International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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Contents
I International Business Management
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9 9 10 12 13 13 13 15 15 15 15 16 18 19 20 23 23 25 28 30 30 32 34 34 34 35 37 38 38 40 42

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

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. . .2 Life Cycle and Strategy . . . . . . . . . . . . . . . . . CONTENTS . .2 A Seven Step Forecasting System . . . . . . . .4 Determining the Project Schedule . . . . 4. . .1 Research .1 Adaptive Smooting . . . . . . . . . . . . . . . . . . . . . . 5. .6 Variability in Activity Times . . . . . . . . . . .2 Build and Staff the Organization . . . . . .1 Qualitative Forecasting Methods . . . . . . . . . 4. . . . . . .1 The Project Manager . . . . .4. . . .4 3. . .3. . . . . . . . . . . . . . . . . . . . . . 5. . . .1 Types of Forecasts . . . . . . . . . . . . . . .4 Adjusting for Trend . . . . . . . . . 4. . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3.3 Dynamics .1.3. . . . . . . . 3. . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . . . . . . . . . . 5.2 Quantitative Forecasting Methods . . . . . . . . . . .2 The Work Breakdown Structure . . . 6.6. . . . . . . . . . . . . . . . . . . . . . . . . .1. .3. . 4. . . . .3 Product-by-Value Analysis . . . . . . . . . . . .3. . . . . . 5. . . . . . . . . . . . 4. . . . .1 What is Forecasting? . . . . . . . . . . . . . . . . 5. . 6. . . . . . .1 PERT and CPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . .3.4. .2 Preconditions . . . . . . . .3 3. . . . . . . . . . . . 6. . . . . . . 5.1. . 4. . . . . . . . . 3. . . . . . .1. . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . . 4. . . 4. . . . . . . . . . . . . . . . . . . . . Strategy Development and Implementation . . . . . . . .3. . . . . . . . 4. . . . . . 3. . . . . . . . . . .2. . .4 Monitoring and Controlling Forecasts . . . . . . . .2 Focus Forecasting .3. . .8 A Critique of PERT and CPM . . . . . .4 4 Project Management 4. . . . . . . . . . .1 Project Planning . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . .2.9 Using Microsoft Project for Managing Projects 5 Forecasting 5.3 Measuring Forecast Error . . . . . . . . . . . . . . 4. . . .1. . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . .6 Associative Models . . 3. . . . . . 6 Design of Goods and Services 6. . . . . . . . . .3. . . . . .1. . . . . . . . . . 5. . . . . . . . . . . 5. . . . . . . . . .2 Network Diagrams . . . . . . . . . . . 4. . .3. .1 Goods and Services Selection . . .5 Seasonal Variations in Data . . . . . .2 Project Scheduling . . .3 Forecasting Approaches . . . . 5. . . . . . . . . . . . . . . .2. . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Project Controlling . .3. .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Probability of Project Completion . . . . . . . . . . . . . . . 5. .3 Integrate OM With Other Activities Global Operations Strategy Options .1 Identify Critical Success Factors . . .1. . . . .

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

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

Part I International Business Management 7 .

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

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.2. This is something Chinese business people should be aware of. and Europe but a commonly accepted practice throughout the developing world. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. 3.1. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.S. 1. Note that during the industrialization of the U.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.1 (Ethics) The study of morality and standards of conduct. • Because of this. there is a perception in the West that Chinese are hard-working and smart. Why is corruption an important business issue? • See sidenote 1.S.10 CHAPTER 1.A. Western business people may not initially trust their Chinese counterparts. Easterners tend to trust people after observing a pattern of consistent behavior.2.A. which are more strictly enforced in the West. For example.. • In general.2. It is much harder for a Westerner to know when to trust a Chinese person than for a Chinese person to know when to trust another Chinese person. child labor was widely used. 2.S.2 Corporate Corruption Side Note 1. Definition 1. • However. Prison labor is also considered improper in the U. 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. • Because guanxi is less important in the West. Which brings us to the subject of this lecture: Ethics. . Westerners rely more on contracts.A. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi.

or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. China continues a battle against corruption.org. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way.2.2 Though things are improving. Definition 1. Side Note 1. investors in the United States had to reevaluate the risk associated with owning stock. Scandinavians are typically highly trustworthy1 but Italians are less so. Source: texttthttp://www. gift. “. WorldCom. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. • It increases the cost of doing business. it is simply inefficient. – A bribe is a business expense that goes to no productive purpose and decreases profits.2.”[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. .2 (Corruption) Corruption is of concern for business people because • It increases risk.org/policy research/surveys indices/cpi. 2 Source: http://www. September 20. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. and Tyco. – 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). • Of course. witness. which requires strict monitoring and verification of financial information. 2006. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. 2006. there are few if any issues which affect and infuriate so many in China as corruption.1. they must factor additional uncertainty into their calculations.transparency. . September 20. . or other person in a position of trust.2. For example. voter. • On a macroeconomic level. In the words of a Beijing correspondent for “The Economist” magazine.1 (Bribe) A price. – In the wake of Enron. reward. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.dict. these are all generalizations and individuals may differ significantly from their cultural affiliations.

2. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.2 (Cultural Heritage in the U.. 2007. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. Dennis Kozlowski. history. • Tyco – The CEO of Tyco. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. succeeding Enron as the largest bankruptcy in U. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. March 17. See sidebar 1. Side Note 1.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. Qwest. the SarbanesOxley Act (SOX) was passed in the U. Worldcom.3 The United States The United States has recently been rocked by a number of scandals in the business community. • WorldCom – Following the Enron scandal. the former CEO of WorldCom.htm. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. WorldCom declared bankruptcy in July 2002. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. Parmalat. was accused of looting the company to fund a lavish lifestyle. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison.3. March 17.3.htm. 2007. was convicted of fraud and conspiracy and sentenced to 25 years in jail. http://www.S.bankruptcydata. There is currently debate as to the effectiveness of the regulations relative to the costs.S.12 CHAPTER 1.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.S.com/Research/15 Largest.com/Research/15 Largest. In Scandinavia. • Enron – In December 2001. . a high value is placed on honesty and personal integrity.bankruptcydata. scandals such as Enron.4 – Bernard Ebbers. While western developed economies often cite a high ethical standard.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. Side Note 1. including a $2 million birthday party for his wife. 3 Source: 4 Source: http://www. and Tyco make it clear that even western developed economies have significant ethical shortcomings. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States.S.1.

1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. also known as thrifts and which function like banks. the political scandals do not appear to have been fully acknowledged and addressed. Side Note 1.4. Likewise. women have a difficult time being taken seriously.pdf. Moreover. JAPAN 13 1. Hodgetts et al.. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.4.1. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. . with many women finding their employment opportunities constrained. 58]. The government was compelled to provide public money to bail out the institutions.1 (The U.fdic. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan.gov/bank/analytical/banking/2000dec/brv13n2 2. p.4. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Better known is the case of Japanese banks. 5 1. cite the example of the chief prosecutor in Tokyo who was transfered to a remote city after an investigation into exhorbitant entertainment spending by private firms on public officials. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty. • Many men do not understand why sexual harassment constitutes a problem.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www. Savings and loan institutions.2 Women in the Workplace Sexual harassment has also become an issue in Japan. were not as highly regulated as banks. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.4.4.S. with many men of the opinion that women were just biding their time until they marry and have children. This resulted in several banks being technically bankrupt [5. Side Note 1. and as a result made high risk investments in the late 1980s and early 1990s.4 1.S.

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

4.S. at 40. EUROPE 15 1. They only have the power of persuasion. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. is the notable exception). yes or no. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.S. than any other. Although women have entered the workforce in large numbers in recent decades.5. men are disproportionately represented in management positions.5. . Definition 1. to try to influence decision-makers in any circumstance. with the purpose to influence their votes.5 1.3 Lobbying by Japan Japan spends more money lobbying in the U. Hodgetts et al. Side Note 1. with most in the top 20 among over 150 countries included in the survey.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.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.1.4.org.5. 7 Source: http://www. 1.7 Note that lobbyists do not have any formal power.5. politicians. there seems to be a glass ceiling due to social factors.dict. Side Note 1. their attitudes towards bribery when working in foreign markets differs from that of the U. particularly in upper management.S.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. in an extended sense..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.4.

about. . 8 Source: http://careerplanning. 8 Side Note 1. 1.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.com/library/glossary/bldef-glassceiling.S.5. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian.htm.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. Side Note 1.16 CHAPTER 1. For those students who think so. • More British companies have actively sought to recruit and promote women into management.5. yes or no. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. • Discrimination lawsuits are more commonplace in Great Britian.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. but there is a perception that there are risks and ethical considerations.5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. though compensation is limited relative to lawsuits filed in the U.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation.

2 (Piracy and Counterfeiting) Present sidenote at [5. pp.1. Bribery and other forms of corruption. • Note that for every corporate spy that is caught. . Side Note 1. • Yet another case in which software from a U. An opaque legal system. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. Piracy and counterfeiting (see sidenote below). Often. Child labor. An increase in crime and illegal business activities. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign firms. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 4.5 billion in sales annually. • A relatively stable government.S. 64]. 3.3 (Corporate Spying) Hodgetts et al.S.6. 5. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. there are undoubtedly many others that get away with it. [5.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets. 7.6. executives.6. and • A recent history of rapid economic development. Side Note 1. Prison labor. 2.6. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. Ethical considerations include 1. 6. company in Boulder was stolen and sold to a Chinese company. p. International corporate spying problems.

education. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.7 Corporate Social Responsibility Definition 1. See http://www. and emergency relief in the event of humanitarian disasters). In the words of a Beijing correspondent for “The Economist” magazine. . political. Other companies.cfm for more detail. .18 CHAPTER 1. such as education and health care. education. there are few if any issues which affect and infuriate so many in China as corruption.. and the environment. social justice.”[6] See also sidenote 1. 1.com/our company/our mission/index.benjerry. • CARE (promotes community development. Side Note 1. 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. not-for-profit organizations that seek to serve society’s interest by focusing on social.S. health.7.4 (Corruption) Though things are improving. China continues a battle against corruption. not-for-profit organizations that seek to serve society’s interest by focusing on social. social justice. provide relief in the event of humanitarian disasters. Definition 1.2. political. and promotion of social equity).3 (Nongovernmental Organizations (NGOs)) Private. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.7. and economic issues such as poverty.2 (Nongovernmental Organizations (NGOs)) Private. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty.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. such as Whole Foods. and the environment.7. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.2.7. and economic issues such as poverty.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. Definition 1. health.6. a grocery chain. . “. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).

