International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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. . . . .1. . 3. . .3. . . . . . 5. .2 A Seven Step Forecasting System .2 Life Cycle and Strategy . . . . .4 4 Project Management 4. . . .1. . . . . 4. . . . . . . . . . . . . . . . . . . . . 4. . . . 5. . .1 Adaptive Smooting . . . . . . . . 5. .3 Dynamics . . . . . . . . . . . . . . 4. . . .1. . . . .3. . . . .1 Types of Forecasts . . . . . . . . . 5. . .1. . . . . .7 Cost-Time Trade-Offs and Project Crashing . . .3. . . .3. . . . . . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . . . . . . . . . . . . .2 Focus Forecasting . 5. . . . . .3 Product-by-Value Analysis . . . . . . . .2 The Work Breakdown Structure . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . 5.3 3. . . . . . . . . .2 Preconditions . . . .3. . . . . . . . . . . . . . . . . . . . . 4. . . . . . 4. . . . . . . . . . . . . . . . .1 Project Planning . . . . . 3. . . . . . . . . . . . . .2 Project Scheduling . . . . . . . . . . . .1. . 6 Design of Goods and Services 6. .2 Network Diagrams . . . . . . . . . . . .1 Goods and Services Selection . . . . . . Strategy Development and Implementation . . . . . . . . . . .3. . . . . . . . . . . . 4. . . . . . . . 5.1. . . . . . 4. . .1 Probability of Project Completion . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . 4. . . .1 Research . . . . .4 3. . . . . . . . . . . . . . . . . . . .1 What is Forecasting? .5 Seasonal Variations in Data .1 The Project Manager . . . .4.2. . . . . . . . . .8 A Critique of PERT and CPM . . . . . . .3 Forecasting Approaches . . . . . . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . . . . . . . . . . . . . 4. . . . .3. . . . . . . . 6. . . . . . . CONTENTS . . . . . .3. . . . . . . . . . . . . . . . . .4 Monitoring and Controlling Forecasts . . . . 4. . . .3.3.2 Build and Staff the Organization . . .4 Determining the Project Schedule . . 5. . . . . . . . 5. . . . . . . . . . . . 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. . . . . 5. . . . . . . . . . 4. 3. . . . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . .2. 4. . . .1 Qualitative Forecasting Methods . . . . . . . . . . .3. .4. . . . . . . . . . . . . . . . . . . . . . . . . . .1 PERT and CPM . . .1. 5. . . . . . . . 3. . . . . . . 6. .4 Adjusting for Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . . 5. . . . . . . . . . . . . . . . . . . .3 Measuring Forecast Error . .1 Identify Critical Success Factors . . . . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . 4. . . . . . . . . . . . . 3. . . . . . . . . . .6. .6 Associative Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . .

. . . . . . . . . . .3 Organizing for Product Development . . . . . . . . . . . .3. . . . . . . . . . 92 7. . . . 12 Presenting the Plan 12.1 What Am I Researching. . . . . . . 6. . . . . . . . . . . . . . . .3 After the Presentation . . . . . . . . . . . . . . . . . . . . 94 7.4 The First Minute is the Most Important . . . .1 Importance of New Products . 12. . . . . . .3 Generating New Products . . . . . . . . . 6. . . . Product Development . . . . . . . 12. . .2. . . . . . .CONTENTS 6. . . . . . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8. . 110 10. . . . . . 111 10. . . . . 6. . . . .1 Finding Your Niche . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . .6 So What? . .3 Be Familiar With All Equipment to be Used 12.3. . . .1 You’ve Got an Idea. . . . . . . .1. . . . . . . . . . .1 Product Development System . . . .2. . . . 111 11 The Business Plan 11. . . . . . . .1 Preparing to Put the Plan 11. . . . . 99 9 Defining Your Market 101 9.2. 104 10 Market Research 109 10.2 Research Methods . . . . . . . . . . . . . . . .5 Take Notes . . . . . . . . . . . . . . . . . . . . .3 Some Style Points 11. . .1. . . . 12. . . . . . . . . . . . . . . . . . . . .2 Are You Ready? . . . . . . . . . . . . . . . . 104 9. . . . . . . . . . . . 11. . . . . . . . . . . . . . . . . . 12. . . . . . . . . . . . . . . . . . . . . .3 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . 12. . . . . . .1 Your Audience . . . . . . . . . . .1. . . .1 Characteristics of the Successful Entrepreneur .2. . . . . . .2. . . . . . . . . . . . . . . . . . . . . .2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . .1 The Presentation . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . 6. .2 Quality Function Deployment (QFD) . . . . .4 Manufacturability and Value Engineering . . . . 101 9. . . . . .2 Redefining and Expanding Your Niche . . . .2 6. . . . . . . . .2. . . . . . . . . . . 11.2 Look and Feel . . . . . .2 The Plan Contents . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . 12.1 Do It Until You Get It Right . . . . . . . . . . . . . . 6. . . . . .2. . . . . . . . . . . . .3. . . .2 Know Your Outline Thoroughly . . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . . Now What? .3 The Mission Statement . . . . . . Exactly? . . . . . . .1 Sources of Secondary Research . . . . . . . . . . . . . . . . . .

.4. . . . . . . . . . . . . . . 13.1. .5. . . . . . . . . .3 Advertising the Job 14. . . . .2 Job Description . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . . . . . . . . . . 13. . . . . . . .1 Buying Inventory . . . . .5. . . . . . . . . . . . . .2 Payment Plans . .1 Job Analysis . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . 14. . . . . . . . . .1. . . . 13. . . . .6 13 Inventory Control 13. . . . 13. . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . .1 Inventory and Cash Flow . . .1 How to Hire . . . .3 Computerized Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Inventory Turnover . . . . . . . . .2 Tracking Inventory . . . . . . 14. . 14 Hiring Employees 14.3. . . . . . . . .5 Suppliers . . . . . . . . . . . . . .4 Finding People . . . . . . . . . . .1 Dealing with Suppliers . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . . . 13. . . .

Part I International Business Management 7 .


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

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

it is simply inefficient. September 20. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. Side Note 1. .”[6] 1 The Scandinavian countries composed 4 of the top 6 and 5 of the top 8 countries perceived as least corrupt in the 2005 Transparency International Corruptions Perception Index. – In the wake of Enron. these are all generalizations and individuals may differ significantly from their cultural affiliations. Scandinavians are typically highly trustworthy1 but Italians are less so. China continues a battle against corruption. • It increases the cost of doing business. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. or other person in a position of trust. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty research/surveys indices/cpi. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. For example. “. – 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). WorldCom. – A bribe is a business expense that goes to no productive purpose and decreases profits. . 2006. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. reward.dict.1.2 (Corruption) Corruption is of concern for business people because • It increases risk.1 (Bribe) A price. September 20. they must factor additional uncertainty into their calculations. gift. witness. In the words of a Beijing correspondent for “The Economist” magazine. Source: texttthttp://www. • Of course. • On a macroeconomic level.2. and Tyco.transparency. investors in the United States had to reevaluate the risk associated with owning stock. which requires strict monitoring and verification of financial information. Definition 1.2 Though things are improving. voter.2. 2 Source: http://www. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. .2. there are few if any issues which affect and infuriate so many in China as corruption.

4 – Bernard Ebbers. • Tyco – The CEO of Tyco. the former CEO of WorldCom.bankruptcydata. March 17.3. Dennis Kozlowski. WorldCom declared bankruptcy in July 2002. • WorldCom – Following the Enron scandal..S. succeeding Enron as the largest bankruptcy in U. Side Note 1.S. See sidebar 1.1.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. In Scandinavia. There is currently debate as to the effectiveness of the regulations relative to the costs. Side Note 1. March 17. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.bankruptcydata. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. Parmalat. • Enron – In December Largest. While western developed economies often cite a high ethical standard. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy.htm.3 The United States The United States has recently been rocked by a number of scandals in the business community.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States. 2007. Worldcom. and Tyco make it clear that even western developed economies have significant ethical shortcomings. .htm. 2007. the SarbanesOxley Act (SOX) was passed in the U. 3 Source: 4 Source: http://www. scandals such as Enron. was accused of looting the company to fund a lavish lifestyle.2.3. a high value is placed on honesty and personal integrity.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Qwest.S. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.12 CHAPTER 1. history. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.2 (Cultural Heritage in the U. including a $2 million birthday party for his wife. was convicted of fraud and conspiracy and sentenced to 25 years in jail. http://www. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial Largest. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.S.

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. and as a result made high risk investments in the late 1980s and early 1990s. Better known is the case of Japanese banks. This resulted in several banks being technically bankrupt [5.4. JAPAN 13 1. • Many men do not understand why sexual harassment constitutes a problem. The government was compelled to provide public money to bail out the institutions. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. 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. 5 1. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. Hodgetts et al.pdf. Moreover.4. with many women finding their employment opportunities constrained.4 1. with many men of the opinion that women were just biding their time until they marry and have children. p. also known as thrifts and which function like banks.. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. were not as highly regulated as banks.S. Side Note 1.fdic. Likewise. the political scandals do not appear to have been fully acknowledged and 2. .1 (The U.S.4.4.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.4. Side Note 1. Savings and loan institutions.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. women have a difficult time being taken seriously. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. 58].

