International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007


Copyright c Collin Starkweather 2007. All rights reserved.


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

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. . . . . . . . . . .1 PERT and CPM . . . .3. . . . . . . . . . . . .3.3. . . . . .3 3. . . . .1. . . . . . . . . . . 6 Design of Goods and Services 6. . . . . . . . .4 3. . . 4. . . . . . . . . . . . . . . . . . . . . . . . . 3. . . 5. .1 Project Planning . .1 Goods and Services Selection .1 Research . . . . . . . . . . . . . . . . . .2. . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Measuring Forecast Error . . . .8 A Critique of PERT and CPM . . . . . . .1 The Project Manager . . . . . . . . . . . . 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. . . .4 Adjusting for Trend . . . 3. . . 3. . 4. . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . .3.1 What is Forecasting? . . . 3. . . . . .2 Build and Staff the Organization . 5. . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . . 5. . . . . . . . . . 5. . . . . .2 Focus Forecasting .3.1. . 6. . . . . . . . . . . . . . .1 Adaptive Smooting .4. . . . . . .3 Project Controlling . . . . . .1.3 Forecasting Approaches . . . . . .4 4 Project Management 4. . . . . . . . . . . . . . . . . 5. . . . . . . . .4 Monitoring and Controlling Forecasts . . . .1 Types of Forecasts . . . . . . . . 4. . . . . . . . . . . . . . . . . .2 Project Scheduling . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . . . . . . . .2 Network Diagrams . . . . . 5. . . 4. . . . . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . Strategy Development and Implementation . . . . . . . . . . . . . 4. 4. .2. CONTENTS .3 Product-by-Value Analysis . . . . . . . . . 6. . . . . . . . .1 Identify Critical Success Factors . . . . . . . . . . . . . . . . . 5. . . . . . .6 Variability in Activity Times . . . . . 4.3. . . . . . . .3. . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . . 4. 5. . . . . 6. .2 The Work Breakdown Structure . . . . . . . . . . . . . . . . . . . . . . . .6 Associative Models . . . . . . . .1. . . . . . . .3 Dynamics .2 Preconditions . . . .3. 4. . . . . . . . 5. .1. . . .2 Life Cycle and Strategy . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . 3. .5 Seasonal Variations in Data . . .2 The Strategic Importance of Forecasting 5.6. . . . 4. . . . . . . .3. . . . . 5. . . . . . . . . . . . . . . . . . . . . . . .2 Quantitative Forecasting Methods . . 4. . . . .1 Qualitative Forecasting Methods . . 4. . . . . . . . . . . . .3. . . . . . . . 5. . . . . . . . . . . .4 Determining the Project Schedule . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . . . . .1 Probability of Project Completion . . . . . . . . . . . . . . . .

. . .2. . . . . . . . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . .1 Your Audience . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . 111 11 The Business Plan 11. . . 12. . . . . . . .1 The Presentation . Now What? . 101 9. . . . . . . . . . 12. . . . . . . . . . . . . . . . .4 The First Minute is the Most Important . .1. . . . 12 Presenting the Plan 12. . 6. .1 Preparing to Put the Plan 11. . . . . . . . . . . . 11.2 Redefining and Expanding Your Niche .2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8. .1 You’ve Got an Idea. . . . . 12. . . Exactly? . . .1. . . 6. . . . .CONTENTS 6. . . . . . . . . .3 Generating New Products . .5 Take Notes . . .2 The Plan Contents . . . . . . 6. . . . . . . . . . . . . . . . . . .1 What Am I Researching. . . . . . . . .3 The Mission Statement . . . 104 10 Market Research 109 10. . . . . . . . . . . .2. . Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Know Your Outline Thoroughly . . . . . . . . . . . . . 12. . . . . . . . . . . . . . .1 Sources of Secondary Research . . . . . . . . . . . . . . 111 10. . . . .3 Be Familiar With All Equipment to be Used 12. . .4 Manufacturability and Value Engineering . . . . . . .1 Finding Your Niche . .1. . . . . .3. . . . . . 99 9 Defining Your Market 101 9. . . . . . . . .3.2 Quality Function Deployment (QFD) . . . . . . . . . . 11. . .2 6.3. . . . . 12. . . .2. . . . . . . . . . . . . . . .2 Research Methods .6 So What? . . . .3. . . . . . . . . . . . . .1 Product Development System .2. . . . .1 Do It Until You Get It Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . . . . 12. . . .2. . . . . . . . . . . . 6. . . .2 Look and Feel . . . . .2. .2. . 110 10. . . . . . . . . . . . . . . . . . . . .2 Are You Ready? . . . .3 Some Style Points 11. . . . . . . . . 104 9. . . . . . . . . . .3 Organizing for Product Development . . . . . . . . . . . . . . . . . 94 7. . . . . .3 After the Presentation . . .3 Setting Goals . . . . . . . . . . . . . . .1 Characteristics of the Successful Entrepreneur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 7.1 Importance of New Products . . . . . . . . . . . . .

. . . . 14. . .1 Buying Inventory . . .6 13 Inventory Control 13.1 Inventory Turnover .4 Inventory Accounting . . . . . . .3.3 Computerized Inventory Control 13. . . . . . . . . 13. .1. . . . . . . . . . . . . . . . . . . . .5 Suppliers . . . . . . . . . . . . . . . . .3 Advertising the Job 14. .2 Payment Plans . . . . . . . . . .1 How to Hire . . . . . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . 14. . . . . . . . . .5. . 13. . . . 13. . . . . . . . . . . . . . . . . . 13. . . . . . . . .1 Job Analysis . . . . . .5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Hiring Employees 14.1. . . . . . . . . . . . . . .1. . . . . . . .1 Dealing with Suppliers . . . . .2 Job Description . . . . . . . . . . . . . . . . . . .2 Tracking Inventory . . . . 13. . . . . .1 Inventory and Cash Flow . . . . . . . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . .4 Finding People . . . . . . . . . . .

Part I International Business Management 7 .


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

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

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

– WorldCom reportedly had over $63 billion in assets prior to Largest. . specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. March 17. a high value is placed on honesty and personal integrity. the SarbanesOxley Act (SOX) was passed in the U.3. and Tyco make it clear that even western developed economies have significant ethical shortcomings.S.3 The United States The United States has recently been rocked by a number of scandals in the business community. succeeding Enron as the largest bankruptcy in U. 2007. history. was convicted of fraud and conspiracy and sentenced to 25 years in jail. There is currently debate as to the effectiveness of the regulations relative to the costs.bankruptcydata. March 17.12 CHAPTER 1. including a $2 million birthday party for his wife. scandals such as Enron. Side Note 1. In Scandinavia.4 – Bernard Ebbers. 2007..S. Worldcom. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. While western developed economies often cite a high ethical standard. http://www.2 (Cultural Heritage in the U. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. WorldCom declared bankruptcy in July 2002. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1.htm.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. See sidebar 1.S.3 – Several Enron executives have since been sentenced to jail for fraud and other charges. was accused of looting the company to fund a lavish lifestyle. • Tyco – The CEO of Tyco. 3 Source: 4 Source: http://www.3. the former CEO of WorldCom.1. Side Note 1. Parmalat. • WorldCom – Following the Enron scandal. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the Largest. • Enron – In December 2001. Dennis Kozlowski.htm.2. Qwest.S.) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.

