International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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. . 4. . . . . . . 5. .1.2 Life Cycle and Strategy . . . . . 5. . . . . . . . . . . . . 5. 4. . . . .1 Probability of Project Completion . . . 3. . . . . .3 Product-by-Value Analysis . . . 4. . . . . . . . . . . 5. . . .1 Identify Critical Success Factors .1. . . . . . . . .1 Qualitative Forecasting Methods .4. . . . . . 3. . . . . . .2 A Seven Step Forecasting System . . . . 4. . .1 What is Forecasting? . . 4. . . . 5. . . . . . .1 Project Planning . . . 4. 5. . . . . . . .4 4 Project Management 4. . . . .1. 3. . . . .8 A Critique of PERT and CPM . . . . . . . . .3. . . . . . . . . . . . . .2. . . . . . . . .2 The Work Breakdown Structure . . . . . . . . . . . 5.3. .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . 6. . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . .4 Monitoring and Controlling Forecasts . 5. . . . . . .5 Seasonal Variations in Data . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . . . . . . . . .4 3. . . . . . . .3. . . . . . . . . . . .2 Build and Staff the Organization . . . . 5. . . . . . . . . . 3. .2 The Strategic Importance of Forecasting 5. . . .1 Product Life Cycles .6 Variability in Activity Times . . . . . . . . . . . . . . .3. . 4. . . . . . .2 Network Diagrams . . . . . . . . .1 Types of Forecasts . . . . . . . . . . . . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . .3 Measuring Forecast Error . . . . . . . . . . . .1 PERT and CPM . . . . . . . . . . 4. . .4. . . . . . . . . . . . . . .2. . . .3. . . . . . .4 Adjusting for Trend . . . . . . . . . . . . . . . 6.6. . . . .3 Forecasting Approaches . . . . . . . . .3 3.1 The Project Manager . . . . .3. . . .3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Associative Models . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . 5. 5. . . . . . .1. . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . .3. . . 6. . . .2 Focus Forecasting . .4 Determining the Project Schedule . .2 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . 6 Design of Goods and Services 6. . . . . . . . 5. . .2. . . . . 4. . .5 Slack Time and Identifying the Critical Path . . . . . . . . . .2 Preconditions . . Strategy Development and Implementation . . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . .3. . . . . . . . . . . . . . . . . . . . . . CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . . . . . . . .1. . . . . . . . . . . . . . 4. . . . . . .3. . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . .1 Goods and Services Selection .1 Research . . . . . . . . .

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

. . . . 14 Hiring Employees 14. . . . . . . .4 Finding People . . . . . . . . . . . . . . . . . . . . . . . . .3 Computerized Inventory Control 13. 14. . 14. . . . . .3. . . . . . . . . .1 Inventory and Cash Flow . . . . . .4. . . . . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . .1. . . . . . . . . . . . . . . .5. . . 13. . . . . . . . . . . . . .2 Tracking Inventory . . . . 13.1 Dealing with Suppliers . . . . . 13. . . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . .2 Job Description . . . . . . . . . . . . . . . . . . .4 Inventory Accounting . . . . .3 Advertising the Job 14. . . . . . . . . . . . . .1 How to Hire . . . . . . .1. . . .6 13 Inventory Control 13. .1 Job Analysis . . . 14. . . . . . . . . . . . . . . . . . . . . .1. . . . .1 Buying Inventory . . . . . . . 13. . . . . 13. . . . . . . . . .5. . . .2 Payment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Inventory Turnover . . . . . . . . . . . . . . . . . . . . . . .5 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . 13. . .

Part I International Business Management 7 .

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

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

gift. Definition 1.1 (Bribe) A price. September 20. voter.2.2.transparency.2 Though things are improving. Source: texttthttp://www. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders.1. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. and Tyco. • It increases the cost of doing business. these are all generalizations and individuals may differ significantly from their cultural affiliations. 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. • Of course. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. In the words of a Beijing correspondent for “The Economist” magazine. reward. which requires strict monitoring and verification of financial information. 2 Source: http://www. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act.”[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. Side Note 1. they must factor additional uncertainty into their calculations. investors in the United States had to reevaluate the risk associated with owning stock.dict. • On a macroeconomic level.2 (Corruption) Corruption is of concern for business people because • It increases risk. .2. For example. . or other person in a position of trust. witness. . China continues a battle against corruption. it is simply inefficient. – In the wake of Enron. – A bribe is a business expense that goes to no productive purpose and decreases profits.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).org. WorldCom. September 20. 2006. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. 2006. “.

1 (Sarbanes-Oxley Act (SOX)) As a result of Enron.htm. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.3.com/Research/15 Largest.com/Research/15 Largest. March 17. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. While western developed economies often cite a high ethical standard. March 17. Side Note 1.2 (Cultural Heritage in the U. In Scandinavia.S.bankruptcydata. including a $2 million birthday party for his wife. • WorldCom – Following the Enron scandal. See sidebar 1.bankruptcydata. history.3. 3 Source: 4 Source: http://www. Worldcom.S.2.12 CHAPTER 1. . Parmalat. and Tyco make it clear that even western developed economies have significant ethical shortcomings. was accused of looting the company to fund a lavish lifestyle. WorldCom declared bankruptcy in July 2002. a high value is placed on honesty and personal integrity.3 The United States The United States has recently been rocked by a number of scandals in the business community. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.4 – Bernard Ebbers. • Tyco – The CEO of Tyco. Side Note 1. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. the SarbanesOxley Act (SOX) was passed in the U. 2007. 2007. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.S. Qwest. Dennis Kozlowski.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.htm. succeeding Enron as the largest bankruptcy in U. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. the former CEO of WorldCom. was convicted of fraud and conspiracy and sentenced to 25 years in jail. http://www.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. scandals such as Enron. There is currently debate as to the effectiveness of the regulations relative to the costs.S. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.. • Enron – In December 2001.1. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.

which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. . Side Note 1. and as a result made high risk investments in the late 1980s and early 1990s.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.4.S. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. • Many men do not understand why sexual harassment constitutes a problem. with many women finding their employment opportunities constrained.4 1.pdf.fdic.4. The government was compelled to provide public money to bail out the institutions.4. Side Note 1. JAPAN 13 1. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.1. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.2 Women in the Workplace Sexual harassment has also become an issue in Japan.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. Savings and loan institutions. 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. Moreover. women have a difficult time being taken seriously.4. 58].gov/bank/analytical/banking/2000dec/brv13n2 2.1 (The U. 5 1. Better known is the case of Japanese banks. the political scandals do not appear to have been fully acknowledged and addressed.. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. were not as highly regulated as banks. Hodgetts et al. also known as thrifts and which function like banks.4. This resulted in several banks being technically bankrupt [5. with many men of the opinion that women were just biding their time until they marry and have children.S. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. Likewise. p.

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

EUROPE 15 1. with most in the top 20 among over 150 countries included in the survey.4.S. 7 Source: http://www. 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. at 40. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. Hodgetts et al. Side Note 1. than any other.S.4. there seems to be a glass ceiling due to social factors.4. yes or no.dict.org.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.7 Note that lobbyists do not have any formal power.5 1. men are disproportionately represented in management positions.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.1. Side Note 1. in an extended sense.5..5.S. Definition 1.5. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts.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. politicians. . They only have the power of persuasion. is the notable exception). 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. to try to influence decision-makers in any circumstance.3 Lobbying by Japan Japan spends more money lobbying in the U. particularly in upper management. with the purpose to influence their votes.5.

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

1. 5. and • A recent history of rapid economic development.3 (Corporate Spying) Hodgetts et al. [5. • Note that for every corporate spy that is caught. An increase in crime and illegal business activities. Child labor.6. 7. Bribery and other forms of corruption. there are undoubtedly many others that get away with it. 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. executives.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets. 2. pp. company in Boulder was stolen and sold to a Chinese company. • A relatively stable government. International corporate spying problems. Side Note 1. 3. Often. 64]. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. • Yet another case in which software from a U.6.6. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. Side Note 1.S. . 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. An opaque legal system.6. 6. Prison labor. 4.5 billion in sales annually.2 (Piracy and Counterfeiting) Present sidenote at [5. Piracy and counterfeiting (see sidenote below). ETHICAL CONCERNS IN CHINA 17 Side Note 1. Ethical considerations include 1. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.S.

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. Definition 1.com/our company/our mission/index. political. Other companies. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. . and promotion of social equity).1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. health. political. and economic issues such as poverty. . social justice. See http://www. Side Note 1.4 (Corruption) Though things are improving.benjerry.7 Corporate Social Responsibility Definition 1. In the words of a Beijing correspondent for “The Economist” magazine. social justice.7. “.S.cfm for more detail. China continues a battle against corruption. • CARE (promotes community development.7. education.3 (Nongovernmental Organizations (NGOs)) Private.2. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. and the environment. and the environment. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.2. health.6.7. not-for-profit organizations that seek to serve society’s interest by focusing on social.7. provide relief in the event of humanitarian disasters. such as Whole Foods.2 (Nongovernmental Organizations (NGOs)) Private.18 CHAPTER 1. and emergency relief in the event of humanitarian disasters). education. 1. there are few if any issues which affect and infuriate so many in China as corruption.”[6] See also sidenote 1. a grocery chain. not-for-profit organizations that seek to serve society’s interest by focusing on social. such as education and health care. 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. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). and economic issues such as poverty. Definition 1.. . BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.

3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. firms a reason to refuse to pay bribes. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). – Even socially responsible executives would consider the “bottom line” when making decisions. Side Note 1. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment. In 2005. and • Rainforest Action Network (RAN). • Conservation International (promotes environmental conservation).7. China ranked 78 out of 158.7.1.9 U. too.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. Executives are people. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. • To prevent a boycott or other consumer defections. • And. note that while U. executives may actually feel that it is the right thing to do. MNCs do not appear to have been significantly impacted. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. last but note least. In fact. as executives of publicly traded companies are ultimately responsible to their shareholders. For example.7. .S.S.000 and $125.S. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. Side Note 1. firms are constrained by the FCPA with regards to bribery and other corrupt practices. many feel that it has had a net benefit.2. 1. but does not outlaw payments to political party leaders. as it gives the U. with a score of 3.7.1 Corruption and the FCPA Revisited Hodgetts et al.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising. Both political groups and businesses are influenced by NGOs.