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. in the millions of dollars) to those who are successfully prosecuted. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. • The harasser’s conduct must be unwelcome. 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. including but not limited to the following: • The victim as well as the harasser may be a woman or a man.14 CHAPTER 1. Are women with equal qualifications as men given equal pay and position? Take a show of hands. hostile or offensive work environment. an agent of the employer.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. Definition 1. or a non-employee. yes or no. Hodgetts et al. • The harasser can be the victim’s supervisor. and for most public institutions and many large corporations. requests for sexual favors. or other issues.S. unreasonably interferes with an individual’s work performance or creates an intimidating. sexual harassment lawsuits result in significant penalties (e. 6 Source: http://www. Furthermore. Side Note 1.4. cite two cases in which foreign firms operating in the U. .edu/harassment/legal.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances.g. a co-worker. The victim does not have to be of the opposite sex. and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment. have paid substantial penalties as a result of sexual harassment or discrimination based on race. gender. a supervisor in another area. It is considered a very serious issue.4.de2..psu.

their attitudes towards bribery when working in foreign markets differs from that of the U.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. .S. Hodgetts et al. there seems to be a glass ceiling due to social factors.5 1. Although women have entered the workforce in large numbers in recent decades. politicians. at 40.S.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.5. Side Note 1.5. is the notable exception). 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.5. in an extended sense. men are disproportionately represented in management positions. 1.1. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. 7 Source: http://www.S. with the purpose to influence their votes. They only have the power of persuasion.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. Definition 1.4.dict.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.3 Lobbying by Japan Japan spends more money lobbying in the U.4. than any other. to try to influence decision-makers in any circumstance. yes or no.4. particularly in upper management.7 Note that lobbyists do not have any formal power..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. EUROPE 15 1. with most in the top 20 among over 150 countries included in the survey.5. Side Note

5.16 CHAPTER 1. yes or no. • More British companies have actively sought to recruit and promote women into management.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. . 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.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. For those students who think so. though compensation is limited relative to lawsuits filed in the U. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. but there is a perception that there are risks and ethical considerations.htm.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. 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.. 8 Side Note 1.5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. 8 Source: http://careerplanning.about.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation. Side Note 1.S. • Discrimination lawsuits are more commonplace in Great Britian.5.

pp. 5. • A relatively stable government.S. Piracy and counterfeiting (see sidenote below). and • A recent history of rapid economic development.6.6. 3.1. p. Child labor. executives. ETHICAL CONCERNS IN CHINA 17 Side Note 1. Ethical considerations include 1. .2 (Piracy and Counterfeiting) Present sidenote at [5. 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. Side Note 1. 4. • Note that for every corporate spy that is caught. Prison labor. Bribery and other forms of corruption. • Yet another case in which software from a U. [5. 64]. 7. Side Note 1. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U.S. there are undoubtedly many others that get away with it. Often. An opaque legal system. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others.6. 2.3 (Corporate Spying) Hodgetts et al. company in Boulder was stolen and sold to a Chinese company.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. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. International corporate spying problems.6. An increase in crime and illegal business activities. 6.5 billion in sales annually.

See http://www. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. 1. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). political.benjerry.”[6] See also sidenote 1.cfm for more detail. . “. . Definition 1.2 (Nongovernmental Organizations (NGOs)) Private. and economic issues such as poverty. and the environment. not-for-profit organizations that seek to serve society’s interest by focusing on social. Definition 1. . a grocery chain.7.7. and economic issues such as poverty. education. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. education. such as education and health care. not-for-profit organizations that seek to serve society’s interest by focusing on social.2.3 (Nongovernmental Organizations (NGOs)) Private..2. health. there are few if any issues which affect and infuriate so many in China as corruption. In the words of a Beijing correspondent for “The Economist” magazine.7 Corporate Social Responsibility Definition 1.7. and emergency relief in the event of humanitarian disasters). China continues a battle against corruption. 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.6. social justice. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. Other companies. health. and promotion of social equity). • CARE (promotes community development. and the environment.4 (Corruption) Though things are improving.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.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.7.18 CHAPTER 1. political. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. Side Note 1. such as Whole company/our mission/index.S. provide relief in the event of humanitarian disasters. social justice.

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. too. and • Rainforest Action Network (RAN). For example.2. note that while U. Both political groups and businesses are influenced by NGOs. but does not outlaw payments to political party leaders. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. firms are constrained by the FCPA with regards to bribery and other corrupt practices.9 U. last but note least.1 Corruption and the FCPA Revisited Hodgetts et al. MNCs do not appear to have been significantly impacted.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.000 and $125.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. .7. executives may actually feel that it is the right thing to do. • To prevent a boycott or other consumer defections.7. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).7. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. Executives are people. Side Note 1. many feel that it has had a net benefit. as executives of publicly traded companies are ultimately responsible to their shareholders.S. China ranked 78 out of 158.S. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. In fact. with a score of 3. In 2005.S. firms a reason to refuse to pay bribes. • And. • Conservation International (promotes environmental conservation).7. as it gives the U. – Even socially responsible executives would consider the “bottom line” when making decisions. Side Note 1.2 (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.1. 1.

html. specify standards and codes of conduct in domestic and global operations. Support and respect the protection of international human rights. . Side Note 1.20 CHAPTER 1. It is a difficult problem to solve. With greater financial transparency. and the environment. with scandals such as Enron. Global Compact. and not based on hard Important: Although it is widely cited. and Parmalat resulting in investors losing billions of dollars. With more disciplined corporate governance. Singapore is number 5 with a score of 9.4 (Some Opinions) Personally. Scandinavian countries are at the top of the list.6 and 8. Moreover.N.3.7. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.S. but most important first step is to recognize that there is a problem. better than the U.4. The government recognizes that it is an issue and is taking action.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities.10 Corruption is certainly not endemic to Asia. Hong Kong is number 15. the United States and Europe have recently been rocked by corporate corruption. such as the U. 4. The government is actively addressing the issue of corruption. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. malfeasance and diversion of corporate funds becomes increasingly difficult. July 1. and Germany at 7.N. societies.7. I think corruption will diminish as China economically develops for several reasons: 1.5 (Table 3-1: Principles of the Global Compact) The U. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. more Chinese will own stock in companies. 1.0 is considered to be the borderline at which countries are considered to have a problem. 3. slightly better than Sweden.7. 2006. Global Compact specifies 10 principles which MNCs should abide by: 1. Side Note 1. 10 http://www. Tyco. with a score of 8. As more state-owned businesses become privatized and the size of the middle class increases. WorldCom. 2. 5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.infoplease.2 respectively. It cannot be considered to be based on a scientific survey. Commitments that many MNCs have signed on to.

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


the efficient production of services will become more important. In total. such as hotels. and Beijing.1 Defining Operations Management Definition 2. often abbreviated OM. Side Note 2. 2–3]..” 2. While some aspects will focus on the “international” component of the name.1. In business parlance. 23 .1 (Heizer Company Profile: Hard Rock Caf´) Review Heizer’s e company profile of the Hard Rock Caf´ [1.1.1 (Operations Management) Operations management. another name for enterprise management is “operations management. As China develops. is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. casinos. Note that the definition refers to both goods and services. much of it will focus on the “enterprise management” component. etc. • They typically combine heavy merchandizing with the restaurant operation.Chapter 2 Operations and Productivity This course is called International Enterprise Management. • They have also expanded into compelementary operations. e • Hard Rock Caf´s are in most major cities in the U.S. pp. e they have restaurants in 38 countries.

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

operations managers make decisions. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.1. known commonly in the U.2. 2. process design.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. inventory. pp.” • Every organization with more than a few employees has an organization chart.2. 1. and 4. Controlling. more generally. WHAT OPERATIONS MANAGERS DO 25 4. OM decisions have been divided into ten categories by Heizer [1. 6–7]. Staffing. 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. place in the heirarchy. To accomplish these functions. 7]. p.2. Planning. Side Note 2. Definition 2. particularly when job titles are not clear. Side Note 2.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. p. scheduling. location selection. 2. quality. .2 (Organization Charts) Review Heizer’s 3 sample organization charts [1.S. OM is one of the most costly aspects of an organization. layout design. • They are often sources of conflict among management. 3. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. Organizing. as the org chart determines executives’ authority and.2. and maintenance. human resources and job design. supply-chain management. 5]. business community as “org charts.

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

Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. 2007. When implemented correctly.2 (A Little History) Review Heizer figure In Time %28business%29. He also believed that management is responsible for – Matching employees to the right job. and efficiency. 8]. and 1 Source: http://en. such as the presence or absence of a part on a shelf. WHAT OPERATIONS MANAGERS DO 27 10. that tell production processes to make the next part. – Providing proper work methods and tools. Kanban are usually simple visual signals. • Eli Whitney (1800) is credited for popularizing interchangeable parts.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. one drawback of the JIT system is that the re-order level is determined by historical demand. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. If demand rises above the historical average planning duration demand.2.1 Side Note 2. p. This saves warehouse space and costs. p. Definition 2. – Providing the proper training. which relied upon standardization and quality control. quality. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. 9]. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide.3 “Significant Events in Operations Management” [1. New stock is ordered when stock reaches the re-order level.2. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester.2. . To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. • Reliability and stability of systems depends on well-planned maintenance schedules. 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. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. the firm could deplete inventory and cause customer service issues. The process is driven by a series of signals.wikipedia. • Frederick W.2. or Kanban. However.

and other essentials for its citizens. • Insurance. 11].. major contributions have come from the field of information sciences. economic output. services account for over 70% of U.3. • Transportation. • In some service industries. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. Definition 2. • Recently. the wages are considerably above average. the economy transitioned from agriculture to manufacturing around 1900.1 (Development of the Service Economy) Present Heizer figure 1. • Government.28 CHAPTER 2.3 (Information Sciences) The systematic processing of data to yield information.2. p. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.5 [1. • Food and lodging. In the U.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food.S. 9] • Repair and maintenance. The U. average wages are below average2 in the U. Today. Bureau of Labor Statistics defines services to include [1.1 (Services) Those economic activities that typically produce an intangible product. • In most western economies. for others professional occupations. Manufacturing was dominant until about 1950 or so. 2. . p. shelter.3. Definition 2. such as retail. the services sector is by far the largest employer. However.S. • Trade. services become increasingly important.S..S. Side Note 2. such as the legal profession or computer services in the financial industry. 2 The average national private industry wage.

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

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. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.30 CHAPTER The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Empowered employees – With the rise of services and knowledge products. operations managers are responding by moving decision making to the individual employee. operations managers are increasingly responsible for innovations that move ideas. the next step in product development involves customizing products according to the customer’s preferences. • 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. or recyclable products or to minimize packaging and other wasteful production steps. capital. parts. it will continue to strongly impact the field. Trends that Heizer and Render identify [1. OPERATIONS AND PRODUCTIVITY 2. Globalization has been having a dramatic impact on operations management and in the future.2. 2. brought about in part by the internet.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. Operations managers are being challenged to produce biodegradable. wherever and whenever needed. p. • Mass customization – With increases in technical capabilities and customerlevel information management. and finished goods rapidly.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. or management). . Definition 2. reusable. • 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.

15].5.5.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Side Note 2. In order to improve productivity.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.4 (Total Factor Productivity) See definition 2. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) 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 2.3. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.5.4375 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.0077 titles per labor-hour = 0.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Consider today’s computers versus those from the 1970s. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.25 titles per labor-hour = 0.5. Also known as total factor productivity. Definition 2.5. but overhead is no $800/day. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5.2. Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. THE PRODUCTIVITY CHALLENGE 31 Definition 2. . p.

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

2. p. and 33 3. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. maintaining and enhancing the skills of labor. “About Half of 17-Year-Olds in the U. writing.S. Cannot Correctly Answer Questions of This Type. THE PRODUCTIVITY CHALLENGE • Better-nourished.S. such as transportation and sanitation.8 [1.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. Basic education appropraite for an effective labor force. Diet of the labor force.S. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. and • Healthier workers as well as • A shorter work week.. there is considerable concern over teaching of basic skills such as mathematics to grade school children. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.” In the U.5. draw the rectangle on the blackboard.3 (The State of Education in the U. The primary variables for improving labor productivity include 1. 16]. . In developed nations.) Present Heizer figure 1. and 4. What is the area of a 4 × 6 meter rectangle. 2. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. and math. Side Note 2.5. Which of the following is true about 84% of 100? 4 When presenting this question. Social overhead that makes labor available.

