5. . . . . . . .1. . . . . .4 Determining the Project Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Project Scheduling . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . .1 Qualitative Forecasting Methods . . .1. . . 6. .4 Adjusting for Trend . . . . . . . . . . . . . . . 4. . . . . . . . . . . .2 Build and Staff the Organization . . . .3. .3 Project Controlling . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . 4. . CONTENTS . . . . . . . . . . . . 3. . . . . . . . . .3. 5. . 6 Design of Goods and Services 6. . .1 Identify Critical Success Factors . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Research .1. . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . .3. . . . . . . . . . . . . . . . 5. . . . . .5 Slack Time and Identifying the Critical Path . . . . .3. 5. .8 A Critique of PERT and CPM . . . . . .1 Project Planning . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . .1 Probability of Project Completion . . . .1 The Project Manager . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . . . . . 4. . . .1 PERT and CPM . . . . 3. . 6. .4 Monitoring and Controlling Forecasts . . . . . . 5. . . .3 Product-by-Value Analysis . . . 4. . . . . . . . . . . . . . . . . . . . . . . .1 What is Forecasting? . .3 Measuring Forecast Error . . 4. . . . .1 Adaptive Smooting . . 4. . . . . . . . . . . . . . . . . . . . . 3. 4. . . . . . . . . .2. . . .2 A Seven Step Forecasting System . . .6. . . . . .1. . . .3 Forecasting Approaches . . . . . .

. . . . .2. . .1. . . . . . .2 Quality Function Deployment (QFD) . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7.1 You’ve Got an Idea. . . . . . . . . 6. . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . 6. . . . . . . . .1 Characteristics of the Successful Entrepreneur . .6 So What? . . . .2. . . . . . . . . . . . Product Development .3. . . . . . . . . . . . . .2. . . . . . . . . . . . 12. . . . . . . . . . . . .5 Take Notes . . . . 6. . . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Research Methods . .3 After the Presentation . . . . .2. . . . . . .3 Setting Goals . .1 Your Audience . . . . . . . .2 Are You Ready? . . . . . . .1 Sources of Secondary Research . . . 99 9 Defining Your Market 101 9. .2. . . . . . . . 11. . . . .2 The Plan Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . .1. . . . . . . . .3. . . . . . . . . . . . . . . . . . .1 Importance of New Products . . . . 12. . 111 10. . . . 104 9. . . . Exactly? . . . 92 7. . . .2 Know Your Outline Thoroughly . . . . . . . . . . . .CONTENTS 6. . .1. . 11. . . . . . .1 What Am I Researching. . . . . . . . . . .2. . . . . . 12. 101 9. . . . . . . . . . . . . 12 Presenting the Plan 12. . .4 Manufacturability and Value Engineering . . . . . . .3 Some Style Points 11. . . . .3. . . . . . . .1 The Presentation . .1 Do It Until You Get It Right . . . . . . . . . . 6.1 Product Development System . . . . . . . 94 7. . . . . . . .3 The Mission Statement . . . . . . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . .3 Organizing for Product Development . . . . . . . . . . . . . . . . 110 10. . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Finding Your Niche . . . . . . .2 Look and Feel . . . . . . . . . . . . . . . .2. . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . 12. . . . . . . . . . .2. . .2 6. . . . . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. . . . . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche . . . . .3 Generating New Products . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . .3. . . . . .2 Some Suggestions . .4 The First Minute is the Most Important . . . . . . . . Now What? . . . 12. . . . . . . . .

. CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . 13. . . . . . . . . .1. . .1 Inventory Turnover . .2 Tracking Inventory . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . .3 Advertising the Job 14. . . . . . . . . . . . . . . . . . . .1. 13. . . . . . . 13. . . . . . . . . . . . . . . . . . . .1 Dealing with Suppliers . . . .5 Suppliers . . . . . . . 14 Hiring Employees 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . .2 Payment Plans . . .1. . . . 13. . . .6 13 Inventory Control 13. . . . 14. . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . .4 Inventory Accounting . . . . . . . . . . . . . . . . . . . . . . . .5. . .3. . . . . .1 Job Analysis . 14.1 How to Hire . . . . . . . .5. . . . . . . . . . . . . . . .1. . . . . . . . . .2 Job Description . . . . . . . . . . . . . . .3 Computerized Inventory Control 13. . . . . . .4 Finding People . . . . . . . . .1 Buying Inventory .1 Inventory and Cash Flow . . . . . . . . . . . . . 14. .

Part I International Business Management 7 .

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

• Because of this.S..2.1. 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. Prison labor is also considered improper in the U. • Because guanxi is less important in the West. 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. Why is corruption an important business issue? • See sidenote 1. business people put less emphasis on socializing and are more comfortable doing business with others they do not know well or do not personally like.A.S. Westerners rely more on contracts.S. Definition 1. • In general. • However. Western business people may not initially trust their Chinese counterparts. 1. Easterners tend to trust people after observing a pattern of consistent behavior. This is something Chinese business people should be aware of.A. and Europe but a commonly accepted practice throughout the developing world.10 CHAPTER 1.1 (Ethics) The study of morality and standards of conduct. Note that during the industrialization of the U.2. 2. For example. which are more strictly enforced in the West. 3.2. there is a perception in the West that Chinese are hard-working and smart.2 Corporate Corruption Side Note 1. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. child labor was widely used.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. . BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.A. Which brings us to the subject of this lecture: Ethics. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.

witness. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. which requires strict monitoring and verification of financial information. reward.2. Definition 1.”[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.org/policy research/surveys indices/cpi. – Resources are diverted from more productive uses (such as building buildings) to less productive uses (such as conspicuous consumption by corrupt officials or business leaders). . September 20. gift. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. . . they must factor additional uncertainty into their calculations.transparency. there are few if any issues which affect and infuriate so many in China as corruption. Scandinavians are typically highly trustworthy1 but Italians are less so. In the words of a Beijing correspondent for “The Economist” magazine.2. Source: texttthttp://www. – A bribe is a business expense that goes to no productive purpose and decreases profits. these are all generalizations and individuals may differ significantly from their cultural affiliations.dict. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. • It increases the cost of doing business. or other person in a position of trust. Side Note 1.2 Though things are improving. September 20.2. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. 2 Source: http://www. 2006. For example. – In the wake of Enron. it is simply inefficient.1 (Bribe) A price. • On a macroeconomic level. WorldCom. China continues a battle against corruption. 2006. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. and Tyco.org. voter.2 (Corruption) Corruption is of concern for business people because • It increases risk. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. • Of course.1. investors in the United States had to reevaluate the risk associated with owning stock. “.

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

and as a result made high risk investments in the late 1980s and early 1990s. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. with many women finding their employment opportunities constrained.4. Hodgetts et al. Better known is the case of Japanese banks.4 1.4.2 (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. were not as highly regulated as banks. the political scandals do not appear to have been fully acknowledged and addressed.gov/bank/analytical/banking/2000dec/brv13n2 2. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. also known as thrifts and which function like banks.4. This resulted in several banks being technically bankrupt [5.2 Women in the Workplace Sexual harassment has also become an issue in Japan. 58].fdic. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. 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.1 (The U. 5 1.1.pdf.. . with many men of the opinion that women were just biding their time until they marry and have children. Moreover.4. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. • Many men do not understand why sexual harassment constitutes a problem. Side Note 1. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.S. Savings and loan institutions.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. women have a difficult time being taken seriously.S. Likewise. Side Note 1.4. JAPAN 13 1. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. p. The government was compelled to provide public money to bail out the institutions.

a co-worker.psu..g. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. a supervisor in another area. requests for sexual favors. unreasonably interferes with an individual’s work performance or creates an intimidating. • The harasser can be the victim’s supervisor. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. • The harasser’s conduct must be unwelcome. Hodgetts et al. or a non-employee. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. have paid substantial penalties as a result of sexual harassment or discrimination based on race.S. an agent of the employer.14 CHAPTER 1.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. sexual harassment lawsuits result in significant penalties (e. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. Furthermore. 6 Source: http://www.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. The victim does not have to be of the opposite sex.4.4. hostile or offensive work environment. . and for most public institutions and many large corporations. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. cite two cases in which foreign firms operating in the U. in the millions of dollars) to those who are successfully prosecuted. Definition 1. 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. gender. Side Note 1. It is considered a very serious issue. Are women with equal qualifications as men given equal pay and position? Take a show of hands. or other issues.edu/harassment/legal. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States.de2. yes or no.

7 Source: http://www.5.4.S.5.1.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. in an extended sense. politicians.org. 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. at 40. there seems to be a glass ceiling due to social factors. is the notable exception). Definition 1.S. with the purpose to influence their votes.4. Side Note 1. yes or no.dict. 1.2 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. men are disproportionately represented in management positions. .5. to try to influence decision-makers in any circumstance. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. Side Note 1. EUROPE 15 1.S.7 Note that lobbyists do not have any formal power. Hodgetts et al. with most in the top 20 among over 150 countries included in the survey.5 1. particularly in upper management.5.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. than any other. They only have the power of persuasion.3 Lobbying by Japan Japan spends more money lobbying in the U. their attitudes towards bribery when working in foreign markets differs from that of the U. 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.

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

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. p.S. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 7. 2.S. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. An opaque legal system. there are undoubtedly many others that get away with it. Often. 6.6.6. 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 $1.5 billion in sales annually. An increase in crime and illegal business activities. 3. Prison labor.6. Child labor. Ethical considerations include 1. pp.1. 5. [5. 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. . • Yet another case in which software from a U. Side Note 1.2 (Piracy and Counterfeiting) Present sidenote at [5. company in Boulder was stolen and sold to a Chinese company. • A relatively stable government. Side Note 1.1 (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. 64]. Bribery and other forms of corruption.3 (Corporate Spying) Hodgetts et al.6. Piracy and counterfeiting (see sidenote below). • Note that for every corporate spy that is caught. 4. International corporate spying problems. executives. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.