With more disciplined corporate governance. 4. 3. It cannot be considered to be based on a scientific survey.4.infoplease. July 1.3. better than the U. Side Note 1. and Germany at 7. The government is actively addressing the issue of corruption. and Parmalat resulting in investors losing billions of dollars. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Side Note 1.N.7. and not based on hard data. Commitments that many MNCs have signed on to.S. . 10 http://www. With greater financial transparency. WorldCom.10 Corruption is certainly not endemic to Asia.5 (Table 3-1: Principles of the Global Compact) The U. 2006.20 CHAPTER 1. Support and respect the protection of international human rights. The government recognizes that it is an issue and is taking action. malfeasance and diversion of corporate funds becomes increasingly difficult. 1. societies. Global Compact. 2.2 respectively.4 (Some Opinions) Personally. Tyco.N. Important: Although it is widely cited. such as the U. and the environment.7. I think corruption will diminish as China economically develops for several reasons: 1. the United States and Europe have recently been rocked by corporate corruption. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. with a score of 8.com/ipa/A0781359.6 and 8. Global Compact specifies 10 principles which MNCs should abide by: 1. Hong Kong is number 15. As more state-owned businesses become privatized and the size of the middle class increases. more Chinese will own stock in companies.html.0 is considered to be the borderline at which countries are considered to have a problem. specify standards and codes of conduct in domestic and global operations. Singapore is number 5 with a score of 9.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. slightly better than Sweden. 5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.7. with scandals such as Enron. It is a difficult problem to solve. Moreover. Scandinavian countries are at the top of the list. but most important first step is to recognize that there is a problem.

Elimination of all forms of forced and compulsory labor. 21 3. Encourage development and dissemination of environmentally friendly technologies. 4.e. . including extortion and bribery. 6. 8. Elimination of discrimination with respect to employment and occupation. 5.7. 7. the right for unions to exist). Elimination of child labor. Freedom of association and recognition of the right of collective bargaining (i. A precautionary approach to environmental challenges. and 10. Undertake initiatives to promote greater environmental responsibility. Business should work against all forms of corruption..1. CORPORATE SOCIAL RESPONSIBILITY 2. Ensure that MNCs are not complicit in human rights abuses. 9.

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

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

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

p. • They are often sources of conflict among management. and maintenance.” • Every organization with more than a few employees has an organization chart.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1.1. and 4. Side Note 2. process design. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. WHAT OPERATIONS MANAGERS DO 25 4.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. p. Definition 2. layout design. particularly when job titles are not clear. 7]. as the org chart determines executives’ authority and.S. Side Note 2. operations managers make decisions. Planning. pp.2. 1.2. scheduling. Staffing. 2. location selection. OM decisions have been divided into ten categories by Heizer [1. known commonly in the U. more generally. human resources and job design. 5]. 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. . business community as “org charts. 3. 2. To accomplish these functions. 6–7].2. place in the heirarchy. Controlling. quality. Organizing. supply-chain management. OM is one of the most costly aspects of an organization. inventory.2.

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

• Reliability and stability of systems depends on well-planned maintenance schedules. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. and 1 Source: http://en.3 “Significant Events in Operations Management” [1. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment.2 (A Little History) Review Heizer figure 1. 2007. The process is driven by a series of signals. such as the presence or absence of a part on a shelf. and efficiency. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. Kanban are usually simple visual signals. . – Providing the proper training. February 14. 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.1 Side Note 2. one drawback of the JIT system is that the re-order level is determined by historical demand.2. 8]. 9]. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. that tell production processes to make the next part. WHAT OPERATIONS MANAGERS DO 27 10. This saves warehouse space and costs. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. • Eli Whitney (1800) is credited for popularizing interchangeable parts. or Kanban. When implemented correctly.org/wiki/Just In Time %28business%29.2.2.2. However. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. which relied upon standardization and quality control. Definition 2.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. – Providing proper work methods and tools. quality. the firm could deplete inventory and cause customer service issues. p. New stock is ordered when stock reaches the re-order level.wikipedia. • Frederick W. p. If demand rises above the historical average planning duration demand. He also believed that management is responsible for – Matching employees to the right job.

for others professional occupations. the economy transitioned from agriculture to manufacturing around 1900. In the U.S.3. • In some service industries. The U.S. • In most western economies..3. average wages are below average2 in the U.3 (Information Sciences) The systematic processing of data to yield information. • Government. major contributions have come from the field of information sciences. services account for over 70% of U. Today. p. p. such as the legal profession or computer services in the financial industry. 9] • Repair and maintenance.S. economic output. • Transportation. shelter..1 (Development of the Service Economy) Present Heizer figure 1. However. • Recently. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. and other essentials for its citizens. Definition 2. the wages are considerably above average. . Definition 2. 2.28 CHAPTER 2. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. 2 The average national private industry wage.5 [1.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. the services sector is by far the largest employer. • Trade. Bureau of Labor Statistics defines services to include [1.1 (Services) Those economic activities that typically produce an intangible product. • Insurance.2.S. Manufacturing was dominant until about 1950 or so. Side Note 2. 11]. • Food and lodging. services become increasingly important. such as retail.

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

• Empowered employees – With the rise of services and knowledge products. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. reusable.2. capital.5.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. and finished goods rapidly. OPERATIONS AND PRODUCTIVITY 2. Operations managers are being challenged to produce biodegradable. operations managers are increasingly responsible for innovations that move ideas. it will continue to strongly impact the field. .1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. Definition 2. Trends that Heizer and Render identify [1. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output. the next step in product development involves customizing products according to the customer’s preferences.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. Globalization has been having a dramatic impact on operations management and in the future. or recyclable products or to minimize packaging and other wasteful production steps. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. parts. brought about in part by the internet. • Mass customization – With increases in technical capabilities and customerlevel information management. operations managers are responding by moving decision making to the individual employee.30 CHAPTER 2. or management). p. wherever and whenever needed. • 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. 2.

25 titles per labor-hour = 0.5.5. 15]. Consider today’s computers versus those from the 1970s.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Definition 2.5. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.3.5. In order to improve productivity.2. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Definition 2. Also known as total factor productivity. p.4 (Total Factor Productivity) See definition 2. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. .5.5.4375 titles per labor-hour = 0. but overhead is no $800/day. Side Note 2.5.97 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.0077 titles per labor-hour = 0. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. Side Note 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.

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

and 4. THE PRODUCTIVITY CHALLENGE • Better-nourished. draw the rectangle on the blackboard.5. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. writing. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. and 33 3. 16].. The primary variables for improving labor productivity include 1. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2.3 (The State of Education in the U. Side Note 2. Which of the following is true about 84% of 100? 4 When presenting this question. there is considerable concern over teaching of basic skills such as mathematics to grade school children. and math. . In developed nations.8 [1. 2. such as transportation and sanitation.” In the U.S. What is the area of a 4 × 6 meter rectangle. maintaining and enhancing the skills of labor. Social overhead that makes labor available. and • Healthier workers as well as • A shorter work week. “About Half of 17-Year-Olds in the U.S. Cannot Correctly Answer Questions of This Type. About half of 17-year-olds cannot answer the following multiple-choice questions: 1.2. p.S. Basic education appropraite for an effective labor force.) Present Heizer figure 1.5. Diet of the labor force.

U. and knowledgeable employees and operations managers are responsible for ensuring that technology. and the cost of capital depends on interest rates.5.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.34 CHAPTER 2. productivity in the service sector has not increased as rapidly as with the production of goods. and knowledge. education.4 (Management as an Input) Because this is a course in business management. 17].S. has increased at about an average of 1.5. management is not always identified separately from labor as an input. however.5.4 Productivity and the Service Sector Historically. and because the author of the textbook is writing about operations management.5. Developed economies (also known as post-industrial economies) require trained. are utilized effectively.S. graduate programs and the students they produce remain the best in the world.. as well as capital. Difficulties arise because service-sector work is .5.2 Capital Capital investment in the U. 2. Note that there is a trade-off between capital and labor in most industries. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Side Note 2.S. 2. management is considered as a separate input.5% after allowances for depreciation.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Note that in classic economic analysis and other areas of business. in the U. 2. Definition 2. p. educated. According to Heizer [1.

5 (Service Productivity in the U.) Productivity is highest in the U. banking system is about 33% more productive than Germany’s. but from customers. 2.6.S..5 • The U. a haircut). the performance of a law firm). Frequently individually processed (e. 35 3. These demands come not only from the manager’s personal ethic. Often difficult to automate (e. . SOCIAL RESPONSIBILITY 1.2. such as cleaning.g.g.S. 18] • Retailing in the U. and • The U. and other stakeholders.6 Social Responsibility As discussed in chapter 1. 4.S. investment advice).g. 5 In Japan. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. and child care. Heizer notes [1. Often an intellectual task performed by professionals (e. watchdog groups such as NGOs. food preparation. p. • General ethical behavior concerning issues such as child labor and corruption. government agencies. Side Note 2. laundry service.g. Typically labor-intensive (e. telephone industry is twice as productive as Germany’s.. legislation protects shopkeepers from discount retailers. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. These challenges include such issues as • Maintaining a clean environment. is twice as productive as in Japan. in both overall and service productivity. and 5. We will discuss this challenge in more detail throughout the course. • Keeping the workplace safe.. medical diagnosis)..S.S. Low-productivity activities. teaching). Difficult to evaluate for quality (e.g.. 2.5.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

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

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

Cost leadership – Providing cheaper products. but can be used at the department level and even at the project level.2 (Strategy) How an organization expects to achieve its missions and goals. and Major Departments in an Operations Function. 2. Definition 3. Definition 3.” Note that mission statements are used not only at the company-wide level.com/our company/our mission/index.cfm for more detail. Differentiation – They make their product better.1.3: “Sample Missions for a Company.3 (Competitive Advantage) In operations management.1. the Operations Function. Differentiation can arise from anything that the customer may value about a product or a services. • Training. • Interoperability with other products. the creation of a unique advantage over competitors.1.40CHAPTER 3. be it • Product features. more responsive products or services. • Availability of complementary products.3 (Sample Mission Statements) Present Heizer’s figure 2. Responsiveness – By providing timelier. • The “look and feel” of the product.1. See http://www. 3.benjerry. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. Side Note 3.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. . 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.