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

telephone industry is twice as productive as Germany’s. but from customers.6. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. . have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.5 • The U. Typically labor-intensive (e. • General ethical behavior concerning issues such as child labor and corruption. Often difficult to automate (e.g.S.2. p..) Productivity is highest in the U. • Keeping the workplace safe. banking system is about 33% more productive than Germany’s.S. These demands come not only from the manager’s personal ethic.. and other stakeholders. government agencies. Heizer notes [1. in both overall and service productivity. We will discuss this challenge in more detail throughout the course. such as cleaning.g.. a haircut). is twice as productive as in Japan. investment advice)..g. Frequently individually processed (e. These challenges include such issues as • Maintaining a clean environment. laundry service. teaching). 2. Often an intellectual task performed by professionals (e. SOCIAL RESPONSIBILITY 1.S.g. food preparation.S.5. 4. and 5.5 (Service Productivity in the U. and • The U. medical diagnosis). Low-productivity activities. 35 3.S. Difficult to evaluate for quality (e. 18] • Retailing in the U. the performance of a law firm). Side Note 2.. 5 In Japan.g. legislation protects shopkeepers from discount retailers.6 Social Responsibility As discussed in chapter 1. 2. and child care. watchdog groups such as NGOs.


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

1 (Mission) The purpose or rationale for an organization’s existence.2 [1. We will produce outstanding financial returns by providing totally reliable.1. competitively superior.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. positive control of each package will be maintained utilizing real time electronic tracking and tracing . FedEx. global organizations can attract and retain better employees. 5. an understanding of cultural differences in preferences is needed to best meet customer needs. France.38CHAPTER 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. 28] which includes mission statements for three multinational companies: 1. 3. Side Note 3. Provide Better Goods and Services – For companies doing business in an international setting. • Perfumers tend to concentrate in Grasse. p. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. and • Increase sales. 3. global air-ground transportation of high-priority goods and documents that require rapid. 6. Attract and Retain Global Talent – By offering more employment opportunities. Equally important. time-certain delivery. 4. 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.1.1.1 Mission Whether large or small. I recommend that all companies draft a mission statement. Missions state the rationale for an organization’s existence. Definition 3. • Provide additional insights and opportunities. 3.1 (Mission Statements for Three Organizations) Review Heizer figure 2.

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

• The “look and feel” of the product.cfm for more detail. Definition 3. Side Note 3. be it • Product features.1. 3. See http://www. and Major Departments in an Operations Function. Differentiation can arise from anything that the customer may value about a product or a company/our mission/index. 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. the Operations Function. • Availability of complementary products. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.1. . Responsiveness – By providing timelier.1.2 (Strategy) How an organization expects to achieve its missions and goals.3 (Sample Mission Statements) Present Heizer’s figure 2. Differentiation – They make their product better.3: “Sample Missions for a Company.benjerry.3 (Competitive Advantage) In operations management. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. 3. • Interoperability with other products. but can be used at the department level and even at the project level.” Note that mission statements are used not only at the company-wide level. the creation of a unique advantage over competitors.1. more responsive products or services. 2.40CHAPTER 3. Cost leadership – Providing cheaper products. • Training. Definition 3.

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


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

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

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

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


Issues in Operations Strategy

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





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



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



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

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

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

Once CSFs are determined. 39]. finance. Southwest Airlines has a competitive advantage in providing low-cost airfares. • Red arrows – critical success factors • Blue arrows – support activities 3. and supporting activities.3.3. p. CSFs.3. Definition 3.2 as examples of how firms organize their activities.6 3. Recall the “org charts” in sidenote 2. a graphical link of competitive advantage. .4. (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.5 and HR.3.3 Integrate OM With Other Activities In order to achieve its strategy.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.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 (Activity Map) In operations management.1.2. OM activities are most productive when they are integrated with other activities such as marketing. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Side Note 3. MIS. 5 Management 6 Human Information Systems Resources.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.

1 (International Business) A firm that engages in cross-border transactions.4. p. • Texas Instruments is an example of a country with a global strategy. Usually does not confer a cost advantage. Definition 3. or joint ventures with substantial independence. International strategy – Often the easiest strategy.46CHAPTER 3. with beer on the menu in Germany.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. 3. In the semiconductor industry. products do not need to be localized. Its menu reflects the country in which it operates. • Nestl´ is an example of a country with a transnational strategy.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. 42] Definition 3. 95% of its assets and 98% of its sales are made outside Switzerland. a strategy that uses exports and licenses to penetrate the global arena. See definition 3. 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.4. wine in France. Definition 3. 4.4. Although e it is legally Swiss. but a good strategy for cost reduction when products do not need to be adapted locally. See definition 3. Global strategy – Not characterized by local responsiveness.6. Also one of the least profitable due to transport costs and little local responsiveness. franchises. . Typically characterized by subsidiaries. Only 10% of its work force is Swiss.5 (Global Strategy) In operations management. See definition 3.4 (Multidomestic Strategy) In operations management. Definition 3.4. [1.4. owning or controlling facilities in more than one country.4.4. See definition 3.5.3 (International Strategy) In operations management. • McDonald’s is an example of a country with a multidomestic strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. 2.4. and hamburgers without beef in India.3. Definition 3. as exports require little change in operations and licenses often leave risk with the licensee. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4.

a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. Side Note 3. p.4. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. 6]..4.6 (Transnational Strategy) In operations management. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5.4. 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 .3.S.


quality.0.3 (Project Planning.Chapter 4 Project Management Side Note 4. p. 2. and supplies are tasked to specific activities and activities are related to each other. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. 49].0. 3.0. Project management involves three phases: 1. costs. Even Microsoft. defining the project. Scheduling.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. the largest software company in the world. and team organization. and budgets. Planning – Goal setting. 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. Side Note 4. Scheduling – People. and Controlling) Present Heizer figure 3. Controlling – Monitoring of resources. The profile highlights the importance of project management in achieving competitive advantage. 49 . pp. money.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. 46–47]. Side Note 4. Plans are also revised to meet changes in time and cost demands. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.1 [1.

” [1. you should always expect the unexpected. 3. Your job is to make things go smoothly and according to plan. Definition 4. and/or 5.0. project managers are highly visible in a firm and have significant responsibilities. However.0.5 (Personal Advice on Project Management) Project management is a tricky profession.1. PROJECT MANAGEMENT However.1 Project Planning While many projects are run within an existing organization. Moreover. a temporary project organization is formed to address a specific project. you will be confronted with a daunting task. You may be managing resources far in excess of your individual salary. often times. Side Note 4. The responsibilities of project managers are to make sure that . Project organizations work best when [1. See also Heizer sidenote “Project Management and Software Development. you are doing your job well if noone notices the project management. The project cuts across organizational lines. 48] 1. it is also an area in which there will continue to be high demand for qualified people. The job is unique or somewhat unfamiliar to the existing organization. it is very obvious and can be very costly. 4. The project is temporary but critical to the organization.50 CHAPTER 4.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.1 The Project Manager As alluded to in sidenote 4. things you thought were certain turn out not to be. p. and you will be forced to improvise. 2. 69].1. p. The work contains complex interrelated tasks requiring specialized skills. if things go wrong. People will not come through with what they promised. 4. In a sense.5. Work can be defined with a specific goal and deadline. 4. If you become a project manager on projects of significant complexity.

Approve software architecture for user account input web page functionality .2 (Work Breakdown Structure (WBS)) In operations management. For example.1. in a software engineering project. Complete software architecture for user account input web page functionality 5. Review graphic design for user account input web page 3. a task that should only take a day or so.4. dividing a project into more and more detailed components. Review software architecture for user account input web page functionality 6. In a project that includes allowing a user to enter personal information on a web page. 3. The project meets its quality goals. People receive motivation and information necessary to do their jobs.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. All projects come in on time. Approve graphic design for user account input web page 4. Side Note 4. The project is on or under budget. • Build the user account input web page is a much better task division than 1. PROJECT PLANNING 1.1. Complete graphic design for user account input web page 2. you have divided the tasks too finely. and 4. 51 4.1. a web page takes about a day to build for an experienced team.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). 2. When dividing a project into tasks. Definition 4.1. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.

4. Test software for user account input and confirmation web page functionality A work breakdown structure contains tasks that decrease in size from top to bottom and is generally divided into the following levels: 1.2 (Work Breakdown Structure) Present Heizer figure 3.2. you should also take note of time and cost estimates given by your technical staff. Scheduling serves to 1. They will be useful for project scheduling. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. PROJECT MANAGEMENT 7. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.1. it is time to assign people and materials and estimate the time and perhaps the cost of various activities.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Side Note 4. which we will discuss next in section 4. Encourage realistic time and cost estimates for each activity .3 [1. p. At the time you are creating the work breakdown structure. Activities (also known as “work packages”) to be completed Side Note 4. Show the relationship between each activity to others and to the whole project 2. Write software for user account input confirmation page functionality 9. the work breakdown structure is not something you go to your office to do in isolation. Write software for user account input web page functionality 8. Major tasks in the project 3. of course.1. The actual WBS for Windows XP would.52 CHAPTER 4. Identify precedence relationships among activities 3.3 (Reality Check: WBS) In reality. fill hundreds if not thousands of pages. Project 2. Subtasks in major tasks 4.

Perhaps they imagine that they are not doing their jobs professionally if they are not.2. the road bottlenecks. PERT. cost estimates. 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 . and 4.” This will give the class an idea of the look and feel of a typical Gantt chart.2. Derives from the typical shape of a bottle. Definition 4. Definition 4. which becomes narrower as one approaches the neck of the bottle. and CPM tools for every project management activity. 51]. Make better use of people.4 [1. It can actually be quite time consuming to create and maintain Gantt charts.2. PROJECT SCHEDULING 53 4.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. However. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. Activity time estimates are recorded.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.4. and material resources by identifying critical bottlenecks in the project Side Note 4. The order of performance is accounted for. 3. p. MS Project’s Gantt chart functions demand you assign employees. Overall project time is developed. – said of roads. 2. as. these should be considered merely tools to be used when they are useful by saving time or energy.2.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. moeny. All activities are planned for. and other values to each activity.2 (Using Gantt. and CPM) Inexperienced project managers often feel the need to use Gantt. PERT and other formal documents.2. Side Note 4. PERT and CPM help answer questions such as • When will the entire project be completed? . right by the bridge. PERT. For smaller projects. Gantt charts are perhaps the most widely used tool for ensuring that 1.

PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.3. 3. which activities will delay the entire project if they are late? • Which are the noncritical activities – the ones that can run late without delaying the whole project’s completion? • What is the probability that the project will be completed by a specific date? • At any particular date. or ahead of schedule? • On any given date. Variance reports. Cost breakdowns for each task. 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.3 Project Controlling Project control involves monitoring resources. and 8.54 CHAPTER 4. Work status reports. Functional cost and hour summaries. is the project on schedule. 5. less than. Cost distribution tables. costs. 4. .3. 4. Definition 4.1 PERT and CPM Two methods. PERT and CPM. is the money spent equal to. behind schedule. 2. what is the best way to accomplish this goal at the least cost? 4. Total program labor curves. and budgets of projects. 7. were developed in the 1950s for project control. quality. 6. Time analysis reports. Raw material and expenditure forecasts.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Control programs typically produce reports detailing 1.

As the names describe. or the critical path. Activity on Node (AON) and 2. Define the project and prepare the WBS. See also definition 4. 4. PROJECT CONTROLLING 55 Definition 4. Use the network to help plan.3. Moreover.3. 5.3 (Critical Path) The computed longest time path through a network.3. p.4. Develop the relationships among activities. See also definition 4. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. Personally. Activity on Arrow (AOA).2 (Example: AON and AOA) Present Heizer’s figure 3. 6.5 [1. and ontrol the project.3. Side Note 4. Also.3. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. Definition 4. Gantt charts are the “go to” visualization method for even very complex projects.3.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. schedule. . AON associates the activity with the node whereas AOA associates the activity with the arrow.3. Assign time and/or cost estimates to each activity. 53]. Draw the network connecting all of the activities. monitor. They both follow six steps: 1.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3. Side Note 4. through the network.2 Network Diagrams There are two approaches to visualizing activity networks: 1. it will do for you automatically much of what we will go through manually in this class. in my experience. 4.2. 2. 3.3. Compute the longest time path.

PROJECT MANAGEMENT Side Note 4. In other words. its LF is the minimum of all LS values of all activities that immediately follow it.3.1 (Critical Path Analysis) In project management. p. that is. 4. 1. Definition 4.3.8 [1. its ES is the maximum of all EF values of its predecessors. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. • Table 3. ES = max{EF of all immediate predecessors}. their dependencies. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. – If an activity is an immediate predecessor to more than one activity. its LF equals its LS of the activity that immediately follows it. – If an activity has multiple immediate predecessors.4. analysis used to determine the project schedule.1 gives sufficient information to describe the network.56 CHAPTER 4. See also definition 4. Follow with example 3 and figure 3. we must use time estimates of each activity to determine the overall schedule for the project. LF = min{LS of all immediate following activities}. that is. 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. 54–55]. .3. 2.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. LS = LF − Activity time. 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. 56]. EF = ES + Activity time. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. pp. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.9 [1.4 Determining the Project Schedule Once we have identified all of our activities.6–3. that is.

Also notable is that if the total time of the project needs to be reduced.3.5.4. 60]. in the example in sidenote 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.4. and • Includes only critical activities (see sidenote 4. 61] based on table 3. the time associated with a single activity.4. or the amount of time an activity can be delayed without delaying the entire project. C.1). we cannot complete the project in 15 weeks. These are called critical activities. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. . G.4. the free time for an activity.4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. if we delay activities B and D by one week each. If an activity2 does not impact the slack time of any other activity.3 and Heizer figure 3.1. they share total slack.3 [1.” Then complete Heizer example 7 figure 3. Side Note 4. the time devoted to one of these activities must also be reduced.4. Definition 4. E. the time shared among more than one activity.5. Slack time is just Slack = LS − ES or Slack = LF − EF . Note that activities A.1 (Slack Time) In project scheduling. p.2 (Forward Pass) In project management scheduling.5. 57]. p.1 When several noncritical activities appear successively in a path. The critical path is one that • Begins at the first activity in the project. the step that identifies all the earliest times that activities can be completed. Definition 4.13 [1. Definition 4. activity F in sidenote 4.5. p. 1 For example. 2 For example.3 (Free Slack) In project scheduling. • Terminates at the last. and H have no slack time and cannot be delayed without delaying the entire project.2 (Total Slack) In project scheduling. it is said to have free slack.10 [1. “Notation Used in Nodes for Forward and Backward Pass.1. Note also that if we delay each activity by the amount of slack that activity has. we may delay the project as a whole. 4.

1 (Optimistic Time) In project scheduling. In reality.1 and 4. See also definitions 4.58 CHAPTER 4. technical considerations that were unknown at the time the project schedule was drawn up.6. PROJECT MANAGEMENT 4.6. Definition 4. etc. The usual definition calls these alpha and beta. three time estimates are used: 1. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6. Side Note 4..6.6.2 and 4. Definition 4. which are labeled according to one of two notational conventions. the project manager pulls the number “out of the air” based on their experience managing related activities.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. Beta distributions have two free parameters. the “best” activity completion time that could be obtained in a PERT network. Effectively.6.1 and 4.6.6. and the other uses β = β − 1 and α = α − 1 .2. we do not.6. unexpected complexities.2 (Pessimistic Time) In project scheduling. See also definitions 4. in most cases.3 (Most Likely Time) In project scheduling.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. Most likely time – The most realistic estimate of the time required to complete an activity. Definition 4. the time required to complete an activity is often uncertain due to supply problems. the most probable activity completion time that could be obtained in a PERT network.6. The beta distribution is used as a prior distribution for binomial proportions in .3.6. Definition 4.3. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. See also definitions 4. the “worst” activity completion time that could be obtained in a PERT network. In PERT.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. However.

00.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. β) Γ(α)Γ(β) P (x) = (4. 63] for activity F based on optimistic.1) where B(p.β) with α = 1 and β ranging from 0. and 7. 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. 4.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [ The expected activity time for activity F is 3 weeks5 and the variance is 1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. 2007. most Total project completion times follow a normal probability distribution and 2. and pessimistic times of weeks. 62]. p. 4 See definition 4.wolfram. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. The variance of the activity time is Variance = [(b − a)/6]2 . Side Note 4.6.25 to 3. q) = (4. and pessimistic times of 1.html http://mathworld. 4.3 The domain is [0. 2. 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1.78 6 6 36 7 4 weeks. Activity times are statistically independent 3 Source: http://mathworld.00 week.html. and . and 9 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. February 21.4.1 Probability of Project Completion If we assume that 1.1]. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. The above plots are for various values of (α. most likely. p.6. 8 1.

1. A2– A3] “Normal Curve Areas. see http://mathworld.6. Side Note 4. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4.3 (Example: Project Variance) Review Heizer example 9 [1.76 weeks implies that the project will exceed the expected completion time by more than 1. 9 For 10 See more information.html. 64]. . 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.” Review Heizer example 10 [1. Definition 4. Note that the standard deviation of 1. Side Note 4. See definition 4. commonly also N written σ 2 .76 weeks approximately 16% of the time. definition 4. p. and within 3 standard deviations approximately 99.wolfram. the population variance var(X).6. pp.60 CHAPTER 4.7% of the time.6.6.3) Definition 4. (Using the Normal Table) Pass out Heizer Appendix I [1.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.6 (Standard Deviation) The standard deviation is the square root of the variance.6. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4. 65] and figure 3. two standard deviations approximately 95% of the time.10 Determining Project Completion Time for a Given Confidence Interval A common question is.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. See also 4.

4. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. See definition 4.4.2 (Crash Time) In project management. crash cost is the cost required to complete an activity in the shortest time possible. Project crashing is the name given to the process of rushing a project to completion.7. permissible and realistic. • The shortened durations will actually enable us to finish the project on time.1.7.7. See definition 4. Step 1 – Compute the crash cost per week. Since activity completion times are typically shortened by adding resources.3 (Crash Cost) In project management. Definition 4. we want to do so in the least cost mannger possible. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. if certain activities off the critical path take the pessimistic time estimate or more to complete. it may result in the project being delayed. we need to ensure • The amount by which an activity is crashed is.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.7.11 Definition 4.7. crash time is the shortest duration of an activity. the crash cost is typically higher than the normal cost. Assuming linear costs. Crashing a project involves a four step process: 1.7.1. . and • The total cost of crashing is as small as possible. When crashing a project. Definition 4.1 (Crashing) In project management.4) 11 Since crashing a project often involves adding additional resources to activities. and if you become a project manager. in fact. you will doubtless experience one or both of these eventualities many times in your career.

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. the advice given in this section should be helpful. If you find yourself needing to rush a project. If you accept the challenge and try to rush the project to please upper management.62 CHAPTER 4. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. Then crash each activity by one period. 3. Note that one activity may be on several critical paths. • Advantages – Especially useful for large projects . Crash this activity by one period.2 (Example: Crashing a Project) Present Heizer example 12 [1. Step 4 – Update all activity times. 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. go to step 2. If not.18–3. 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 there is more than one critical path. Side Note 4. pp. 4. Side Note 4. Step 3 – If there is only one critical path. PROJECT MANAGEMENT 2.1 (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. you should be very wary of such pressure. At times this may be politically infeasible. 4. If the due date has been reached.19. stop. As a project manager.7.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.5 and figures 3. Step 2 – Find the critical path(s) in the project network.

Information on Planner can be found at http://live. 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. There are a variety of of project management software for a list of project management software or ask Dr. it is relatively expensive and the features are so numerous and complex. Information on Achievo can be found at http://www. . Noncritical paths should be closely monitored as well. including open source software that is free. Note that most project management textbooks refer to MS Project as the software of choice for project management. 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. 4. 12 Recall sidenote 4.9 Using Microsoft Project for Managing Projects Present programs 3.1. You may also refer to http://en. It is perhaps the most widely known and featureful project management software available.4. independent.1–3. Starkweather about his impression of various alternatives.9.dotproject. they are often overkill for [1. 70–74] with figures demonstrating MS Project mediumsized projects.7. Information on dotProject can be found at However.


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

5. Useful for – – – – Planning for new products. CHAPTER 5. Generally deals with more comprehensive issues than short-range forecasts. which impacts purchases of new plant and equipment as well as development of new products.66 – – – – Sales forecasting. In the first two stages. long-range forecasts. FORECASTING • Long-range forecasts – Generally more than 3 years. Facility locations or expansion. Growth. Cash budgeting.2 and 5. • Technological forecasts.1.1 Types of Forecasts Organizations typically use • Economic forecasts.1. Capital expenditures. Production planning and budgeting. and 4. . These concern rates of technological progress. These may include inflation rates.4. long-term forecasts concerned with the rates of technological progress. Definition 5. and other economic indicators. See also definitions 5. planning indicators valuable in helping organizations prepare medium.1. Definition 5. and • Demand forecasts. Decline.3 and 5.1. See also definitions 5. Product life cycles tend to follow four stages: 1.2 (Economic Forecasts) In operations management. and Analyzing various operating plans. Introduction. and Research and development. 3.1.1. housing starts. Maturity.1. longer forecasts are needed. money supply.3 (Technological Forecasts) In operations management.