2 Women in the Workplace Sexual harassment has also become an issue in Japan. Side Note 1. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. with many men of the opinion that women were just biding their time until they marry and have children. 5 1. Likewise. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. Better known is the case of Japanese banks.1 Japan Political and Business Scandals Japan has been beset by both political and business 2. 58].4. women have a difficult time being taken seriously.. .4.4 1. the political scandals do not appear to have been fully acknowledged and addressed. Hodgetts et al. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. • 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.4.4.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www. JAPAN 13 1.S.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.4. Side Note 1. The government was compelled to provide public money to bail out the institutions.1 (The U. also known as thrifts and which function like banks.S. p.fdic. and as a result made high risk investments in the late 1980s and early 1990s. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Moreover. were not as highly regulated as banks. This resulted in several banks being technically bankrupt [5.pdf. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. Savings and loan institutions. with many women finding their employment opportunities constrained.

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

Although women have entered the workforce in large numbers in recent decades. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. is the notable exception). their attitudes towards bribery when working in foreign markets differs from that of the U. there seems to be a glass ceiling due to social factors. than any other. . Hodgetts et al.5.3 Lobbying by Japan Japan spends more money lobbying in the U.7 Note that lobbyists do not have any formal power.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.5 1. 7 Source: http://www.4.1. with most in the top 20 among over 150 countries included in the survey. men are disproportionately represented in management positions.dict.S.5. at 40. Side Note 1. Definition 1. to try to influence decision-makers in any circumstance. 1.5. They only have the power of persuasion.S. politicians.. particularly in upper management.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. Side Note 1.S. yes or no.4. in an extended sense.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption ( (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. EUROPE 15 1.4. with the purpose to influence their votes. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts.

1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an (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. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 8 Source: http://careerplanning. For those students who think so. Side Note 1.5. 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.htm.16 CHAPTER 1. • Discrimination lawsuits are more commonplace in Great Britian. yes or no. but there is a perception that there are risks and ethical considerations.5..S. .6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity.about.5. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. though compensation is limited relative to lawsuits filed in the U. 1. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian. • More British companies have actively sought to recruit and promote women into management.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. 8 Side Note 1.

7.6.S. [5. company in Boulder was stolen and sold to a Chinese company. 3. there are undoubtedly many others that get away with it. Often. 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. International corporate spying problems. 64]. Piracy and counterfeiting (see sidenote below).6. Side Note 1. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. pp. • A relatively stable government. 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.S.2 (Piracy and Counterfeiting) Present sidenote at [5.3 (Corporate Spying) Hodgetts et al.6. 4.6. 63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. An increase in crime and illegal business activities. • Note that for every corporate spy that is caught. Child labor. Prison labor. p. Ethical considerations include 1. executives. . Bribery and other forms of corruption. and • A recent history of rapid economic development. 6. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. An opaque legal system. • Yet another case in which software from a U. ETHICAL CONCERNS IN CHINA 17 Side Note 1.5 billion in sales annually.1. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. 2. Side Note 1.

3 (Nongovernmental Organizations (NGOs)) Private.18 CHAPTER 1. social justice. not-for-profit organizations that seek to serve society’s interest by focusing on social. and emergency relief in the event of humanitarian disasters). such as education and health care. political. • CARE (promotes community development. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the company/our mission/index.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. there are few if any issues which affect and infuriate so many in China as corruption.7. social justice.7. .7.7. and economic issues such as poverty. Side Note 1. China continues a battle against corruption.2 (Nongovernmental Organizations (NGOs)) Private. health.2. Definition 1. and the environment. and promotion of social equity). See http://www. Definition 1. “. health. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).”[6] See also sidenote 1. . • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. education. such as Whole Foods.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm.2.cfm for more detail. not-for-profit organizations that seek to serve society’s interest by focusing on social. political.S. a grocery chain. Other companies. 1..4 (Corruption) Though things are improving. In the words of a Beijing correspondent for “The Economist” magazine. provide relief in the event of humanitarian disasters. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 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. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.6. and the environment. education.7 Corporate Social Responsibility Definition 1. and economic issues such as poverty. .benjerry.

Side Note 1. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. as executives of publicly traded companies are ultimately responsible to their shareholders.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. China ranked 78 out of 158. with a score of 3. firms a reason to refuse to pay bribes. MNCs do not appear to have been significantly impacted. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.000 and $125. In fact.9 U.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. • Conservation International (promotes environmental conservation). Executives are people.1.S. Side Note 1. last but note least. but does not outlaw payments to political party leaders. • And. note that while U. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).S. 1. executives may actually feel that it is the right thing to do. • To prevent a boycott or other consumer defections. as it gives the U.7. Both political groups and businesses are influenced by NGOs. and • Rainforest Action Network (RAN).2. – Even socially responsible executives would consider the “bottom line” when making decisions. In 2005.S. firms are constrained by the FCPA with regards to bribery and other corrupt practices. For example. .1 Corruption and the FCPA Revisited Hodgetts et al.7. many feel that it has had a net benefit.7. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment. too.7.

Important: Although it is widely cited. societies. With greater financial transparency.N.0 is considered to be the borderline at which countries are considered to have a problem. and not based on hard data.20 CHAPTER 1.2 respectively. malfeasance and diversion of corporate funds becomes increasingly difficult. Tyco.N. Moreover.S. 2006. and Parmalat resulting in investors losing billions of dollars. . With more disciplined corporate governance. such as the U. but most important first step is to recognize that there is a problem. It cannot be considered to be based on a scientific survey. The government recognizes that it is an issue and is taking action. specify standards and codes of conduct in domestic and global operations. with scandals such as Enron. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. better than the U. 3. Hong Kong is number 15. I think corruption will diminish as China economically develops for several reasons: 1.6 and 8.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. and the environment. Singapore is number 5 with a score of 9. Support and respect the protection of international human rights. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt.10 Corruption is certainly not endemic to Asia. 5. and Germany at 7. Scandinavian countries are at the top of the list.4.html. It is a difficult problem to solve.7.5 (Table 3-1: Principles of the Global Compact) The 4. Global Compact specifies 10 principles which MNCs should abide by: 1. 1. more Chinese will own stock in companies. with a score of 8. Global Compact.7. Side Note 1. As more state-owned businesses become privatized and the size of the middle class increases. 10 http://www.4 (Some Opinions) Personally. Side Note 1. The government is actively addressing the issue of corruption.infoplease. 2. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Commitments that many MNCs have signed on to. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. slightly better than Sweden. WorldCom. the United States and Europe have recently been rocked by corporate corruption. July 1.