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.

then determine whether the organization does these things well (and. The purpose of this process is to 1. and Threats) analysis to develop strategies.1 (Strategy Development Process) Present Heizer figure 2. Provide competitive advantage. if the firm has a competitive advantage in these things) and where failures are most likely.3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.3.” The process of developing a strategy involves the following steps: • Environmental Analysis. Implement an OM strategy. 2. p. and 3. Staff the organization with personnel that will get the job done. 37]. Side Note 3. and 3. in particular. 2.3. Weakness. • Determine Corporate Mission. Definition 3. These critical success factors are used to develop a competitive advantage.6 [1. The operations manager’s job is a three-step process: 1. those activities or factors that are key to achieving competitive advantage.1 (SWOT Analysis) In operations management. determining internal strengths and weaknesses and external opportunities and threats. Group the necessary activities into an organizational structure. “Strategy Development Process. 3. Increase productivity.2 (Critical Success Factors) In operations management. . then • Form a Strategy. Opportunities. Identify a strategy and critical success factors.44CHAPTER 3. Definition 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success.3.

• Red arrows – critical success factors • Blue arrows – support activities 3.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.1 as a checklist to determine critical success factors.3.3 Integrate OM With Other Activities In order to achieve its strategy. 3. Southwest Airlines has a competitive advantage in providing low-cost airfares.3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Side Note 3.3 (Activity Map) In operations management.6 3. Once CSFs are determined. 5 Management 6 Human Information Systems Resources. CSFs. 39]. finance. and supporting activities.3. Recall the “org charts” in sidenote 2. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. OM activities are most productive when they are integrated with other activities such as marketing. MIS. Definition 3.3. 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.5 and HR.1.3. p.2.4.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.

. • McDonald’s is an example of a country with a multidomestic strategy. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. franchises. Definition 3.3. 95% of its assets and 98% of its sales are made outside Switzerland. Definition 3.3 (International Strategy) In operations management. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. Only 10% of its work force is Swiss. 4.4. owning or controlling facilities in more than one country.4 (Multidomestic Strategy) In operations management. as exports require little change in operations and licenses often leave risk with the licensee. Usually does not confer a cost advantage. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. p.1 (International Business) A firm that engages in cross-border transactions. Although e it is legally Swiss. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. Definition 3.4.4. Also one of the least profitable due to transport costs and little local responsiveness. Its menu reflects the country in which it operates. See definition 3.4.5 (Global Strategy) In operations management.4. 42] Definition 3. a strategy that uses exports and licenses to penetrate the global arena. 2. International strategy – Often the easiest strategy. See definition 3.4.4. with beer on the menu in Germany. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.5.6. Global strategy – Not characterized by local responsiveness. Definition 3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. or joint ventures with substantial independence.4. • Nestl´ is an example of a country with a transnational strategy. products do not need to be localized. 3. and hamburgers without beef in India.46CHAPTER 3. Typically characterized by subsidiaries.4. See definition 3. In the semiconductor industry. [1.4. • Texas Instruments is an example of a country with a global strategy. See definition 3. wine in France. but a good strategy for cost reduction when products do not need to be adapted locally.

3. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. Side Note 3. 6]. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.6 (Transnational Strategy) In operations management. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.S.4. p.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5..4.4. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

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

The work contains complex interrelated tasks requiring specialized skills. Definition 4.5. you are doing your job well if noone notices the project management. PROJECT MANAGEMENT However. You may be managing resources far in excess of your individual salary. it is very obvious and can be very costly. 48] 1.” [1.5 (Personal Advice on Project Management) Project management is a tricky profession. things you thought were certain turn out not to be. Side Note 4. it is also an area in which there will continue to be high demand for qualified people. 2. 4. 3. p. Your job is to make things go smoothly and according to plan. In a sense.1.50 CHAPTER 4. you will be confronted with a daunting task. The project cuts across organizational lines.0. project managers are highly visible in a firm and have significant responsibilities. you should always expect the unexpected. often times. People will not come through with what they promised.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.1. and/or 5. Moreover. The job is unique or somewhat unfamiliar to the existing organization. 4. and you will be forced to improvise. if things go wrong.0. However. p. See also Heizer sidenote “Project Management and Software Development.1 The Project Manager As alluded to in sidenote 4. The project is temporary but critical to the organization. If you become a project manager on projects of significant complexity. Project organizations work best when [1. 69]. The responsibilities of project managers are to make sure that . a temporary project organization is formed to address a specific project. Work can be defined with a specific goal and deadline. 4.1 Project Planning While many projects are run within an existing organization.

4. People receive motivation and information necessary to do their jobs.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). When dividing a project into tasks. 3.1.1. and 4. Review software architecture for user account input web page functionality 6.2 (Work Breakdown Structure (WBS)) In operations management.1. 51 4. dividing a project into more and more detailed components.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. • Build the user account input web page is a much better task division than 1. 2. Approve software architecture for user account input web page functionality . The project meets its quality goals. Approve graphic design for user account input web page 4. Side Note 4. in a software engineering project.1. All projects come in on time. you have divided the tasks too finely. Complete software architecture for user account input web page functionality 5. For example. a web page takes about a day to build for an experienced team. a task that should only take a day or so. In a project that includes allowing a user to enter personal information on a web page. Complete graphic design for user account input web page 2. Definition 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. PROJECT PLANNING 1. The project is on or under budget. Review graphic design for user account input web page 3.

it is time to assign people and materials and estimate the time and perhaps the cost of various activities.1. the work breakdown structure is not something you go to your office to do in isolation. 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Scheduling serves to 1. of course. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.2. Show the relationship between each activity to others and to the whole project 2. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Side Note 4. The actual WBS for Windows XP would.1. you should also take note of time and cost estimates given by your technical staff. Activities (also known as “work packages”) to be completed Side Note 4. Write software for user account input confirmation page functionality 9.3 (Reality Check: WBS) In reality. 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. Project 2. Subtasks in major tasks 4. PROJECT MANAGEMENT 7. fill hundreds if not thousands of pages. Major tasks in the project 3. Write software for user account input web page functionality 8.52 CHAPTER 4. They will be useful for project scheduling.2 (Work Breakdown Structure) Present Heizer figure 3.3 [1. Identify precedence relationships among activities 3. Encourage realistic time and cost estimates for each activity . which we will discuss next in section 4. At the time you are creating the work breakdown structure. p.

2. MS Project’s Gantt chart functions demand you assign employees. these should be considered merely tools to be used when they are useful by saving time or energy.4.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.2. However. PERT and CPM help answer questions such as • When will the entire project be completed? . Side Note 4. The order of performance is accounted for. and other values to each activity. Gantt charts are perhaps the most widely used tool for ensuring that 1. PROJECT SCHEDULING 53 4.4 [1. moeny.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. and CPM) Inexperienced project managers often feel the need to use Gantt. the road bottlenecks. Overall project time is developed.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. which becomes narrower as one approaches the neck of the bottle. It can actually be quite time consuming to create and maintain Gantt charts. p.2. Activity time estimates are recorded. cost estimates. PERT. right by the bridge. 51].2. 2. 3.” This will give the class an idea of the look and feel of a typical Gantt chart. 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. Definition 4. PERT and other formal documents. and 4. Make better use of people. and CPM tools for every project management activity. For smaller projects. PERT. All activities are planned for.2 (Using Gantt. as. and material resources by identifying critical bottlenecks in the project Side Note 4. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. – said of roads.2. Definition 4. Perhaps they imagine that they are not doing their jobs professionally if they are not.

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

schedule.2 Network Diagrams There are two approaches to visualizing activity networks: 1. through the network. 4. it will do for you automatically much of what we will go through manually in this class.5 [1.4. Use the network to help plan.2 (Example: AON and AOA) Present Heizer’s figure 3. Define the project and prepare the WBS. Compute the longest time path. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.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. 2.3. Activity on Node (AON) and 2. Side Note 4. Personally.3. See also definition 4. Gantt charts are the “go to” visualization method for even very complex projects. Activity on Arrow (AOA). Also.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Side Note 4. 6. See also definition 4. AON associates the activity with the node whereas AOA associates the activity with the arrow.3.3. Moreover. Assign time and/or cost estimates to each activity.3. They both follow six steps: 1. 53]. monitor. Develop the relationships among activities. or the critical path. PROJECT CONTROLLING 55 Definition 4.3.3 (Critical Path) The computed longest time path through a network.3. and ontrol the project. .3. Definition 4. 5. in my experience. p. 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. As the names describe. 4.2.3. Draw the network connecting all of the activities. 3.

1. PROJECT MANAGEMENT Side Note 4.6–3. Definition 4.3. their dependencies. – If an activity is an immediate predecessor to more than one activity. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.4 Determining the Project Schedule Once we have identified all of our activities.56 CHAPTER 4. Follow with example 3 and figure 3. EF = ES + Activity time.3. ES = max{EF of all immediate predecessors}. its LF is the minimum of all LS values of all activities that immediately follow it. LS = LF − Activity time. that is.9 [1. 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 3.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. 2. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor.3. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. analysis used to determine the project schedule. 54–55]. that is. LF = min{LS of all immediate following activities}.8 [1. we must use time estimates of each activity to determine the overall schedule for the project.1 gives sufficient information to describe the network. – If an activity has multiple immediate predecessors. pp. We do this with a critical path analysis with involves a 2-step procedure. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. See also definition 4.4. 4. In other words. 56]. p. its LF equals its LS of the activity that immediately follows it. its ES is the maximum of all EF values of its predecessors.1 (Critical Path Analysis) In project management. that is.