• And. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.000 and $125. but does not outlaw payments to political party leaders. For example. many feel that it has had a net benefit. Both political groups and businesses are influenced by NGOs. Side Note 1.S.7. In fact. • Conservation International (promotes environmental conservation). executives may actually feel that it is the right thing to do.S. In 2005. . firms are constrained by the FCPA with regards to bribery and other corrupt practices.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. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. too. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). China ranked 78 out of 158. with a score of 3. 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. note that while U. – Even socially responsible executives would consider the “bottom line” when making decisions.S.7. Executives are people.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. • To prevent a boycott or other consumer defections. as it gives the U. Side Note 1. 1.9 U.1. as executives of publicly traded companies are ultimately responsible to their shareholders.7.7. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.1 Corruption and the FCPA Revisited Hodgetts et al.2. last but note least. firms a reason to refuse to pay bribes.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. and • Rainforest Action Network (RAN). MNCs do not appear to have been significantly impacted.

I think corruption will diminish as China economically develops for several reasons: 1. The government recognizes that it is an issue and is taking action. Support and respect the protection of international human rights. 4. Global Compact. Side Note 1. With greater financial transparency. 2. As more state-owned businesses become privatized and the size of the middle class increases.10 Corruption is certainly not endemic to Asia. Global Compact specifies 10 principles which MNCs should abide by: 1. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Tyco. It cannot be considered to be based on a scientific survey.6 and 8. It is a difficult problem to solve. 10 http://www.N. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. societies. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.3.0 is considered to be the borderline at which countries are considered to have a problem. 3. with scandals such as Enron. July 1. 2006.20 CHAPTER 1. Singapore is number 5 with a score of 9. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. Hong Kong is number 15.4.N.2 respectively. WorldCom. The government is actively addressing the issue of corruption. but most important first step is to recognize that there is a problem.7. With more disciplined corporate governance.5 (Table 3-1: Principles of the Global Compact) The U. Commitments that many MNCs have signed on to.7. Moreover.com/ipa/A0781359. Side Note 1. Important: Although it is widely cited.infoplease. such as the U. and Germany at 7. better than the U.7.4 (Some Opinions) Personally. the United States and Europe have recently been rocked by corporate corruption. specify standards and codes of conduct in domestic and global operations. and Parmalat resulting in investors losing billions of dollars. 1. and the environment. and not based on hard data.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. Scandinavian countries are at the top of the list.S. slightly better than Sweden. malfeasance and diversion of corporate funds becomes increasingly difficult.html. with a score of 8. . 5. more Chinese will own stock in companies.

6. 9. Elimination of child labor. Elimination of discrimination with respect to employment and occupation. . the right for unions to exist). Encourage development and dissemination of environmentally friendly technologies. A precautionary approach to environmental challenges. 8. Ensure that MNCs are not complicit in human rights abuses. 4. including extortion and bribery. Undertake initiatives to promote greater environmental responsibility. Business should work against all forms of corruption. CORPORATE SOCIAL RESPONSIBILITY 2. 7.e. Freedom of association and recognition of the right of collective bargaining (i. Elimination of all forms of forced and compulsory labor.7.1. and 10. 5.. 21 3.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

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

Location – Where should we put the facility? • Location decisions are crucial. • Discuss Active. quality.26 CHAPTER 2. personnel use. Human resources and job design – How do we provide a reasonable work environment? How much can we expect our employees to produce? • Human resources decisions are critical to all aspects of success. OPERATIONS AND PRODUCTIVITY 2. innovation. Intermediate and short-term scheduling – Are we better off keeping people on the payroll during slowdowns? Which job do we perform next? • Feasible and efficient production schedules must be determined. 3. 7. production scheduling. 5. Poor location decisions may overwhelm other efficiencies. technology decisions. • Mutual trust between buyers and suppliers is crucial. capacity needs. and price. 4. delivery. and maintenance and determine much of the cost of a product or service. . 6. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. 8. and JIT (just-in-time) – How much inventory of each item should we have? When do we reorder? • Inventory decisions must follow from customer and supplier considerations. material requirements planning. Supply-chain management – Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program? • Managers must consider quality.com’s location decisions and Matt McAdams a posteriori assessment of the choices. 9. Inventory. personnel levels. • Personnel costs are a significant part of most production or service processes. and inventory requirements. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. 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. and human resource planning.

2. This saves warehouse space and costs. New stock is ordered when stock reaches the re-order level. WHAT OPERATIONS MANAGERS DO 27 10. and efficiency. • Eli Whitney (1800) is credited for popularizing interchangeable parts.2 (A Little History) Review Heizer figure 1. February 14.org/wiki/Just In Time %28business%29. Kanban are usually simple visual signals. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock.2. • Reliability and stability of systems depends on well-planned maintenance schedules. such as the presence or absence of a part on a shelf. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. He also believed that management is responsible for – Matching employees to the right job.wikipedia. 2007. and 1 Source: http://en. 9]. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. – Providing proper work methods and tools. quality. However. Definition 2. the firm could deplete inventory and cause customer service issues.2. or Kanban.1 Side Note 2. – Providing the proper training. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.3 “Significant Events in Operations Management” [1. The process is driven by a series of signals. • Frederick W. When implemented correctly. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. . If demand rises above the historical average planning duration demand. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. p.2. one drawback of the JIT system is that the re-order level is determined by historical demand. 8].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. that tell production processes to make the next part. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs. which relied upon standardization and quality control. p.

2.S. Definition 2. • Transportation. . the services sector is by far the largest employer.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. 11].3 (Information Sciences) The systematic processing of data to yield information. 2 The average national private industry wage.S. • Trade. • Insurance. such as the legal profession or computer services in the financial industry. In the U. such as retail. economic output. and other essentials for its citizens. • In some service industries. the economy transitioned from agriculture to manufacturing around 1900. major contributions have come from the field of information sciences.. the wages are considerably above average. • Recently. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. • Food and lodging. average wages are below average2 in the U.3. Side Note 2.2.5 [1. • Government. However. 9] • Repair and maintenance.28 CHAPTER 2. for others professional occupations. Today.1 (Services) Those economic activities that typically produce an intangible product.1 (Development of the Service Economy) Present Heizer figure 1.S. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.S..3. p. shelter. • In most western economies. Definition 2. Manufacturing was dominant until about 1950 or so. The U. Bureau of Labor Statistics defines services to include [1. services account for over 70% of U. services become increasingly important. p.

• Services have a high consumer interaction. This is important insofar as there is no inventory. Note that many goods include services and many services include goods.3. Consumers interact with those providing the service. Legal advice is rarely identical for two clients. . • Legal. • Services are more often unique. • Services are often dispersed.3. When buying a computer.2. Customers seek services through local intermediaries. • Real estate. • Services have inconsistent product definition. Therefore it is difficult to automate. used in your treatment. such as pharmaceuticals or medical supplies. • Education. 3 Services that do not include a good as a component are called pure services. a support contract in case you have problems or training to familiarize you with the features of the computer. the purchase price may include installation services.3.2 (Differences Between Goods and Services) There are a variety of important differences between goods and services which result in differences in the way they are managed. • Services are typically intangible. • Services are often produced and consumed simultaneously. when going to a restaurant. • Other professional occupations. • Services are often knowledge-based. Hospital care includes both health services and goods.2 (Pure Service) A service that does not include a tangible product. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. 29 Side Note 2. Definition 2. • Medical. See definition 2. THE SERVICE SECTOR • Financial. • Entertainment.3.3 That is.2.

5.2. . the next step in product development involves customizing products according to the customer’s preferences. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. and finished goods rapidly. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. operations managers are responding by moving decision making to the individual employee. Definition 2.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. • Empowered employees – With the rise of services and knowledge products. 2. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs.2. • Mass customization – With increases in technical capabilities and customerlevel information management. 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. Trends that Heizer and Render identify [1. operations managers are increasingly responsible for innovations that move ideas. it will continue to strongly impact the field. wherever and whenever needed.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. OPERATIONS AND PRODUCTIVITY 2. Operations managers are being challenged to produce biodegradable. capital. or management).1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor.30 CHAPTER 2. reusable. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. brought about in part by the internet. Globalization has been having a dramatic impact on operations management and in the future. or recyclable products or to minimize packaging and other wasteful production steps. • 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. p. parts.

2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.5. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. Side Note 2.2.5. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.25 titles per labor-hour = 0. Also known as total factor productivity. Consider today’s computers versus those from the 1970s. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. p. 15]. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. THE PRODUCTIVITY CHALLENGE 31 Definition 2. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5. . Definition 2.5. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.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. but overhead is no $800/day.4375 titles per labor-hour = 0.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Definition 2. Side Note 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.3.4 (Total Factor Productivity) See definition 2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs).5.5.0077 titles per labor-hour = 0. In order to improve productivity.5.

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

” In the U. . writing. The primary variables for improving labor productivity include 1.5.2. and math. Cannot Correctly Answer Questions of This Type. draw the rectangle on the blackboard. 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.8 [1.) Present Heizer figure 1. What is the area of a 4 × 6 meter rectangle. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. such as transportation and sanitation. Which of the following is true about 84% of 100? 4 When presenting this question.S. and 4. THE PRODUCTIVITY CHALLENGE • Better-nourished. Basic education appropraite for an effective labor force.3 (The State of Education in the U. “About Half of 17-Year-Olds in the U. 2. there is considerable concern over teaching of basic skills such as mathematics to grade school children. 16]. About half of 17-year-olds cannot answer the following multiple-choice questions: 1.S. and 33 3. maintaining and enhancing the skills of labor. Side Note 2.5. In developed nations. Diet of the labor force. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.S. Social overhead that makes labor available. p..