1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. Definition 1. In the words of a Beijing correspondent for “The Economist” magazine.4 (Corruption) Though things are improving. • CARE (promotes community development.7.2. social justice.18 CHAPTER 1. and promotion of social equity). not-for-profit organizations that seek to serve society’s interest by focusing on social. political. “. Other companies.7. and the environment. provide relief in the event of humanitarian disasters. such as education and health care. there are few if any issues which affect and infuriate so many in China as corruption. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. not-for-profit organizations that seek to serve society’s interest by focusing on social. and emergency relief in the event of humanitarian disasters). 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.. See http://www. and economic issues such as poverty.2 (Nongovernmental Organizations (NGOs)) Private.benjerry. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). and economic issues such as poverty. Definition 1. . social justice.com/our company/our mission/index.7. education. education.”[6] See also sidenote 1.7.7 Corporate Social Responsibility Definition 1.1 (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.2. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. China continues a battle against corruption.6. health. such as Whole Foods. . a grocery chain. and the environment. 1. political. Side Note 1.3 (Nongovernmental Organizations (NGOs)) Private. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. health. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty.S. .cfm for more detail.

000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment.S. – Even socially responsible executives would consider the “bottom line” when making decisions. In 2005.1.S.7. Side Note 1. 1. China ranked 78 out of 158.2 (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. .000 and $125. For example. as executives of publicly traded companies are ultimately responsible to their shareholders. MNCs do not appear to have been significantly impacted. firms a reason to refuse to pay bribes. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. note that while U. Both political groups and businesses are influenced by NGOs.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.1 Corruption and the FCPA Revisited Hodgetts et al. and • Rainforest Action Network (RAN).2. too. with a score of 3.7. executives may actually feel that it is the right thing to do. • And.S. as it gives the U. but does not outlaw payments to political party leaders. Side Note 1.9 U. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. last but note least. many feel that it has had a net benefit.7. • To prevent a boycott or other consumer defections.7. • Conservation International (promotes environmental conservation). Executives are people. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). In fact. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. firms are constrained by the FCPA with regards to bribery and other corrupt practices.

1.7.4 (Some Opinions) Personally. such as the U. slightly better than Sweden. Side Note 1.infoplease.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. and Parmalat resulting in investors losing billions of dollars.4. 4. 10 http://www. It is a difficult problem to solve.com/ipa/A0781359. Tyco. Support and respect the protection of international human rights. and the environment. Side Note 1. Singapore is number 5 with a score of 9.N. WorldCom. but most important first step is to recognize that there is a problem. It cannot be considered to be based on a scientific survey.10 Corruption is certainly not endemic to Asia. better than the U.N. Moreover. Global Compact.20 CHAPTER 1. more Chinese will own stock in companies. 2. Important: Although it is widely cited. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Hong Kong is number 15. Commitments that many MNCs have signed on to. 2006. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. and not based on hard data. With more disciplined corporate governance. The government is actively addressing the issue of corruption.2 respectively.5 (Table 3-1: Principles of the Global Compact) The U. . 5. 3.7. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. with scandals such as Enron. the United States and Europe have recently been rocked by corporate corruption. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.6 and 8. I think corruption will diminish as China economically develops for several reasons: 1.0 is considered to be the borderline at which countries are considered to have a problem. July 1. Global Compact specifies 10 principles which MNCs should abide by: 1. and Germany at 7. As more state-owned businesses become privatized and the size of the middle class increases. Scandinavian countries are at the top of the list. societies.3. With greater financial transparency.7.S.html. The government recognizes that it is an issue and is taking action. specify standards and codes of conduct in domestic and global operations. malfeasance and diversion of corporate funds becomes increasingly difficult. with a score of 8.

the right for unions to exist). A precautionary approach to environmental challenges. Business should work against all forms of corruption. Undertake initiatives to promote greater environmental responsibility.7. Freedom of association and recognition of the right of collective bargaining (i. 4. Encourage development and dissemination of environmentally friendly technologies. 21 3. and 10. 7. 8. . Elimination of all forms of forced and compulsory labor. 5.e. CORPORATE SOCIAL RESPONSIBILITY 2.. 6. Elimination of child labor. including extortion and bribery. Elimination of discrimination with respect to employment and occupation. 9.1. Ensure that MNCs are not complicit in human rights abuses.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

23 .1. pp.1 Defining Operations Management Definition 2. e they have restaurants in 38 countries. the efficient production of services will become more important.. e • Hard Rock Caf´s are in most major cities in the U.1 (Heizer Company Profile: Hard Rock Caf´) Review Heizer’s e company profile of the Hard Rock Caf´ [1.1 (Operations Management) Operations management. • They typically combine heavy merchandizing with the restaurant operation. often abbreviated OM. another name for enterprise management is “operations management. and Beijing.” 2. While some aspects will focus on the “international” component of the name. Side Note 2.1. As China develops. In business parlance. In total. is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. casinos. such as hotels. Note that the definition refers to both goods and services. • They have also expanded into compelementary operations. etc. 2–3]. much of it will focus on the “enterprise management” component.Chapter 2 Operations and Productivity This course is called International Enterprise Management.S.

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

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

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

. – Providing proper work methods and tools. 9]. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. such as the presence or absence of a part on a shelf.2. The process is driven by a series of signals. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. New stock is ordered when stock reaches the re-order level. one drawback of the JIT system is that the re-order level is determined by historical demand.1 Side Note 2.2. – Providing the proper training. p. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. February 14.3 “Significant Events in Operations Management” [1. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. 8]. • Eli Whitney (1800) is credited for popularizing interchangeable parts. When implemented correctly.org/wiki/Just In Time %28business%29. 2007. that tell production processes to make the next part. and 1 Source: http://en. WHAT OPERATIONS MANAGERS DO 27 10. This saves warehouse space and costs. the firm could deplete inventory and cause customer service issues. If demand rises above the historical average planning duration demand.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs.2 (A Little History) Review Heizer figure 1. quality. and efficiency. • Reliability and stability of systems depends on well-planned maintenance schedules. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level.2. Definition 2. or Kanban. However.wikipedia. • Frederick W. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. which relied upon standardization and quality control. Kanban are usually simple visual signals.2. p. 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. He also believed that management is responsible for – Matching employees to the right job.

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

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

parts. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. brought about in part by the internet. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. 2. operations managers are responding by moving decision making to the individual employee. Globalization has been having a dramatic impact on operations management and in the future. and finished goods rapidly. • Empowered employees – With the rise of services and knowledge products.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. Trends that Heizer and Render identify [1.2. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. . • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. capital. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output. operations managers are increasingly responsible for innovations that move ideas. Operations managers are being challenged to produce biodegradable. Definition 2. • Mass customization – With increases in technical capabilities and customerlevel information management.2. p. wherever and whenever needed. reusable.5.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2.30 CHAPTER 2. it will continue to strongly impact the field. or management). or recyclable products or to minimize packaging and other wasteful production steps. OPERATIONS AND PRODUCTIVITY 2. • 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. the next step in product development involves customizing products according to the customer’s preferences.

The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Consider today’s computers versus those from the 1970s.5.4375 titles per labor-hour = 0.5. THE PRODUCTIVITY CHALLENGE 31 Definition 2.5. . Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity. Side Note 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.0077 titles per labor-hour = 0.2.5. Definition 2. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Also known as total factor productivity. Definition 2.5. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). p. 15].5.5.25 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.4 (Total Factor Productivity) See definition 2. Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.3. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. In order to improve productivity.

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

and 4. 2. The primary variables for improving labor productivity include 1. In developed nations. Cannot Correctly Answer Questions of This Type. and • Healthier workers as well as • A shorter work week.. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. Diet of the labor force.5. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. What is the area of a 4 × 6 meter rectangle. there is considerable concern over teaching of basic skills such as mathematics to grade school children.2.S. and math. p. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.5. “About Half of 17-Year-Olds in the U.8 [1. Basic education appropraite for an effective labor force. Social overhead that makes labor available. writing.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. and 33 3. THE PRODUCTIVITY CHALLENGE • Better-nourished. .” In the U.) Present Heizer figure 1. maintaining and enhancing the skills of labor. Side Note 2. 16]. such as transportation and sanitation. draw the rectangle on the blackboard. About half of 17-year-olds cannot answer the following multiple-choice questions: 1.S. Which of the following is true about 84% of 100? 4 When presenting this question.S.3 (The State of Education in the U.

34 CHAPTER 2.5% after allowances for depreciation. Side Note 2. productivity in the service sector has not increased as rapidly as with the production of goods.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.5. 2.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. management is not always identified separately from labor as an input.. are utilized effectively.S. Developed economies (also known as post-industrial economies) require trained. and because the author of the textbook is writing about operations management. Note that in classic economic analysis and other areas of business.4 Productivity and the Service Sector Historically. has increased at about an average of 1. Note that there is a trade-off between capital and labor in most industries.5. U. education. 2.5. Definition 2. According to Heizer [1. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.2 Capital Capital investment in the U. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. as well as capital.S. management is considered as a separate input. 2. Difficulties arise because service-sector work is .5.4 (Management as an Input) Because this is a course in business management. graduate programs and the students they produce remain the best in the world.S.5. 17]. and knowledgeable employees and operations managers are responsible for ensuring that technology. p. and the cost of capital depends on interest rates. however. educated. and knowledge. in the U.

Difficult to evaluate for quality (e.g..g.. These demands come not only from the manager’s personal ethic. Side Note 2.2. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.5 • The U.5. and • The U. 2. laundry service. • Keeping the workplace safe. 2. Low-productivity activities.g.S. p. legislation protects shopkeepers from discount retailers. 5 In Japan.6 Social Responsibility As discussed in chapter 1. Frequently individually processed (e. • General ethical behavior concerning issues such as child labor and corruption. government agencies.5 (Service Productivity in the U. 18] • Retailing in the U. and child care. banking system is about 33% more productive than Germany’s.6. Typically labor-intensive (e.S. medical diagnosis). teaching). telephone industry is twice as productive as Germany’s. . Often difficult to automate (e. Heizer notes [1. in both overall and service productivity.S.) Productivity is highest in the U... and 5. a haircut).g. the performance of a law firm).g. and other stakeholders. We will discuss this challenge in more detail throughout the course. 35 3.S. 4. such as cleaning.S. These challenges include such issues as • Maintaining a clean environment. investment advice). but from customers. is twice as productive as in Japan. watchdog groups such as NGOs. Often an intellectual task performed by professionals (e. food preparation. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. SOCIAL RESPONSIBILITY 1..