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


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

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

We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. supply-chain management. layout design.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. • They are often sources of conflict among management. business community as “org charts. . scheduling. process design.S.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. WHAT OPERATIONS MANAGERS DO 25 What Operations Managers Do Operations managers focus on the four functions of the management process: 1.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. 6–7]. 3. operations managers make decisions. quality. 5]. 1. p. as the org chart determines executives’ authority and. and 4.” • Every organization with more than a few employees has an organization chart. location selection.2.2. Side Note 2. OM is one of the most costly aspects of an organization. more generally. Staffing. and maintenance. p. 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. To accomplish these functions. pp. known commonly in the U. 2. OM decisions have been divided into ten categories by Heizer [1. particularly when job titles are not clear. Controlling. human resources and job design. place in the heirarchy. Side Note 2. Planning. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. 2. Definition 2. inventory. 7].2. Organizing.

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

Kanban are usually simple visual signals.wikipedia. – Providing proper work methods and tools. 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. When implemented correctly.2. that tell production processes to make the next part. However. WHAT OPERATIONS MANAGERS DO 27 10. which relied upon standardization and quality control. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. – Providing the proper training. 8]. 9]. one drawback of the JIT system is that the re-order level is determined by historical demand. February 14. • Frederick W. If demand rises above the historical average planning duration demand. p. Definition In Time %28business%29. . He also believed that management is responsible for – Matching employees to the right job. such as the presence or absence of a part on a shelf. the firm could deplete inventory and cause customer service issues. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process.2 (Just in Time) Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs.2. • Reliability and stability of systems depends on well-planned maintenance schedules. 2007. This saves warehouse space and costs. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. or Kanban. and 1 Source: http://en. • Eli Whitney (1800) is credited for popularizing interchangeable parts.2.2 (A Little History) Review Heizer figure 1. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. New stock is ordered when stock reaches the re-order level.1 Side Note 2. and efficiency. quality. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.2.3 “Significant Events in Operations Management” [1. p. The process is driven by a series of signals.

• In most western economies. . 11]. the economy transitioned from agriculture to manufacturing around 1900. average wages are below average2 in the U. • Transportation. • Food and lodging..S. such as retail.S. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.2.28 CHAPTER 2. • Trade. economic output. services account for over 70% of U.3 (Information Sciences) The systematic processing of data to yield information. Today.1 (Services) Those economic activities that typically produce an intangible product. and other essentials for its citizens. Manufacturing was dominant until about 1950 or so. for others professional occupations. • Government. 9] • Repair and maintenance. However.1 (Development of the Service Economy) Present Heizer figure 1.S. • Insurance. the services sector is by far the largest employer. shelter. major contributions have come from the field of information sciences. the wages are considerably above average. Side Note 2. The U.3. Bureau of Labor Statistics defines services to include [1. Definition 2. services become increasingly important.. p. such as the legal profession or computer services in the financial industry. 2. • In some service industries.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. 2 The average national private industry wage. Definition 2. • Recently.S. p.3.5 [1. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. In the U.

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

Definition 2. Operations managers are being challenged to produce biodegradable.2. p.2. or management). reusable. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. or recyclable products or to minimize packaging and other wasteful production steps. • Mass customization – With increases in technical capabilities and customerlevel information management. parts. OPERATIONS AND PRODUCTIVITY 2. 2. operations managers are increasingly responsible for innovations that move ideas. brought about in part by the internet. • Empowered employees – With the rise of services and knowledge products. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. capital. it will continue to strongly impact the field.30 CHAPTER 2. the next step in product development involves customizing products according to the customer’s preferences. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. and finished goods rapidly.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. operations managers are responding by moving decision making to the individual employee. wherever and whenever needed. • 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. • 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.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. Trends that Heizer and Render identify [1.5. 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. . Globalization has been having a dramatic impact on operations management and in the future.

25 titles per labor-hour = 0.5.3. Definition Also known as total factor productivity. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Definition 2.5. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. .0077 titles per labor-hour = 0. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Consider today’s computers versus those from the 1970s. 15]. THE PRODUCTIVITY CHALLENGE 31 Definition 2. In order to improve productivity.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). p. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.4 (Total Factor Productivity) See definition 2. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.4375 titles per labor-hour = 0. but overhead is no $800/day. Side Note 2. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.

or other commercial software available. – For example.5 (Productivity Variables) In operations management. the public provision of electricity is highly variable. There were. Labor productivity has increased due to • Better-educated. – This can be a particular problem in the service industry. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. you had to write a program from scratch. about 10% of the annual improvement in productivity is due to increases in labor productivity. . A Toyota Corolla is a much different car than a Porsche 911 Turbo. • Units of measure – There may not be appropriate units of measure.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1.) The screen had only one color. The electricity often goes out in the middle of the day and the current may vary in strength. and the arts and science of management. green. 2. 3. capital. such as convenience or safety. in Cambodia. and was about the size of my hand. 2. – Not all cars are the same.. of course.5.32 CHAPTER 2. Labor In the U. • Exogeneous factors – External elements may cause changes in productivity which the operations manager or other factors in the system under study is not responsible for.S. the three factors critical to productivity improvement – labor.5. Capital. If you wanted the computer to do something. Labor. (It used audio tapes for memory storage. where quality and other factors vary widely or the level of service provision includes items difficult to measure. Management. no word processors. Definition 2. If the public electricity provision increases in quality. spreadsheets. it may improve productivity.

Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.S. Cannot Correctly Answer Questions of This Type. there is considerable concern over teaching of basic skills such as mathematics to grade school children. What is the area of a 4 × 6 meter rectangle.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. and 33 3.) Present Heizer figure 1.. “About Half of 17-Year-Olds in the U. 16]. Which of the following is true about 84% of 100? 4 When presenting this question. p.S.3 (The State of Education in the U. Diet of the labor force. 2. Basic education appropraite for an effective labor force. maintaining and enhancing the skills of labor. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. and • Healthier workers as well as • A shorter work week. writing.2. Social overhead that makes labor available. and math. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. In developed nations.8 [1.S. The primary variables for improving labor productivity include 1. draw the rectangle on the blackboard. . Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. Side Note 2. THE PRODUCTIVITY CHALLENGE • Better-nourished. and 4.5.” In the U.5. such as transportation and sanitation.

management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge. Note that there is a trade-off between capital and labor in most industries. management is considered as a separate input. are utilized effectively.5. and because the author of the textbook is writing about operations management.S..5% after allowances for depreciation. graduate programs and the students they produce remain the best in the world. 2.5.5. educated. productivity in the service sector has not increased as rapidly as with the production of goods. 2. Definition 2.S.34 CHAPTER 2. however.2 Capital Capital investment in the U.4 (Management as an Input) Because this is a course in business management. management is not always identified separately from labor as an input. 2.5. p.5. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. and knowledge.S. in the U. 17]. Developed economies (also known as post-industrial economies) require trained. Note that in classic economic analysis and other areas of business. and the cost of capital depends on interest rates. Difficulties arise because service-sector work is .3 Management Management is used to ensure that labor and capital are used effectively and efficiently. as well as capital. has increased at about an average of 1. education. According to Heizer [1. Side Note 2. and knowledgeable employees and operations managers are responsible for ensuring that technology.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.4 Productivity and the Service Sector Historically. U.