2 For example.2 (Total Slack) In project scheduling. G. If an activity2 does not impact the slack time of any other activity.1 (Slack Time) In project scheduling.5. 57].3 and Heizer figure 3. the time shared among more than one activity. 1 For example. we cannot complete the project in 15 weeks. E. the step that identifies all the earliest times that activities can be completed.1.2 (Forward Pass) In project management scheduling. or the amount of time an activity can be delayed without delaying the entire project. .13 [1. the time devoted to one of these activities must also be reduced. p. the free time for an activity.1 When several noncritical activities appear successively in a path.5. 4.4. if we delay activities B and D by one week each. “Notation Used in Nodes for Forward and Backward Pass. Definition 4.4. Definition 4.5. p. they share total slack. 61] based on table 3. • Terminates at the last.4.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.1. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. and H have no slack time and cannot be delayed without delaying the entire project. Side Note 4.4. activity F in sidenote 4.5. Note that activities A. Also notable is that if the total time of the project needs to be reduced. Definition 4. p.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.3 (Free Slack) In project scheduling. Slack time is just Slack = LS − ES or Slack = LF − EF .3. The critical path is one that • Begins at the first activity in the project. and • Includes only critical activities (see sidenote 4.3 [1. These are called critical activities.4. C. the time associated with a single activity. Note also that if we delay each activity by the amount of slack that activity has.10 [1. it is said to have free slack.” Then complete Heizer example 7 figure 3.1).4. we may delay the project as a whole. 60]. in the example in sidenote 4.

6. unexpected complexities. However.6.6. See also definitions 4. three time estimates are used: 1. Side Note 4. technical considerations that were unknown at the time the project schedule was drawn up. The usual definition calls these alpha and beta. Definition 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. etc.6.3. The beta distribution is used as a prior distribution for binomial proportions in .2 and 4. the project manager pulls the number “out of the air” based on their experience managing related activities. In PERT.6. the most probable activity completion time that could be obtained in a PERT network.3 (Most Likely Time) In project scheduling. which are labeled according to one of two notational conventions.6.58 CHAPTER 4. and the other uses β = β − 1 and α = α − 1 . Beta distributions have two free parameters.1 and 4.6..6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.2.2 (Pessimistic Time) In project scheduling. Most likely time – The most realistic estimate of the time required to complete an activity. Definition 4. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. Effectively. the time required to complete an activity is often uncertain due to supply problems. See also definitions 4.6. the “worst” activity completion time that could be obtained in a PERT network. Definition 4. PROJECT MANAGEMENT 4.3. Definition 4.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.6.6. the “best” activity completion time that could be obtained in a PERT network. In reality. in most cases.1 (Optimistic Time) In project scheduling. we do not.1 and 4. See also definitions 4.

6. and pessimistic times of 1. 8 1. p.78 weeks. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.00.6.wolfram. The above plots are for various values of (α. 62].2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.6.β) with α = 1 and β ranging from 0. 2. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.com/BetaFunction. and 9 weeks. 63] for activity F based on optimistic.4. q) = (4.com/BetaDistribution. 4. β) Γ(α)Γ(β) P (x) = (4.1 Probability of Project Completion If we assume that 1. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. most likely.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. most likely.4.1) where B(p. Activity times are statistically independent 3 Source: http://mathworld.6. p. Total project completion times follow a normal probability distribution and 2. 2007.wolfram.00 week. and . The variance of the activity time is Variance = [(b − a)/6]2 .html. The expected activity time for activity F is 3 weeks5 and the variance is 1.25 to 3.html http://mathworld.78 6 6 36 7 4 weeks.3 The domain is [0. 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. 4 See definition 4. and 7. 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. Side Note 4. 4.1]. February 21.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.

. 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) (4.7% of the time. Note that the standard deviation of 1.6. p.” Review Heizer example 10 [1.6. definition 4. See also 4. and within 3 standard deviations approximately 99.6.6.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.76 weeks approximately 16% of the time. See definition 4. 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. the population variance var(X). two standard deviations approximately 95% of the time.6.16.6.6. commonly also N written σ 2 .76 weeks implies that the project will exceed the expected completion time by more than 1.html.6 (Standard Deviation) The standard deviation is the square root of the variance. “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 4.4 (Using the Normal Table) Pass out Heizer Appendix I [1. 9 For 10 See more information. Side Note 4.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6. Definition 4.wolfram.6.3 (Example: Project Variance) Review Heizer example 9 [1.3) Definition 4.10 Determining Project Completion Time for a Given Confidence Interval A common question is. 65] and figure 3. 64].5. pp. Side Note 4. A2– A3] “Normal Curve Areas.1. p. see http://mathworld.com/StandardDeviation.60 CHAPTER 4.

we want to do so in the least cost mannger possible.7. Project crashing is the name given to the process of rushing a project to completion. • The shortened durations will actually enable us to finish the project on time. crash cost is the cost required to complete an activity in the shortest time possible. 4.11 Definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.7. the crash cost is typically higher than the normal cost. you will doubtless experience one or both of these eventualities many times in your career.1. we need to ensure • The amount by which an activity is crashed is. See definition 4.3 (Crash Cost) In project management. Definition 4.4.2 (Crash Time) In project management. and if you become a project manager. Crashing a project involves a four step process: 1.1 (Crashing) In project management.7. Definition 4.7. When crashing a project. if certain activities off the critical path take the pessimistic time estimate or more to complete. Since activity completion times are typically shortened by adding resources. in fact.4) 11 Since crashing a project often involves adding additional resources to activities.7. Assuming linear costs.7. permissible and realistic. and • The total cost of crashing is as small as possible. . it may result in the project being delayed. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.1. See definition 4. Step 1 – Compute the crash cost per week. crash time is the shortest duration of an activity.

stop.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT.7. 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. • Advantages – Especially useful for large projects . 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.18–3. If not. go to step 2. Crash this activity by one period.19.2 (Example: Crashing a Project) Present Heizer example 12 [1. you should be very wary of such pressure. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. If the due date has been reached. Step 3 – If there is only one critical path.7. 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 you find yourself needing to rush a project. PROJECT MANAGEMENT 2. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. Note that one activity may be on several critical paths. pp. Step 4 – Update all activity times. 3.5 and figures 3. Side Note 4. At times this may be politically infeasible. If you accept the challenge and try to rush the project to please upper management. Side Note 4. Step 2 – Find the critical path(s) in the project network. 4. As a project manager. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. 67–69] including table 3.62 CHAPTER 4. the advice given in this section should be helpful. If there is more than one critical path. 4.

org/wiki/List of project management software for a list of project management software or ask Dr. Information on Planner can be found at http://live.dotproject.4. 12 Recall sidenote 4. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined. pp.9. There are a variety of alternatives.1.achievo. You may also refer to http://en.org. Information on dotProject can be found at http://www.net. they are often overkill for small. Starkweather about his impression of various alternatives.gnome. Noncritical paths should be closely monitored as well.7 [1.org/Planner.7.to mediumsized projects. including open source software that is free. 4.1–3.wikipedia. it is relatively expensive and the features are so numerous and complex. 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. Information on Achievo can be found at http://www.9 Using Microsoft Project for Managing Projects Present programs 3. It is perhaps the most widely known and featureful project management software available. 70–74] with figures demonstrating MS Project functionality. . Note that most project management textbooks refer to MS Project as the software of choice for project management. However. independent.

64 CHAPTER 4. PROJECT MANAGEMENT .

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

and 4. Cash budgeting.1. which impacts purchases of new plant and equipment as well as development of new products.4.1. 3. Introduction. 2. FORECASTING • Long-range forecasts – Generally more than 3 years. Facility locations or expansion.4.to long-range forecasts. See also definitions 5. Growth. These may include inflation rates.2 and 5. Generally deals with more comprehensive issues than short-range forecasts. In the first two stages. Production planning and budgeting.1. Maturity. 5. . and Analyzing various operating plans. Definition 5. housing starts. and other economic indicators. Decline. These concern rates of technological progress. long-term forecasts concerned with the rates of technological progress. planning indicators valuable in helping organizations prepare medium.1.1 Types of Forecasts Organizations typically use • Economic forecasts. • Technological forecasts. Definition 5. Useful for – – – – Planning for new products.1. money supply.2 (Economic Forecasts) In operations management.66 – – – – Sales forecasting. Capital expenditures. See also definitions 5.1.3 (Technological Forecasts) In operations management. longer forecasts are needed. and Research and development.1. CHAPTER 5.3 and 5. Product life cycles tend to follow four stages: 1. and • Demand forecasts.

• Loss of customers. 2.3.1. 7. 5.1. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. Select the forecasting models.2 and 5. . 6.4 (Demand Forecasts) In operations management.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1.1. Determine the time horizon of the forecast. See also definitions 5. and scheduling decisions and serve as inputs to financial. marketing. 2. capacity. these drive a company’s production. projections of a company’s sales for each time period in the planning horizon. 5. Make the forecast. Capacity – Underestimating demand can result in • Undependable delivery. Select the items to be forecasted.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Gather the data needed to make the forecast.2. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. • Training. and • Layoffs. 5. 3. Validate and implement the results. Determine the use of the forecast. 4. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Also called sales forecasts. and • Loss of market share.5. 3. and personnel planning.

– You should be able to explain how and why you arrived at each and every number that you forecast. 5. • Lack of follow-up.68 CHAPTER 5. use something simpler. • Lack of sanity checking. – In one case. it is a bit of an art that mixes both.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. – If someone challenges your forecast and you do not have supporting logic or documentation. • Lack of support for the forecasts. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. – Before you show your numbers to others. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. you will be unable to defend your numbers.2. I have seen otherwise competent people (including Ph. FORECASTING Side Note 5.1 (The Most Common Errors in Forecasting Methodology) In my experience. 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.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. figure out whether an improvement to the forecasting methodology can be made. In practice. • Using models that are more sophisticated than the user’s understanding. . ask yourself if they make sense. – If they do not match.D. based on a linear model. – On a number of occasions. track the actual outcomes and compare them to the forecasts. – Many people try to apply ordinary least squares (OLS) regression techniques. Any quantitative approach should be complemented with a qualitative “reality check. – If you do not truly understand the mathematics. to inherently nonlinear systems. – After making a forecast.