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

global organizations can attract and retain better employees.2 [1. • 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. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. 28] which includes mission statements for three multinational companies: 1. Side Note 3. 5. p. • Provide additional insights and opportunities. and • Increase sales. Missions state the rationale for an organization’s existence. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. France. competitively superior. global air-ground transportation of high-priority goods and documents that require rapid.1 (Mission Statements for Three Organizations) Review Heizer figure 2.1 (Mission) The purpose or rationale for an organization’s existence. We will produce outstanding financial returns by providing totally reliable.1. time-certain delivery. Equally important. an understanding of cultural differences in preferences is needed to best meet customer needs.1 Mission Whether large or small. positive control of each package will be maintained utilizing real time electronic tracking and tracing . FedEx is committed to our People-Service-Profit philosophy.1.1. FedEx.38CHAPTER 3. Attract and Retain Global Talent – By offering more employment opportunities. 4. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. Provide Better Goods and Services – For companies doing business in an international setting. 3. Definition 3. I recommend that all companies draft a mission statement. 6. 3.

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

Differentiation – They make their product better.3 (Sample Mission Statements) Present Heizer’s figure 2. be it • Product features. and Major Departments in an Operations Function. . • Availability of complementary products.3 (Competitive Advantage) In operations management.com/our company/our mission/index.1. Cost leadership – Providing cheaper products. Responsiveness – By providing timelier.1. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.1. Definition 3.1. See http://www. the creation of a unique advantage over competitors.” Note that mission statements are used not only at the company-wide level. 2. 3.benjerry. Differentiation can arise from anything that the customer may value about a product or a services. 3.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. • Interoperability with other products. the Operations Function.40CHAPTER 3. but can be used at the department level and even at the project level. • Training. • The “look and feel” of the product. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers.3: “Sample Missions for a Company.cfm for more detail. more responsive products or services. Side Note 3. Definition 3. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.2 (Strategy) How an organization expects to achieve its missions and goals.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

3. Definition 3. Opportunities.3. Implement an OM strategy. then determine whether the organization does these things well (and. then • Form a Strategy. and Threats) analysis to develop strategies. 37]. and 3. These critical success factors are used to develop a competitive advantage. Weakness.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. The operations manager’s job is a three-step process: 1.44CHAPTER 3. Side Note 3. Increase productivity.3. 2.” The process of developing a strategy involves the following steps: • Environmental Analysis.6 [1.3. • Determine Corporate Mission. 3. “Strategy Development Process.1 (Strategy Development Process) Present Heizer figure 2. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. in particular. and 3. . Provide competitive advantage. The purpose of this process is to 1. determining internal strengths and weaknesses and external opportunities and threats. p. Identify a strategy and critical success factors.2 (Critical Success Factors) In operations management.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.1 (SWOT Analysis) In operations management. those activities or factors that are key to achieving competitive advantage. Staff the organization with personnel that will get the job done. 2. Group the necessary activities into an organizational structure. if the firm has a competitive advantage in these things) and where failures are most likely. Definition 3.

Southwest Airlines has a competitive advantage in providing low-cost airfares.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.1 as a checklist to determine critical success factors. CSFs.3.3. and supporting activities. 5 Management 6 Human Information Systems Resources. 39].4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. 3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Recall the “org charts” in sidenote 2. finance. .4. Side Note 3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.2 as examples of how firms organize their activities. a graphical link of competitive advantage. • Red arrows – critical success factors • Blue arrows – support activities 3.3 Integrate OM With Other Activities In order to achieve its strategy.6 3.3. p.3.2. MIS.3. OM activities are most productive when they are integrated with other activities such as marketing. Definition 3.3.1.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3 (Activity Map) In operations management. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.5 and HR. Once CSFs are determined.

Typically characterized by subsidiaries. Usually does not confer a cost advantage.4 (Multidomestic Strategy) In operations management. owning or controlling facilities in more than one country. as exports require little change in operations and licenses often leave risk with the licensee.46CHAPTER 3. Only 10% of its work force is Swiss. a strategy that uses exports and licenses to penetrate the global arena. 2. franchises.4. See definition 3.1 (International Business) A firm that engages in cross-border transactions. with beer on the menu in Germany. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. but a good strategy for cost reduction when products do not need to be adapted locally. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. 42] Definition 3.5 (Global Strategy) In operations management.4.4. [1.4. Definition 3. .2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Although e it is legally Swiss.4.4. 4.4. 95% of its assets and 98% of its sales are made outside Switzerland. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. products do not need to be localized. or joint ventures with substantial independence. • McDonald’s is an example of a country with a multidomestic strategy. See definition 3. wine in France. See definition 3. Definition 3. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. International strategy – Often the easiest strategy.4. See definition 3. Its menu reflects the country in which it operates.5. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. • Texas Instruments is an example of a country with a global strategy. 3. p. In the semiconductor industry. Definition 3. • Nestl´ is an example of a country with a transnational strategy.3 (International Strategy) In operations management.4. Definition 3.4. Global strategy – Not characterized by local responsiveness.6. and hamburgers without beef in India.3. Also one of the least profitable due to transport costs and little local responsiveness.

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

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. 49]. Controlling – Monitoring of resources. pp. costs.1 [1. defining the project. Scheduling. 46–47]. The profile highlights the importance of project management in achieving competitive advantage. 3.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. 2. 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. Even Microsoft. 49 . Plans are also revised to meet changes in time and cost demands.Chapter 4 Project Management Side Note 4. money. Side Note 4. and budgets. the largest software company in the world. Project management involves three phases: 1. quality. p. Planning – Goal setting. Side Note 4.3 (Project Planning.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. and supplies are tasked to specific activities and activities are related to each other. and Controlling) Present Heizer figure 3. and team organization.0.0. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.0. Scheduling – People.

Project organizations work best when [1. People will not come through with what they promised. 48] 1. 4. you will be confronted with a daunting task.5 (Personal Advice on Project Management) Project management is a tricky profession.50 CHAPTER 4.” [1. you are doing your job well if noone notices the project management. The work contains complex interrelated tasks requiring specialized skills.1 Project Planning While many projects are run within an existing organization. things you thought were certain turn out not to be. Moreover. If you become a project manager on projects of significant complexity. p. The project cuts across organizational lines. 4.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. often times. The responsibilities of project managers are to make sure that . The job is unique or somewhat unfamiliar to the existing organization. it is very obvious and can be very costly. it is also an area in which there will continue to be high demand for qualified people. and/or 5. you should always expect the unexpected. See also Heizer sidenote “Project Management and Software Development. 69]. p.1. 2. You may be managing resources far in excess of your individual salary. if things go wrong. a temporary project organization is formed to address a specific project. project managers are highly visible in a firm and have significant responsibilities.0.1 The Project Manager As alluded to in sidenote 4. PROJECT MANAGEMENT However.5. Work can be defined with a specific goal and deadline.1.0. Definition 4. In a sense. 3. However. 4. and you will be forced to improvise. Side Note 4. Your job is to make things go smoothly and according to plan. The project is temporary but critical to the organization.

1.2 (Work Breakdown Structure (WBS)) In operations management. When dividing a project into tasks. In a project that includes allowing a user to enter personal information on a web page. People receive motivation and information necessary to do their jobs. All projects come in on time. The project meets its quality goals. • Build the user account input web page is a much better task division than 1. you have divided the tasks too finely. Side Note 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). dividing a project into more and more detailed components. Complete software architecture for user account input web page functionality 5.1 (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 4.1. 2. The project is on or under budget. PROJECT PLANNING 1. For example. Approve software architecture for user account input web page functionality . Review graphic design for user account input web page 3. 3. Approve graphic design for user account input web page 4. a task that should only take a day or so. and 4. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.1. a web page takes about a day to build for an experienced team. in a software engineering project.4. Definition 4. Review software architecture for user account input web page functionality 6.1. Complete graphic design for user account input web page 2.

The actual WBS for Windows XP would. of course.1. fill hundreds if not thousands of pages. Identify precedence relationships among activities 3. Major tasks in the project 3. you should also take note of time and cost estimates given by your technical staff.52 CHAPTER 4. At the time you are creating the work breakdown structure. PROJECT MANAGEMENT 7. which we will discuss next in section 4. Side Note 4. Write software for user account input web page functionality 8. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Write software for user account input confirmation page functionality 9.3 [1. Encourage realistic time and cost estimates for each activity .3 (Reality Check: WBS) In reality. Activities (also known as “work packages”) to be completed Side Note 4. Subtasks in major tasks 4. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.2 (Work Breakdown Structure) Present Heizer figure 3. Show the relationship between each activity to others and to the whole project 2. the work breakdown structure is not something you go to your office to do in isolation. 4. Project 2.1. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. p.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Scheduling serves to 1.2. 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. They will be useful for project scheduling.