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


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

Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. global organizations can attract and retain better employees. p.1. Missions state the rationale for an organization’s existence. positive control of each package will be maintained utilizing real time electronic tracking and tracing . Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. 28] which includes mission statements for three multinational companies: 1. Attract and Retain Global Talent – By offering more employment opportunities. 3. global air-ground transportation of high-priority goods and documents that require rapid. 3.1. Side Note 3. FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable. an understanding of cultural differences in preferences is needed to best meet customer needs. France. Definition 3. I recommend that all companies draft a mission statement.2 [1. • Perfumers tend to concentrate in Grasse.1. 3. 6.1 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. 4. Equally important. competitively superior. 5. and • Increase sales. Provide Better Goods and Services – For companies doing business in an international setting.1 (Mission Statements for Three Organizations) Review Heizer figure 2. time-certain delivery. FedEx.38CHAPTER 3.1 Mission Whether large or small.1 (Mission) The purpose or rationale for an organization’s existence. • Provide additional insights and opportunities.

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

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

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


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

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

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

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


Issues in Operations Strategy

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





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



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



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

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

The purpose of this process is to 1.1 (Strategy Development Process) Present Heizer figure 2.2 (Critical Success Factors) In operations management.3. 37]. 2. 3. Increase productivity.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength.6 [1. Identify a strategy and critical success factors. Definition 3. Opportunities. • Determine Corporate Mission. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.1 (SWOT Analysis) In operations management. “Strategy Development Process. These critical success factors are used to develop a competitive advantage. Side Note 3. then • Form a Strategy.3. p. Staff the organization with personnel that will get the job done. Definition 3. those activities or factors that are key to achieving competitive advantage. The operations manager’s job is a three-step process: 1. and 3. Group the necessary activities into an organizational structure. if the firm has a competitive advantage in these things) and where failures are most likely.44CHAPTER 3.3. in particular. 2.3. Provide competitive advantage. then determine whether the organization does these things well (and. . and 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. and Threats) analysis to develop strategies. determining internal strengths and weaknesses and external opportunities and threats.” The process of developing a strategy involves the following steps: • Environmental Analysis. Implement an OM strategy. Weakness.

39]. and supporting activities.2 as examples of how firms organize their activities.2. Recall the “org charts” in sidenote 2. 3. p.4. OM activities are most productive when they are integrated with other activities such as marketing. Once CSFs are determined. CSFs. .4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3. 5 Management 6 Human Information Systems Resources. Southwest Airlines has a competitive advantage in providing low-cost airfares.6 3. Definition 3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.5 and HR.3. finance. • Red arrows – critical success factors • Blue arrows – support activities 3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note as a checklist to determine critical success factors.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3.1. an activity map can be used to link an organization’s competitive advantage to the CSFs.3. MIS.3 Integrate OM With Other Activities In order to achieve its strategy. Side Note 3.3 (Activity Map) In operations management. a graphical link of competitive advantage.

Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization. a strategy that uses exports and licenses to penetrate the global arena. or joint ventures with substantial independence. Definition 3. and hamburgers without beef in India. .2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Typically characterized by subsidiaries.4. wine in France.46CHAPTER 3. Definition 3.4. 3. See definition 3. See definition 3. owning or controlling facilities in more than one country. See definition 3. Only 10% of its work force is Swiss. Definition 3. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. but a good strategy for cost reduction when products do not need to be adapted locally. franchises. Also one of the least profitable due to transport costs and little local responsiveness. as exports require little change in operations and licenses often leave risk with the licensee.5. Usually does not confer a cost advantage.4. 4. [1. p. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.4. Although e it is legally Swiss.4. 42] Definition 3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.3 (International Strategy) In operations management. products do not need to be localized. Its menu reflects the country in which it operates.3. • Texas Instruments is an example of a country with a global strategy. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. with beer on the menu in Germany. Definition 3.4. 95% of its assets and 98% of its sales are made outside Switzerland. 2.4. • Nestl´ is an example of a country with a transnational strategy. • McDonald’s is an example of a country with a multidomestic strategy. See definition 3.4. International strategy – Often the easiest strategy.5 (Global Strategy) In operations management.6.4 (Multidomestic Strategy) In operations management. Global strategy – Not characterized by local responsiveness.1 (International Business) A firm that engages in cross-border transactions.4. In the semiconductor industry.4.

4.3.S.. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.4.4. Side Note 3. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox . 6]. p. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.6 (Transnational Strategy) In operations management.


1 [1. and supplies are tasked to specific activities and activities are related to each other.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. Controlling – Monitoring of resources. Project management involves three phases: 1. quality. and budgets. Side Note 4. 3.0. p.0. money. pp. 49 .4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. the largest software company in the world. 2. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. defining the project. Even Microsoft.Chapter 4 Project Management Side Note 4. and team organization. 49]. and Controlling) Present Heizer figure 3. 46–47]. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. Scheduling – People. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Planning – Goal setting. Plans are also revised to meet changes in time and cost demands. Scheduling.3 (Project Planning. costs. Side Note 4.0. The profile highlights the importance of project management in achieving competitive advantage.

Project organizations work best when [1.5.0. it is also an area in which there will continue to be high demand for qualified people. Moreover.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. The job is unique or somewhat unfamiliar to the existing organization.5 (Personal Advice on Project Management) Project management is a tricky profession. However. 69]. 4.0.” [1. p. and you will be forced to improvise. PROJECT MANAGEMENT However. p. If you become a project manager on projects of significant complexity. The responsibilities of project managers are to make sure that . a temporary project organization is formed to address a specific project. if things go wrong. often times. See also Heizer sidenote “Project Management and Software Development.50 CHAPTER 4. Your job is to make things go smoothly and according to plan. 3.1 Project Planning While many projects are run within an existing organization. People will not come through with what they promised.1 The Project Manager As alluded to in sidenote 4. You may be managing resources far in excess of your individual salary. 2.1. Work can be defined with a specific goal and deadline. you should always expect the unexpected. Definition 4.1. project managers are highly visible in a firm and have significant responsibilities. you are doing your job well if noone notices the project management. The work contains complex interrelated tasks requiring specialized skills. Side Note 4. things you thought were certain turn out not to be. and/or 5. it is very obvious and can be very costly. In a sense. The project is temporary but critical to the organization. 48] 1. 4. The project cuts across organizational lines. 4. you will be confronted with a daunting task.