2.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. are utilized effectively.5. and the cost of capital depends on interest rates. Note that in classic economic analysis and other areas of business.5. 17]. has increased at about an average of 1.S.5.2 Capital Capital investment in the U.. and knowledge.S.5.4 (Management as an Input) Because this is a course in business management. 2. however. 2. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.S. educated.5. U. management is considered as a separate input. productivity in the service sector has not increased as rapidly as with the production of goods. Definition 2. education. graduate programs and the students they produce remain the best in the world. as well as capital. and because the author of the textbook is writing about operations management. management is not always identified separately from labor as an input. Developed economies (also known as post-industrial economies) require trained. and knowledgeable employees and operations managers are responsible for ensuring that technology.5% after allowances for depreciation. Side Note 2. p. According to Heizer [1.4 Productivity and the Service Sector Historically. in the U. Difficulties arise because service-sector work is . OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Note that there is a trade-off between capital and labor in most industries.3 Management Management is used to ensure that labor and capital are used effectively and efficiently.34 CHAPTER 2.

teaching).. government agencies. We will discuss this challenge in more detail throughout the course. Frequently individually processed (e. 2. but from customers.S.. the performance of a law firm). food preparation.5 (Service Productivity in the U.S. These challenges include such issues as • Maintaining a clean environment. p. medical diagnosis). watchdog groups such as NGOs.g.5 • The U.g. and child care.S. 5 In Japan.g.) Productivity is highest in the U. 18] • Retailing in the U.S. These demands come not only from the manager’s personal ethic. 4.. Heizer notes [1. Difficult to evaluate for quality (e. Typically labor-intensive (e..2. a haircut).6.6 Social Responsibility As discussed in chapter 1. laundry service. . Side Note 2. and other stakeholders. 35 3. investment advice). • Keeping the workplace safe. 2. Often an intellectual task performed by professionals (e.g. and 5. SOCIAL RESPONSIBILITY 1.g..5. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward.S. banking system is about 33% more productive than Germany’s. • General ethical behavior concerning issues such as child labor and corruption. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. Low-productivity activities. is twice as productive as in Japan. in both overall and service productivity. Often difficult to automate (e. such as cleaning. telephone industry is twice as productive as Germany’s. and • The U. legislation protects shopkeepers from discount retailers.

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

positive control of each package will be maintained utilizing real time electronic tracking and tracing . France.2 [1.1 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. an understanding of cultural differences in preferences is needed to best meet customer needs. Attract and Retain Global Talent – By offering more employment opportunities. and • Increase sales.1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable. 5.38CHAPTER 3.1.1. 3. 3. FedEx. time-certain delivery. I recommend that all companies draft a mission statement. • Provide additional insights and opportunities. 4. global air-ground transportation of high-priority goods and documents that require rapid. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. Side Note 3. Equally important.1 Mission Whether large or small. Provide Better Goods and Services – For companies doing business in an international setting. 28] which includes mission statements for three multinational companies: 1.1 (Mission) The purpose or rationale for an organization’s existence. Missions state the rationale for an organization’s existence.1 (Mission Statements for Three Organizations) Review Heizer figure 2. 3. 6. Definition 3. global organizations can attract and retain better employees. p. competitively superior. • Perfumers tend to concentrate in Grasse. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets.

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

Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. the creation of a unique advantage over competitors. Responsiveness – By providing timelier.benjerry.1. .3 (Sample Mission Statements) Present Heizer’s figure 2.40CHAPTER 3. but can be used at the department level and even at the project level. Differentiation can arise from anything that the customer may value about a product or a services. See http://www. 3.com/our company/our mission/index. • The “look and feel” of the product. be it • Product features.3: “Sample Missions for a Company.2 (Strategy) How an organization expects to achieve its missions and goals.1. • Interoperability with other products. • Availability of complementary products.” Note that mission statements are used not only at the company-wide level.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Definition 3. 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. Side Note 3. and Major Departments in an Operations Function. 2.1. 3. Cost leadership – Providing cheaper products.1. • Training. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Definition 3. more responsive products or services. Differentiation – They make their product better. the Operations Function.cfm for more detail.3 (Competitive Advantage) In operations management.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

3. These critical success factors are used to develop a competitive advantage.6 [1. Implement an OM strategy. Definition 3. then • Form a Strategy. Group the necessary activities into an organizational structure. and Threats) analysis to develop strategies. 3. p. and 3.44CHAPTER 3. Opportunities. Side Note 3. Identify a strategy and critical success factors. 37].3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.2 (Critical Success Factors) In operations management. 2. then determine whether the organization does these things well (and. . 2. determining internal strengths and weaknesses and external opportunities and threats.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. The operations manager’s job is a three-step process: 1.” The process of developing a strategy involves the following steps: • Environmental Analysis. those activities or factors that are key to achieving competitive advantage. Weakness. The purpose of this process is to 1. if the firm has a competitive advantage in these things) and where failures are most likely. “Strategy Development Process.3. in particular. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Provide competitive advantage. Definition 3.3. • Determine Corporate Mission. and 3. Staff the organization with personnel that will get the job done.3. Increase productivity.1 (Strategy Development Process) Present Heizer figure 2.1 (SWOT Analysis) In operations management.

39]. p. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.3.6 3. and supporting activities. 3.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3 Integrate OM With Other Activities In order to achieve its strategy.3.4.1. OM activities are most productive when they are integrated with other activities such as marketing.3. Definition 3. CSFs.3.3 (Activity Map) In operations management. Southwest Airlines has a competitive advantage in providing low-cost airfares.3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. • Red arrows – critical success factors • Blue arrows – support activities 3. Once CSFs are determined.1 as a checklist to determine critical success factors. MIS. .3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Recall the “org charts” in sidenote 2. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. a graphical link of competitive advantage.2.2 as examples of how firms organize their activities. Side Note 3.5 and HR. 5 Management 6 Human Information Systems Resources.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.2 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. finance.

4. Its menu reflects the country in which it operates. Global strategy – Not characterized by local responsiveness. Usually does not confer a cost advantage. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. or joint ventures with substantial independence.4. Although e it is legally Swiss.3. See definition 3. Also one of the least profitable due to transport costs and little local responsiveness.3 (International Strategy) In operations management. a strategy that uses exports and licenses to penetrate the global arena. p.46CHAPTER 3. wine in France. and hamburgers without beef in India. 3. with beer on the menu in Germany. See definition 3.4.1 (International Business) A firm that engages in cross-border transactions. In the semiconductor industry.4.6.5 (Global Strategy) In operations management. Definition 3.4 (Multidomestic Strategy) In operations management.4.4. See definition 3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. 4. 42] Definition 3. • Texas Instruments is an example of a country with a global strategy. • Nestl´ is an example of a country with a transnational strategy. owning or controlling facilities in more than one country. Only 10% of its work force is Swiss.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. 2. 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. 95% of its assets and 98% of its sales are made outside Switzerland. . See definition 3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. [1. franchises.4. Definition 3. • McDonald’s is an example of a country with a multidomestic strategy. as exports require little change in operations and licenses often leave risk with the licensee. products do not need to be localized. Definition 3. but a good strategy for cost reduction when products do not need to be adapted locally.4.5. Typically characterized by subsidiaries.4. International strategy – Often the easiest strategy.

GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox . p.S.3.4.4.4.6 (Transnational Strategy) In operations management. Side Note 3.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. 6].. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

49 . costs.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. money.3 (Project Planning. Controlling – Monitoring of resources. quality. and supplies are tasked to specific activities and activities are related to each other.Chapter 4 Project Management Side Note 4.0. Even Microsoft. 46–47]. pp. Plans are also revised to meet changes in time and cost demands.1 [1.0. defining the project. Planning – Goal setting. the largest software company in the world. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Scheduling – People. 2. p. Side Note 4. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. Side Note 4. Project management involves three phases: 1. 3. and team organization. Scheduling.0. and Controlling) Present Heizer figure 3. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. and budgets.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. The profile highlights the importance of project management in achieving competitive advantage. 49].

p. However.0. In a sense. and/or 5. The project is temporary but critical to the organization. 4. p. Definition 4. often times. 2.1. 4. PROJECT MANAGEMENT However. things you thought were certain turn out not to be.0. The project cuts across organizational lines.5 (Personal Advice on Project Management) Project management is a tricky profession. and you will be forced to improvise. it is also an area in which there will continue to be high demand for qualified people. Your job is to make things go smoothly and according to plan. The work contains complex interrelated tasks requiring specialized skills.5. 48] 1. See also Heizer sidenote “Project Management and Software Development.50 CHAPTER 4.1 Project Planning While many projects are run within an existing organization. Moreover.1 The Project Manager As alluded to in sidenote 4. it is very obvious and can be very costly. People will not come through with what they promised. Side Note 4. The job is unique or somewhat unfamiliar to the existing organization. you will be confronted with a daunting task. you are doing your job well if noone notices the project management. project managers are highly visible in a firm and have significant responsibilities. The responsibilities of project managers are to make sure that . you should always expect the unexpected. Project organizations work best when [1. Work can be defined with a specific goal and deadline. 69]. 4. You may be managing resources far in excess of your individual salary.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.” [1. 3.1. If you become a project manager on projects of significant complexity. a temporary project organization is formed to address a specific project. if things go wrong.