Overall project time is developed. 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 . Derives from the typical shape of a bottle. It can actually be quite time consuming to create and maintain Gantt charts. p. Gantt charts are perhaps the most widely used tool for ensuring that 1. cost estimates.2. Side Note 4.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded.2. these should be considered merely tools to be used when they are useful by saving time or energy. Definition 4. However. and CPM) Inexperienced project managers often feel the need to use Gantt.2.2 (Using Gantt. MS Project’s Gantt chart functions demand you assign employees. which becomes narrower as one approaches the neck of the bottle. All activities are planned for. PERT and other formal documents.2.2. The order of performance is accounted for. PERT. and material resources by identifying critical bottlenecks in the project Side Note 4. Make better use of people.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. PERT. as. moeny.4 [1. Activity time estimates are recorded. the road bottlenecks.” This will give the class an idea of the look and feel of a typical Gantt chart. 2. and CPM tools for every project management activity. PERT and CPM help answer questions such as • When will the entire project be completed? . PROJECT SCHEDULING 53 4. 3. – said of roads. For smaller projects. Perhaps they imagine that they are not doing their jobs professionally if they are not. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. Definition 4.4. right by the bridge. and 4. and other values to each activity.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. 51].

and 8. Control programs typically produce reports detailing 1.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity.3. Time analysis reports. 6. 4. Total program labor curves. Raw material and expenditure forecasts. costs. is the money spent equal to. Cost distribution tables. or ahead of schedule? • On any given date. PERT and CPM. 3. Definition 4. . 2. is the project on schedule.54 CHAPTER 4. Variance reports. 7. what is the best way to accomplish this goal at the least cost? 4. 4.3. and budgets of projects.3 Project Controlling Project control involves monitoring resources. Work status reports.1 PERT and CPM Two methods. less than. were developed in the 1950s for project control. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. 5. Cost breakdowns for each task. Functional cost and hour summaries. 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. behind schedule. 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. quality.

3.3.3.3.3. Activity on Arrow (AOA).3. 2. 6. Develop the relationships among activities.2. or the critical path. 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.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.5 [1. See also definition 4. p.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3. Definition 4. Assign time and/or cost estimates to each activity. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. They both follow six steps: 1. 4. monitor. Use the network to help plan.3. in my experience. See also definition 4. Also. Draw the network connecting all of the activities. 4. it will do for you automatically much of what we will go through manually in this class. As the names describe. through the network. 53].2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Gantt charts are the “go to” visualization method for even very complex projects. Personally. AON associates the activity with the node whereas AOA associates the activity with the arrow. 5. Side Note 4. Activity on Node (AON) and 2. PROJECT CONTROLLING 55 Definition 4.3. Moreover. Compute the longest time path.2 (Example: AON and AOA) Present Heizer’s figure 3. 3. schedule. . and ontrol the project.4. Side Note 4.3 (Critical Path) The computed longest time path through a network. Define the project and prepare the WBS.

We do this with a critical path analysis with involves a 2-step procedure. analysis used to determine the project schedule. their dependencies.1 gives sufficient information to describe the network. that is. its LF equals its LS of the activity that immediately follows it. – If an activity is an immediate predecessor to more than one activity.3.9 [1. See also definition 4. its ES is the maximum of all EF values of its predecessors. 1.6–3.3.4. 54–55]. LF = min{LS of all immediate following activities}. In other words. 2. pp.1 (Critical Path Analysis) In project management. we must use time estimates of each activity to determine the overall schedule for the project. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. 4. EF = ES + Activity time. LS = LF − Activity time. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. – If an activity has multiple immediate predecessors.4 Determining the Project Schedule Once we have identified all of our activities. its LF is the minimum of all LS values of all activities that immediately follow it. . p. Definition 4. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. that is. that is.56 CHAPTER 4. PROJECT MANAGEMENT Side Note 4. 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. • Table 3.8 [1.3. 56]. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. ES = max{EF of all immediate predecessors}. Follow with example 3 and figure 3. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.

and • Includes only critical activities (see sidenote 4. it is said to have free slack.4. the time devoted to one of these activities must also be reduced. Slack time is just Slack = LS − ES or Slack = LF − EF . 60]. if we delay activities B and D by one week each. the free time for an activity. Note also that if we delay each activity by the amount of slack that activity has. the time associated with a single activity. Note that activities A. p. If an activity2 does not impact the slack time of any other activity. 57].4.3 [1. G.4. Side Note 4.1. p.1.2 (Forward Pass) In project management scheduling.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.5. and H have no slack time and cannot be delayed without delaying the entire project.5.3 and Heizer figure 3. 61] based on table 3. 4. they share total slack.1 When several noncritical activities appear successively in a path. The critical path is one that • Begins at the first activity in the project. E.13 [1.10 [1. activity F in sidenote 4. • Terminates at the last. or the amount of time an activity can be delayed without delaying the entire project.5. Definition 4. p.4.1 (Slack Time) In project scheduling. Also notable is that if the total time of the project needs to be reduced. in the example in sidenote 4.2 (Total Slack) In project scheduling. .4.” Then complete Heizer example 7 figure 3. we may delay the project as a whole. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.5.3 (Free Slack) In project scheduling. Definition 4.4. C. the step that identifies all the earliest times that activities can be completed. the time shared among more than one activity. These are called critical activities.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.1). Definition 4. “Notation Used in Nodes for Forward and Backward Pass. 2 For example. we cannot complete the project in 15 weeks.3. 1 For example.

6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.1 and 4. In reality.6. three time estimates are used: 1. PROJECT MANAGEMENT 4.3. Definition 4. See also definitions 4. unexpected complexities. the time required to complete an activity is often uncertain due to supply problems.6.6. In PERT. the project manager pulls the number “out of the air” based on their experience managing related activities. The beta distribution is used as a prior distribution for binomial proportions in .58 CHAPTER 4.6. However.6.3. and the other uses β = β − 1 and α = α − 1 . Definition 4. in most cases.2. the “best” activity completion time that could be obtained in a PERT network. technical considerations that were unknown at the time the project schedule was drawn up. See also definitions 4. Definition 4.2 and 4.6. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. See also definitions 4. Definition 4.1 and 4. the “worst” activity completion time that could be obtained in a PERT network.6.6.. Most likely time – The most realistic estimate of the time required to complete an activity. Side Note 4. which are labeled according to one of two notational conventions. the most probable activity completion time that could be obtained in a PERT network. Beta distributions have two free parameters.3 (Most Likely Time) In project scheduling. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.6. The usual definition calls these alpha and beta.2 (Pessimistic Time) In project scheduling. we do not.1 (Optimistic Time) In project scheduling.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. Effectively.6. etc.6.

6. p.78 weeks.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. and pessimistic times of 1. Side Note 4. 2007.wolfram.1 Probability of Project Completion If we assume that 1.4.html.6. most likely. The expected activity time for activity F is 3 weeks5 and the variance is 1. 63] for activity F based on optimistic.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. and pessimistic times of 1.html http://mathworld.25 to 3. 62].β) with α = 1 and β ranging from 0. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. The above plots are for various values of (α. 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. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.1]. 4. Activity times are statistically independent 3 Source: http://mathworld.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. and 7.6.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. q) = (4.3 The domain is [0. most likely. and . February 21.com/BetaFunction. β) Γ(α)Γ(β) P (x) = (4. 4 See definition 4. 4. Total project completion times follow a normal probability distribution and 2. 8 1. The variance of the activity time is Variance = [(b − a)/6]2 .00.1) where B(p.6.78 6 6 36 7 4 weeks. 2.wolfram. and 9 weeks.00 week. p.com/BetaDistribution.

definition 4.6.6.html. 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.76 weeks approximately 16% of the time. and within 3 standard deviations approximately 99. Note that the standard deviation of 1.” Review Heizer example 10 [1. A2– A3] “Normal Curve Areas.6. 65] and figure 3.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. Definition 4.76 weeks implies that the project will exceed the expected completion time by more than 1.16. 64]. see http://mathworld.3 (Example: Project Variance) Review Heizer example 9 [1.com/StandardDeviation.6.5.60 CHAPTER 4.6. Side Note 4. 9 For 10 See more information. 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) (4.6.1. pp.6 (Standard Deviation) The standard deviation is the square root of the variance. See also 4.7% of the time. See definition 4. Side Note 4. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. p. p. the population variance var(X).6.3) Definition 4.10 Determining Project Completion Time for a Given Confidence Interval A common question is.4 (Using the Normal Table) Pass out Heizer Appendix I [1. commonly also N written σ 2 . two standard deviations approximately 95% of the time. .9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6.wolfram.6.6.

Assuming linear costs.7. crash cost is the cost required to complete an activity in the shortest time possible.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) (4.2 (Crash Time) In project management.1. if certain activities off the critical path take the pessimistic time estimate or more to complete.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. 4. it may result in the project being delayed. Crashing a project involves a four step process: 1. in fact.7.1 (Crashing) In project management.7.7. you will doubtless experience one or both of these eventualities many times in your career.7.7. • The shortened durations will actually enable us to finish the project on time. and • The total cost of crashing is as small as possible. we need to ensure • The amount by which an activity is crashed is. and if you become a project manager. the crash cost is typically higher than the normal cost. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.11 Definition 4. Definition 4.4. permissible and realistic. Definition 4.3 (Crash Cost) In project management. Project crashing is the name given to the process of rushing a project to completion. Step 1 – Compute the crash cost per week. .1. crash time is the shortest duration of an activity. Since activity completion times are typically shortened by adding resources. See definition 4. we want to do so in the least cost mannger possible. See definition 4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. When crashing a project.

3. Note that one activity may be on several critical paths. If you accept the challenge and try to rush the project to please upper management.7.5 and figures 3. Step 2 – Find the critical path(s) in the project network. 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.7. If not. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. As a project manager. Side Note 4. If you find yourself needing to rush a project.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If there is more than one critical path.62 CHAPTER 4. 4. 67–69] including table 3.2 (Example: Crashing a Project) Present Heizer example 12 [1. 4. Step 3 – If there is only one critical path. PROJECT MANAGEMENT 2. pp. as the negative impact on your career of tactfully pushing back against management is usually much less than the negative impact of a significant project delay or cost overrun. If the due date has been reached. the advice given in this section should be helpful. stop. go to step 2. • Advantages – Especially useful for large projects . My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. you should be very wary of such pressure. Crash this activity by one period. Step 4 – Update all activity times.18–3. 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.19. Side Note 4. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. At times this may be politically infeasible.

dotproject. 4. You may also refer to http://en. There are a variety of alternatives.org. Starkweather about his impression of various alternatives.org/Planner. they are often overkill for small.org/wiki/List of project management software for a list of project management software or ask Dr.7. it is relatively expensive and the features are so numerous and complex. Information on dotProject can be found at http://www.to mediumsized projects. pp.wikipedia.net.9. . independent.1–3. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths. Note that most project management textbooks refer to MS Project as the software of choice for project management. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined. Information on Achievo can be found at http://www.9 Using Microsoft Project for Managing Projects Present programs 3. 70–74] with figures demonstrating MS Project functionality.7 [1.achievo.gnome. including open source software that is free. It is perhaps the most widely known and featureful project management software available. 12 Recall sidenote 4. However. Information on Planner can be found at http://live.1.4. Noncritical paths should be closely monitored as well.