Complete software architecture for user account input web page functionality 5.2 (Work Breakdown Structure (WBS)) In operations management. PROJECT PLANNING 1. In a project that includes allowing a user to enter personal information on a web page. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no.1. Side Note 4. you have divided the tasks too finely.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. Review software architecture for user account input web page functionality 6. The project meets its quality goals. in a software engineering project.1. a task that should only take a day or so.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS).1.1. Complete graphic design for user account input web page 2. The project is on or under budget. and 4. 51 4. When dividing a project into tasks. All projects come in on time. For example. 3. Approve graphic design for user account input web page 4. Review graphic design for user account input web page 3. People receive motivation and information necessary to do their jobs.4. • Build the user account input web page is a much better task division than 1. Definition 4. dividing a project into more and more detailed components. 2. a web page takes about a day to build for an experienced team. Approve software architecture for user account input web page functionality .

p. you should also take note of time and cost estimates given by your technical staff. Major tasks in the project 3. 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 confirmation page functionality 9. fill hundreds if not thousands of pages. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP.1. which we will discuss next in section 4. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Subtasks in major tasks 4. Project 2.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.1. They will be useful for project scheduling. Identify precedence relationships among activities 3. Write software for user account input web page functionality 8. Encourage realistic time and cost estimates for each activity . Scheduling serves to 1. PROJECT MANAGEMENT 7. Activities (also known as “work packages”) to be completed Side Note 4. Side Note 4. At the time you are creating the work breakdown structure.52 CHAPTER 4.2 (Work Breakdown Structure) Present Heizer figure 3.3 (Reality Check: WBS) In reality.2.3 [1. Show the relationship between each activity to others and to the whole project 2. the work breakdown structure is not something you go to your office to do in isolation. The actual WBS for Windows XP would. of course. 4.

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

Control programs typically produce reports detailing 1. Variance reports. or ahead of schedule? • On any given date. is the project on schedule. is the money spent equal to.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity.3 Project Controlling Project control involves monitoring resources. and budgets of projects. Work status reports. which activities will delay the entire project if they are late? • Which are the noncritical activities – the ones that can run late without delaying the whole project’s completion? • What is the probability that the project will be completed by a specific date? • At any particular date. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. Functional cost and hour summaries. and 8. what is the best way to accomplish this goal at the least cost? 4. Definition 4. were developed in the 1950s for project control. less than. Time analysis reports. 4. 5. quality. Cost distribution tables. 7. Total program labor curves. PERT and CPM. 3. behind schedule.3.3. 6.54 CHAPTER 4. Cost breakdowns for each task. 2.1 PERT and CPM Two methods. 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. Raw material and expenditure forecasts. costs. . 4.

2. Gantt charts are the “go to” visualization method for even very complex projects.3. 53]. or the critical path.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. They both follow six steps: 1. Side Note 4.2 (Example: AON and AOA) Present Heizer’s figure 3. As the names describe.5 [1.2 Network Diagrams There are two approaches to visualizing activity networks: 1. See also definition 4. Develop the relationships among activities. p.4. Also.3. 3.2. Side Note 4.3.3. through the network. Draw the network connecting all of the activities. monitor. 5. Activity on Arrow (AOA). Define the project and prepare the WBS. Compute the longest time path. Definition 4. schedule. Use the network to help plan. AON associates the activity with the node whereas AOA associates the activity with the arrow.3.3. and ontrol the project. PROJECT CONTROLLING 55 Definition 4.3. 6. Moreover. . 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. 4. Activity on Node (AON) and 2. See also definition 4. Assign time and/or cost estimates to each activity. it will do for you automatically much of what we will go through manually in this class. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. Personally.3.3.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3 (Critical Path) The computed longest time path through a network. 4. in my experience.

LS = LF − Activity time. . 4. 54–55]. Definition 4. See also definition 4. – If an activity has multiple immediate predecessors. Follow with example 3 and figure 3. In other words. ES = max{EF of all immediate predecessors}.3.4. 56].6–3.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3.1 gives sufficient information to describe the network.1 (Critical Path Analysis) In project management. • Table 3. LF = min{LS of all immediate following activities}.9 [1. its LF equals its LS of the activity that immediately follows it. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. that is. We do this with a critical path analysis with involves a 2-step procedure.4 Determining the Project Schedule Once we have identified all of our activities. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. that is. we must use time estimates of each activity to determine the overall schedule for the project. EF = ES + Activity time. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. analysis used to determine the project schedule.3. that is.8 [1. its ES is the maximum of all EF values of its predecessors. PROJECT MANAGEMENT Side Note 4. their dependencies. pp. 1.3. – If an activity is an immediate predecessor to more than one activity. its LF is the minimum of all LS values of all activities that immediately follow it. 2. Backward Pass – Uses the latest finish time (LF) rule and latest start time (LS) rule to determine the latest times that activities can be completed.56 CHAPTER 4. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. p.

5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. the time associated with a single activity.5.4. the step that identifies all the earliest times that activities can be completed.3. Definition 4.1 When several noncritical activities appear successively in a path. activity F in sidenote 4. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. . E. and • Includes only critical activities (see sidenote 4. 57].2 (Total Slack) In project scheduling.3 [1. and H have no slack time and cannot be delayed without delaying the entire project. “Notation Used in Nodes for Forward and Backward Pass.1 (Slack Time) In project scheduling.2 (Forward Pass) In project management scheduling.1). p. the time shared among more than one activity. we may delay the project as a whole. p. 60].4. 61] based on table 3. the free time for an activity.4. Also notable is that if the total time of the project needs to be reduced. Slack time is just Slack = LS − ES or Slack = LF − EF .5.10 [1. if we delay activities B and D by one week each.5. or the amount of time an activity can be delayed without delaying the entire project. we cannot complete the project in 15 weeks.5. 2 For example. 4. in the example in sidenote 4. These are called critical activities. Definition 4.3 (Free Slack) In project scheduling. Definition 4. • Terminates at the last.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.4. If an activity2 does not impact the slack time of any other activity.3 and Heizer figure 3.” Then complete Heizer example 7 figure 3. C.1. they share total slack. p.4. 1 For example. Note that activities A. the time devoted to one of these activities must also be reduced. it is said to have free slack.13 [1.4. Note also that if we delay each activity by the amount of slack that activity has. The critical path is one that • Begins at the first activity in the project. G.1. Side Note 4.

In PERT.6. the most probable activity completion time that could be obtained in a PERT network. the “best” activity completion time that could be obtained in a PERT network.3. See also definitions 4. The usual definition calls these alpha and beta. Definition 4. Definition 4.3 (Most Likely Time) In project scheduling.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. See also definitions 4. Definition 4. PROJECT MANAGEMENT 4. Most likely time – The most realistic estimate of the time required to complete an activity. which are labeled according to one of two notational conventions. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. the time required to complete an activity is often uncertain due to supply problems. etc..1 (Optimistic Time) In project scheduling.1 and 4.2. the project manager pulls the number “out of the air” based on their experience managing related activities. technical considerations that were unknown at the time the project schedule was drawn up.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.3. in most cases. However. Effectively. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. See also definitions 4.6. Definition 4. The beta distribution is used as a prior distribution for binomial proportions in .6.58 CHAPTER 4.6. three time estimates are used: 1.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.2 and 4.1 and 4.6. we do not.6. unexpected complexities.6. Beta distributions have two free parameters.6. and the other uses β = β − 1 and α = α − 1 .6. In reality.6.6.2 (Pessimistic Time) In project scheduling. Side Note 4. the “worst” activity completion time that could be obtained in a PERT network.