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

3. See also definition 5.1 Qualitative Forecasting Methods Definition 5. 5.3.5 (Sales Force Composite) In operations management. and 5.6.3.3. and 5. and 5. See also definitions 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3.10.3. See also definitions 5.3.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. 5. 5. 5.4. a forecasting technique based on salespersons estimates of expected sales. Definition 5.3.3.3. and 5.3. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.6 (Consumer Market Survey) In operations management.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. 5.3. · See definition 5. Definition 5.70 CHAPTER 5. and value system.6.3. .3 (Jury of Executive Opinion) In operations management.5. a forecasting technique using a group process that allows experts to make forecasts. emotions.4 (Delphi Method) In operations management.2.5.3. personal experiences.3.6. See also definitions 5.1.5. Definition 5. See also definitions 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.4.3.4.3. Definition 5.3.3.3.3.3. See also definition 5.3.

Higher values give more weight to recent data.3.5.3. α.3.2) See also definition 5. 5. Definition 5.3.05 to 0.1) n • Weighted Moving Average – Mathematically. See also definitions 5. Moving averages can be either simple or weighted.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.3.10. 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3. a simple moving average is given by demand in previous n periods Moving average = (5.8.7. See also definition 5.3. That is.3.3) The smoothing constant.7.3.3.2 Quantitative Forecasting Methods Definition 5. Mathematically. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. Definition 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. FORECASTING APPROACHES 71 5. and are appropriate to use when the underlying average .10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.5. and 5. Definition 5. 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.3.11. • Simple Moving Average – Mathematically. generally ranges from 0.9.3.

3.7.12.8. When α = 1.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. such as the mean absolute deviation (see definition 5. See also definition 5. Mean absolute percent error (MAPE).3.4) definition 5.7.3. See also definition 5.13.3. 5. exponential smoothing is equivalent to naive forecasting.3. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.14. Definition 5.0.3. Definition 5.3.12). 2. while lower values give more weight to past data.72 CHAPTER 5.3. and 5.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. Mean squared error (MSE).3.3 Measuring Forecast Error Once a forecast is made. Definition 5. 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. .15. FORECASTING is likely to change. Three popular measures are 1. 5.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts.3.3.3.13). Mean absolute deviation (MAD). 1 See |actual − forecast| n (5. and are appropriate to use when the underlying average is relatively stable.

Mathematically.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.5. MAPE is given by MAPE = See also definition 5. 100 n i=1 (forecast errors)2 n (5.3.3.3.12.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.12.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.8) With smoothing constants α for the average and β for the trend. Definition 5. Mathematically.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3.3. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.11) .7) or F ITt = Ft + Tt (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends.5) |actuali − forecasti |/actuali n (5.6) 5. MSE is given by MSE = See also definition 5. expressed as a percent of actual values.3. FORECASTING APPROACHES 73 Definition 5.

F ITt . by the formula F ITt = Ft + Tt . 2. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.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. Tt with equation 5. 1. Calculate the forecast including trend. It is also commonly called linear regression analysis. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. the emponentially smoothed forecast for period t using equation 5.12. Ordinary Least Squares Regression analysis is also useful for predicting trends.10.74 or CHAPTER 5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.14) . Compute the smoothed trend.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Compute Ft . time) (5. 3.

Divide this estimate of total annual demand by the number of seasons.5 Seasonal Variations in Data In most businesses.13 assumes a linear relationship. . consumers often make fewer purchases of durable goods. 3. Deviations around the least squares line are assumed to be random. It cannot be used to predict too many periods into the future as the further into the future the prediction is made.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. Find the average historical demand for each season. Compute the average demand over all months. such as cars and washing machines. 1. Compute a seasonal index for each season by dividing the historical demand by average demand. 5. Although there are many methods to accomodate seasonal demand.5. This provides the seasonal forecast. the more uncertain it is. 2.3. 3. The first step is to calculate the seasonal forecast. Recall that the equation 5. to account for seasonal changes in demand in our forecasting. the multiplicative seasonal model. demand is seasonal. then multiply it by the seasonal index for that month.. 2. In the U. We do that with a 5-step process.S. ¯ x The least squares method has several drawbacks. 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¯. Definition 5. 5. we will examine one model.3. Most businesses experience a surge in sales around Christmas. Estimate next year’s total annual demand. during the summer months when it is common to take a vacation. 4.

g. We will use the same technique..x = (5. average local salary) (5. It is also called the standard deviation of the regression and..g. is given by (y − yc )2 n−2 Sy.16 is y2 − a y − b n−2 xy Sy.15) Side Note 5.. pp.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. if you are uncertain about predictions of x. 106– 107].g.3.3.1 (Example: Using OLS) Present Heizer example 12 [1. However.4.3. If there are published estimates you can cite (e.x = (5. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model. FORECASTING 5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. mathematically. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. sales) = y-axis intercept = the slope of the regression line = the independent variable (e.17) . whatever uncertainties you may have transfer to your predicition of y.76 CHAPTER 5. but x will be something other than time. Note that making predictions of future demand involves also making predictions about the independent variable x.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.

The correlation coefficient of variables x and y is given by r= See also definition 5.3.4 (Causation vs. in all but one Year of the Pig.10 [1. the note in the margin accompanying Heizer example 14 [1. FORECASTING APPROACHES 77 Side Note 5.3 (Examples of Correlation Coefficients) Present Heizer figure 4. p. football in the U.com/time/business/article/0. Correlation Coefficients for Regression Lines Definition 5.S. nor does it imply that they will continue to be related. but the relationship is coincidental. the U. Dow Jones Industrial Average and Standard and Poor 500.S. Other interesting correlations that have been identified over the years include banana prices and U.3. has risen.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.9 [1. Even the Year of the Pig correlates strongly with the U. Since 1935.time. or National Football League. 2007. February 28. Definition 5. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.3. 107].2 (Distribution About the Point Estimate) Present Heizer figure 4.S. stock market. pp. stock markets.html?xid=sitecnn-partner.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.18) .S.3. Correlation) Correlation merely means that the values of two variables are historically related. Certainly.S.2 with stock prices generally rising as skirts rise.4 .” the AFL (American Football Conference) and the NFC (National Football Conference). have been correlated.” Side Note 5. p.5.3 and the U.00. changes in skirt lengths don’t cause stock market prices to rise and vice versa. the average length of a woman’s skirt and stock market prices in the U. 109].3.1594488.8599. stock market prices as well as the winner of the Super Bowl.3. which is divided into two “conferences. “Distribution about the Point Estimate of $600 Million Payroll. is monopolized by the NFL.18. 108]. Side Note 5. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. “Four Values of the Correlation Coefficient. Historically.S.” Note that the regression assumes a standard normal distribution about the estimate.3. leading stock indexes. 4 Source: http://www. It does not imply causation one way or the other. a football game played between two football conferences in the U.S.

.3. x2 .3. (See definition 5.3. etc. 5 See definition 5. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. .3.19) Determining the values of a.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.19 (Multiple Regression) A causal forecasting method with more than one independent variable.g.” For example. = the dependent variable (e. In practice. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. results in additional predictive accuracy as measured by r2 . 110].5 Definition 5.6. if they are indeed related to the dependent variable. . .3. Side Note 5. you would use statistics software to calculate these values. b1 . Adding additional independent variables as predictors.15 is given by y = a + b1 x1 + b2 x2 + . p. It is commonly simply called “R squared. we discussed a means by which we can attempt to predict the value of one variable using the value of another. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. b1 . .18 and Heizer example 15 [1. b2 . sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . . b 2 . 110]. p..” As the sidebar points out. often the most difficult part of building a multiple regression model is to pick the independent variables. . The multiple regression equivalent of equation 5.78 CHAPTER 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. .17.

1.6. 111]. three M ADs about 98% of the time.4 standard deviations. the forecasting methodology needs to be modified. three M ADs to 2. Definition 5. Side Note 5.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.6 One M AD is equivalent to 0.8 standard deviations.4. p. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).forecast| n where M AD = (5.5.4. In other words. Definition 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. This means that the observed value should be within 2 M ADs abut 89% of the time.6. . MONITORING AND CONTROLLING FORECASTS 79 5. and 4 M ADs to 3. These limits are typically based on M ADs.20) A good tracking signal has about as much positive as negative error.2 standard deviations.11 [1.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. though large errors may be a problem as well even if the positive and negative errors balance. and within 4 M ADs about 99. The tracking signals should also be compared as they are generated against limits. 6 Recall definition 4.1 (A Plot of Tracking Signals) Review Heizer figure 4. If the tracking signals violate upper or lower limits. one of the most common problems with forecasting is a lack of follow-up. which correspond roughly to standard deviations.4. Tracking signals are typically used monitor forecasts. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. two M ADs to 1. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .2.4. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.9% of the time.6 standard deviations.

10) is automatically changed to keep errors to a minimum. changes need to be check with human eyeballs to ensure that the adjustments make sense. 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.2 [1. Side Note 5. 5. “Summary of Forecasting Formulas.80 CHAPTER 5.. you should be aware of the criticism of focus forecasting. 114]. FORECASTING 5.4. 2.4.4.2 Focus Forecasting Focus forecasting.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. you must make your own decision as to how you select the forecasting models that you use. Definition 5. There is no single technique that should be used for all products or services.3.4. Side Note 5. Note that even with computer monitoring.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. there has been much criticism of the approach to using models based on thier fit to the data. is based on two principles: 1. Sophisticated forecasting models are not always better than simple ones. α in definition 5. However.g. In your career. p. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. which selects a model based on goodness-of-fit to a data set.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.4.” . Definition 5.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4.

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

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

4 For 3 For .500 or 100.1.2 Generating New Products Most products have a limited life cycle.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.1 (Example: Brainstorming) Lead the class in a brainstorming session.3 • Political and legal change can also bring about business opportunities. • Technological change often drives product innovation. it must regularly redesign existing products or bring new products to market. example. Ideas are not reviewed until after the brainstorming session.2. as well as the total annual dollar contribution of the product. Definition 6. • Economic factors. • Sociological and demographic change is also tied to product demand.2.3 Product-by-Value Analysis For firms with many products.4 Side Note 6. and if a company is to survive. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.1. example. 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.2. GENERATING NEW PRODUCTS 83 6. such as consumer incomes. Definition 6.6. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.2. are tied to product demand. 6.000 yuan. 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. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.