Validate and implement the results. Gather the data needed to make the forecast. 6. • Training. 5. A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. and scheduling decisions and serve as inputs to financial. 5. 3. and • Layoffs. . 5. Make the forecast. marketing. Determine the time horizon of the forecast. • Loss of customers.2.1. See also definitions 5. capacity. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts.5. Also called sales forecasts. 3. Select the items to be forecasted. 2. projections of a company’s sales for each time period in the planning horizon.2 and 5.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Determine the use of the forecast. Capacity – Underestimating demand can result in • Undependable delivery. 2. Human resources – Anticipated demand is needed to estimate the need for • Hiring. and • Loss of market share.4 (Demand Forecasts) In operations management. 7. these drive a company’s production. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. and personnel planning.1.1. Select the forecasting models.

it is a bit of an art that mixes both. use something simpler. FORECASTING Side Note 5. – If you do not truly understand the mathematics. • Using models that are more sophisticated than the user’s understanding.2.68 CHAPTER 5. – After making a forecast. 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. . – On a number of occasions. track the actual outcomes and compare them to the forecasts. ask yourself if they make sense. 5. • Lack of sanity checking. – In one case. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. Any quantitative approach should be complemented with a qualitative “reality check. • Lack of follow-up. • Lack of support for the forecasts.1 (The Most Common Errors in Forecasting Methodology) In my experience.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. – Before you show your numbers to others. based on a linear model. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations.” • 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. I have seen otherwise competent people (including Ph. you will be unable to defend your numbers. figure out whether an improvement to the forecasting methodology can be made. – You should be able to explain how and why you arrived at each and every number that you forecast. – Many people try to apply ordinary least squares (OLS) regression techniques.D. – If they do not match. to inherently nonlinear systems. In practice.

· There are three problems with moving averages 1. be sure that the sales force is clear that their incentive is to be as accurate as possible. ∗ Moving averages · Simple.9. Moving averages cannot pick out trends very well.3. · See definition 5.3. · See definition 5. · The simplest and easiest way to estimate demand. 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. – Sales force composite ∗ You would be surprised how accurate your sales force can be. or other incentives to over or understate demand. useful method if we can assume that market demands will stay fairly steady over time. . Sales people typically respond to incentives. political. for example. say. the naive approach. 2.5. and · Respondents. and if they perceive there is an incentive to exaggerate. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. 3. they will do so. ∗ The more independent your decision makers are from economic. · Staff personnel. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period.3. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. ∗ However. the more likely it is your results will be accurate.8. · Requires less past data than moving averages. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. · Useful as a starting point or sanity check for more sophisticated methods.

and a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.10.3. 5. See also definition Qualitative Forecasting Methods Definition 5. and See also definitions 5.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.3.3. See also definitions 5.5.3. and 5.6. See also definitions Definition 5. a forecasting technique using a group process that allows experts to make forecasts.3.4. See also definition 5. emotions. .5.3. 5. Definition 5.3 (Jury of Executive Opinion) In operations management.3.3. and 5. personal experiences. 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. 5.6 (Consumer Market Survey) In operations management.6. Definition 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.5 (Sales Force Composite) In operations management. a forecasting technique based on salespersons estimates of expected sales. Definition 5.4.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. See also definitions 5.3.5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3.3. and value system.3.3.3. 5.3.70 CHAPTER 5. · See definition 5.3.4 (Delphi Method) In operations management.

3.2 Quantitative Forecasting Methods Definition 5.3. See also definitions 5.3. Moving averages can be either simple or weighted. See also definition 5.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. and 5. n • Weighted Moving Average – Mathematically. Higher values give more weight to recent data.3.5.05 to 0.2) See also definition 5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. 5. generally ranges from 0.7. α. That is.8. a simple moving average is given by demand in previous n periods Moving average = (5. Mathematically. FORECASTING APPROACHES 71 The smoothing constant. Definition 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. and are appropriate to use when the underlying average . 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. • Simple Moving Average – Mathematically.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3.3. Definition 5. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.7.3. Definition

and are appropriate to use when the underlying average is relatively stable.3.8. and 5. 1 See |actual − forecast| n (5.7.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. When α = 1.0. 3. Definition 5. 2.3. FORECASTING is likely to change. 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 5.12). See also definition 5.12. Mean absolute percent error (MAPE).15.14. Definition 5.3.3 Measuring Forecast Error Once a forecast is made.3. Definition 5. Mean squared error (MSE). . Mean absolute deviation (MAD).3.4) definition 5. Three popular measures are 1. 5.3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3.72 CHAPTER 5.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions (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. such as the mean absolute deviation (see definition 5.3.3. 5.7.3. it is good practice to compare the estimated value with the actual value as actual values become available. while lower values give more weight to past data. See also definition 5.3. exponential smoothing is equivalent to naive forecasting.3.

10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. 100 n i=1 (forecast errors)2 n (5.3. MAPE is given by MAPE = See also definition 5. FORECASTING APPROACHES 73 Definition 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) ( With smoothing constants α for the average and β for the trend. MSE is given by MSE = See also definition 5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition Mathematically.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. expressed as a percent of actual values.3. Definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Mathematically.6) 5.5) |actuali − forecasti |/actuali n ( or F ITt = Ft + Tt (5.12.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.11) .

FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. 2. It is also commonly called linear regression analysis. Calculate the forecast including trend.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. Ordinary Least Squares Regression analysis is also useful for predicting trends. 3. 1. Compute the smoothed trend. the emponentially smoothed forecast for period t using equation 5. Tt with equation 5.74 or CHAPTER 5.12. Compute Ft . F ITt . The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables.14) . y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case.10. by the formula F ITt = Ft + Tt . time) (5.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast.

during the summer months when it is common to take a vacation.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. 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¯. 5. Deviations around the least squares line are assumed to be random. Compute the average demand over all months.. Compute a seasonal index for each season by dividing the historical demand by average demand. In the U. 5. Divide this estimate of total annual demand by the number of seasons. 1. we will examine one model. demand is seasonal. 3. the multiplicative seasonal model. to account for seasonal changes in demand in our forecasting. We do that with a 5-step process. the more uncertain it is. consumers often make fewer purchases of durable goods. Estimate next year’s total annual demand. ¯ x The least squares method has several drawbacks. 1. Find the average historical demand for each season.3.S.3. .5 Seasonal Variations in Data In most businesses.5.13 assumes a linear relationship. Definition 5. Recall that the equation 5. 4. 2. This provides the seasonal forecast. The first step is to calculate the seasonal forecast. such as cars and washing machines. Most businesses experience a surge in sales around Christmas. then multiply it by the seasonal index for that month. Although there are many methods to accomodate seasonal demand. It cannot be used to predict too many periods into the future as the further into the future the prediction is made.3. 3. 2.

g.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.g. if you are uncertain about predictions of x. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. FORECASTING 5.x = (5.16 is y2 − a y − b n−2 xy Sy.3. If there are published estimates you can cite (e.3. is given by (y − yc )2 n−2 Sy.4. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. 106– 107].17) .15) Side Note 5.3.16) 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. It is also called the standard deviation of the regression and.1 (Example: Using OLS) Present Heizer example 12 [1. mathematically. However.g. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. pp.. Note that making predictions of future demand involves also making predictions about the independent variable x.. but x will be something other than time.76 CHAPTER 5.x = (5. whatever uncertainties you may have transfer to your predicition of y. average local salary) (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.. We will use the same technique.

Certainly. which is divided into two “conferences. “Distribution about the Point Estimate of $600 Million Payroll.3 and the U. football in the U. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.18.S.3. Even the Year of the Pig correlates strongly with the U. Definition 5. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. the note in the margin accompanying Heizer example 14 [ nor does it imply that they will continue to be related.2 (Distribution About the Point Estimate) Present Heizer figure 4. but the relationship is coincidental. a football game played between two football conferences in the U.S.S.4 (Causation vs.” Note that the regression assumes a standard normal distribution about the estimate.8599. 2007. “Four Values of the Correlation Coefficient.2 with stock prices generally rising as skirts rise.9 [1. 107].3. Since 1935.S. or National Football League. The correlation coefficient of variables x and y is given by r= See also definition 5. have been correlated.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. 109].S. FORECASTING APPROACHES 77 Side Note 5. February 28. stock markets. leading stock indexes. changes in skirt lengths don’t cause stock market prices to rise and vice versa. Correlation Coefficients for Regression Lines Definition 5.S.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables.1594488. is monopolized by the NFL.3. in all but one Year of the Pig.” Side Note 5. 108]. 4 Source: http://www.time.10 [1.html?xid=sitecnn-partner.3 (Examples of Correlation Coefficients) Present Heizer figure 4.S.3. Other interesting correlations that have been identified over the years include banana prices and U. Dow Jones Industrial Average and Standard and Poor 500. Historically.18) . Side Note 5. pp. the U.3. It does not imply causation one way or the” the AFL (American Football Conference) and the NFC (National Football Conference). stock market. p. has risen.5.4 . stock market prices as well as the winner of the Super Bowl. p. Correlation) Correlation merely means that the values of two variables are historically related. the average length of a woman’s skirt and stock market prices in the U.

b2 . = the dependent variable (e. .. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. Side Note 5.15 is given by y = a + b1 x1 + b2 x2 + . x2 . . The same technique can be applied to use several independent variables to predict the value of a dependent variable.19) Determining the values of a. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. often the most difficult part of building a multiple regression model is to pick the independent variables.3.17.3. if they are indeed related to the dependent variable. 110].5 Definition 5. results in additional predictive accuracy as measured by r2 . “What was the R squared of your regression?” Multiple Regression Analysis In section 5. .” As the sidebar points out. in a multiple regression analysis involves a complex formula which is beyond the scope of this class.18 and Heizer example 15 [1. you would use statistics software to calculate these values.g. Adding additional independent variables as predictors.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. etc.78 CHAPTER 5.3. . . p. It is commonly simply called “R squared. b 2 .3. 110]. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .19 (Multiple Regression) A causal forecasting method with more than one independent variable. In practice. . p. . we discussed a means by which we can attempt to predict the value of one variable using the value of another. .6. b1 . 5 See definition 5. . The multiple regression equivalent of equation 5. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.3.” For example. (See definition 5. b1 .

which correspond roughly to standard deviations.20) A good tracking signal has about as much positive as negative error.1 (A Plot of Tracking Signals) Review Heizer figure 4. p.4.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. and within 4 M ADs about 99. Definition 5. though large errors may be a problem as well even if the positive and negative errors balance. three M ADs about 98% of the time.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. If the tracking signals violate upper or lower limits.1.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. one of the most common problems with forecasting is a lack of follow-up. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4.9% of the time. the forecasting methodology needs to be modified.2 standard deviations. 111].4.6.6 standard deviations.4 standard deviations.forecast| n where M AD = (5. three M ADs to 2. two M ADs to 1. 6 Recall definition 4. In other words.8 standard deviations. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).5. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. Definition 5.11 [1.6 One M AD is equivalent to 0. The tracking signals should also be compared as they are generated against limits. . Side Note 5.4. This means that the observed value should be within 2 M ADs abut 89% of the time. MONITORING AND CONTROLLING FORECASTS 79 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.2.6. and 4 M ADs to 3. These limits are typically based on M ADs. Tracking signals are typically used monitor forecasts.