78 weeks. The variance of the activity time is Variance = [(b − a)/6]2 .4. p. and pessimistic times of 1. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.1) where B(p. q) = (4. most likely.html http://mathworld.4.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1. 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. The above plots are for various values of (α.com/BetaFunction. and .78 6 6 36 7 4 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. and 7. Side Note 4. 2.wolfram. and 9 weeks. 2007. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(]. and pessimistic times of 1.β) with α = 1 and β ranging from 0. 4. 8 1.1 Probability of Project Completion If we assume that 1.3 The domain is [0. 63] for activity F based on optimistic.6. 62]. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. Total project completion times follow a normal probability distribution and 2.html.25 to 3.wolfram.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. 4.00. 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. Activity times are statistically independent 3 Source: http://mathworld. February 21.00 week.6.6. 4 See definition 4. β) Γ(α)Γ(β) P (x) = (4. p. most likely.6. The expected activity time for activity F is 3 weeks5 and the variance is 1.

definition 4.6.” Review Heizer example 10 [1. 65] and figure 3.6. See definition 4.60 CHAPTER 4.6.6 (Standard Deviation) The standard deviation is the square root of the variance. See also 4. A2– A3] “Normal Curve weeks approximately 16% of the time. and within 3 standard deviations approximately (Example: Project Variance) Review Heizer example 9 [1.html.6. Note that the standard deviation of 1. p.4 (Using the Normal Table) Pass out Heizer Appendix I [1. 64]. 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. 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. pp.6. Side Note 4. the population variance var(X).3) Definition 4.1.6. p. Side Note 4. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4.6. Definition 4.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. commonly also N written σ 2 . see http://mathworld.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.6. .7% of the time. 9 For 10 See more information.10 Determining Project Completion Time for a Given Confidence Interval A common question is.76 weeks implies that the project will exceed the expected completion time by more than 1.6. two standard deviations approximately 95% of the time.

Assuming linear costs. When crashing a project.7.7.1. it may result in the project being delayed. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. See definition 4.7. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Since activity completion times are typically shortened by adding resources.7. Step 1 – Compute the crash cost per week.1. if certain activities off the critical path take the pessimistic time estimate or more to complete. Definition 4.2 (Crash Time) In project management. permissible and realistic. in fact. • The shortened durations will actually enable us to finish the project on time. See definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. Crashing a project involves a four step process: 1.7. .3 (Crash Cost) In project management. we need to ensure • The amount by which an activity is crashed is.7. crash time is the shortest duration of an activity. 4. Project crashing is the name given to the process of rushing a project to completion. you will doubtless experience one or both of these eventualities many times in your career. the crash cost is typically higher than the normal cost.4.1 (Crashing) In project management. we want to do so in the least cost mannger possible.11 Definition 4. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.4) 11 Since crashing a project often involves adding additional resources to activities. Definition 4. and if you become a project manager. and • The total cost of crashing is as small as possible. crash cost is the cost required to complete an activity in the shortest time possible.

PROJECT MANAGEMENT 2.19. If you accept the challenge and try to rush the project to please upper management. select one activity from each such that • Each selected activity can still be crashed and • The total crash cost per period of all selected activities is smallest. If you find yourself needing to rush a project. 4. At times this may be politically infeasible. 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.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. stop. Then crash each activity by one period.5 and figures 3.7. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. Step 3 – If there is only one critical path.2 (Example: Crashing a Project) Present Heizer example 12 [1. If the due date has been reached. If there is more than one critical path. Note that one activity may be on several critical paths. 67–69] including table 3. • Advantages – Especially useful for large projects .18–3. you should be very wary of such pressure.7. go to step 2. the advice given in this section should be helpful. 4.1 (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. 3. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. Step 4 – Update all activity times. Side Note 4. pp. Step 2 – Find the critical path(s) in the project network. Side Note 4. If not. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. As a project manager.62 CHAPTER 4. Crash this activity by one period.

7 [1. You may also refer to http://en.9 Using Microsoft Project for Managing Projects Present programs 3.1. independent. Information on Planner can be found at http://live. Information on dotProject can be found at 12 Recall sidenote 4. pp.7.1–3. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths. Information on Achievo can be found at http://www. including open source software that is free. it is relatively expensive and the features are so numerous and Noncritical paths should be closely monitored as well. There are a variety of alternatives.achievo. 70–74] with figures demonstrating MS Project functionality. Starkweather about his impression of various alternatives. However. 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. .org/Planner.gnome. Note that most project management textbooks refer to MS Project as the software of choice for project of project management software for a list of project management software or ask mediumsized projects.4.wikipedia. It is perhaps the most widely known and featureful project management software available.9.dotproject. 4. they are often overkill for small.


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

Cash budgeting. Capital expenditures. These concern rates of technological progress.1.66 – – – – Sales long-range forecasts. money supply.2 and 5. Definition 5. FORECASTING • Long-range forecasts – Generally more than 3 years. Decline. These may include inflation rates. planning indicators valuable in helping organizations prepare medium. Growth. Production planning and budgeting. and 4.4.1. Useful for – – – – Planning for new products. 2.1. Maturity. longer forecasts are needed. and other economic indicators. Introduction. Facility locations or expansion.4. 5.1.3 (Technological Forecasts) In operations management. In the first two stages. Product life cycles tend to follow four stages: 1.3 and 5. • Technological forecasts. Definition 5. . housing starts. long-term forecasts concerned with the rates of technological progress. Generally deals with more comprehensive issues than short-range forecasts. which impacts purchases of new plant and equipment as well as development of new products. See also definitions 5. CHAPTER 5.1 Types of Forecasts Organizations typically use • Economic forecasts. and • Demand forecasts. and Research and development. and Analyzing various operating plans. 3. See also definitions 5.2 (Economic Forecasts) In operations management.

and • Layoffs. 6. • Training. Make the forecast. • Loss of customers.4 (Demand Forecasts) In operations management.1.1. 4.3. 2. 5.2. and • Loss of market share.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. these drive a company’s production. Select the items to be forecasted. 2.5. projections of a company’s sales for each time period in the planning horizon. capacity. and scheduling decisions and serve as inputs to financial. . Also called sales forecasts.2 and 5. 5. and personnel planning.1. marketing. Validate and implement the results. Gather the data needed to make the forecast. 5. 7. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Determine the use of the forecast. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 3. See also definitions 5.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Select the forecasting models. Capacity – Underestimating demand can result in • Undependable delivery. Determine the time horizon of the forecast.1. 3.

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

– Sales force composite ∗ You would be surprised how accurate your sales force can be. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. and if they perceive there is an incentive to exaggerate. and · Respondents. ∗ Moving averages · Simple. the more likely it is your results will be accurate. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. say. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. · Staff personnel. useful method if we can assume that market demands will stay fairly steady over time. the naive approach.3.9. or other incentives to over or understate demand. be sure that the sales force is clear that their incentive is to be as accurate as possible. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. for example. Moving averages require more past data to work with than. Moving averages cannot pick out trends very well. · Useful as a starting point or sanity check for more sophisticated methods. they will do so. . · See definition 5.3. · See definition 5. · There are three problems with moving averages 1.3. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. ∗ However. · Requires less past data than moving averages. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.8. ∗ The more independent your decision makers are from economic. Sales people typically respond to incentives. political. 3. · The simplest and easiest way to estimate demand. 2.5.