64 CHAPTER 4. PROJECT MANAGEMENT .

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

Capital expenditures. Definition 5. Decline. In the first two stages.1. These concern rates of technological progress. Cash budgeting. These may include inflation rates.1.2 (Economic Forecasts) In operations management. . Growth. planning indicators valuable in helping organizations prepare medium. See also definitions 5.2 and 5. money supply. Facility locations or expansion.3 and 5. Introduction.4. • Technological forecasts. Production planning and budgeting. and Analyzing various operating plans.4. Maturity. CHAPTER 5. Product life cycles tend to follow four stages: 1.1.to long-range forecasts. and 4. which impacts purchases of new plant and equipment as well as development of new products. and Research and development.66 – – – – Sales forecasting. Generally deals with more comprehensive issues than short-range forecasts. See also definitions 5.3 (Technological Forecasts) In operations management.1. Useful for – – – – Planning for new products. and • Demand forecasts. 5. 2. housing starts.1. long-term forecasts concerned with the rates of technological progress. and other economic indicators. FORECASTING • Long-range forecasts – Generally more than 3 years.1 Types of Forecasts Organizations typically use • Economic forecasts. Definition 5.1. longer forecasts are needed.1. 3.

2.2 and 5. 2.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. Determine the time horizon of the forecast. Select the items to be forecasted. projections of a company’s sales for each time period in the planning horizon.2.1. Capacity – Underestimating demand can result in • Undependable delivery. .1. 5. 5. • Training. Also called sales forecasts. 5.4 (Demand Forecasts) In operations management. Make the forecast. 4. marketing. and • Loss of market share. these drive a company’s production. 6. Human resources – Anticipated demand is needed to estimate the need for • Hiring.1. 3. Validate and implement the results.1. Gather the data needed to make the forecast. and personnel planning.5. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.3. capacity. and scheduling decisions and serve as inputs to financial. and • Layoffs. See also definitions 5. Select the forecasting models. 7.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Determine the use of the forecast. 3. • Loss of customers.

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

– Sales force composite ∗ You would be surprised how accurate your sales force can be. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. Sales people typically respond to incentives. 3. · Requires less past data than moving averages. ∗ Moving averages · Simple. · See definition 5. they will do so. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. and if they perceive there is an incentive to exaggerate.3. and · Respondents. · There are three problems with moving averages 1. the more likely it is your results will be accurate. useful method if we can assume that market demands will stay fairly steady over time. · Staff personnel. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. Moving averages cannot pick out trends very well. ∗ However. · The simplest and easiest way to estimate demand.3. say. 2.9. or other incentives to over or understate demand.5. be sure that the sales force is clear that their incentive is to be as accurate as possible. political.3. the naive approach. · See definition 5. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. Moving averages require more past data to work with than. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. · Useful as a starting point or sanity check for more sophisticated methods. for example. . ∗ The more independent your decision makers are from economic.8.

2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.6. a forecasting technique using a group process that allows experts to make forecasts. a forecasting technique based on salespersons estimates of expected sales. See also definition 5.3 (Jury of Executive Opinion) In operations management. See also definitions 5.5. and 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. 5.3.3.3.3.70 CHAPTER 5.4.6 (Consumer Market Survey) In operations management.3.1.3.10.3. Definition 5.3.4 (Delphi Method) In operations management. .1 Qualitative Forecasting Methods Definition 5.3. See also definitions 5.5.2. See also definitions 5.3.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. 5.3.3. Definition 5. personal experiences. 5.6. and value system.3. See also definitions 5.5 (Sales Force Composite) In operations management.3. and 5.3.3. Definition 5. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. emotions. Definition 5.3. · See definition 5. 5.4.3.3. and 5.3.5. and 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.4.3.3.6.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. 5. See also definition 5.3.

5.2) See also definition 5.3. That is.3) The smoothing constant.10.9. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.7.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. and are appropriate to use when the underlying average .3.7.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. generally ranges from 0. • Simple Moving Average – Mathematically.3. Moving averages can be either simple or weighted. and 5.8. Definition 5. Higher values give more weight to recent data.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. Mathematically.5.3.5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. Definition 5.2 Quantitative Forecasting Methods Definition 5. See also definition 5.3. See also definitions 5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.1) n • Weighted Moving Average – Mathematically. α.05 to 0.3.3. FORECASTING APPROACHES 71 5.3.3. a simple moving average is given by demand in previous n periods Moving average = (5. 5.3. Definition 5.3.11.

12.13. Mean squared error (MSE). 5. such as the mean absolute deviation (see definition 5.15. 3.3.3. When α = 1.3.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.3. FORECASTING is likely to change.3.3.7. and 5.3. exponential smoothing is equivalent to naive forecasting. .3. Definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. Mean absolute percent error (MAPE). Mean absolute deviation (MAD). Three popular measures are 1. Definition 5.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 5.7.12).3.3.3 Measuring Forecast Error Once a forecast is made.3. Definition 5.8.11 (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.3.4) definition 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5. while lower values give more weight to past data. 1 See |actual − forecast| n (5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.0. and are appropriate to use when the underlying average is relatively stable. 2.14.3. See also definition 5. See also definition 5.72 CHAPTER 5.13).

3.3. Mathematically.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.5.8) With smoothing constants α for the average and β for the trend.11) . expressed as a percent of actual values. MAPE is given by MAPE = See also definition 5. 100 n i=1 (forecast errors)2 n (5.3. Definition 5.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.5) |actuali − forecasti |/actuali n (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.12.12.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.3.3.7) or F ITt = Ft + Tt (5. FORECASTING APPROACHES 73 Definition 5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.6) 5.3. Mathematically. MSE is given by MSE = See also definition 5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.

10. It is also commonly called linear regression analysis. Calculate the forecast including trend.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. time) (5. F ITt . the emponentially smoothed forecast for period t using equation 5. by the formula F ITt = Ft + Tt . Ordinary Least Squares Regression analysis is also useful for predicting trends. 1. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (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.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.14) . Compute Ft .12. 2. 3.74 or CHAPTER 5. Compute the smoothed trend. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Tt with equation 5.

3.. Although there are many methods to accomodate seasonal demand. Estimate next year’s total annual demand. ¯ x The least squares method has several drawbacks.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Most businesses experience a surge in sales around Christmas. 5. Divide this estimate of total annual demand by the number of seasons. such as cars and washing machines. to account for seasonal changes in demand in our forecasting. Find the average historical demand for each season. 1.3. 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 5.5 Seasonal Variations in Data In most businesses. demand is seasonal.5. 5. Deviations around the least squares line are assumed to be random. 1. 2. . It cannot be used to predict too many periods into the future as the further into the future the prediction is made. consumers often make fewer purchases of durable goods. This provides the seasonal forecast. 3. the more uncertain it is. 2. In the U. Compute the average demand over all months. the multiplicative seasonal model.3. then multiply it by the seasonal index for that month. The first step is to calculate the seasonal forecast. Compute a seasonal index for each season by dividing the historical demand by average demand.13 assumes a linear relationship. We do that with a 5-step process.S. Definition 5. 3. during the summer months when it is common to take a vacation. 4. we will examine one model.

106– 107]. whatever uncertainties you may have transfer to your predicition of y.g. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model. average local salary) (5. Note that making predictions of future demand involves also making predictions about the independent variable x. FORECASTING 5..3. It is also called the standard deviation of the regression and.15) Side Note 5.g.17) . is given by (y − yc )2 n−2 Sy.76 CHAPTER 5. pp.. If there are published estimates you can cite (e.16 is y2 − a y − b n−2 xy Sy. However.x = (5.g.x = (5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. mathematically. but x will be something other than time.1 (Example: Using OLS) Present Heizer example 12 [1. if you are uncertain about predictions of x. We will use the same technique.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.3.4.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.3. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.

“Distribution about the Point Estimate of $600 Million Payroll.S.S. stock markets. Correlation) Correlation merely means that the values of two variables are historically related.html?xid=sitecnn-partner. Historically.3 and the U.2 (Distribution About the Point Estimate) Present Heizer figure 4. “Four Values of the Correlation Coefficient. 2007. stock market.3. the average length of a woman’s skirt and stock market prices in the U.3.S.4 . changes in skirt lengths don’t cause stock market prices to rise and vice versa.3 (Examples of Correlation Coefficients) Present Heizer figure 4.” Note that the regression assumes a standard normal distribution about the estimate. 109].3. has risen. is monopolized by the NFL.2 with stock prices generally rising as skirts rise.5. Dow Jones Industrial Average and Standard and Poor 500.1594488.S. p. or National Football League. It does not imply causation one way or the other.8599. The correlation coefficient of variables x and y is given by r= See also definition 5.4 (Causation vs. but the relationship is coincidental. stock market prices as well as the winner of the Super Bowl. in all but one Year of the Pig.time.” Side Note 5. p.3.18) . 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. Correlation Coefficients for Regression Lines Definition 5. Since 1935. have been correlated. 108].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. February 28.9 [1.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. the note in the margin accompanying Heizer example 14 [1.3. 4 Source: http://www. nor does it imply that they will continue to be related.10 [1. a football game played between two football conferences in the U. leading stock indexes. pp.S. 107]. Definition 5.3.18.” the AFL (American Football Conference) and the NFC (National Football Conference). football in the U.S. FORECASTING APPROACHES 77 Side Note 5.S. the U. which is divided into two “conferences.3. Other interesting correlations that have been identified over the years include banana prices and U. Side Note 5.com/time/business/article/0. Even the Year of the Pig correlates strongly with the U.00. Certainly.