Definition 6. Determines what will satisfy the customer and 2. Side Note 6.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on. Translates customer desires into a product design. 6.3. the product life cycle. The house of quality is a graphic technique for defining the relationship between customer desires and a product.2.3.1 (Product Development Stages) Present Heizer figure 5.3 [1. p. 6. 128]. p. DESIGN OF GOODS AND SERVICES For example.3 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. p. market dynamics. 128]. and the organization’s capabilities.2 [1.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Side Note 6.3.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.3. Many successful companies rely on sales from products introduced within the past five years. Definition 6. 129]. DuPont estimates that it takes 250 ideas to yield one marketable product [1.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.84 CHAPTER 6. Each stage should have an accompanying review to determine whether to progress or not.3. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market. .

3 Organizing for Product Development In the West. PRODUCT DEVELOPMENT 85 Side Note 6. Building the house of quality involves six steps: 1. • Perhaps the most popular approach in the U.10 Side Note 6.3.2.3. and production departments.. e. Note that it is not free or open source. Develop importance ratings. a research & development.3.2. there are three popular methods by which organizations undertake product development. .2. design engineering. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.3. 10 The right-hand columns of the house in sidenote 6.9 6. • Effective communication and coordination between separate departments can be problematic. 1.S.com for more information. • Fixed duties exist.2. 130]. 7 In other words.3. Product development is done by teams.2 (Example: House of Quality) Present Heizer example 1 [1. See http://www. 6. Evaluate competing products. as was the software described in section 4. Identify relationships between the firm’s hows. 2. bureaucratic companies and organizations.” 6 For example. Identify customer wants. 8 These are given on the roof of the house in sidenote 6.g.qfdcapture. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. p. 3.3. In other words. 2. Relate customer wants to product hows.8 5. identify the rows of the house in sidenote 6.2. which can be an advantage. with product features.7 4. • More common in large. An organization is divided into departments.6. manufacturing engineering. Identify how the good or service satisfies customer wants..3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.3.9.3. create the columns of the house in sidenote 6.6 3.

4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. The goals of manufacturability and value engineering are 11 See definition 6. . These teams often include representatives from marketing.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. engineering. 6. but my personal impression is that formal QFD practices are not widespread in practice. Side Note 6. and use. My experience may not be indicative of management practices in general in the U. quality assurance. design. and production stages of product development.S. production.4.3..3.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. will often advocate for continuation of their project past the point that it is profitable for the company. Some teams even include representatives from vendors..3.11 In Japan. development. manufacturing. However. etc. engineering. it can also be problematic because teams. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.4 (Concurrent Engineering) In project development. Definition 6. organizations are less structured and typically not divided into research and development. production.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.. and field service personnel. use of participating teams in design and engineering activities. Side Note 6. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.S.3. purchasing.3. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. because their fate is tied to a product. Definition 6. Definition 6.3.3.86 CHAPTER 6.3. maintainability.

4. Standardization of components. Improved job design and job safety. 87 . Improvement of functional aspects of the product.6. 5. and 7. 6. Cost reduction. Robust design. 2. Improved maintainability (serviceability) of the product. 3. PRODUCT DEVELOPMENT 1.3. Reduced complexity of the product.

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

jewelry.ccer. successful entrepreneurs know how to raise money.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. I mean believe in you enough to give you money.php?id=2018 http://www. and .com/article. 2007. • Finally.edu. you will maximize your chance of success. 1 There are a variety of studies that support this. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. – You not only have to believe in yourself. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship.asp?NewsID=5324. – We will discuss techniques for raising money in detail later in the course. for example.92 CHAPTER 7.1 In our discussion of entrepreneurship. And by believe in you.cn/en/ReadNews. make lots of money quickly and with little effort. Hopefully. you will finish the course with the confidence that if you decide to start a small business. 12–13]. we will discuss how to prepare to start a small business as well as manage a business early in its life. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. March 6. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. but a series of frustrations. • Surveys and research indicates that the most common personality trait is self-confidence. See. http://wistechnology. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. everyone would say that they want to be thier own boss. you have to convince others to believe in you.”’ • According to experts who have studied entrepreneurs. If asked. 7. pp.

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. for example. You may lose friends because you do not have the time to maintain the friendship. • Among the means by which you can to raise money. friends and family are the most important concerns in their life. we suffered a database corruption that resulted in my practically living at work for three weeks . CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.1.1.7. Side Note 7.com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. If you are not prepared to redefine relationships relative to your business life. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. the use of venture capital will probably increase over time in China. • Some of the information is intended for those who have an established career and real-world experience to draw upon. week after week. Venture capital financing is common in the United States but is not yet a common means of financing in China. Putting in long hours is not something that is done once in a while. we will discuss venture capital. Discuss the impact of the demands of a startup on the marriages of Active.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active. For many people. or angel investors. but something you may need to do day after day.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. Often.1.com management and Jerry’s difficulty balancing work and family life. possibly even years at a time. friends. you may not be prepared to start a company. – Additionally. – However. 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. It may be useful later in your career. month after month. “When are you coming home for dinner?” or criticizing you for ignoring them. it may be difficult to keep the necessary focus on the business. – For now. If after many long hours at work your family will be asking you. take note of this information. at Active.com.

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

7. it is common to exchange “war stories” about the difficult times and sacrifices. 10. .3. it helps to set goals. even the successful ones will probably focus on the negative. 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. Move on to larger goals once the small goals have been met. “Raise 100. “Achieve financial independence” is much better than “pay the bills. When setting goals. than learning from success. – Long-term goals are those that may take 5. – Start with small goals. Like parents.000 yuan by July 1” is a much better goal than “raise money.000.” you may not want to start a business that focuses on customer relationships. ask yourself the following questions: • Income – How much do you want to earn. marketing.” • Be realistic. Consider at least a five-year time horizon. When setting goals. and administration. or 20 years to accomplish. if not more important.1 (What’s It Really Like?) If you wonder what running a business is really like. your goal may not be realistic. Side Note 7. although the successful ones generally view their experiences as positive on the whole.7. If you talk to an entrepreneur who has not been successful. When I talk to those who I know who have started businesses.3 Setting Goals With any major endeavor. If your goal is to raise 1. • Be specific. advertising.3.000 yuan and you’ve never had a job before. SETTING GOALS 95 If you are not a “people person. • Set both short-term goals and long-term goals. Learning from failure is as important. • Analyze Your Professional Attributes – Be aware of where you need help. ask other entrepreneurs.” • Be optimistic. such as sales. – Short-term goals are those that can be accomplished within a year. try to figure out why they were not successful.

– Hours of work. Acknowledge this fact and factor it into your decisionmaking. How much is your ego worth? Side Note 7.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. Side Note 7.3.3. pp. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Many people want to start their own business for ego gratification. Eliminate question 1 and substract one point from the scoring given on p. 18–20]. The reasons given for adding or subtracting points are as interesting as the ultimate score.96 CHAPTER 7. 21]. 20. pp. – Geographic location.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. 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. and – Investment of personal assets. . • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. Have the class write down their answers and evaluate their own EQ.

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

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

” That is.1 You’ve Got an Idea. Entrepreneurs are often told their idea is flawed. it is too risky.1. 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. that they will never make it. he would never succeed. home. computer-controlled security cameras. p. Warnings about risk are perhaps the criticism you should consider most carefully. to be truly self-motivated and persistent in the way you need to succeed. Have students fill out the form on their own time. 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. His sales are now in the millions of dollars per year and the business is very profitable. February 17.imdb. 2007. you will be spending years of your life trying to make the idea work. “Never say die. p. A well-known phrase in English. He ran the business as a one-man operation for years. thinking that if he did not succeed after a couple of years. or are otherwise discouraged. Side Note 8.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. After all. or health.” Side Note 8. in the wake of 9/11. 8. 33]. you should not let it dissuade you. And you should not risk anything you can’t afford to lose. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. You should be realistic about risks. 2 http://www.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.2 is. such as your family.8. the business took off. while you should listen to criticism that others give. Finally. Side Note 8. YOU’VE GOT AN IDEA. However.com/find?s=all&q=never+say+die. Have students come up with examples of products that meet various criteria on the checklist.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. . you should have “thick skin. making just enough to get by but not much more.1. 35]. People thought he was going nowhere and generally dimissed his business.1.1. used as the title of at least 12 movies and television shows. Now What? The number one trait needed by successful entrepreneurs is perseverance.

FINDING AN IDEA .100 CHAPTER 8.

1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.” or business-to-consumer ventures.0.Chapter 9 Defining Your Market After coming up with your idea.2. 9. go through the following 7 steps: 1. but you should try to target your market as specifically as possible. See also 9.0. Definition 9. 101 . Consumers and 2.0.” or business-to-business ventures.0.1. Businesses. When trying to identify your niche market. Not only do you need to decide whether you are marketing to businesses or consumers.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. See also 9.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. There are two broad categories of markets: 1. Definition 9. your next step is to do some market research. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.

Focus – Be specific. and other important demographics. • A friend in Chicago. Test – Offer samples.000 per year. She started by making a few samples and giving them to friends with dogs. • If your initial test does not go well. it allows you to branch off into other niches as the business grows. the longer it will be until you make your first profit. That is.. . (c) It’s carefully planned. (e) It evolves. Falkenstein. Synthesize – Coalesce your ideas. If it does not sufficiently meet the criteria. decided to start a business selling unique winter clothes for dogs. 6. • 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. (b) Somebody else wants it. (d) It’s one-of-a-kind. Lynda C. discard the idea and move on to the next one. etc.” To focus your search for a niche. A good niche has five qualities (a) It takes you where you want to go. Donna. Then she approached a few local pet stores and arranged for them to offer her products for sale at a low price. earnings. But do test your product before you go ahead full speed. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves.” 2. the longer you wait to go into business in earnest. After all. give a seminar. “Selling maternity clothes to executive women” is much better than “selling clothes. It should confirm to your long-term vision. you need to stop and seriously reevaluate your plan. That is. 75] 4. I mean customers. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50. • Don’t spend alot of money. there is not already alot of competition. p. 5.” [4.102 CHAPTER 9. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. then asked them about customer reactions. Evaluation – Evaluate your niche against the criteria in step 4. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. By someone else. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule.