The project is on or under budget. Approve graphic design for user account input web page 4. a task that should only take a day or so. PROJECT PLANNING 1.1 (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. For example. Approve software architecture for user account input web page functionality . In a project that includes allowing a user to enter personal information on a web page. Complete graphic design for user account input web page 2. a web page takes about a day to build for an experienced team. Review graphic design for user account input web page 3. dividing a project into more and more detailed components. in a software engineering project. All projects come in on time.1. 3. Definition 4.1. and 4.4. The project meets its quality goals.2 (Work Breakdown Structure (WBS)) In operations management. you have divided the tasks too finely. People receive motivation and information necessary to do their jobs.1. Side Note 4.1. 2. Complete software architecture for user account input web page functionality 5. When dividing a project into tasks. 51 4. • Build the user account input web page is a much better task division than 1. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.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). Review software architecture for user account input web page functionality 6.

which we will discuss next in section 4.1. They will be useful for project scheduling.1. Write software for user account input confirmation page functionality 9. 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. Write software for user account input web page functionality 8.2 (Work Breakdown Structure) Present Heizer figure 3. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. Scheduling serves to 1. Subtasks in major tasks 4. the work breakdown structure is not something you go to your office to do in isolation. Encourage realistic time and cost estimates for each activity . 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). of course. At the time you are creating the work breakdown structure.3 (Reality Check: WBS) In reality. PROJECT MANAGEMENT 7. Major tasks in the project 3. p. 4. Identify precedence relationships among activities 3. Side Note 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Activities (also known as “work packages”) to be completed Side Note 4.3 [1. you should also take note of time and cost estimates given by your technical staff. Show the relationship between each activity to others and to the whole project 2. Project 2.2.52 CHAPTER 4. fill hundreds if not thousands of pages. The actual WBS for Windows XP would.

All activities are planned for. cost estimates. The order of performance is accounted for.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. Overall project time is developed. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover.” This will give the class an idea of the look and feel of a typical Gantt chart. For smaller projects.4 [1. Derives from the typical shape of a bottle.2.2. as. – said of roads. PERT. 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 4.2. PERT and other formal documents. Definition 4.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. It can actually be quite time consuming to create and maintain Gantt charts. Side Note 4. and CPM) Inexperienced project managers often feel the need to use Gantt. which becomes narrower as one approaches the neck of the bottle. PERT and CPM help answer questions such as • When will the entire project be completed? . Definition 4.2. 2. and material resources by identifying critical bottlenecks in the project Side Note 4. PERT. and CPM tools for every project management activity. Gantt charts are perhaps the most widely used tool for ensuring that 1. moeny. the road bottlenecks. p. Make better use of people.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. PROJECT SCHEDULING 53 4. 51]. these should be considered merely tools to be used when they are useful by saving time or energy.2. and other values to each activity. Perhaps they imagine that they are not doing their jobs professionally if they are not. 3.2 (Using Gantt.4. MS Project’s Gantt chart functions demand you assign employees. Activity time estimates are recorded. However. right by the bridge.

Cost distribution tables.3. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time. Total program labor curves. behind schedule. is the project on schedule. and 8. less than. or ahead of schedule? • On any given date. what is the best way to accomplish this goal at the least cost? 4. 3. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. costs. 6. PERT and CPM. is the money spent equal to. Work status reports. 4.3 Project Controlling Project control involves monitoring resources. and budgets of projects. 4.1 PERT and CPM Two methods. 5.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Raw material and expenditure forecasts. quality. Control programs typically produce reports detailing 1. 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. were developed in the 1950s for project control. 7. Definition 4.54 CHAPTER 4.3. . Time analysis reports. Cost breakdowns for each task. Functional cost and hour summaries. 2. Variance reports.

6. monitor.3. Develop the relationships among activities. in my experience.2 Network Diagrams There are two approaches to visualizing activity networks: 1.2 (Example: AON and AOA) Present Heizer’s figure 3. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. 5. See also definition 4. or the critical path. 3. and ontrol the project. Activity on Arrow (AOA).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.3 (Critical Path) The computed longest time path through a network. . it will do for you automatically much of what we will go through manually in this class. Definition 4. Also.3. p.3. Define the project and prepare the WBS. AON associates the activity with the node whereas AOA associates the activity with the arrow. Side Note 4.3. Draw the network connecting all of the activities.3. Assign time and/or cost estimates to each activity. Gantt charts are the “go to” visualization method for even very complex projects. See also definition 4. through the network.3. Moreover. 53].3. 2.5 [1. Side Note 4. As the names describe. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.3. Personally.3. PROJECT CONTROLLING 55 Definition 4.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. They both follow six steps: 1. schedule. 4. Activity on Node (AON) and 2.4. Use the network to help plan. Compute the longest time path. 4.2.

8 [1. 1. that is.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.3.6–3.3. its ES is the maximum of all EF values of its predecessors. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. We do this with a critical path analysis with involves a 2-step procedure.1 gives sufficient information to describe the network. – If an activity has multiple immediate predecessors. 4. 54–55]. we must use time estimates of each activity to determine the overall schedule for the project. In other words. . 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. LF = min{LS of all immediate following activities}.1 (Critical Path Analysis) In project management. PROJECT MANAGEMENT Side Note 4. its LF is the minimum of all LS values of all activities that immediately follow it.4 Determining the Project Schedule Once we have identified all of our activities. p.56 CHAPTER 4. 56].3. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. – If an activity is an immediate predecessor to more than one activity. its LF equals its LS of the activity that immediately follows it. pp. that is. that is.9 [1. See also definition 4. Definition 4. their dependencies. 2. analysis used to determine the project schedule. LS = LF − Activity time. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. EF = ES + Activity time. • Table 3. ES = max{EF of all immediate predecessors}.4. Follow with example 3 and figure 3.

3 and Heizer figure 3. the time shared among more than one activity.4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.2 (Total Slack) In project scheduling. and • Includes only critical activities (see sidenote 4. Definition 4. If an activity2 does not impact the slack time of any other activity. Also notable is that if the total time of the project needs to be reduced. and H have no slack time and cannot be delayed without delaying the entire project. Note that activities A. we may delay the project as a whole. in the example in sidenote 4. Definition 4.10 [1. we cannot complete the project in 15 weeks. the step that identifies all the earliest times that activities can be completed. Note also that if we delay each activity by the amount of slack that activity has.1 (Slack Time) In project scheduling. 61] based on table 3. “Notation Used in Nodes for Forward and Backward Pass. G. 4.1). The critical path is one that • Begins at the first activity in the project. the time associated with a single activity.5. . These are called critical activities. C. 2 For example.1. Definition 4.” Then complete Heizer example 7 figure 3.3.2 (Forward Pass) In project management scheduling.13 [1. the free time for an activity.4. p.4. Slack time is just Slack = LS − ES or Slack = LF − EF . p.3 [1.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.3 (Free Slack) In project scheduling. if we delay activities B and D by one week each.1.4.4. it is said to have free slack.5.1 When several noncritical activities appear successively in a path.5. they share total slack. Side Note 4. 57]. p.5. the time devoted to one of these activities must also be reduced. 1 For example. E.4. • Terminates at the last. or the amount of time an activity can be delayed without delaying the entire project.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. activity F in sidenote 4. 60].

Pessimistic time – The longest amount of time an activity will take 1% of the time 3. the project manager pulls the number “out of the air” based on their experience managing related activities.6.6.6.6.2 and 4. which are labeled according to one of two notational conventions. The beta distribution is used as a prior distribution for binomial proportions in . Definition 4.2. three time estimates are used: 1.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. In reality.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Effectively. In PERT. the “worst” activity completion time that could be obtained in a PERT network.6.1 and 4. Definition 4. the most probable activity completion time that could be obtained in a PERT network. The usual definition calls these alpha and beta. Beta distributions have two free parameters.6.1 (Optimistic Time) In project scheduling. PROJECT MANAGEMENT 4.3.58 CHAPTER 4.1 and 4.3.6. the time required to complete an activity is often uncertain due to supply problems.6.6. we do not. in most cases. See also definitions 4. and the other uses β = β − 1 and α = α − 1 .6.3 (Most Likely Time) In project scheduling. See also definitions 4. Definition 4. See also definitions 4. technical considerations that were unknown at the time the project schedule was drawn up.. Definition 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be.6. unexpected complexities. etc. the “best” activity completion time that could be obtained in a PERT network. Side Note 4.2 (Pessimistic Time) In project scheduling. However. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. Most likely time – The most realistic estimate of the time required to complete an activity.

4.com/BetaDistribution. Side Note 4. and 9 weeks. and pessimistic times of 1. Activity times are statistically independent 3 Source: http://mathworld. The variance of the activity time is Variance = [(b − a)/6]2 . Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. p.1) where B(p. 4 See definition 4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. p.wolfram.6. 2007.3 The domain is [0.25 to 3. most likely.com/BetaFunction.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.1].6. β) Γ(α)Γ(β) P (x) = (4.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. February 21.4. q) = (4.html http://mathworld. and pessimistic times of 1.78 6 6 36 7 4 weeks.wolfram. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.6. 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.html. The above plots are for various values of (α.00.78 weeks. 63] for activity F based on optimistic.1 Probability of Project Completion If we assume that 1. and . q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. The expected activity time for activity F is 3 weeks5 and the variance is 1.00 week. and 7. most likely. 2.β) with α = 1 and β ranging from 0. Total project completion times follow a normal probability distribution and 2. 62]. 8 1. 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 = 1.6. 4.4.

6.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.wolfram. See definition 4. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution.7% of the time. 9 For 10 See more information.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. Definition 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) (4.5.6.3) Definition 4.16. and within 3 standard deviations approximately 99.6. pp.” Review Heizer example 10 [1.10 Determining Project Completion Time for a Given Confidence Interval A common question is.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1. see http://mathworld.76 weeks approximately 16% of the time. the population variance var(X).60 CHAPTER 4.1.6 (Standard Deviation) The standard deviation is the square root of the variance. two standard deviations approximately 95% of the time. See also 4.6. 64].html.6.3 (Example: Project Variance) Review Heizer example 9 [1. p. 65] and figure 3.com/StandardDeviation.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 4.6. Note that the standard deviation of 1. .6.76 weeks implies that the project will exceed the expected completion time by more than 1. Side Note 4. Side Note 4.6. p. definition 4. commonly also N written σ 2 . A2– A3] “Normal Curve Areas.