. . b1 .5 Definition 5. b 2 . in a multiple regression analysis involves a complex formula which is beyond the scope of this class. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . 110]. “Forecasting Manpower with Multiple Regression at TransAlta Utilities.6. In practice. b1 . p. p.18 and Heizer example 15 [1. .19 (Multiple Regression) A causal forecasting method with more than one independent variable. .) It measures the percent of variation in the dependent variable (y) explained by the regression equation.” As the sidebar points out. . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.78 CHAPTER 5. if they are indeed related to the dependent variable. . b2 . you would use statistics software to calculate these values. It is commonly simply called “R squared. Side Note 5. 110].3. often the most difficult part of building a multiple regression model is to pick the independent variables.19) Determining the values of a. (See definition 5. . results in additional predictive accuracy as measured by r2 . .” For example. etc. The same technique can be applied to use several independent variables to predict the value of a dependent variable. The multiple regression equivalent of equation 5. . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.g. we discussed a means by which we can attempt to predict the value of one variable using the value of another. Adding additional independent variables as predictors. 5 See definition 5.3. “What was the R squared of your regression?” Multiple Regression Analysis In section 5.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.3. .15 is given by y = a + b1 x1 + b2 x2 + .3. = the dependent variable (e. x2 .3.17.

2 standard deviations.4 standard deviations. These limits are typically based on M ADs. MONITORING AND CONTROLLING FORECASTS 79 5. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).4. 111]. If the tracking signals violate upper or lower limits.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. The tracking signals should also be compared as they are generated against limits. 6 Recall definition 4.6.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.forecast| n where M AD = (5. three M ADs about 98% of the time. and within 4 M ADs about 99.4. This means that the observed value should be within 2 M ADs abut 89% of the time.4.9% of the time. .2. though large errors may be a problem as well even if the positive and negative errors balance. which correspond roughly to standard deviations. Definition 5. p. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .1.5.20) A good tracking signal has about as much positive as negative error.8 standard deviations. Tracking signals are typically used monitor forecasts. two M ADs to 1. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.6 standard deviations.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. and 4 M ADs to 3. Side Note 5. In other words.6 One M AD is equivalent to 0. Definition 5. three M ADs to 2. the forecasting methodology needs to be modified.6.11 [1. one of the most common problems with forecasting is a lack of follow-up.1 (A Plot of Tracking Signals) Review Heizer figure 4.

1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4. Side Note 5.” . p. there has been much criticism of the approach to using models based on thier fit to the data.. Side Note 5. 2.80 CHAPTER 5. “Summary of Forecasting Formulas. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. which selects a model based on goodness-of-fit to a data set. 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. changes need to be check with human eyeballs to ensure that the adjustments make sense. Note that even with computer monitoring. Sophisticated forecasting models are not always better than simple ones.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. 5. Definition 5.4. you must make your own decision as to how you select the forecasting models that you use. α in definition 5.g.3.4. 114].4.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. FORECASTING 5. However.4. is based on two principles: 1. There is no single technique that should be used for all products or services.4.10) is automatically changed to keep errors to a minimum.2 [1. In your career.2 Focus Forecasting Focus forecasting. Definition 5. you should be aware of the criticism of focus forecasting.

time permitting. insurance companies often refer to their policies. Product strategy2 defines the breadth of the product line and links product decisions to [1. Referring to services as products is common in the service industry. • Market share and dynamics. which.0. Definition 6. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. For example.1 . 81 . is a service.1 Side Note 6.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. and • The organization’s capabilities. definition.2. the word “product” will refer to both goods and services. and design of products. 2 Recall sidenote 2. pp. pp.Chapter 6 Design of Goods and Services Many companies derive a competitive advantage by using product strategies to efficiently produce a variety of products and/or services to meet changing customer demand or target specific consumer niches. as products. • Product life cycle. 1 In this chapter. They also use just-in-time production techniques.128] • Investment and cash flow. 122–123]. as an intangible.5 (Product Decision) The selection.0. which will be discussed in detail later in the semester. 124.

6..1. Growth. and – Supplier development. Maturity. months (e. Product strategy involves determining the best strategy for each product based on its position in the life cycle. Decline.g.. DESIGN OF GOODS AND SERVICES 6. clothing fashions).1 Goods and Services Selection Product decisions focus on creating a competitive advantage via • Differentiation – Offering distinctly unique or high-quality products • Low cost – Providing quality goods and services at a lower cost than competitors • Rapid response – Executing rapid design and product development to respond to changing consumer demand 6. YouTube videos). • Growth phase – Effective capacity forecasting is necessary.2 Life Cycle and Strategy Strategies change as products move through their life cycle. products expenses are often high for – Research and development. and 4. restaurants or nightclubs).g. Life cycles can be in the days or weeks (e. Introduction. and innovative production is appropriate. or even decades. • Decline phase – Investment needs to be minimized and resources need to be redeployed. – Process modification and enhancement. often ruthlessly. . years (e.1 Product Life Cycles Product life cycles can be divided into four phases: 1.. low-cost.g. 2. 3.82 CHAPTER 6. • Maturity phase – Competitors have entered or are entering the market. so high volume. • Introductory phase – In the introductory phase.1.

example.2 Generating New Products Most products have a limited life cycle. it must regularly redesign existing products or bring new products to market. example.2.2. • Economic factors.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.3 • Political and legal change can also bring about business opportunities.6. • Sociological and demographic change is also tied to product demand.1 (Example: Brainstorming) Lead the class in a brainstorming session. such as consumer incomes. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. 6. the development of cellular telephone technology or the internet.500 or 100.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. Ideas are not reviewed until after the brainstorming session.2.1. and if a company is to survive.4 Side Note 6. Definition 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. GENERATING NEW PRODUCTS 83 6. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted. as well as the total annual dollar contribution of the product. are tied to product demand. 4 For 3 For .3 Product-by-Value Analysis For firms with many products. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.1.2. • Technological change often drives product innovation. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. Definition 6. 6.000 yuan.

A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. 128]. Side Note 6. Each stage should have an accompanying review to determine whether to progress or not.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.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.2 [1.3. Definition 6.3.3 [1.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Definition 6. p. p.1 (Product Development Stages) Present Heizer figure 5. 6. 128]. . market dynamics. DuPont estimates that it takes 250 ideas to yield one marketable product [1. DESIGN OF GOODS AND SERVICES For example.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. Determines what will satisfy the customer and 2. the product life cycle.84 CHAPTER 6.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. Side Note 6.3.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. The house of quality is a graphic technique for defining the relationship between customer desires and a product.3. 6. and the organization’s capabilities. Translates customer desires into a product design. 129].3 6.2.3. p. Many successful companies rely on sales from products introduced within the past five years.

• Perhaps the most popular approach in the U. create the columns of the house in sidenote 6. a research & development.2.8 5.. Product development is done by teams.g. Relate customer wants to product hows.2. An organization is divided into departments. Develop importance ratings. Building the house of quality involves six steps: 1.3.3.9. as was the software described in section 4.. 7 In other words. and production departments. p.qfdcapture.6.10 Side Note 6.3. 1.3. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. Identify how the good or service satisfies customer wants.3. 3.2.6 3. 2. design engineering. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. Evaluate competing products. 6.2. • Fixed duties exist.2. • Effective communication and coordination between separate departments can be problematic. • More common in large. Note that it is not free or open source. See http://www.3. .3 Organizing for Product Development In the West. PRODUCT DEVELOPMENT 85 Side Note 6.S. bureaucratic companies and organizations. manufacturing engineering. e. 2. with product features. 130]. 10 The right-hand columns of the house in sidenote 6.com for more information. Identify relationships between the firm’s hows.9 6. Identify customer wants.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.2 (Example: House of Quality) Present Heizer example 1 [1. there are three popular methods by which organizations undertake product development. which can be an advantage.7 4. In other words.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. identify the rows of the house in sidenote 6.3.” 6 For example. 8 These are given on the roof of the house in sidenote 6.3.

it can also be problematic because teams. The goals of manufacturability and value engineering are 11 See definition 6. manufacturing.3.S. etc. and field service personnel. quality assurance.3. Definition 6.4 (Concurrent Engineering) In project development.. but my personal impression is that formal QFD practices are not widespread in practice. 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.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. because their fate is tied to a product. development. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. production. and production stages of product development. design. . Side Note 6. These teams often include representatives from marketing..4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. Side Note 6. Definition 6. engineering.3. maintainability.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. purchasing. production. use of participating teams in design and engineering activities. Definition 6.S. organizations are less structured and typically not divided into research and development.11 In Japan.4.3. engineering.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. 6. Some teams even include representatives from vendors.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. However.3.86 CHAPTER 6. My experience may not be indicative of management practices in general in the U..5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. will often advocate for continuation of their project past the point that it is profitable for the company.3. and use.3.3. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.

4. PRODUCT DEVELOPMENT 1. Improvement of functional aspects of the product. and 7. Cost reduction. 3. Reduced complexity of the product. Robust design. Improved job design and job safety. 2.6. 87 . Improved maintainability (serviceability) of the product.3. Standardization of components. 6. 5.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

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

1. 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. take note of this information. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. we will discuss venture capital. • Among the means by which you can to raise money. “When are you coming home for dinner?” or criticizing you for ignoring them.com. 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. we suffered a database corruption that resulted in my practically living at work for three weeks . – However. For many people.com management and Jerry’s difficulty balancing work and family life. friends and family are the most important concerns in their life.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active. If after many long hours at work your family will be asking you. at Active. • Some of the information is intended for those who have an established career and real-world experience to draw upon. Side Note 7. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. Putting in long hours is not something that is done once in a while. or angel investors. If you are not prepared to redefine relationships relative to your business life. the use of venture capital will probably increase over time in China. Venture capital financing is common in the United States but is not yet a common means of financing in China. friends. possibly even years at a time. but something you may need to do day after day. Discuss the impact of the demands of a startup on the marriages of Active. – Additionally. It may be useful later in your career. it may be difficult to keep the necessary focus on the business.7. week after week.1. You may lose friends because you do not have the time to maintain the friendship. – For now.com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty.1. you may not be prepared to start a company. Often. month after month. for example.