FORECASTING 5. α in definition 5. Sophisticated forecasting models are not always better than simple ones.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. which selects a model based on goodness-of-fit to a data set. There is no single technique that should be used for all products or services. Side Note 5. changes need to be check with human eyeballs to ensure that the adjustments make sense. you should be aware of the criticism of focus forecasting. 114]. Note that even with computer monitoring. Definition 5. Side Note 5. 5.g.4. is based on two principles: 1.4.80 CHAPTER 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.2 [1.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. p.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. 2.” .. However. 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. In your career.2 Focus Forecasting Focus forecasting. you must make your own decision as to how you select the forecasting models that you use.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.10) is automatically changed to keep errors to a minimum. there has been much criticism of the approach to using models based on thier fit to the data.4. Definition 5. “Summary of Forecasting Formulas.

the word “product” will refer to both goods and services.0.1 . 124. as products. Referring to services as products is common in the service industry.5 (Product Decision) The selection. is a service. Definition 6. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. which. 2 Recall sidenote 2.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.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. definition. and design of products. They also use just-in-time production techniques. Product strategy2 defines the breadth of the product line and links product decisions to [1. and • The organization’s capabilities. For example.0. • Market share and dynamics. pp.2.128] • Investment and cash flow. 1 In this chapter. insurance companies often refer to their policies. pp. time permitting. as an intangible. 81 . which will be discussed in detail later in the semester.1 Side Note 6. • Product life cycle. 122–123].

1. • Maturity phase – Competitors have entered or are entering the market.g. • Decline phase – Investment needs to be minimized and resources need to be redeployed.g. – Process modification and enhancement.1. Growth. or even decades. 2.1 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 6.2 Life Cycle and Strategy Strategies change as products move through their life cycle. 3. products expenses are often high for – Research and development. and – Supplier development. .. 6. months (e. YouTube videos). DESIGN OF GOODS AND SERVICES 6. Life cycles can be in the days or weeks (e.82 CHAPTER 6. and 4.1 Product Life Cycles Product life cycles can be divided into four phases: 1. • Introductory phase – In the introductory phase. low-cost.. years (e. and innovative production is appropriate. • Growth phase – Effective capacity forecasting is necessary. restaurants or nightclubs). Introduction.g. Decline. often ruthlessly. so high volume.. Product strategy involves determining the best strategy for each product based on its position in the life cycle. clothing fashions). Maturity.

• Sociological and demographic change is also tied to product demand. GENERATING NEW PRODUCTS 83 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.000 yuan. Definition 6.2. 4 For 3 For . • Economic factors. 6. it must regularly redesign existing products or bring new products to market.6.2. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted.1. the development of cellular telephone technology or the internet.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. and if a company is to survive.2. 6. as well as the total annual dollar contribution of the product. example.3 • Political and legal change can also bring about business opportunities.1. example. such as consumer incomes. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.4 Side Note 6. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.3 Product-by-Value Analysis For firms with many products.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Ideas are not reviewed until after the brainstorming session.2 Generating New Products Most products have a limited life cycle.2.1 (Example: Brainstorming) Lead the class in a brainstorming session. • Technological change often drives product innovation. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. Definition 6.500 or 100. are tied to product demand.

Definition 6.3.3. 129].1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on. .2.3 6.3. Definition 6. 6. p.1 (Product Development Stages) Present Heizer figure 5. Side Note 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. and the organization’s capabilities. 128]. p. market dynamics. 128]. Side Note 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Each stage should have an accompanying review to determine whether to progress or not. Many successful companies rely on sales from products introduced within the past five years. p. Translates customer desires into a product design.3.3. 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. Determines what will satisfy the customer and 2.2 [1. DESIGN OF GOODS AND SERVICES For example. The house of quality is a graphic technique for defining the relationship between customer desires and a product.84 CHAPTER 6. 6.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. the product life cycle.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.3 [1. DuPont estimates that it takes 250 ideas to yield one marketable product [1.

3.9 6.7 4.2. as was the software described in section 4.3 Organizing for Product Development In the West.9. 2.. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. create the columns of the house in sidenote 6. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.2. Product development is done by teams. • Perhaps the most popular approach in the U.3. In other words. Identify customer wants.S. identify the rows of the house in sidenote 6. design engineering. • Fixed duties exist. a research & development.6 3.g. Identify relationships between the firm’s hows.2. 8 These are given on the roof of the house in sidenote 6. 1. 3. there are three popular methods by which organizations undertake product development.3. An organization is divided into departments. .10 Side Note 6.2. manufacturing engineering.8 5. • Effective communication and coordination between separate departments can be problematic. Note that it is not free or open source. e. Building the house of quality involves six steps: 1.” 6 For example.3.3.3. 10 The right-hand columns of the house in sidenote 6. Identify how the good or service satisfies customer wants. Develop importance ratings.3. 2..3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. with product features. 7 In other words.2 (Example: House of Quality) Present Heizer example 1 [1. • More common in large. for more information. 130]. See http://www. p.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. PRODUCT DEVELOPMENT 85 Side Note 6. and production departments. Evaluate competing products.3. Relate customer wants to product hows.qfdcapture.2. bureaucratic companies and organizations. which can be an advantage.

4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.S.3.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design.. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.3. Side Note 6. 6. maintainability.86 CHAPTER 6.. purchasing.3. and use. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. Side Note 6. production. manufacturing. Definition 6.3. use of participating teams in design and engineering activities. because their fate is tied to a product. development. Definition 6.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.3.3. etc. engineering.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. engineering. My experience may not be indicative of management practices in general in the U. will often advocate for continuation of their project past the point that it is profitable for the company. However.3. These teams often include representatives from marketing. it can also be problematic because teams.4 (Concurrent Engineering) In project development. The goals of manufacturability and value engineering are 11 See definition 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. Some teams even include representatives from vendors. design.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.11 In Japan. .3. quality assurance.4. but my personal impression is that formal QFD practices are not widespread in practice. organizations are less structured and typically not divided into research and development.. and field service personnel. and production stages of product development.S.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. production. Definition 6.

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


Part II Entrepreneurship 89 .


difficult undertaking.7 (Confidence vs. you should be confident. who has started two businesses and been CEO of three startups once told me. Side Note 7. then another. that is. you will have to decide that you have done as much as you can do and simply take action. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. Matt McAdams. . doing it is simple. taking that first step can be extremely daunting. then taking another step.” He was joking.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. people who can tolerate a high degree of risk.0.” At its core. In fact. However. Realism) Most people perceive those who start businesses as risk-takers. Most businesses fail within the first 18 months.0. . Side Note 7. ultimately. fear of failure and other insecurities dissuade most people from ever starting a business. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge. studies have found that most successful entrepreneurs are actually unrealistically confident 91 .7. but also realistic. “Every journey . As a Chinese philosopher once said.0.6 (Business Failures) A friend and former colleague. starting a business simply involves taking the first step. See also sidenote 7. While it is important to be realistic about risks when starting a business. but the humor in the statement lay in the fact that there is some truth to it. If you start a small business.” However. must begin with a single step.

– Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. jewelry. 1 There are a variety of studies that support this. I mean believe in you enough to give you money.php?id=2018 http://www. See. 7. you have to convince others to believe in you. And by believe in everyone would say that they want to be thier own boss. http://wistechnology. 2007. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny.”’ • According to experts who have studied entrepreneurs. 12–13]. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve. Hopefully. • Surveys and research indicates that the most common personality trait is self-confidence. for example. we will discuss how to prepare to start a small business as well as manage a business early in its life. INTRODUCTION TO ENTREPRENEURSHIP about their prospects.92 CHAPTER 7.asp? and . If asked. They may not have a realistic assessment of the risks they are undertaking when they start their businesses.1 In our discussion of entrepreneurship. – You not only have to believe in yourself. March 6. make lots of money quickly and with little effort. you will finish the course with the confidence that if you decide to start a small business. pp. successful entrepreneurs know how to raise Characteristics of the Successful Entrepreneur What are the qualities that lead people to start businesses? • Most entrepreneurs feel a sense of urgency that made starting a business seem like a necessity [4. – We will discuss techniques for raising money in detail later in the course. but a series of frustrations. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur. you will maximize your chance of success. • Finally. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship.

we will discuss venture capital. Often. If you are not prepared to redefine relationships relative to your business life.1.1. at Active. • Among the means by which you can to raise and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. If after many long hours at work your family will be asking you. For many people. or angel investors. You may lose friends because you do not have the time to maintain the friendship. • Some of the information is intended for those who have an established career and real-world experience to draw upon. “When are you coming home for dinner?” or criticizing you for ignoring them. – However. we suffered a database corruption that resulted in my practically living at work for three weeks . month after month. you may not be prepared to start a company. friends. – Additionally. take note of this information. Side Note 7. possibly even years at a – For now. 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.7. Discuss the impact of the demands of a startup on the marriages of Active. Putting in long hours is not something that is done once in a while. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. week after management and Jerry’s difficulty balancing work and family life. it may be difficult to keep the necessary focus on the business. the use of venture capital will probably increase over time in China. It may be useful later in your career. for example.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.1. 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. but something you may need to do day after day. Venture capital financing is common in the United States but is not yet a common means of financing in China. friends and family are the most important concerns in their life. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.

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

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

such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Acknowledge this fact and factor it into your decisionmaking. Many people want to start their own business for ego gratification. The reasons given for adding or subtracting points are as interesting as the ultimate score.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. pp. Eliminate question 1 and substract one point from the scoring given on p.96 CHAPTER 7. and – Investment of personal assets. Side Note 7. – Hours of work. 20. pp. 18–20].3. Have the class write down their answers and evaluate their own EQ. 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. How much is your ego worth? Side Note 7. – Geographic location.3. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. . 21].