3.3. personal experiences.6. a forecasting technique using a group process that allows experts to make forecasts. and 5.4. 5. and 5. (Jury of Executive Opinion) In operations management. emotions.6.5. 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.3.4 (Delphi Method) In operations management.3.5.3. and 5.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. and value system.3.3.5. 5.3. . a forecasting technique based on salespersons estimates of expected sales. See also definition 5.6 (Consumer Market Survey) In operations management.70 CHAPTER 5. 5. Definition (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. Definition 5.4. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. See also definitions Definition 5. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. See also definitions 5.1 Qualitative Forecasting Methods Definition 5.3. See also definitions 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. See also definition 5. · See definition 5.1. and 5.5 (Sales Force Composite) In operations management.3. See also definitions 5.3. Definition 5.3.6.

Definition 5.7. • Simple Moving Average – Mathematically. Higher values give more weight to recent data.3) The smoothing constant. and 5.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.2) See also definition 5.3.1) n • Weighted Moving Average – Mathematically.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast. Moving averages can be either simple or weighted.05 to 0. FORECASTING APPROACHES 71 5.3.5. generally ranges from 0.3. Mathematically. 5. Definition 5. See also definition 5.2 Quantitative Forecasting Methods Definition 5.3. See also definitions 5.3. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.7. a simple moving average is given by demand in previous n periods Moving average = (5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. and are appropriate to use when the underlying average . α.5.11. Definition 5. That is. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.3. 5.3.3.

exponential smoothing is equivalent to naive forecasting. it is good practice to compare the estimated value with the actual value as actual values become available. and 5.15.13. 5. Mean absolute deviation (MAD).3. 1 See |actual − forecast| n (5.3. (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. Mean absolute percent error (MAPE).3.3. Definition 5.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. See also definition 5. .72 CHAPTER 5. See also definition 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. Definition 5.3.4) definition 5.3.7. FORECASTING is likely to change. such as the mean absolute deviation (see definition 5. 5.3.12).3. When α = 1.13).3 Measuring Forecast Error Once a forecast is made.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. 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. Mean squared error (MSE).7.12. and are appropriate to use when the underlying average is relatively stable. 2.14. Three popular measures are 1.3. Definition 5.0. while lower values give more weight to past data.

Mathematically. Mathematically.5) |actuali − forecasti |/actuali n (5.7) or F ITt = Ft + Tt (5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5. MSE is given by MSE = See also definition 5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.6) 5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.3. MAPE is given by MAPE = See also definition 5.12. Definition 5.8) With smoothing constants α for the average and β for the trend.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. 100 n i=1 (forecast errors)2 n (5.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) ( .3.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. expressed as a percent of actual values. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. FORECASTING APPROACHES 73 Definition 5.5.

Tt with equation 5.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5.10. 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. the emponentially smoothed forecast for period t using equation 5. 3. 2.12.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. F ITt . 1. Compute the smoothed trend. by the formula F ITt = Ft + Tt . It is also commonly called linear regression analysis. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case.74 or CHAPTER 5. Ordinary Least Squares Regression analysis is also useful for predicting trends. Compute Ft .14) . Calculate the forecast including trend. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.

This provides the seasonal forecast. Recall that the equation 5. we will examine one model. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. 5. to account for seasonal changes in demand in our forecasting. Estimate next year’s total annual demand. the multiplicative seasonal model. demand is seasonal. ¯ x The least squares method has several drawbacks. during the summer months when it is common to take a vacation. The first step is to calculate the seasonal forecast.3. Most businesses experience a surge in sales around Christmas. We do that with a 5-step process. 3. then multiply it by the seasonal index for that month. 2. Divide this estimate of total annual demand by the number of seasons. Compute a seasonal index for each season by dividing the historical demand by average demand. 5. In the U. Deviations around the least squares line are assumed to be random. the more uncertain it is. Find the average historical demand for each season.5. 1.5 Seasonal Variations in Data In most businesses. consumers often make fewer purchases of durable goods. 2.3. Although there are many methods to accomodate seasonal demand. 1. such as cars and washing machines. 3. Definition 5. Compute the average demand over all months.S. 4.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events.13 assumes a linear relationship.3. .. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯.

but x will be something other than time. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.x = (5. pp.15) Side Note 5.1 (Example: Using OLS) Present Heizer example 12 [1. if you are uncertain about predictions of x. Note that making predictions of future demand involves also making predictions about the independent variable x. 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.. However. is given by (y − yc )2 n−2 Sy.. FORECASTING 5.16 is y2 − a y − b n−2 xy Sy.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 We will use the same technique.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.3. whatever uncertainties you may have transfer to your predicition of y.76 CHAPTER 5. mathematically. It is also called the standard deviation of the regression and. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. If there are published estimates you can cite (e.g.. 106– 107]. average local salary) (5.17) .g.x = (5.g. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.

It does not imply causation one way or the other.18) .” the AFL (American Football Conference) and the NFC (National Football Conference). Historically.3 and the U.” Side Note 5.S. Side Note 5. Dow Jones Industrial Average and Standard and Poor 500. or National Football League. 2007. Correlation Coefficients for Regression Lines Definition 5.8599.3. Definition 5. pp. but the relationship is coincidental. stock market. leading stock indexes.S.2 (Distribution About the Point Estimate) Present Heizer figure 4. 107]. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5.S.3. 108]. Since 1935. Certainly. Other interesting correlations that have been identified over the years include banana prices and U. “Distribution about the Point Estimate of $600 Million Payroll.S. the note in the margin accompanying Heizer example 14 [1. 4 Source: http://www. [1. 109].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.S.html?xid=sitecnn-partner.” Note that the regression assumes a standard normal distribution about the estimate. stock market prices as well as the winner of the Super Bowl. is monopolized by the NFL. stock markets.time.4 .3. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. have been correlated.10 [1.5. changes in skirt lengths don’t cause stock market prices to rise and vice versa.1594488. which is divided into two “conferences. in all but one Year of the Pig. FORECASTING APPROACHES 77 Side Note 5.3. February 28. Correlation) Correlation merely means that the values of two variables are historically related. “Four Values of the Correlation Coefficient.3.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. the average length of a woman’s skirt and stock market prices in the U.3.3. The correlation coefficient of variables x and y is given by r= See also definition 5. Even the Year of the Pig correlates strongly with the U. p. nor does it imply that they will continue to be related. football in the U.S.00.S.3 (Examples of Correlation Coefficients) Present Heizer figure 4. a football game played between two football conferences in the U.4 (Causation vs.2 with stock prices generally rising as skirts rise. has risen. the U.

b1 . you would use statistics software to calculate these values. In practice.3. often the most difficult part of building a multiple regression model is to pick the independent variables.) It measures the percent of variation in the dependent variable (y) explained by the regression equation. = the dependent variable (e. . x2 . 110]. b2 . (See definition 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable. . .3. Adding additional independent variables as predictors. . we discussed a means by which we can attempt to predict the value of one variable using the value of another.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .3. . results in additional predictive accuracy as measured by r2 . .18 and Heizer example 15 [1.. p.g. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. if they are indeed related to the dependent variable. .17.3. b1 . in a multiple regression analysis involves a complex formula which is beyond the scope of this class. p. 110]. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.78 CHAPTER 5. Side Note 5.” As the sidebar points out. . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. etc. It is commonly simply called “R squared.5 Definition 5. 5 See definition 5.19 (Multiple Regression) A causal forecasting method with more than one independent variable.3.19) Determining the values of a.15 is given by y = a + b1 x1 + b2 x2 + .6. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. The multiple regression equivalent of equation 5. b 2 . .” For example.