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

7. – Start with small goals.000. Side Note 7.3. it is common to exchange “war stories” about the difficult times and sacrifices. • Set both short-term goals and long-term goals. ask other entrepreneurs. 10. . even the successful ones will probably focus on the negative.” you may not want to start a business that focuses on customer relationships.000 yuan by July 1” is a much better goal than “raise money. such as sales. If you talk to an entrepreneur who has not been successful. – Long-term goals are those that may take 5. Move on to larger goals once the small goals have been met. and administration. “Achieve financial independence” is much better than “pay the bills.000 yuan and you’ve never had a job before.” • Be realistic. ask yourself the following questions: • Income – How much do you want to earn. marketing. your goal may not be realistic. When setting goals. Like parents. – Short-term goals are those that can be accomplished within a year. it helps to set goals. Learning from failure is as important. Listening to war stories can help you arrive at an accurate mental picture of what it is really like to start and manage a business. • Analyze Your Professional Attributes – Be aware of where you need help. advertising. SETTING GOALS 95 If you are not a “people person.” • Be optimistic. if not more important. or 20 years to accomplish. When I talk to those who I know who have started businesses.7.1 (What’s It Really Like?) If you wonder what running a business is really like. If your goal is to raise 1.3 Setting Goals With any major endeavor. try to figure out why they were not successful.3. Consider at least a five-year time horizon. When setting goals. “Raise 100. • Be specific. than learning from success. although the successful ones generally view their experiences as positive on the whole.

pp. Many people want to start their own business for ego gratification. 18–20]. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. 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. – Hours of work. Acknowledge this fact and factor it into your decisionmaking. How much is your ego worth? Side Note 7. 20. Side Note 7. Have the class write down their answers and evaluate their own EQ. pp. – Geographic location. 21].2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. and – Investment of personal assets.3. The reasons given for adding or subtracting points are as interesting as the ultimate score.3.96 CHAPTER 7.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. Eliminate question 1 and substract one point from the scoring given on p. .

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

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

computer-controlled security cameras. Have students come up with examples of products that meet various criteria on the checklist. You should be realistic about risks. you will be spending years of your life trying to make the idea work.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.1.2 is. February 17. People thought he was going nowhere and generally dimissed his business. that they will never make it. And you should not risk anything you can’t afford to lose. home. Now What? The number one trait needed by successful entrepreneurs is perseverance.1. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4.1 You’ve Got an Idea. Have students fill out the form on their own time. used as the title of at least 12 movies and television shows. YOU’VE GOT AN IDEA. Warnings about risk are perhaps the criticism you should consider most carefully. “Never say die. or health.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. you should have “thick skin. 33].1. you should not let it dissuade you. p.com/find?s=all&q=never+say+die.1. 2 http://www. 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. 35]. Side Note 8. Finally. Side Note 8. he would never succeed. Entrepreneurs are often told their idea is flawed.” Side Note 8. such as your family. He ran the business as a one-man operation for years. to be truly self-motivated and persistent in the way you need to succeed. His sales are now in the millions of dollars per year and the business is very profitable. thinking that if he did not succeed after a couple of years. 2007. while you should listen to criticism that others give. in the wake of 9/11. 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. After all.” That is. making just enough to get by but not much more. p. A well-known phrase in English.imdb. or are otherwise discouraged. 8. the business took off. However. .8.

FINDING AN IDEA .100 CHAPTER 8.

but you should try to target your market as specifically as possible.” or business-to-consumer ventures. 101 .0. go through the following 7 steps: 1.0. See also 9.Chapter 9 Defining Your Market After coming up with your idea.” or business-to-business ventures. There are two broad categories of markets: 1. Definition 9. your next step is to do some market research. See also 9. Not only do you need to decide whether you are marketing to businesses or consumers. Definition 9. When trying to identify your niche market. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Consumers and 2. Businesses.1. 9.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.0.2.

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

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

Falkenstein states. Falkenstein1 advises that you regularly reevaluate your niche. create a mission statement.1.3.2 [1.2 Redefining and Expanding Your Niche Lynda C. • 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.104 CHAPTER 9. Side Note 9. • Convey the essence of your business’s goals and philosophies. 79] 9. . The mission statement should • Be succinct.” [4. you should. a few sentences at most. Every six months or so.3 The Mission Statement Once you have a niche.1 (Mission Statements for Three Organizations) Review Heizer figure 2. p. p. DEFINING YOUR MARKET 9. “Creating a niche is the difference between being in business and not being in business. 28] which includes mission statements for three multinational companies: 1 See section 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.

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. time-certain delivery. competitively superior.3.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. 3. We will be helpful. 105 Side Note 9. We will produce outstanding financial returns by providing totally reliable. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. contributing member of our community and offering the Hard Rock family a fun. Our mission consists of 3 interrelated parts: • Product Mission – To make. We will strive to have a completely satisfied customer at the end of each transaction. natural ingredients and promoting business practices that respect the Earth and the Environment. and nurturing work environment while ensuring our long-term success. . healthy. 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. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. 2. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity.9. Equally important. and professional to each other and the public.3. courteous. THE MISSION STATEMENT 1. global air-ground transportation of high-priority goods and documents that require rapid. FedEx FedEx is committed to our People-Service-Profit philosophy.

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

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

2. .” [4. 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.10. RESEARCH METHODS 113 Side Note 10. pp.2.

114 CHAPTER 10. MARKET RESEARCH .

0. and so should you be.4 (Business Plan) A business plan is a written document that details a proposed venture. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. It must describe current status. In terms of sanity checking. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. Those who provide financing are aware of these pitfalls. 5. Set up a timetable with specific steps to be accomplished in a specific period. Definition 11. 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. 2. including 115 . Your business plan should list obstacles that may arise and what will be done to address them. 3. Every aspect of the venture should be covered. expected needs. No realistic goals – Your business plan should help you ascertain whether your goals are realistic.Chapter 11 The Business Plan The business plan is an essential document not only to seek funding but to provide a sanity check and to give you a framework for developing your business. and projected results of the new business. 1. 4.

or investment prospectus. • Management. CHAPTER 11. • Financing. • Research and development. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. • The business plan quantifies objectives. THE BUSINESS PLAN A business plan is also known as a venture plan.116 • The project. • The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. • Marketing. you will likely be giving your plan to read many business plans per day. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure. and while a business plan will not guarantee success. and • Milestones or a timetable. • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. • Critical risks. Failing in business is very costly. allowing the entrepreneur to track results by measurable benchmarks. • Manufacturing.1. They may spend no more than five . loan proposals. It provides a variety of other benefits. it will help you maximize your venture’s chances for success.1 11. 11.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is.

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

the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. they will not read it. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. You should use this to keep track of who has which copy.118 CHAPTER 11. – On the title page. address. – It should explain 1. 4. The amount of financing needed. the date of the plan. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. and/or web site. If you write to much. e-mail address. and How investors will benefit. a number should be in a corner5 indicating the copy number. and full contact information4 for the company. Its products or services. 6.3 • The Cover and Title Page – The cover should have the name of the company. The financial forecasts. though you should not put it in the same corner as page numbers appear. The venture’s objectives in 3 to 5 years. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. The benefits to customers. .3 Some Style Points Kuratko also recommends that you [3.1. The company’s current status. 5. 3 Note that for this class. – 40 pages is ideal. 3. 4 Phone number. 11. 7. • The Executive Summary – Two or three pages immediately following the title page. 5 I suggest the lower-right corner. THE BUSINESS PLAN – It should be no more than 50 pages. p. – Inside the front cover should be a title page repeating the cover information. – It is worth repeating: Keep it down to at most two or three pages. 2.

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

and r´sum´s should be given. describe the location of the new segment. Management Segment – Key personnel. including • The kinds of customer groups to be initially targeted. Important aspects of location include • Labor. (a) Market Niche – Define your market niche. pay and ownership (such e e as stock agreements) should be described. offices. • Features of the product to be emphasized in your sales efforts. service. their job descriptions and responsibilities. should be described. and customer availability and proximity. In addition. and • Possible support of local banks. 5.120 CHAPTER 11. and that you can beat the competition. warranty. • The Kinds of customer groups to be targeted as the business matures. including the type of media8 and. (e) Advertising Plan – Discuss any promotional campaign. (c) Marketing Strategy – Your marketing strategy should be described based on research. • Methods of identifying and contacting customers. Any risks should also be detailed. Operations Segment – First. television. 6. • Local taxes and zoning requirements. such as equipment. 7. In addition. Financial Segment – The financial segment should include 7 For example. radio. and Development – If R&D9 is to be performed. 8 Such as magazines. Design. 4. if the promotional campaign will be a significant portion of expenses. storage. Research. that your sales estimates are reasonable. cost.7 (d) Pricing Policy – Compare your pricing policy with competitors. quality. time. This should be an honest assessment. • Any innovative sales or marketing concepts that will enhance customer acceptance. if you are going to market leases on equipment where previously only sales were allowed. or internet. Costs should be detailed for all major expenses. etc. facilities requirements. etc. 9 Research and Development . Justify any price increases over competitors based on newness. testing. supplier. how and when expenses will be incurred. THE BUSINESS PLAN 3. Marketing Segment – You must convince investors that a market exists. and project status should be discussed.. Gross profit margin should be discussed. (b) Competitive Analysis – Assess the strengths and weaknesses of the competition.

detailing projected inflows and outflows. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. Completion of prototypes. and Payment of first accounts receivable.com) Discuss the growth of Active.2. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Your investors are probably as aware. current ratios. Definition 11.2. Receipt of first orders. 9.2 (The Growth of Active. Signing up distributors and dealers. Risks might include • • • • • Negative industry trends. Product display at trade shows. These might include • • • • • • • • • • Incorporation of the new venture. First sales and first deliveries. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. For example. etc. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. a balance sheet containing projected balances is called a pro forma balance sheet.1 (Pro Forma) A latin term that means projected. of the risks than you are. detailing projected profits and losses. Appendix – If there are documents. inventory turnover. 8.com. Unexpected competitions. Side Note 11.. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. as opposed to actual. Try to be honest and realistic. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. which investors will use to estimate debt/equity ratios. Difficulty purchasing parts or materials. Costs exceeding estimates.11. Hiring of sales representatives. Design or research difficulties.2. (c) A cash-flow statement. . Completion of design and development. include an appendix. Ordering production quantities of materials. (b) An income statement. working capital. or more aware. Critical-Risks Segment – Discuss business risks and the ways you might address them. 11.