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

• They require business relationships that the entrepreneur does not have.0. • A nose piercing that consists of a small. 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. business ideas come at a rapid rate. Often times. The tube could be made unobtrusive enough that it would not need to be removed for work. hollow tube. . often one or more a day. pp. • They require expertise that the entrepreneur does not have. • The business would involve too much risk. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. people have to remove nose piercings for work or social occasions. I continue to generate business ideas as a matter of habit. 28–29].. Those with nose piercings would not need to remove the piercing and risk it closing. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. Side Note 8.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. etc. However.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4.98 CHAPTER 8. most ideas are not feasible because • They would not be profitable enough. • The ideas are easily copied and would be quickly appropriated by more able competitors. • They require more financing than the entrepreneur has access to. Side Note 8. It sounds silly. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. • 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.0. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. • Etc.. but it is a major complaint for female rock climbers. however.

it is too risky. used as the title of at least 12 movies and television shows.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. or health. to be truly self-motivated and persistent in the way you need to succeed. p. People thought he was going nowhere and generally dimissed his business. the business took off. in the wake of 9/11.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. p.1 You’ve Got an Idea. He ran the business as a one-man operation for years. you should not let it dissuade you.” That is. You should be realistic about risks.1. while you should listen to criticism that others give. 2007. he would never succeed. However. Warnings about risk are perhaps the criticism you should consider most carefully. February 17. or are otherwise Entrepreneurs are often told their idea is flawed. His sales are now in the millions of dollars per year and the business is very profitable. “Never say die. that they will never make it. 33].com/find?s=all&q=never+say+die. 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. home. Have students fill out the form on their own time. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.1. YOU’VE GOT AN IDEA.8. you should have “thick skin. making just enough to get by but not much more.1.1. Have students come up with examples of products that meet various criteria on the checklist. 35]. Side Note 8. Now What? The number one trait needed by successful entrepreneurs is perseverance. computer-controlled security cameras. After all. And you should not risk anything you can’t afford to lose. 2 http://www. you will be spending years of your life trying to make the idea work. 8.2 is. .” Side Note 8. A well-known phrase in English. such as your family. 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. Side Note 8. Finally. thinking that if he did not succeed after a couple of years.


When trying to identify your niche market. your next step is to do some market research.” or business-to-consumer ventures.0. There are two broad categories of markets: 1. but you should try to target your market as specifically as possible.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Consumers and 2. 101 . Businesses.0.0.” or business-to-business ventures. Not only do you need to decide whether you are marketing to businesses or consumers.2. See also 9.0.1 Finding Your Niche Finding a niche can be a more daunting task than you might think.1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. go through the following 7 steps: 1.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. See also 9.Chapter 9 Defining Your Market After coming up with your idea. Definition 9. Definition 9. 9.

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

1.1 (Smaller is Bigger) When starting a business. the more likely you are to score a hit. Side Note 9. Chinese. and other Asian customers together.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1. life stage. the World War II cohort. Definition 9. in the U. and psychological factors. many are choosing to start families later in life or even have children ten years or more apart.1.1 (Generational Marketing) Marketing to consumers based on age as well as social.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years..” That is. demographic. For example. for example. you should practice extra caution to avoid stereotypes or other insensitive approaches.2. many entrepreneurs make the mistake of being “all over the map. they try to satisfy all possible customers and end up trying to do too many things well. This can be offensive and serve to alienate rather than appeal to your customer. economic.1. and cohort marketing. . Many Western companies make the mistake of lumping together Japanese. etc. many Eastern companies make the mistake of lumping together American and European customers.1. Side Note 9.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. but their behavior differs significantly due to the different influences in their youth. Likewise.. Marketing to demographic groups has become much more refined in the last few decades.S. New marketing techniques include generational. and 9. FINDING YOUR NICHE 103 7.) Using these new marketing techniques can allow you to narrow your market. Definition 9.1.1. As older people are more active than before. the Depression-era cohort. (See definitions 9. It is better to do just one thing well than to do many things poorly. Go for it! – Implement your idea..9. buying a home. you should be able to enter your niche market with confidence. and the narrower your focus on your target. such as having children.1.1. This marketing technique has been widely used since the early 1980s in the U. when the country was immersed in a war effort.3. or retiring. when many people were suffering from extreme poverty. Korean. young adults in the Depression. 9. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different. If you did your homework.S. are similar in age to those who came of age in World War II. Definition 9.1.

a few sentences at most. Falkenstein1 advises that you regularly reevaluate your niche. • 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. Every six months or so. Side Note 9. Falkenstein states. 79] 9.” [4. p.1.2 [1. DEFINING YOUR MARKET 9. you should. • Convey the essence of your business’s goals and philosophies. create a mission statement. The mission statement should • Be succinct. 28] which includes mission statements for three multinational companies: 1 See section 9.1 (Mission Statements for Three Organizations) Review Heizer figure 2.3 The Mission Statement Once you have a niche.3. “Creating a niche is the difference between being in business and not being in business. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.2 Redefining and Expanding Your Niche Lynda C.104 CHAPTER 9. . p.

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

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

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


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




What Am I Researching, Exactly?

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




Research Methods

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


Sources of Secondary Research

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

definition 10.2.1.


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

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

10. pp.” [4.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. RESEARCH METHODS 113 Side Note 10.2. .2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.


1. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. Every aspect of the venture should be covered. Set up a timetable with specific steps to be accomplished in a specific period.0.4 (Business Plan) A business plan is a written document that details a proposed venture. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. and projected results of the new business.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. 5. 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. 3. It must describe current status. Definition 11. including 115 . Your business plan should list obstacles that may arise and what will be done to address them. 4. 2. expected needs. and so should you be. In terms of sanity checking. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. Those who provide financing are aware of these pitfalls. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture.

CHAPTER 11.1.1 11. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. • The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. • The business plan quantifies objectives. and • Milestones or a timetable. Failing in business is very costly. THE BUSINESS PLAN A business plan is also known as a venture plan. • Research and development. loan proposals. • Critical risks. • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. • Marketing. They may spend no more than five . • Manufacturing. or investment prospectus. you will likely be giving your plan to read many business plans per day. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure. • Financing. allowing the entrepreneur to track results by measurable benchmarks.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. and while a business plan will not guarantee success. • Management. 11. It provides a variety of other benefits.116 • The project. it will help you maximize your venture’s chances for success.

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

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

2 The Plan Contents Side Note 11. Use the spell checker on your word processor to check for spelling mistakes.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. but it is the first thing that your audience will read. 11.g. p. 6 E.” “we.” “they. and tell why it is named what it is. 305].2.11. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.2 [3. be sure to include them in the business description. • If there are patents. • Orient the Plant Toward the Future – Create an air of excitement.” or “them. 2. • Keep the Plan Written in the Third Person – Do not use “I.2. Present a focused plan. or other special market advantages you have. • Identify the Target Market – Market research should support a focused customer niche. which describes the 10 sections of a typical business plan. • Do Not Overdiversify – Don’t try to be all things to all people. so be sure the writing is finely crafted.1 (10 Sections of a Business Plan) Present Kuratko Table 10. Some details on each section of the business plan: 1. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar.” or “us. copyrights. The executive summary gives readers their first impression. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. is it based on a family name? Does it include technical terms you need to identify? . use “he.. Include any pictures or designs that would be helpful. Your credibility is established in part by the credibility of your plan. • Avoid Exaggeration – Your sales and revenue estimates should be well researched.” Instead. Business Description – Name the business. trademarks. Executive Summary – This should be the last thing you write.6 Note any industry developments and describe the business thoroughly.

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

as opposed to actual. working capital. current ratios. or more aware. Ordering production quantities of materials. 11. Risks might include • • • • • Negative industry trends. These might include • • • • • • • • • • Incorporation of the new venture. . Difficulty purchasing parts or materials.. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. Hiring of sales representatives.2. Critical-Risks Segment – Discuss business risks and the ways you might address them. Product display at trade shows. 9. 8. Try to be honest and realistic.2 (The Growth of Active. Receipt of first orders. which investors will use to estimate debt/equity ratios. Signing up distributors and dealers. For example. Appendix – If there are documents. Side Note Discuss the growth of Active. Your investors are probably as aware. and Payment of first accounts receivable. inventory turnover. Design or research difficulties. include an appendix. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. etc. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. First sales and first including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. detailing projected inflows and outflows. Costs exceeding estimates.11. (b) An income statement. detailing projected profits and losses. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.1 (Pro Forma) A latin term that means projected. (c) A cash-flow statement.2. of the risks than you are. Completion of design and development. Unexpected competitions. a balance sheet containing projected balances is called a pro forma balance sheet. Definition 11. Completion of prototypes.


local business associations. you will probably not do a good job.1 Do It Until You Get It Right This is perhaps the most important piece of advice. 12. anyone who will listen.1 The Presentation Side Note 12.1. 51–56].2. 12.1 You will have to pitch to many medium-size fish before you are ready for the big fish. your family.Chapter 12 Presenting the Plan 12. Present it to your friends. author of The Art of the Start. p.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. recommends twenty-five times [2. The first time you present your plan. pp. 123 . This means that you should not count on presenting your plan to your most critical investor for the first time. Your presentation should evolve over time as you listen to your audience and receive feedback. your dog. The presentation of your plan is an ongoing process. your business class. not a one-time event. and Potential Partner Pitch [2.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. Present it many 1 Guy Kawasaki. You will probably have to present it at least ten times before it is ready for the medium-sized fish. 62]. Do not be dismayed. Sales Prospect Pitch.

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

They may ask you something that makes you want to change your presentation. If they cannot explain it clearly. 12.3.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. • Your audience may ask you several questions at once. p. and each investor will respond differently. 12. ask yourself after every statement you make. 45]. You should be prepared for the unexpected.2. AFTER THE PRESENTATION 125 Side Note 12. 12.3 After the Presentation Each presentation will be different. Much of the material required use of the internet. They may ask you something you want to respond to in an e-mail later.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. where some of the smartest people in the world worked. Everyone. In general.2.2. 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. Stop when it goes off. so write things down to make sure you don’t forget. “So what?” If you cannot answer this question simply and easily. Many people feel as if taking notes makes them look stupid. It is easy for things to get lost in the heat of the moment.12. • Taking notes also makes you look conscientious. you need to change or eliminate the statement.6 So What? When you are planning your presentation. Guy Kawasaki recommends you set a timer [2. Give your presentation to friends or family. everyone brought a pen and paper. Ask them what your company will do. and although you go into each presentation .5 Take Notes Have a pen and paper ready and take notes during the pitch. you are not presenting it well. At my company in Chicago. 12. but in reality.2. I always bring a pen and paper to meetings. it is quite the opposite.