Go for it! – Implement your idea.1 (Smaller is Bigger) When starting a business. for example. Definition 9. you should be able to enter your niche market with confidence. Many Western companies make the mistake of lumping together Japanese. young adults in the Depression. many are choosing to start families later in life or even have children ten years or more apart.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.. in the U. when the country was immersed in a war effort.) Using these new marketing techniques can allow you to narrow your market.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. the more likely you are to score a hit.1. they try to satisfy all possible customers and end up trying to do too many things well. This marketing technique has been widely used since the early 1980s in the U. Likewise. many entrepreneurs make the mistake of being “all over the map.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.. life stage. New marketing techniques include generational. Korean. are similar in age to those who came of age in World War II. Chinese.” That is. As older people are more active than before.1.1.1. many Eastern companies make the mistake of lumping together American and European customers.1.1 (Generational Marketing) Marketing to consumers based on age as well as social. such as having children. 9. Side Note 9. FINDING YOUR NICHE 103 7. This can be offensive and serve to alienate rather than appeal to your customer. and cohort marketing. the World War II cohort. If you did your homework.9.S. demographic. and the narrower your focus on your target.. the Depression-era cohort. but their behavior differs significantly due to the different influences in their youth. or retiring. you should practice extra caution to avoid stereotypes or other insensitive approaches. and psychological factors. etc. . 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. Marketing to demographic groups has become much more refined in the last few decades. Side Note 9.1.1. It is better to do just one thing well than to do many things poorly. Definition 9. and other Asian customers together. buying a home. For example. and 9. when many people were suffering from extreme poverty.2.1.S. Definition 9.1.3. (See definitions 9. economic.

you should. Falkenstein states.2 Redefining and Expanding Your Niche Lynda C. p. p. 79] 9.3 The Mission Statement Once you have a niche. a few sentences at most.1. “Creating a niche is the difference between being in business and not being in business. Falkenstein1 advises that you regularly reevaluate your niche. The mission statement should • Be succinct.2 [1. • Convey the essence of your business’s goals and philosophies. . DEFINING YOUR MARKET 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. create a mission statement. • 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.” [4. 28] which includes mission statements for three multinational companies: 1 See section 9.3.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Side Note 9. Every six months or so.104 CHAPTER 9.

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

benjerry. and recognizes outstanding employees. such as Whole Foods. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. processes. nationally & internationally.S. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.com/our company/our mission/index. a grocery chain. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. . capital.1. Answering the following questions can provide you with a clear picture of what your mission statement should include: • Who are your customers?2 • What image of your business do you want to convey? • What is the nature of your products and services? – What determines pricing and quantity? – What is your competitive edge? Price? Features? – Will this change over time? • What level of service do you provide? • What roles do you and your employees play? – You should develop a leadership that organizes.106 CHAPTER 9. Other companies.cfm for more detail.. challenges. DEFINING YOUR MARKET • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally. 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. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. so do your partners.

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

108 CHAPTER 9. DEFINING YOUR MARKET .

Donna Barson. president of Barson Marketing. Market research should answer the following questions: • Who will by my product or service? • Why will they buy it? • Where will they buy it? In a store? On the internet? • What do I need to charge to make a sufficient profit? • What products or services will mine be competing with? • Am I positioning my product or service correctly? How do I compete successfully with existing suppliers? • What government regulations do I need to be aware of with respect to my products or services? 109 . 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. location and needs of your business’s target market. and the particular competitors you face. the industry as a whole.” Definition 10.1 (Market Research) Research into the characteristics. spending habits. you need to take a step back for a sanity check.. Inc.0.Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business.

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.

.” [4. pp. RESEARCH METHODS 113 Side Note 10.10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.

114 CHAPTER 10. MARKET RESEARCH .

In terms of sanity checking. and projected results of the new business. 3. 5. Your business plan should list obstacles that may arise and what will be done to address them. 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. Definition 11. 1. 2. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. including 115 . 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.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. Set up a timetable with specific steps to be accomplished in a specific period. 4.0.4 (Business Plan) A business plan is a written document that details a proposed venture. expected needs. and so should you be. Every aspect of the venture should be covered. It must describe current status. Those who provide financing are aware of these pitfalls.

• The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. It provides a variety of other benefits. you will likely be giving your plan to read many business plans per day. THE BUSINESS PLAN A business plan is also known as a venture plan. • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. CHAPTER 11. They may spend no more than five .1.1 11. • The business plan quantifies objectives. • Financing. Failing in business is very costly. loan proposals. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. • 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. • Manufacturing. • Marketing. and • Milestones or a timetable. it will help you maximize your venture’s chances for success. • Research and development. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers.116 • The project.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. • Critical risks. 11. allowing the entrepreneur to track results by measurable benchmarks. or investment prospectus. • Management.

p. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. Kuratko suggests the following [3.1. bear in mind that once the plan is advanced to the next stage of financing. 2. 3. While the initial read-through might be only a five-minute perusal. including debt or equity financing required. you will not even get your foot in the door and be invited to present your plan to investors. or spendthrift. the trash can.1. 300]. 4. Read the latest balance sheet. .2 5.. pretentious. p.e. not ostentatious.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person.”1 Many venture capitalists use the following six step process to evaluate a business plan [3.11. 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. Note that less than a minute on average is devoted to each step. Determine the characteristics of the venture and its industry. Read the plan over casually. 6. – Binding and printing should not be sloppy. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. thorough and careful. but not too good. Determine the financial structure of the plan. They will want to see something that reflects that you are neat. other financing professionals may spend more time analyzing the details of the plan. 2 Do not underestimate the importance of this step. 1. If you cannot impress the financier with these three steps. Determine the quality of the entrepreneurs. but should not be too lavish. i. Establish the unique details of this venture. 301]: • Appearance – It should look good. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. 11.

• Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. Its products or services. The company’s current status. 6. .1. the date of the plan. 4. e-mail address. – It is worth repeating: Keep it down to at most two or three pages. though you should not put it in the same corner as page numbers appear. and full contact information4 for the company. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 5. 7. If you write to much. 11. The benefits to customers. – It should explain 1.3 Some Style Points Kuratko also recommends that you [3. • The Executive Summary – Two or three pages immediately following the title page. 4 Phone number. 2. and How investors will benefit. 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.3 • The Cover and Title Page – The cover should have the name of the company. a number should be in a corner5 indicating the copy number. The financial forecasts. – On the title page. – 40 pages is ideal. and/or web site. You should use this to keep track of who has which copy. THE BUSINESS PLAN – It should be no more than 50 pages. – Inside the front cover should be a title page repeating the cover information. The amount of financing needed. they will not read it. 3 Note that for this class.118 CHAPTER 11. address. p. The venture’s objectives in 3 to 5 years. 3. 5 I suggest the lower-right corner. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time.

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

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

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

THE BUSINESS PLAN .122 CHAPTER 11.

12. 62]. author of The Art of the Start.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. p. anyone who will listen. The presentation of your plan is an ongoing process. Sales Prospect Pitch. 51–56]. Present it to your friends.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. you will probably not do a good job. your family. 12. recommends twenty-five times [2. Present it many 1 Guy Kawasaki. and Potential Partner Pitch [2.2.1 The Presentation Side Note 12. pp. This means that you should not count on presenting your plan to your most critical investor for the first time. You will probably have to present it at least ten times before it is ready for the medium-sized fish. not a one-time event. your business class. local business associations. your dog. 123 . Your presentation should evolve over time as you listen to your audience and receive feedback.1 Do It Until You Get It Right This is perhaps the most important piece of advice.Chapter 12 Presenting the Plan 12. The first time you present your plan. Do not be dismayed.1 You will have to pitch to many medium-size fish before you are ready for the big fish.1.

of course. Most Ph.D. Adobe Reader. the lawyer joke.”2 [2.2 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. is. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.2. • Test the equipment the day before. I had given it over a dozen times. You don’t want to try to figure out other people’s equipment. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. Most graduates get between 5 and 15 interviews when they graduate. • Bring your own laptop. In retrospect. p. Bring at least twice as many as you expect there to be people in the room. “His lips are moving. Guy Kawasaki likes to tell a different version of an old joke. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. Post a copy of your presentation in a secure location on your homepage just in case. they may have another version of PowerPoint. 2 This originally comes from an American classic. and you don’t want something as silly as a burned-out light bulb to cost you an investor.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. 12.2. The original joke goes. 12. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. 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.124 CHAPTER 12.D. and even if you can figure it out. PRESENTING THE PLAN times. “How can you tell when a lawyer is lying?” The answer. Lexecon.1 (The Job Talk) Every Ph.” 3 Color copies! . There will always be glitches. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving.2. By the time I gave my job talk to my eventual employer. • Bring a backup thumb drive with your presentation on it. I don’t think it was quite right until somewhere between the 8th and 10th time. • Bring paper copies3 of your presentation in case all else fails. 44] Side Note 12.

where some of the smartest people in the world worked. It is easy for things to get lost in the heat of the moment.12. everyone brought a pen and paper. ask yourself after every statement you make.3 After the Presentation Each presentation will be different.2. you are not presenting it well. Give your presentation to friends or family.5 Take Notes Have a pen and paper ready and take notes during the pitch. If they cannot explain it clearly. but in reality. and although you go into each presentation . 12. p. They may ask you something you want to respond to in an e-mail later. You should be prepared for the unexpected. 45]. it is quite the opposite. At my company in Chicago.2. • Your audience may ask you several questions at once. 12. Stop when it goes off.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. and each investor will respond differently. Many people feel as if taking notes makes them look stupid. Everyone. Ask them what your company will do. Guy Kawasaki recommends you set a timer [2. 12.6 So What? When you are planning your presentation. AFTER THE PRESENTATION 125 Side Note 12. I always bring a pen and paper to meetings. They may ask you something that makes you want to change your presentation.3. “So what?” If you cannot answer this question simply and easily. you need to change or eliminate the statement. Much of the material required use of the internet.2.2. 12. • Taking notes also makes you look conscientious.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. so write things down to make sure you don’t forget. In general.

you should also realize that most most comments will be negative and most presentations are rejected. PRESENTING THE PLAN with only success on your mind.3. Each time your are rejected improves your future opportunities. p.5 [3.1 (What to Do When You’re Turned Down) Present Kuratko table 10.” . Remember that persistence is the most important character trait of entrepreneurs. Side Note 12.126 CHAPTER 12. Each negative comment gives you an opportunity to change an investor’s opinion. 321]: “What to do when a venture capitalist turns you down: Ten questions. Be prepared for rejection and do not consider it the end of the road.