11 Definition 4. crash cost is the cost required to complete an activity in the shortest time possible.2 (Crash Time) In project management. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. in fact. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. When crashing a project. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. permissible and realistic. Project crashing is the name given to the process of rushing a project to completion.7. if certain activities off the critical path take the pessimistic time estimate or more to complete.3 (Crash Cost) In project management.7. crash time is the shortest duration of an activity. Definition 4. . and • The total cost of crashing is as small as possible. we need to ensure • The amount by which an activity is crashed is. you will doubtless experience one or both of these eventualities many times in your career. See definition 4.7. and if you become a project manager.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. Since activity completion times are typically shortened by adding resources. Definition 4. See definition 4.1 (Crashing) In project management.1. it may result in the project being delayed. the crash cost is typically higher than the normal cost.7. 4.7.4) 11 Since crashing a project often involves adding additional resources to activities. • The shortened durations will actually enable us to finish the project on time.7. we want to do so in the least cost mannger possible. Step 1 – Compute the crash cost per week. Assuming linear costs.1. Crashing a project involves a four step process: 1.4.

pp.5 and figures 3. • Advantages – Especially useful for large projects . you should be very wary of such pressure. If not. go to step 2.19.7. 4. If you accept the challenge and try to rush the project to please upper management. Crash this activity by one period. 3. Then crash each activity by one period. At times this may be politically infeasible.18–3.2 (Example: Crashing a Project) Present Heizer example 12 [1. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.1 (Reality Check: Project Crashing) As common as projects falling behind schedule or deadlines being moved up is upper management’s insistence that a project be completed in less time than a project manager estimates.7. If the due date has been reached. Step 4 – Update all activity times. Step 2 – Find the critical path(s) in the project network. 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. 4. PROJECT MANAGEMENT 2.62 CHAPTER 4. Side Note 4. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. Side Note 4. 67–69] including table 3. Step 3 – If there is only one critical path. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. As a project manager. Note that one activity may be on several critical paths. the advice given in this section should be helpful. 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. stop. If you find yourself needing to rush a project.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT.

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

PROJECT MANAGEMENT .64 CHAPTER 4.

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

Definition 5. 2. long-term forecasts concerned with the rates of technological progress.1. Maturity. These may include inflation rates. Product life cycles tend to follow four stages: 1. Introduction.1.3 (Technological Forecasts) In operations management. These concern rates of technological progress.3 and 5.4. 5. . CHAPTER 5. See also definitions 5.66 – – – – Sales forecasting. Definition 5. • Technological forecasts.4. 3. and 4. Production planning and budgeting. Cash budgeting. longer forecasts are needed. Growth. Decline. and other economic indicators.to long-range forecasts. Capital expenditures. which impacts purchases of new plant and equipment as well as development of new products. In the first two stages. and • Demand forecasts.1. See also definitions 5.1. and Analyzing various operating plans. Facility locations or expansion.1.1 Types of Forecasts Organizations typically use • Economic forecasts. and Research and development. Generally deals with more comprehensive issues than short-range forecasts. planning indicators valuable in helping organizations prepare medium.1.2 and 5. money supply.1. FORECASTING • Long-range forecasts – Generally more than 3 years. Useful for – – – – Planning for new products. housing starts.2 (Economic Forecasts) In operations management.

3. • Loss of customers. and • Layoffs.3. 7. 6. these drive a company’s production. See also definitions 5.4 (Demand Forecasts) In operations management.2 and 5. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1.2.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. • Training. 3. 5. and scheduling decisions and serve as inputs to financial. Select the forecasting models. 4.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Also called sales forecasts. 5. capacity. Make the forecast.1. Validate and implement the results. and • Loss of market share. Select the items to be forecasted. Human resources – Anticipated demand is needed to estimate the need for • Hiring. projections of a company’s sales for each time period in the planning horizon. 5. 2. marketing. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Determine the time horizon of the forecast. Capacity – Underestimating demand can result in • Undependable delivery. .1.1. and personnel planning.5. 2. Gather the data needed to make the forecast. Determine the use of the forecast.

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

• Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ Moving averages · Simple. · The simplest and easiest way to estimate demand. ∗ The more independent your decision makers are from economic.3. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. and · Respondents. · See definition 5.9. they will do so. for example. · There are three problems with moving averages 1. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. Moving averages require more past data to work with than.3. · See definition 5. and if they perceive there is an incentive to exaggerate. – Sales force composite ∗ You would be surprised how accurate your sales force can be.5. be sure that the sales force is clear that their incentive is to be as accurate as possible. · Requires less past data than moving averages. 2. political.3. the naive approach. . useful method if we can assume that market demands will stay fairly steady over time. say. ∗ However. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. · Staff personnel. the more likely it is your results will be accurate.8. or other incentives to over or understate demand. Moving averages cannot pick out trends very well. Sales people typically respond to incentives. · Useful as a starting point or sanity check for more sophisticated methods. 3.

and 5.3.5.3. See also definition 5.3.6.3.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. a forecasting technique based on salespersons estimates of expected sales.5. See also definitions 5.2.3.5 (Sales Force Composite) In operations management.3.4.1.3.3 (Jury of Executive Opinion) In operations management. · See 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.1 Qualitative Forecasting Methods Definition 5. See also definitions 5.3.4 (Delphi Method) In operations management.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. emotions. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3.4. 5. Definition 5.70 CHAPTER 5.3. Definition 5.3.3. Definition 5. Definition 5.3. and 5. and 5.3.3. 5.3. 5.5. See also definition 5.3. .6. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3. and value system.4. 5.3.3. and 5.3.6. personal experiences.10.3.3. 5. See also definitions 5.3. a forecasting technique using a group process that allows experts to make forecasts.3. See also definitions 5.6 (Consumer Market Survey) In operations management. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.

3. and 5.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.11. generally ranges from 0. a simple moving average is given by demand in previous n periods Moving average = (5.3. See also definitions 5. That is.7.3.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. Higher values give more weight to recent data. Mathematically. Moving averages can be either simple or weighted.5. 5.3. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.10. • Simple Moving Average – Mathematically.1) n • Weighted Moving Average – Mathematically.2 Quantitative Forecasting Methods Definition 5. Definition 5. and are appropriate to use when the underlying average . 5. See also definition 5.3) The smoothing constant.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.9. α. Definition 5. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. Definition 5.7.3.3.3.2) See also definition 5.5.3.05 to 0.8. 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 (5.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. FORECASTING APPROACHES 71 5.3.

13). and 5. When α = 1. while lower values give more weight to past data.72 CHAPTER 5.3.3.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts.3.8. .3. Mean absolute deviation (MAD).3 Measuring Forecast Error Once a forecast is made. Definition 5.3. exponential smoothing is equivalent to naive forecasting. See also definition 5. Mean squared error (MSE).15. and are appropriate to use when the underlying average is relatively stable.3.3.14.3.3. 1 See |actual − forecast| n (5. 2. FORECASTING is likely to change.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.0. 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. Definition 5. 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 5. Definition 5. such as the mean absolute deviation (see definition 5. it is good practice to compare the estimated value with the actual value as actual values become available. Mean absolute percent error (MAPE).13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3. Three popular measures are 1.7. 5.12).3.13. 3.3.7.4) definition 5.3.

14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. 100 n i=1 (forecast errors)2 n (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3.3.12. expressed as a percent of actual values. MSE is given by MSE = See also definition 5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.3. Mathematically. MAPE is given by MAPE = See also definition 5.3.6) 5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.3.5. Mathematically. FORECASTING APPROACHES 73 Definition 5. Definition 5.11) .15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.3.8) With smoothing constants α for the average and β for the trend.3.12.7) or F ITt = Ft + Tt (5.5) |actuali − forecasti |/actuali n (5.

12. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. F ITt . 2. by the formula F ITt = Ft + Tt . It is also commonly called linear regression analysis.74 or CHAPTER 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. time) (5. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Compute Ft . 1. Calculate the forecast including trend. Ordinary Least Squares Regression analysis is also useful for predicting trends. 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. Tt with equation 5.14) .10. 3. Compute the smoothed trend.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. the emponentially smoothed forecast for period t using equation 5.

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

We will use the same technique. FORECASTING 5.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5.3. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.1 (Example: Using OLS) Present Heizer example 12 [1. pp.g. mathematically.3. It is also called the standard deviation of the regression and.. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. However. if you are uncertain about predictions of x. 106– 107]. If there are published estimates you can cite (e.3. Note that making predictions of future demand involves also making predictions about the independent variable x.g. is given by (y − yc )2 n−2 Sy.x = (5.g. whatever uncertainties you may have transfer to your predicition of y.17) .x = (5..15) Side Note 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..6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. but x will be something other than time. average local salary) (5.16 is y2 − a y − b n−2 xy Sy.76 CHAPTER 5.4.

4 . Correlation) Correlation merely means that the values of two variables are historically related. 2007.” the AFL (American Football Conference) and the NFC (National Football Conference). Certainly.com/time/business/article/0. Side Note 5.” Note that the regression assumes a standard normal distribution about the estimate.3 (Examples of Correlation Coefficients) Present Heizer figure 4. “Four Values of the Correlation Coefficient. stock markets. changes in skirt lengths don’t cause stock market prices to rise and vice versa.S. stock market. has risen. “Distribution about the Point Estimate of $600 Million Payroll.3.3. leading stock indexes.” Side Note 5.10 [1.3. February 28.S. nor does it imply that they will continue to be related.3.4 (Causation vs.S.3.3 and the U. FORECASTING APPROACHES 77 Side Note 5. Dow Jones Industrial Average and Standard and Poor 500. is monopolized by the NFL. Even the Year of the Pig correlates strongly with the U. Historically. a football game played between two football conferences in the U. the average length of a woman’s skirt and stock market prices in the U. It does not imply causation one way or the other. 4 Source: http://www.html?xid=sitecnn-partner. football in the U.S. the U. pp. 109].S. Correlation Coefficients for Regression Lines Definition 5.18 (Coefficient of Determination) A measure of the amount of variation in the dependent variable about its mean that is explained by the regression equation. Since 1935. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. or National Football League. p.3. p.5. 108]. Definition 5.9 [1.8599. 107]. the note in the margin accompanying Heizer example 14 [1.2 with stock prices generally rising as skirts rise. but the relationship is coincidental. Other interesting correlations that have been identified over the years include banana prices and U.time.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. have been correlated.S. The correlation coefficient of variables x and y is given by r= See also definition 5.1594488. which is divided into two “conferences.00.2 (Distribution About the Point Estimate) Present Heizer figure 4. in all but one Year of the Pig.3. stock market prices as well as the winner of the Super Bowl.S.18. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.18) .