5 [3. Each negative comment gives you an opportunity to change an investor’s opinion. Side Note 12.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Remember that persistence is the most important character trait of entrepreneurs. PRESENTING THE PLAN with only success on your mind. Each time your are rejected improves your future opportunities.3. you should also realize that most most comments will be negative and most presentations are rejected.126 CHAPTER 12. 321]: “What to do when a venture capitalist turns you down: Ten questions. p.” . 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




Inventory and Cash Flow

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


Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems


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


Computerized Inventory Control

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

section 13.3 below.

a high inventory turnover is a mark of a well-managed inventory system. . To improve efficiency of inventory control.3. CHAPTER 13.3.1 (Turnover) When you have replaced 100% of your original inventory. these systems should automatically update inventory and accounting records. Definition 13. For example. you have “turned over” your inventory. the count cycle is the amount of time between counting inventory.130 • Maintain a sales history.3 (Count Cycle) In inventory management.2 (Order Cycle) In inventory management. the order cycle is the amount of time it takes to process paperwork and place orders. Definition 13. the delivery cycle is the amount of time between placing an order and receiving it.3. if you perform an inventory count four times a year. 13. INVENTORY CONTROL When considering the purchase of a POS. • Security – To prevent theft. and • Improve pricing accuracy.1 Inventory Turnover Typically.3. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet. • Updating product information – At the time a sale is entered. Definition 13. such as for volume discounts for preferred customers. Definition 13. 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. your count cycle is 12 weeks.4 (Delivery Cycle) In inventory management. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item. be sure it’s not easy to “hack” the system. work with suppliers to improve delivery times and count inventory more often.3.

4. which may result in higher taxes.3. it values your remaining inventory based on the prices of the most recently purchased items.4.3.. First Out)) LIFO (last in.4. 13. In deciding which to use. 13. After you have been in business your inventory control system should give you a better idea of stocking levels. it values your remaining inventory based on the prices of the least recently purchased items.1. See definitions 13. If there is inflation.2 (FIFO (First In. The author is unfamiliar with Chinese tax codes.13. Definition 13. but you should at least know about LIFO and FIFO. In the U.2.S.4.3 See also 13.3. The author is unfamiliar with Chinese tax codes.1 Buying Inventory In the process of putting together your business plan. first out) assumes that you sell the least recently purchased inventory first. and delivery cycle.2 See also 13. If there is inflation. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. LIFO and FIFO are two accounting methods used to do this.3. and 13. First Out)) FIFO (first in. .4. least this is true in the U. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. 2 At 3 At least this is true in the U. Definition 13.5 (Needs Period) In inventory management.4. which allows you to pay less taxes on your inventory.S. You should know how many sales per square meter per year you need to survive.4.1 (LIFO (Last In. follow the recommendation of your accountant.S. 13. In other words. Many businesses also measure turnover by measuring sales per square foot (or square meter). INVENTORY ACCOUNTING 131 Definition 13. first out) assumes that you sell the most recently purchased inventory first. you must estimate your inventory value when you file your taxes.4 Inventory Accounting Your accountant will typically handle inventory accounting. the needs period is the sum of the count cycle.2. order cycle.3. Calculate your sales per square meter once per month.

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

If a supplier is uncertain about you. Tips for dealing with suppliers: 1.o.d..5. do not falsify or misrepresent your financial statements. .d. Definition 13.5.5. 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.o. Whatever you do. 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.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references.S. If a supplier does not extend credit. Suppliers sometimes try to complicate pricing to their advantage.13. Ask about the freight policy before ordering. personal interaction can work wonders. If you are dealing with a reticent large supplier. and • Allowances before you make a decision. • For items being shipped.1 (COD (or c. Side Note 13.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. and • The need to be firm but fair. basis until you have proven yourself reliable. customers may be required to pay upon receipt of goods. 2. Discuss • Their negotiating technique when discussing pricing. Be sure to add up • Costs. SUPPLIERS 133 13. I regularly had to deal with food vendors. You can also present your financial statements and prospects for success. you should know who is liable for damage to goods in transit. it is considered a felony.5.)) Cash on delivery. At least in the U. the supplier will pay for freight. • Sometimes if an order is large enough. • Discounts. they will put you on a c.

7 Source: http://en.5.5. people often say something like “ Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.134 CHAPTER 13.2 (FOB (or f.o. Destination)) Free on board destination.5. Be aware of your supplier’s priorities. 2007.2. May 19. Under this arrangement. 5 FOB Destination changes the location where title and risk pass. This differs from a forward order where stock is available but delivery is postponed for other reasons. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Definition 13.b. May 19. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that efg. 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 The FOB term requires the seller to clear the goods for export. 6 Source: http://www. May 19.html. Definition 13. .5.)) Free on board.roadway.6 See also definition 13. Definition 13.o. 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.3. 2007.html.b. 3. Specify a cancellation date on your order forms. http://www. As opposed to FOB. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.3 (FOB Destination (or f. 2007.4 Colloquially.o.html.abcsmallbiz. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. INVENTORY CONTROL • Depending on whether the supplier pays frieght. May 19. Seattle” to indicate that an item being shipped from Seattle is free on board. See also definition 13. 5. it may be worthwhile to cancel backorders and bundle them with a subsequent orders.7 4 Source: 5 Source: http://www.5.

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

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

1. Side Note 14. Definition 14.1.1) and should include the personal requirements expected of an employee [4. Definition 14. • If you give someone an inflated job title but do not offer a salary commensurate with the title. Part of retaining quality employees is the prospect of advancement. then they go on to a Director position at another company. you may find it difficult to give them a promotion later.1 (Job Description) Job descriptions should include • A job title. and • Job summary with major and minor duties. 338]. • The position of that employee in the corporate heirarchy.1. • Who the person reports to. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career.1. • Benefits. . • Specialized skills or knowledge. If. HOW TO HIRE 137 • There is little room for advancement. and • A summary description of the position. • Physical or other special requirements associated with the job.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. • Desired experience. it includes • The job title. Like a job description.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. p. you may find they are tempted to leverage that job title to seek employment elsewhere. 339]. • A salary range. If you hire someone at the highest level of their competency. p.14. and • Any occupational hazards. It also includes • Any educational requirements. for example.1. you hire someone as Director who is not qualified to be a director. You may actually be doing your employee a disservice by inflating their job title.

HIRING EMPLOYEES 14. 14. • Be sure to list appropriate contact information.4 Finding People There are many possible sources of applicants. – For other positions. • Do not list requirements other than educational or experience-related ones. if you are looking for an accountant.. • Do not ask for specific personality traits. . It also makes it easy to receive and process a large number of applications with a minimum of effort. 2 See sidenote 14. • List the top 4 or 5 skills that are most essential to the job. For example. e-mail addresses have become perhaps the most popular way to get applicant information at U.2 Side Note 14.138 CHAPTER 14. companies. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. such as “outgoing” or “detailoriented. due to the number of applicants for competitive positions.4 (Using an E-mail Address) For professional positions.S. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.S. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. With e-mail.3 Advertising the Job When you write an advertisement.” or people who may not have them will just try to fake those personality traits in the interview. – For professional positions. Many American companies are no longer providing phone numbers. particularly those that advertise on web sites. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.5.

most professional associations’ job banks are now online. Try to perform a search on a job sites such as http://www. If you are lucky. 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.3 Generally. particularly in the high-tech industry.1.S. 6. about 10 or so. be sure that a candidate can provide what you are looking for. You narrow down the 10 candidates to 3. not a science. 3 Java is a programming language. 3.” 665 in “Internet/ with the keyword Java on May 19. many positions are being filled You hire the preferred candidate. • Focus on the skills that a person can bring to your company. Screening People Reviewing resumes and applications is an art. for professional positions.000 hits searching just the “Information Technology” search category. 2007 turned up more than 5. In the U. To “weed out” candidates. Software” category.dice. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. • Industry Publications – Most trade publications take ads for job openings. the hiring process proceeds as follows: or http://www. 159 in “Financial Services. 5. You check references. There were 4. but when looking at a resume.” And 921 in “Engineering. You interview the candidates.. You can evaluate their personality during the interview.” .S. 2. you will get several candidates for any job you are offering. Searching on with the keyword “java” will demonstrate just how widely used online tools are. You narrow the number of resumes down to about 10.314 listings in the “Computers.14. You conduct a second round of interviews with the remaining 3 candidates. • Online – In the U. 4. For any job.

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

• Maiden name (for female applicants). Get clarification on anything that you think may be suspect. • Do not hire people who are discovered to be lying on their resume. then go home and play on computers in their spare time.S. including [4.. • How many days the applicant was sick in the previous year. • Whether the applicant has every been arrested. • Marital status.S. creed. 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.14.1.1. such as through a “Green Card. Several of the engineers I hired did not finish their undergraduate degree. • Disabilities of any kind.5 Side Note 14. include • Whether the applicant has children. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. Though laws undoubtedly differ in China. or national origin. but which can get employers in legal trouble. 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.7 (No-nos) In the U.” . ask prospective employees whether they can submit proof that they have the legal right to work in the United States. They were the type of people who would write software all day. • Sex. or • If a person is a citizen. • Whether the applicant has every been treated by a psychologist or psychiatrist.6 Questions that are not explicitly prohibited. 347] • Age or date of birth. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. employers may not ask about anything not related to the job. p. Not also that many of the best people we hired were not the best on paper. • Ask people questions about their resume during the interview. • Whether the applicant has every been treated for drug or alcohol addiction. 6 Employers can. race. in the U. however.. religion. However. Ever. color.

First impressions are the most important. only one of them answered. 8 In 7 Taken . 349]. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. He got the job. such as “Tell me about your last position. Good candidates will do their best to put their best foot forward.142 CHAPTER 14.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. Be sure to ask open-ended questions. It is as important to get the candidate excited about your company as you want to be about them. Texas. You should do the same. Side Note 14.” 9 This is a very typical job interview question in the United States. Discuss the job and the company.1. “President of the United States.” The interviewer laughed out loud. You want the candidate to talk enough to give you a detailed impression. friendly. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. Curiously. He answered. Then ask them about their skills and background. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. p.” Don’t ask yes-or-no questions. Begin with some small talk. and demonstrate good communication skills.” or “Tell me about a problem that you solved at your last job and the way you solved it. 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. so much so that it is almost a clich´. Hopefully they will be neat and clean. “bowling. a recent debate. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be.

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

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

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

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