THE BUSINESS PLAN .122 CHAPTER 11.

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

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

Many people feel as if taking notes makes them look stupid. They may ask you something you want to respond to in an e-mail later.2.2. At my company in Chicago. 12. and each investor will respond differently.2. 12.5 Take Notes Have a pen and paper ready and take notes during the pitch.2. Guy Kawasaki recommends you set a timer [2. it is quite the opposite. • Your audience may ask you several questions at once. where some of the smartest people in the world worked. Stop when it goes off.3. 12.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. 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. ask yourself after every statement you make. so write things down to make sure you don’t forget. You should be prepared for the unexpected. 12.3 After the Presentation Each presentation will be different. everyone brought a pen and paper. “So what?” If you cannot answer this question simply and easily.6 So What? When you are planning your presentation. I always bring a pen and paper to meetings. Everyone. They may ask you something that makes you want to change your presentation. Much of the material required use of the internet. In general. It is easy for things to get lost in the heat of the moment.12. Give your presentation to friends or family. you are not presenting it well. 45].4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. p. Ask them what your company will do. but in reality. you need to change or eliminate the statement. AFTER THE PRESENTATION 125 Side Note 12. • Taking notes also makes you look conscientious. If they cannot explain it clearly. and although you go into each presentation .

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

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.

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

In deciding which to use. Many businesses also measure turnover by measuring sales per square foot (or square meter). which may result in higher taxes.1 Buying Inventory In the process of putting together your business plan. follow the recommendation of your accountant.2. but you should at least know about LIFO and FIFO.4. If there is inflation.S. 13. and 13. .4. first out) assumes that you sell the least recently purchased inventory first. Definition 13. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. You should know how many sales per square meter per year you need to survive. The author is unfamiliar with Chinese tax codes. The author is unfamiliar with Chinese tax codes. Calculate your sales per square meter once per month. it values your remaining inventory based on the prices of the most recently purchased items. INVENTORY ACCOUNTING 131 Definition 13. which allows you to pay less taxes on your inventory.2. After you have been in business your inventory control system should give you a better idea of stocking levels.4 Inventory Accounting Your accountant will typically handle inventory accounting. you must estimate your inventory value when you file your taxes. In other words.13. First Out)) FIFO (first in.. Definition 13.2 See also 13.3. LIFO and FIFO are two accounting methods used to do this. order cycle.S. least this is true in the U. 2 At 3 At least this is true in the U.3 See also 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. See definitions 13.3. 13. In the U.2 (FIFO (First In.4.4.1. 13. If there is inflation.4.S. and delivery cycle.5 (Needs Period) In inventory management.1 (LIFO (Last In.3.4. it values your remaining inventory based on the prices of the least recently purchased items.3.4. first out) assumes that you sell the most recently purchased inventory first. the needs period is the sum of the count cycle.3. First Out)) LIFO (last in.

INVENTORY CONTROL Definition 13.5 Suppliers Suppliers can be divided into four categories: 1.1 Dealing with Suppliers The most important thing about a supplier is reliability. – The minimum may be higher for first orders to cover the cost of setting up a new account. three or four months. 3.5. says. Independent craftspeople 4. • Some suppliers demand a minimum number of items per order.actual inventory . Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . 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.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. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. and they will respond in kind.132 CHAPTER 13. author of Start Your Own Business. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. 13. courteous and firm with your suppliers. Import sources – They operate like domestic wholesalers. Distributors – Also known as wholesalers. usually one. 13.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Their prices are higher than a manufacturers. “Be open.” .4. brokers or jobbers. Rieva Lesonsky. Manufacturers – Note that some manufacturers refuse to fill small orders.

5.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. 2.5.o. You can also present your financial statements and prospects for success. SUPPLIERS 133 13. Whatever you do. If you are dealing with a reticent large supplier. and • The need to be firm but fair..o. Tips for dealing with suppliers: 1. .d. Definition 13.d. Side Note 13. do not falsify or misrepresent your financial statements. • Sometimes if an order is large enough. Suppliers sometimes try to complicate pricing to their advantage. Ask about the freight policy before ordering. • For items being shipped. the supplier will pay for freight. 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. and • Allowances before you make a decision. customers may be required to pay upon receipt of goods.S.13. personal interaction can work wonders. Be sure to add up • Costs.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.)) Cash on delivery. basis until you have proven yourself reliable.5. it is considered a felony. At least in the U. I regularly had to deal with food vendors. you should know who is liable for damage to goods in transit.5. Discuss • Their negotiating technique when discussing pricing. they will put you on a c. If a supplier is uncertain about you. 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. • Discounts.1 (COD (or c. If a supplier does not extend credit.

Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. 6 Source: http://www. The FOB term requires the seller to clear the goods for export. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. May 19.5.5.abcsmallbiz.5.2.html. INVENTORY CONTROL • Depending on whether the supplier pays frieght. Be aware of your supplier’s priorities. As opposed to FOB. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. 2007. 3.5. May 19.o. Definition 13.org/wiki/Backorder. May 19. 5. 7 Source: http://en.epoi.html.b. Definition 13.com/jargon.2 (FOB (or f.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.roadway. 2007.5.134 CHAPTER 13. Definition 13. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. .com/reference/glossary/glossary efg.3. Destination)) Free on board destination.o.3 (FOB Destination (or f. Seattle” to indicate that an item being shipped from Seattle is free on board.com/shippers/glossary. Specify a cancellation date on your order forms. 2007. See also definition 13. May 19.html.4 Colloquially. 5 FOB Destination changes the location where title and risk pass.b.6 See also definition 13. 2007. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. Under this arrangement. 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.wikipedia. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.o.)) Free on board.7 4 Source: 5 Source: http://www. This differs from a forward order where stock is available but delivery is postponed for other reasons. http://www. people often say something like “f.b.

besides being bad for business. 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. Side Note 14. they are often emotionally draining for the manager as well as the employee involved.0.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. • Temporary employees (temps).3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. 135 . Side Note 14. The benefits of finding the right person for a job cannot be overstated. and • Independent contractors. 337].0. p. • Part-time employees.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. a bad hire. On the other hand. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).

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

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

• Do not ask for specific personality traits. • 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. • Do not list requirements other than educational or experience-related ones. • Be sure to list appropriate contact information.1. particularly those that advertise on web sites. It also makes it easy to receive and process a large number of applications with a minimum of effort. such as “outgoing” or “detailoriented. With e-mail.4 (Using an E-mail Address) For professional positions. For example.1. . Many American companies are no longer providing phone numbers.S. companies. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. 14. HIRING EMPLOYEES 14.. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.S. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.138 CHAPTER 14.4 Finding People There are many possible sources of applicants.” or people who may not have them will just try to fake those personality traits in the interview. e-mail addresses have become perhaps the most popular way to get applicant information at U. – For other positions.2 Side Note 14.3 Advertising the Job When you write an advertisement. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. – For professional positions. • List the top 4 or 5 skills that are most essential to the job.5.1. 2 See sidenote 14. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. if you are looking for an accountant.1. due to the number of applicants for competitive positions.

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

Applications should ask for things such as • Name. Due to this. we tossed those that had spelling or grammatical mistakes.4 were not experienced enough. • Rely on your intuition. so many resumes came in that an administrative assistant was asked to perform the first screening. • On the other hand. and e-mail address. If an applicant indicated they were an expert with too many technologies. That typically indicates that someone cannot supply enough positive references. that is a very good sign that they are a survivor. 344–345]. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. listed expertise in too many subject areas. and • References. • Educational background.1. address. • Work experience – As for salary information when asking about work experience • Availability.com) In the hiring process at Active. I have some personal recommendations: • Always check references. From the hiring process at Active. this indicated to us that the applicant was not being truthful. • Special skills.5 (Job Application) Present Lesonsky’s sample job application [4. including when an applicant can work and the hours they can work. CHAPTER 14.1. did not match our requirements closely enough. • Don’t necessarily discard resumes with some gaps. pp. or were too experienced. Of those we looked at. Side Note 14. phone number.com. if a person survives downsizing or other major changes at their former employers. . 4 It takes time to become an expert with any sufficiently compex technology. Side Note 14. She simply passed along resumes that contained certain keywords that we were looking for.140 • Look for patterns in their career.com.6 (Hiring at Active. I learned that people lie on their resumes all the time.

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

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

do not give bad references to avoid potential lawsuits. Finally. Side Note 14. gave a strong interview.Q.com. what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer. how many handshakes are there? Checking References One thing that far too few employers do is check references. 143 • The candidate’s general demeanor.9 (The I. I have interviewed people who looked great on paper. They were not hired. but there references were poor. at least in the U. After your questions. Be wary of answers that subtly indicate that there may have been a problem with the candidate. test to see how employees solved problems. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized. they will have questions about the company and the position. and general tidiness in their appearance.Q. Lesonsky tells of one supervisor who was asked about . This has become popular recently in the U. Most supervisors. • Whether the candidate can think on their feet.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. Examples of these kinds of questions include • Name as many ways you can think of to find a needle in a haystack within 30 seconds. after you finish the interview. such as their posture. If the candidate is really interested in the position. • Things the candidate seems reluctant to talk about.14.1.S.. with many companies like Google incorporating these kinds of questions into their standard interview process. attentiveness..1. give them time to ask you questions. Test) At Active. take a few minutes to write down your impressions. the CTO liked to ask questions like you would find on an I. • Have you hired people before? If so.

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

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

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