17. b1 .3. = the dependent variable (e. often the most difficult part of building a multiple regression model is to pick the independent variables. p. Adding additional independent variables as predictors. 110]. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. 5 See definition 5.6. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . Side Note 5. .) It measures the percent of variation in the dependent variable (y) explained by the regression equation. .15 is given by y = a + b1 x1 + b2 x2 + .3.g. x2 . if they are indeed related to the dependent variable. In practice. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. b1 .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.. you would use statistics software to calculate these values.” As the sidebar points out. . p. 110]. (See definition 5. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. . results in additional predictive accuracy as measured by r2 . we discussed a means by which we can attempt to predict the value of one variable using the value of another.” For example.5 Definition 5. b 2 . The same technique can be applied to use several independent variables to predict the value of a dependent variable.3. .3.19 (Multiple Regression) A causal forecasting method with more than one independent variable. The multiple regression equivalent of equation 5. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.3. .18 and Heizer example 15 [1. b2 . . It is commonly simply called “R squared.19) Determining the values of a. .78 CHAPTER 5. . etc.

Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. Side Note 5.4.6 One M AD is equivalent to 0.4.4. one of the most common problems with forecasting is a lack of follow-up. If the tracking signals violate upper or lower limits. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. These limits are typically based on M ADs.1 (A Plot of Tracking Signals) Review Heizer figure 4. the forecasting methodology needs to be modified. Tracking signals are typically used monitor forecasts.8 standard deviations.6 standard deviations.11 [1.5.9% of the time.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . three M ADs about 98% of the time. MONITORING AND CONTROLLING FORECASTS 79 5. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).2. 111]. Definition 5. In other words. The tracking signals should also be compared as they are generated against limits. .2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. two M ADs to 1.forecast| n where M AD = (5. and within 4 M ADs about 99. 6 Recall definition 4. Definition 5. though large errors may be a problem as well even if the positive and negative errors balance. three M ADs to 2.20) A good tracking signal has about as much positive as negative error. This means that the observed value should be within 2 M ADs abut 89% of the time. p.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.6. and 4 M ADs to 3. which correspond roughly to standard deviations.4.1.6.4 standard deviations.2 standard deviations.

Side Note 5. There is no single technique that should be used for all products or services. 2. 5.2 Focus Forecasting Focus forecasting.4. you must make your own decision as to how you select the forecasting models that you use.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. 114]. “Summary of Forecasting Formulas. which selects a model based on goodness-of-fit to a data set. Note that even with computer monitoring. there has been much criticism of the approach to using models based on thier fit to the data.4.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Definition 5. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally flawed in its approach.2 [1.4. Side Note 5. In your career. However. is based on two principles: 1. you should be aware of the criticism of focus forecasting. Definition 5. p. Sophisticated forecasting models are not always better than simple ones.80 CHAPTER 5.10) is automatically changed to keep errors to a minimum.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. α in definition 5.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.3.4. changes need to be check with human eyeballs to ensure that the adjustments make sense.4.” .. FORECASTING 5.4.g.

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

restaurants or nightclubs). and 4. • Maturity phase – Competitors have entered or are entering the market. • Growth phase – Effective capacity forecasting is necessary.. low-cost. • Introductory phase – In the introductory phase.1. Product strategy involves determining the best strategy for each product based on its position in the life cycle. often ruthlessly. DESIGN OF GOODS AND SERVICES 6. months (e. . or even decades.2 Life Cycle and Strategy Strategies change as products move through their life cycle. clothing fashions). and innovative production is appropriate. • Decline phase – Investment needs to be minimized and resources need to be redeployed. Life cycles can be in the days or weeks (e. 3. 2. Growth.1.1 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 6.82 CHAPTER 6. so high volume. 6.g. Decline.1 Product Life Cycles Product life cycles can be divided into four phases: 1.g.. – Process modification and enhancement. Maturity..g. products expenses are often high for – Research and development. years (e. and – Supplier development. YouTube videos). Introduction.

1.6. as well as the total annual dollar contribution of the product. 6.1 (Example: Brainstorming) Lead the class in a brainstorming session. Ideas are not reviewed until after the brainstorming session.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. • Technological change often drives product innovation. it must regularly redesign existing products or bring new products to market. such as consumer incomes.2 Generating New Products Most products have a limited life cycle.2.4 Side Note 6. 6.2. Definition 6.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. 4 For 3 For . • Economic factors. 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.3 • Political and legal change can also bring about business opportunities.2. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.500 or 100. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. Definition 6. example.1.2. GENERATING NEW PRODUCTS 83 6.3 Product-by-Value Analysis For firms with many products. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. the development of cellular telephone technology or the internet. and if a company is to survive. example. are tied to product demand. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. • Sociological and demographic change is also tied to product demand.000 yuan.

3. the product life cycle.3 [1. market dynamics.3. p. p.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. 129]. and the organization’s capabilities. p.84 CHAPTER 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 6. 128]. Side Note 6. 6. Definition 6. Many successful companies rely on sales from products introduced within the past five years.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. 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. Definition 6.2.2 [1.1 (Quality Function Deployment (QFD)) A process for determining customer requirements (customer “wants”) and translating them into the attributes (the “hows”) that each functional area can understand and act on.3. .1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. Translates customer desires into a product design.3 6.1 (Product Development Stages) Present Heizer figure 5. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Each stage should have an accompanying review to determine whether to progress or not. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market.3. 128]. Determines what will satisfy the customer and 2.3. Side Note 6.

2.2 (Example: House of Quality) Present Heizer example 1 [1. 10 The right-hand columns of the house in sidenote 6. bureaucratic companies and organizations. 130]. Identify how the good or service satisfies customer wants. Identify relationships between the firm’s hows. • Perhaps the most popular approach in the U. In other words.3. manufacturing engineering. p.3.3. Evaluate competing products. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.3.g. design engineering.3 Organizing for Product Development In the West. and production departments. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. 8 These are given on the roof of the house in sidenote 6.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.” 6 For example. 1.3.6 3. identify the rows of the house in sidenote 6. there are three popular methods by which organizations undertake product development.2.com for more information.9. which can be an advantage. 6. Develop importance ratings..7 4.9 6. as was the software described in section 4. create the columns of the house in sidenote 6. 2.6.S.3.3. a research & development. Product development is done by teams.8 5.qfdcapture. 3. See http://www. An organization is divided into departments. Identify customer wants. • Effective communication and coordination between separate departments can be problematic.2.3. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. Note that it is not free or open source. 7 In other words.2. Building the house of quality involves six steps: 1.. • More common in large.3. PRODUCT DEVELOPMENT 85 Side Note 6. 2. with product features. Relate customer wants to product hows. . • Fixed duties exist.10 Side Note 6. e.2.

will often advocate for continuation of their project past the point that it is profitable for the company.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. organizations are less structured and typically not divided into research and development.4 (Concurrent Engineering) In project development.3.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. use of participating teams in design and engineering activities. development.3. . production.3.. purchasing. and use.11 In Japan. and field service personnel. it can also be problematic because teams. production. because their fate is tied to a product. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.S.86 CHAPTER 6. quality assurance.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.3.. Definition 6. 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. etc.3. My experience may not be indicative of management practices in general in the U. design. Definition 6.. but my personal impression is that formal QFD practices are not widespread in practice. and production stages of product development. These teams often include representatives from marketing.3.4. Side Note 6. Definition 6. Side Note 6. maintainability.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.3.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. engineering. manufacturing.S.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. 6.3. Some teams even include representatives from vendors. However. engineering.

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

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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

• Surveys and research indicates that the most common personality trait is self-confidence. successful entrepreneurs know how to raise money. – You not only have to believe in yourself. – We will discuss techniques for raising money in detail later in the course. you will finish the course with the confidence that if you decide to start a small business.1 In our discussion of entrepreneurship. it’s not usually a single incident (such as getting fired) that leads to entrepreneurship.”’ • According to experts who have studied entrepreneurs. pp.ccer. but a series of frustrations.92 CHAPTER 7. They may not have a realistic assessment of the risks they are undertaking when they start their businesses. • Finally. See. make lots of money quickly and with little effort. 12–13]. everyone would say that they want to be thier own boss. • Entrepreneurs typically do not feel fulfilled working for others and feel the need to control their own destiny. I mean believe in you enough to give you money. you have to convince others to believe in you.edu. – Entrepreneur Magazine cites an entrepreneur who states that the time will be right when “you can honestly say ‘I’ll put my house. 2007. If asked.php?id=2018 http://www. INTRODUCTION TO ENTREPRENEURSHIP about their prospects. And by believe in you. jewelry. March 6. and . 7. 1 There are a variety of studies that support this. for example. http://wistechnology.1 Characteristics of the Successful Entrepreneur What are the qualities that lead people to start businesses? • Most entrepreneurs feel a sense of urgency that made starting a business seem like a necessity [4. Hopefully. we will discuss how to prepare to start a small business as well as manage a business early in its life. you will maximize your chance of success.com/article. • The desire to make alot of money quickly is not one of the characteristics of the successful entrepreneur.cn/en/ReadNews.asp?NewsID=5324. and other personal collateral on the line to attain the start-up capital I need for the long-term rewards I deserve.

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

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

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

and – Investment of personal assets. Have the class write down their answers and evaluate their own EQ. Eliminate question 1 and substract one point from the scoring given on p. 20. .96 CHAPTER 7. pp. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. 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. 21]. 18–20].2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel. – Geographic location.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.3. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. pp.3. Acknowledge this fact and factor it into your decisionmaking. Side Note 7. How much is your ego worth? Side Note 7. – Hours of work.

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

• Etc. people have to remove nose piercings for work or social occasions. however. • They require business relationships that the entrepreneur does not have. often one or more a day. Side Note 8. business ideas come at a rapid rate. 28–29]. • The ideas are easily copied and would be quickly appropriated by more able competitors. Often times. etc. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. hollow tube. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. I continue to generate business ideas as a matter of habit.98 CHAPTER 8.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. The tube could be made unobtrusive enough that it would not need to be removed for work. • The business would involve too much risk. 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. but it is a major complaint for female rock climbers. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. However. most ideas are not feasible because • They would not be profitable enough. • 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. It sounds silly.. • They require expertise that the entrepreneur does not have. • They require more financing than the entrepreneur has access to. Side Note 8.0. . • A nose piercing that consists of a small.. pp.0.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. Those with nose piercings would not need to remove the piercing and risk it closing.