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

3 (Count Cycle) In inventory management.3. these systems should automatically update inventory and accounting records. the order cycle is the amount of time it takes to process paperwork and place orders. INVENTORY CONTROL When considering the purchase of a POS. • Security – To prevent theft. • 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. a high inventory turnover is a mark of a well-managed inventory system. Definition 13.3. the count cycle is the amount of time between counting inventory.1 Inventory Turnover Typically. if you perform an inventory count four times a year. and • Improve pricing accuracy.4 (Delivery Cycle) In inventory management.2 (Order Cycle) In inventory management. 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. 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. Definition 13. 13. To improve efficiency of inventory control.3. the delivery cycle is the amount of time between placing an order and receiving it. your count cycle is 12 weeks. CHAPTER 13. For example. work with suppliers to improve delivery times and count inventory more often. be sure it’s not easy to “hack” the system.130 • Maintain a sales history. Definition 13. Definition 13. . • Updating product information – At the time a sale is entered. such as for volume discounts for preferred customers.3.3.1 (Turnover) When you have replaced 100% of your original inventory. you have “turned over” your inventory.

S. You should know how many sales per square meter per year you need to survive. which allows you to pay less taxes on your inventory. Definition 13.3.1. INVENTORY ACCOUNTING 131 Definition 13. The author is unfamiliar with Chinese tax codes.3.4.4. Many businesses also measure turnover by measuring sales per square foot (or square meter). first out) assumes that you sell the most recently purchased inventory first. it values your remaining inventory based on the prices of the least recently purchased items.S. follow the recommendation of your accountant.3. See definitions 13.4. and delivery cycle.1 (LIFO (Last In. it values your remaining inventory based on the prices of the most recently purchased items. first out) assumes that you sell the least recently purchased inventory first.4.2.1 Buying Inventory In the process of putting together your business plan. After you have been in business your inventory control system should give you a better idea of stocking levels.2. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. but you should at least know about LIFO and FIFO.5 (Needs Period) In inventory management..S.3. LIFO and FIFO are two accounting methods used to do this. order cycle.2 See also 13. least this is true in the U. the needs period is the sum of the count cycle. In the U. If there is inflation. In other words.3. 13.4 Inventory Accounting Your accountant will typically handle inventory accounting. Calculate your sales per square meter once per month.2 (FIFO (First In. .4. The author is unfamiliar with Chinese tax codes. 13. Definition 13.4. First Out)) LIFO (last in. 2 At 3 At least this is true in the U. In deciding which to use. you must estimate your inventory value when you file your taxes.3 See also 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. First Out)) FIFO (first in.13. If there is inflation. 13. and 13. which may result in higher taxes.4.

says. author of Start Your Own Business.actual inventory . Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Distributors – Also known as wholesalers. Import sources – They operate like domestic wholesalers. usually one.stock on order = open-to-buy Note that formulas and computerized inventory control systems and other means to manage inventory don’t make up for a business owner’s intuition. 3. three or four months.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. INVENTORY CONTROL Definition 13. and they will respond in kind.” . • Some suppliers demand a minimum number of items per order. courteous and firm with your suppliers.1 Dealing with Suppliers The most important thing about a supplier is reliability. 13. Independent craftspeople 4.132 CHAPTER 13. 2. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise.5. “Be open. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Their prices are higher than a manufacturers.5 Suppliers Suppliers can be divided into four categories: 1. – The minimum may be higher for first orders to cover the cost of setting up a new account. 13. brokers or jobbers. Rieva Lesonsky. Manufacturers – Note that some manufacturers refuse to fill small orders. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.4.

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

2007. people often say something like “f.com/reference/glossary/glossary efg.html. As opposed to FOB. May 19. 5 FOB Destination changes the location where title and risk pass.o. INVENTORY CONTROL • Depending on whether the supplier pays frieght. See also definition 13.html. 2007.4 (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.7 4 Source: 5 Source: http://www.3 (FOB Destination (or f.com/jargon.5. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. Destination)) Free on board destination. 7 Source: http://en. .5.org/wiki/Backorder.5. 3. 2007. http://www.html.b.)) Free on board. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.2 (FOB (or f.5. Be aware of your supplier’s priorities.4 Colloquially.wikipedia. 5. The FOB term requires the seller to clear the goods for export.b.abcsmallbiz. Definition 13. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.134 CHAPTER 13. 6 Source: http://www. May 19.2.3. Definition 13. Seattle” to indicate that an item being shipped from Seattle is free on board. Specify a cancellation date on your order forms.5.roadway. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. May 19. 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. 2007.b. Definition 13.o.6 See also definition 13.epoi. May 19.o. This differs from a forward order where stock is available but delivery is postponed for other reasons.com/shippers/glossary. Under this arrangement.

The benefits of finding the right person for a job cannot be overstated.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. and • Independent contractors. 337]. they are often emotionally draining for the manager as well as the employee involved. On the other hand. • Part-time employees. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). besides being bad for business. p.0. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. Side Note 14.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. Side Note 14.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur.0. can take a tremendous personal toll on the entrepreneur as he or she is faced with the prospect of stressful personnel management duties such firing the employee. • Temporary employees (temps). a bad hire. 135 .

HIRING EMPLOYEES 14. writing reports.136 CHAPTER 14.1.. an employee with an inflated job title may expect an inflated severance package. If you call someone a Vice President but don’t compensate them as such. you need to consider • The physical or mental tasks involved. you will likely find that they will come to you at some point to demand a vice president’s salary. However.1 How to Hire Hiring involves analyzing the job requirements. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed.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. Not only education and skills. creating a job description. etc.1.2 Job Description Side Note 14. • If you have do terminate the employee. • How the job will be done. lifting. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. they will soon expect compensation commensurate with their job title. • You may not leave enough buffer above the employee. you’ll be grateful to have spent the time to go through a more formal process.1 Job Analysis Before creating a job description. you have nothing to offer.1. If you give someone a job as Vice President. . 14. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists. selling. but personality traits. Side Note 14. then want to hire someone else later at a position above them in the company. Cleaning. by the time you hire your 40th employee. programming. and recruiting. 14.1.1 (Formalities) While it may seem when you hire your first employee an unnecessary burden to write a job description and create all the other formalities.

2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. If you hire someone at the highest level of their competency. then they go on to a Director position at another company. Side Note 14. you may find it difficult to give them a promotion later. It also includes • Any educational requirements. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. you may find they are tempted to leverage that job title to seek employment elsewhere. and • A summary description of the position. • The position of that employee in the corporate heirarchy.1 (Job Description) Job descriptions should include • A job title. • Specialized skills or knowledge. • A salary range. HOW TO HIRE 137 • There is little room for advancement. If. • Who the person reports to. p. • Desired experience. 338]. • If you give someone an inflated job title but do not offer a salary commensurate with the title. Like a job description. You may actually be doing your employee a disservice by inflating their job title.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. p.1.14. 339]. Definition 14. and • Any occupational hazards.1. • Physical or other special requirements associated with the job. Part of retaining quality employees is the prospect of advancement. . • Benefits.1) and should include the personal requirements expected of an employee [4.1. you hire someone as Director who is not qualified to be a director.1. and • Job summary with major and minor duties.1. for example. Definition 14. it includes • The job title.

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

not a science..1. You hire the preferred candidate.com or http://www. Try to perform a search on a job sites such as http://www. 4. 2. Software” category. but when looking at a resume. 3. In the U. particularly in the high-tech industry.” 665 in “Internet/E-Commerce.” . • Online – In the U.314 listings in the “Computers. the hiring process proceeds as follows: 1.14. 159 in “Financial Services. 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. You narrow the number of resumes down to about 10. You interview the candidates. To “weed out” candidates.com with the keyword Java on May 19. There were 4. 3 Java is a programming language. 2007 turned up more than 5. You can evaluate their personality during the interview.. be sure that a candidate can provide what you are looking for. If you are lucky. • Industry Publications – Most trade publications take ads for job openings. • Focus on the skills that a person can bring to your company. 6.S.monster. 5. Searching on Monster. You conduct a second round of interviews with the remaining 3 candidates.3 Generally.” And 921 in “Engineering. For any job. many positions are being filled online. Screening People Reviewing resumes and applications is an art. for professional positions. you will get several candidates for any job you are offering.S. about 10 or so. most professional associations’ job banks are now online.com with the keyword “java” will demonstrate just how widely used online tools are. You check references. You narrow down the 10 candidates to 3. you need to narrow down the number of applicants to those you can interview in a reasonable time frame.000 hits searching just the “Information Technology” search category.dice.

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

including [4. • Maiden name (for female applicants). ask prospective employees whether they can submit proof that they have the legal right to work in the United States. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. or • If a person is a citizen. 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. 347] • Age or date of birth. creed.. Get clarification on anything that you think may be suspect. their love of and devotion to learning technology far exceeded most university graduates who were computer science majors simply because they thought it would make them money. but which can get employers in legal trouble. color. include • Whether the applicant has children.. such as through a “Green Card. • Marital status. Ever.7 (No-nos) In the U. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. or national origin. Not also that many of the best people we hired were not the best on paper. 6 Employers can. • Sex. then go home and play on computers in their spare time.1.14. p.1. in the U. • Whether the applicant has every been treated by a psychologist or psychiatrist. however. They were the type of people who would write software all day. Several of the engineers I hired did not finish their undergraduate degree. employers may not ask about anything not related to the job. • How many days the applicant was sick in the previous year. • Ask people questions about their resume during the interview.S.” . • Do not hire people who are discovered to be lying on their resume. Though laws undoubtedly differ in China. religion. race. • Whether the applicant has every been arrested. However.S.6 Questions that are not explicitly prohibited. • Whether the applicant has every been treated for drug or alcohol addiction.5 Side Note 14. • Disabilities of any kind.

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

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

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

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

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