“Never say die.” That is. 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.imdb. 33]. you should not let it dissuade you. p. Have students come up with examples of products that meet various criteria on the checklist. 35]. After all. it is too risky.1. Finally. or health. 8. he would never succeed. 2007. Entrepreneurs are often told their idea is flawed. Have students fill out the form on their own time. while you should listen to criticism that others give. A well-known phrase in English.” Side Note 8. p. to be truly self-motivated and persistent in the way you need to succeed. or are otherwise discouraged. . making just enough to get by but not much more.1 You’ve Got an Idea.2 is. home. Side Note 8. Side Note 8.1. YOU’VE GOT AN IDEA. such as your family. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your idea. thinking that if he did not succeed after a couple of years.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. You should be realistic about risks. Warnings about risk are perhaps the criticism you should consider most carefully. His sales are now in the millions of dollars per year and the business is very profitable. the business took off. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.com/find?s=all&q=never+say+die. However.8. you should have “thick skin. computer-controlled security cameras. And you should not risk anything you can’t afford to lose. used as the title of at least 12 movies and television shows. Now What? The number one trait needed by successful entrepreneurs is perseverance. He ran the business as a one-man operation for years. that they will never make it. in the wake of 9/11. People thought he was going nowhere and generally dimissed his business.1. February 17. you will be spending years of your life trying to make the idea work. 2 http://www.1.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated.

FINDING AN IDEA .100 CHAPTER 8.

Not only do you need to decide whether you are marketing to businesses or consumers. 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: 1.1.0.2.” or business-to-consumer ventures.Chapter 9 Defining Your Market After coming up with your idea. Definition 9. Definition 9. Consumers and 2.0. See also 9.0. 9. See also 9. Businesses. but you should try to target your market as specifically as possible.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. There are two broad categories of markets: 1. When trying to identify your niche market. your next step is to do some market research.” or business-to-business ventures.0. 101 .

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

economic. for example. New marketing techniques include generational. (See definitions 9. the more likely you are to score a hit.3.1.1. Definition 9. Chinese. As older people are more active than before. Definition 9. the World War II cohort. 9... life stage. you should practice extra caution to avoid stereotypes or other insensitive approaches.1. they try to satisfy all possible customers and end up trying to do too many things well. and 9.S. in the U.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups.1 (Generational Marketing) Marketing to consumers based on age as well as social. are similar in age to those who came of age in World War II.” That is. demographic.1. Side Note 9.1. such as having children. It is better to do just one thing well than to do many things poorly.9. . Marketing to demographic groups has become much more refined in the last few decades. many Eastern companies make the mistake of lumping together American and European customers. Many Western companies make the mistake of lumping together Japanese.S. Side Note 9. when the country was immersed in a war effort. This can be offensive and serve to alienate rather than appeal to your customer.2. For example. many are choosing to start families later in life or even have children ten years or more apart. and other Asian customers together. young adults in the Depression. and psychological factors.1.. or retiring. Korean. when many people were suffering from extreme poverty.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.1 (Smaller is Bigger) When starting a business.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. many entrepreneurs make the mistake of being “all over the map. but their behavior differs significantly due to the different influences in their youth.1.) Using these new marketing techniques can allow you to narrow your market. If you did your homework.1. and cohort marketing. the Depression-era cohort. you should be able to enter your niche market with confidence.1. Likewise. Definition 9. buying a home. etc. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different. and the narrower your focus on your target. This marketing technique has been widely used since the early 1980s in the U.1. FINDING YOUR NICHE 103 7. Go for it! – Implement your idea.

The mission statement should • Be succinct.” [4. • Convey the essence of your business’s goals and philosophies.1.3 The Mission Statement Once you have a niche. you should. DEFINING YOUR MARKET 9. • 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. create a mission statement.2 [1. p. Falkenstein1 advises that you regularly reevaluate your niche. Every six months or so.104 CHAPTER 9. 79] 9. “Creating a niche is the difference between being in business and not being in business. a few sentences at most. Falkenstein states.1 (Mission Statements for Three Organizations) Review Heizer figure 2.2 Redefining and Expanding Your Niche Lynda C. 28] which includes mission statements for three multinational companies: 1 See section 9. p.3. Side Note 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. .

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

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

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

108 CHAPTER 9. DEFINING YOUR 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 .Chapter 10 Market Research While the excitement of a great idea is often enough to propel an entrepreneur into business. spending habits. president of Barson Marketing..1 (Market Research) Research into the characteristics. the industry as a whole. location and needs of your business’s target market.0. says “A lot of companies skim over the important background information because they’re so interested in getting their product to market. Inc. But the companies that do the best are the ones that do their homework. Donna Barson.” Definition 10. and the particular competitors you face.

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CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. .2. RESEARCH METHODS 113 Side Note 10.10. pp.2. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.” [4.

MARKET RESEARCH .114 CHAPTER 10.

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

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

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

4 Phone number. they will not read it. The amount of financing needed. 3. • The Executive Summary – Two or three pages immediately following the title page. 5. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section.3 • The Cover and Title Page – The cover should have the name of the company. . 6. and/or web site. and full contact information4 for the company. a number should be in a corner5 indicating the copy number. 3 Note that for this class. THE BUSINESS PLAN – It should be no more than 50 pages. p. The financial forecasts.118 CHAPTER 11. 11. – It is worth repeating: Keep it down to at most two or three pages. 7. 4. the date of the plan. – It should explain 1. If you write to much. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 5 I suggest the lower-right corner. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. 2.3 Some Style Points Kuratko also recommends that you [3. Its products or services. though you should not put it in the same corner as page numbers appear. The company’s current status.1. You should use this to keep track of who has which copy. 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. – Inside the front cover should be a title page repeating the cover information. The venture’s objectives in 3 to 5 years. e-mail address. – 40 pages is ideal. and How investors will benefit. address. The benefits to customers. – On the title page.

2. Executive Summary – This should be the last thing you write.1 (10 Sections of a Business Plan) Present Kuratko Table 10.6 Note any industry developments and describe the business thoroughly. Business Description – Name the business. is it based on a family name? Does it include technical terms you need to identify? .11. copyrights.2. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. which describes the 10 sections of a typical business plan.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly.” Instead.” or “them. 11.” or “us. p. The executive summary gives readers their first impression. and tell why it is named what it is. • Keep the Plan Written in the Third Person – Do not use “I. Use the spell checker on your word processor to check for spelling mistakes. Your credibility is established in part by the credibility of your plan. 305].2 [3. but it is the first thing that your audience will read.g. • Identify the Target Market – Market research should support a focused customer niche. trademarks. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. Include any pictures or designs that would be helpful.2 The Plan Contents Side Note 11. be sure to include them in the business description. • Orient the Plant Toward the Future – Create an air of excitement. 6 E. • Do Not Overdiversify – Don’t try to be all things to all people. so be sure the writing is finely crafted. or other special market advantages you have. use “he. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. • If there are patents.. Some details on each section of the business plan: 1. • Avoid Exaggeration – Your sales and revenue estimates should be well researched.” “they. Present a focused plan.2.” “we.

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

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

122 CHAPTER 11. THE BUSINESS PLAN .

not a one-time event. You will probably have to present it at least ten times before it is ready for the medium-sized fish. 51–56].1. p. pp. Your presentation should evolve over time as you listen to your audience and receive feedback.1 Do It Until You Get It Right This is perhaps the most important piece of advice. your family.Chapter 12 Presenting the Plan 12. Sales Prospect Pitch. local business associations. Present it to your friends. 62].1 The Presentation Side Note 12. Do not be dismayed. 12.2. recommends twenty-five times [2. anyone who will listen. Present it many 1 Guy Kawasaki.1 You will have to pitch to many medium-size fish before you are ready for the big fish. The first time you present your plan. This means that you should not count on presenting your plan to your most critical investor for the first time. you will probably not do a good job. 123 . author of The Art of the Start. 12. The presentation of your plan is an ongoing process.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch. your dog. your business class.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. and Potential Partner Pitch [2.

2.D. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. Most Ph. 2 This originally comes from an American classic. • Bring paper copies3 of your presentation in case all else fails. Bring at least twice as many as you expect there to be people in the room.2. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out.124 CHAPTER 12. 44] Side Note 12. Adobe Reader. and you don’t want something as silly as a burned-out light bulb to cost you an investor.1 (The Job Talk) Every Ph. By the time I gave my job talk to my eventual employer. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. p. the lawyer joke. You don’t want to try to figure out other people’s equipment. The original joke goes. Post a copy of your presentation in a secure location on your homepage just in case. is. 12.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. • Bring your own laptop. PRESENTING THE PLAN times. • Test the equipment the day before. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers.2. Lexecon. and even if you can figure it out. • Bring a backup thumb drive with your presentation on it.D.” 3 Color copies! . they may have another version of PowerPoint. of course. I don’t think it was quite right until somewhere between the 8th and 10th time. “His lips are moving. There will always be glitches. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. I had given it over a dozen times. Guy Kawasaki likes to tell a different version of an old joke.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. “How can you tell when a lawyer is lying?” The answer.”2 [2. In retrospect. Most graduates get between 5 and 15 interviews when they graduate. 12.

and although you go into each presentation . 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.3 After the Presentation Each presentation will be different.2. 12. • Your audience may ask you several questions at once.2. so write things down to make sure you don’t forget. you are not presenting it well. “So what?” If you cannot answer this question simply and easily. Ask them what your company will do. 45].12.6 So What? When you are planning your presentation.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. In general.5 Take Notes Have a pen and paper ready and take notes during the pitch. Much of the material required use of the internet. AFTER THE PRESENTATION 125 Side Note 12. At my company in Chicago. ask yourself after every statement you make. It is easy for things to get lost in the heat of the moment. p. Give your presentation to friends or family. I always bring a pen and paper to meetings. If they cannot explain it clearly. everyone brought a pen and paper. Stop when it goes off. Many people feel as if taking notes makes them look stupid.2. but in reality. where some of the smartest people in the world worked.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. it is quite the opposite.3. They may ask you something that makes you want to change your presentation. You should be prepared for the unexpected. • Taking notes also makes you look conscientious. Guy Kawasaki recommends you set a timer [2. 12.2. and each investor will respond differently. 12. They may ask you something you want to respond to in an e-mail later. Everyone. you need to change or eliminate the statement. 12.

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

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

3. • 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.3 (Count Cycle) In inventory management.1 Inventory Turnover Typically. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons.2 (Order Cycle) In inventory management. such as for volume discounts for preferred customers. 13. these systems should automatically update inventory and accounting records.130 • Maintain a sales history. • Updating product information – At the time a sale is entered. INVENTORY CONTROL When considering the purchase of a POS. To improve efficiency of inventory control. your count cycle is 12 weeks.3. Definition 13. For example. the count cycle is the amount of time between counting inventory.3. CHAPTER 13.3. work with suppliers to improve delivery times and count inventory more often. be sure it’s not easy to “hack” the system. the order cycle is the amount of time it takes to process paperwork and place orders. Definition 13. • Security – To prevent theft. 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. you have “turned over” your inventory. Definition 13. .1 (Turnover) When you have replaced 100% of your original inventory. and • Improve pricing accuracy. Definition 13.4 (Delivery Cycle) In inventory management. if you perform an inventory count four times a year.3. the delivery cycle is the amount of time between placing an order and receiving it. a high inventory turnover is a mark of a well-managed inventory system.

4. first out) assumes that you sell the most recently purchased inventory first.4. 13. In other words.4. First Out)) FIFO (first in.4.. You should know how many sales per square meter per year you need to survive.4.1.2. In the U. it values your remaining inventory based on the prices of the least recently purchased items. Calculate your sales per square meter once per month. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.4.1 (LIFO (Last In.S.1 Buying Inventory In the process of putting together your business plan. order cycle. least this is true in the U.13. First Out)) LIFO (last in. it values your remaining inventory based on the prices of the most recently purchased items.S.3.S.3. If there is inflation.2.2 See also 13. and delivery cycle. If there is inflation.3 See also 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.5 (Needs Period) In inventory management. In deciding which to use.4. Definition 13. After you have been in business your inventory control system should give you a better idea of stocking levels. the needs period is the sum of the count cycle. Many businesses also measure turnover by measuring sales per square foot (or square meter).3. The author is unfamiliar with Chinese tax codes. LIFO and FIFO are two accounting methods used to do this. you must estimate your inventory value when you file your taxes.3. which allows you to pay less taxes on your inventory. INVENTORY ACCOUNTING 131 Definition 13. and 13. Definition 13. 13. first out) assumes that you sell the least recently purchased inventory first. which may result in higher taxes.3. 2 At 3 At least this is true in the U. but you should at least know about LIFO and FIFO. follow the recommendation of your accountant. . See definitions 13.4 Inventory Accounting Your accountant will typically handle inventory accounting. 13. The author is unfamiliar with Chinese tax codes.2 (FIFO (First In.

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

SUPPLIERS 133 13.5.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. Tips for dealing with suppliers: 1. Whatever you do. customers may be required to pay upon receipt of goods. Suppliers sometimes try to complicate pricing to their advantage. • For items being shipped.5. Discuss • Their negotiating technique when discussing pricing.S. do not falsify or misrepresent your financial statements.5. At least in the U. .o.d. it is considered a felony. Be sure to add up • Costs. 2.)) Cash on delivery. If a supplier does not extend credit. they will put you on a c. 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.d. and • Allowances before you make a decision. and • The need to be firm but fair.. If you are dealing with a reticent large supplier.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. Ask about the freight policy before ordering. I regularly had to deal with food vendors. basis until you have proven yourself reliable. You can also present your financial statements and prospects for success. personal interaction can work wonders. • Sometimes if an order is large enough.o. you should know who is liable for damage to goods in transit.1 (COD (or c. Definition 13. the supplier will pay for freight. • Discounts.5.13. Side Note 13. 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. If a supplier is uncertain about you.

5. http://www.7 4 Source: 5 Source: http://www.)) Free on board. 3. As opposed to FOB. May 19. .4 Colloquially. May 19.3 (FOB Destination (or f. 2007.5.com/reference/glossary/glossary efg.b. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. 2007.com/jargon. The FOB term requires the seller to clear the goods for export. 6 Source: http://www. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.2 (FOB (or f. See also definition 13. Be aware of your supplier’s priorities. Seattle” to indicate that an item being shipped from Seattle is free on board.html. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. May 19.wikipedia.134 CHAPTER 13.b.abcsmallbiz.html. Under this arrangement. 2007. Definition 13. 7 Source: http://en.5.epoi. Definition 13.o. Specify a cancellation date on your order forms. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. INVENTORY CONTROL • Depending on whether the supplier pays frieght.5.org/wiki/Backorder. Definition 13.3. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.b.o.2. 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.html.5.4 (Back Order) This is a Distribution (business) term and refers to the status of items on a purchase order in the event that some or all of the inventory required to fulfil the order is out of stock. Destination)) Free on board destination.com/shippers/glossary. 5 FOB Destination changes the location where title and risk pass.roadway.6 See also definition 13. people often say something like “f. This differs from a forward order where stock is available but delivery is postponed for other reasons. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.o. May 19. 2007. 5.

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

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

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

applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. .138 CHAPTER 14. • Be sure to list appropriate contact information. • List the top 4 or 5 skills that are most essential to the job.4 (Using an E-mail Address) For professional positions. due to the number of applicants for competitive positions. particularly those that advertise on web sites.” or people who may not have them will just try to fake those personality traits in the interview. 2 See sidenote 14. – For other positions.4 Finding People There are many possible sources of applicants.1.S. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. – For professional positions..5. such as “outgoing” or “detailoriented. • Do not list requirements other than educational or experience-related ones. • 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. 14. With e-mail. For example. e-mail addresses have become perhaps the most popular way to get applicant information at U. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.S.1.1. companies.2 Side Note 14. HIRING EMPLOYEES 14.3 Advertising the Job When you write an advertisement. It also makes it easy to receive and process a large number of applications with a minimum of effort. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.1. Many American companies are no longer providing phone numbers. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. if you are looking for an accountant. • Do not ask for specific personality traits.

particularly in the high-tech industry. 3 Java is a programming language.. 6. If you are lucky. You narrow the number of resumes down to about 10. Try to perform a search on a job sites such as http://www. In the U. • Focus on the skills that a person can bring to your company. You check references.314 listings in the “Computers. 3.” 665 in “Internet/E-Commerce.14.S. Screening People Reviewing resumes and applications is an art.1. be sure that a candidate can provide what you are looking for. • Industry Publications – Most trade publications take ads for job openings.com with the keyword “java” will demonstrate just how widely used online tools are.com with the keyword Java on May 19. you will get several candidates for any job you are offering. You hire the preferred candidate. To “weed out” candidates. You interview the candidates. 5. about 10 or so.dice.” .monster. Searching on Monster. for professional positions. 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. 159 in “Financial Services. the hiring process proceeds as follows: 1. You conduct a second round of interviews with the remaining 3 candidates. but when looking at a resume. not a science. You can evaluate their personality during the interview.S. There were 4. 2007 turned up more than 5. 4.000 hits searching just the “Information Technology” search category.com or http://www. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. For any job. Software” category. • Online – In the U. You narrow down the 10 candidates to 3.. 2.” And 921 in “Engineering. most professional associations’ job banks are now online. many positions are being filled online.

HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. Of those we looked at. this indicated to us that the applicant was not being truthful. including when an applicant can work and the hours they can work. if a person survives downsizing or other major changes at their former employers. I learned that people lie on their resumes all the time.4 were not experienced enough. Due to this. If an applicant indicated they were an expert with too many technologies. . we tossed those that had spelling or grammatical mistakes. and e-mail address.com) In the hiring process at Active.6 (Hiring at Active. CHAPTER 14. • Work experience – As for salary information when asking about work experience • Availability. address. I have some personal recommendations: • Always check references. • Special skills.5 (Job Application) Present Lesonsky’s sample job application [4. That typically indicates that someone cannot supply enough positive references. 4 It takes time to become an expert with any sufficiently compex technology. From the hiring process at Active.140 • Look for patterns in their career.com. pp. that is a very good sign that they are a survivor. and • References. • On the other hand. Applications should ask for things such as • Name. She simply passed along resumes that contained certain keywords that we were looking for.1.1. or were too experienced. • Educational background. so many resumes came in that an administrative assistant was asked to perform the first screening. • Don’t necessarily discard resumes with some gaps. Side Note 14. listed expertise in too many subject areas.com. phone number. Side Note 14. did not match our requirements closely enough. • Rely on your intuition. 344–345].

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

Begin with some small talk.” 9 This is a very typical job interview question in the United States. First impressions are the most important. 8 In 7 Taken . HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. a recent debate. what would you do? Why?8 • What kind of supervisor gets the best work out of you? • How would you describe your current supervisor? • How do you structure your time? • What are three things you like about your current job? • What were your three biggest accomplishments in your last job? In your career? • What can you do for our company that noone else can? • What are your strengths and weaknesses? • How far do you think you can go in the company? Why? • What do you expect to be doing in five years?9 from [4. Side Note 14. You should do the same. Hopefully they will be neat and clean. Discuss the job and the company. so much so that it is almost a clich´. “President of the United States.” or “Tell me about a problem that you solved at your last job and the way you solved it. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. He got the job.” Don’t ask yes-or-no questions. only one of them answered. and demonstrate good communication skills. “bowling. Good candidates will do their best to put their best foot forward. You want the candidate to talk enough to give you a detailed impression.1. 349]. Be sure to ask open-ended questions. Texas.” The interviewer laughed out loud. Then ask them about their skills and background.142 CHAPTER 14. friendly. A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. He answered. It is as important to get the candidate excited about your company as you want to be about them. such as “Tell me about your last position. p.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. Curiously.

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

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

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

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