4.6 One M AD is equivalent to 0. and within 4 M ADs about 99.forecast| n where M AD = (5.2. three M ADs about 98% of the time. MONITORING AND CONTROLLING FORECASTS 79 5.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.4.1 (A Plot of Tracking Signals) Review Heizer figure 4.4. These limits are typically based on M ADs.1.6 standard deviations.20) A good tracking signal has about as much positive as negative error. 6 Recall definition 4. which correspond roughly to standard deviations. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).11 [1. Definition 5. Side Note 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. 111].6. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.4.8 standard deviations. three M ADs to 2. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. and 4 M ADs to 3.6. This means that the observed value should be within 2 M ADs abut 89% of the time. . one of the most common problems with forecasting is a lack of follow-up. In other words. Tracking signals are typically used monitor forecasts. p.4 standard deviations. Definition 5. The tracking signals should also be compared as they are generated against limits.5.2 standard deviations. though large errors may be a problem as well even if the positive and negative errors balance. the forecasting methodology needs to be modified.9% of the time. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. two M ADs to 1. If the tracking signals violate upper or lower limits.

4. there has been much criticism of the approach to using models based on thier fit to the data. which selects a model based on goodness-of-fit to a data set.80 CHAPTER 5. α in 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. FORECASTING 5. Note that even with computer monitoring. changes need to be check with human eyeballs to ensure that the adjustments make sense.3. Side Note 5. Definition 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.2 Focus Forecasting Focus forecasting. “Summary of Forecasting Formulas. However. Definition 5. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.g.2 [1.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. you should be aware of the criticism of focus forecasting. you must make your own decision as to how you select the forecasting models that you use. 5.. 2. 114].2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4.10) is automatically changed to keep errors to a minimum. In your career. Side Note 5. is based on two principles: 1.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.4. p. Sophisticated forecasting models are not always better than simple ones.4.4.” .4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.4. There is no single technique that should be used for all products or services.

pp. and • The organization’s capabilities. 2 Recall sidenote 2. is a service. • Product life cycle. 81 . the word “product” will refer to both goods and services. They also use just-in-time production techniques. definition. as an intangible. pp.Chapter 6 Design of Goods and Services Many companies derive a competitive advantage by using product strategies to efficiently produce a variety of products and/or services to meet changing customer demand or target specific consumer niches. which. insurance companies often refer to their policies.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.128] • Investment and cash flow. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches.1 Side Note 6.0. For example. Definition 6.5 (Product Decision) The selection. Product strategy2 defines the breadth of the product line and links product decisions to [1.1 . 124. 122–123]. 1 In this chapter. time permitting. and design of products. Referring to services as products is common in the service industry.2. • Market share and dynamics.0. which will be discussed in detail later in the semester. as products.

so high volume.1. YouTube videos). 3. Maturity. and 4. • Decline phase – Investment needs to be minimized and resources need to be redeployed.g. or even decades.1. • Introductory phase – In the introductory phase. Introduction. Growth. Product strategy involves determining the best strategy for each product based on its position in the life cycle. Decline. low-cost.82 CHAPTER 6. – Process modification and enhancement. restaurants or nightclubs). • Growth phase – Effective capacity forecasting is necessary.1 Product Life Cycles Product life cycles can be divided into four phases: 1. Life cycles can be in the days or weeks (e. 6.. products expenses are often high for – Research and development. • Maturity phase – Competitors have entered or are entering the market. .2 Life Cycle and Strategy Strategies change as products move through their life cycle. often ruthlessly..g. and – Supplier development. and innovative production is appropriate. clothing fashions). DESIGN OF GOODS AND SERVICES 6. 2.1 Goods and Services Selection Product decisions focus on creating a competitive advantage via • Differentiation – Offering distinctly unique or high-quality products • Low cost – Providing quality goods and services at a lower cost than competitors • Rapid response – Executing rapid design and product development to respond to changing consumer demand 6. months (e. years (e..g.

6.1 (Example: Brainstorming) Lead the class in a brainstorming session. as well as the total annual dollar contribution of the product.2 Generating New Products Most products have a limited life cycle. it must regularly redesign existing products or bring new products to market. • Technological change often drives product innovation.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.4 Side Note 6.3 • Political and legal change can also bring about business opportunities.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.1. such as consumer incomes.6. example.1. and if a company is to survive. • Economic factors. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. 4 For 3 For .2. GENERATING NEW PRODUCTS 83 6. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. Definition 6. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted. example.2. the development of cellular telephone technology or the internet.500 or 100.2. Ideas are not reviewed until after the brainstorming session. 6. Definition 6.2.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. are tied to product demand.000 yuan.3 Product-by-Value Analysis For firms with many products. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. • Sociological and demographic change is also tied to product demand. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.

3. DESIGN OF GOODS AND SERVICES For example. 128].3.3.84 CHAPTER 6. p.3. market dynamics.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. Definition 6. . 128]. Side Note 6. Definition 6.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants. Each stage should have an accompanying review to determine whether to progress or not.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.2 [1. Side Note 6. The house of quality is a graphic technique for defining the relationship between customer desires and a product. 6. Determines what will satisfy the customer and 2. 129]. 6. the product life cycle.1 (Product Development Stages) Present Heizer figure 5. DuPont estimates that it takes 250 ideas to yield one marketable product [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.3.3 [1. p. Translates customer desires into a product design. and the organization’s capabilities.2. p. Many successful companies rely on sales from products introduced within the past five years.3 6. 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. An organization is divided into departments. • Fixed duties exist.2.2. See http://www. identify the rows of the house in sidenote 6. create the columns of the house in sidenote 6. Identify how the good or service satisfies customer wants. 1. Product development is done by teams.3 Organizing for Product Development In the West. Building the house of quality involves six steps: Identify relationships between the firm’s hows. p. Relate customer wants to product hows. PRODUCT DEVELOPMENT 85 Side Note 6. 2. Note that it is not free or open source. and production departments.7 4. Evaluate competing for more information. a research & development. Identify customer wants.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. bureaucratic companies and organizations. e.qfdcapture. manufacturing engineering..9 6.3. In other words.3. • Perhaps the most popular approach in the U. 10 The right-hand columns of the house in sidenote 6. there are three popular methods by which organizations undertake product development. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. 3. 130].. as was the software described in section 4. with product features.2.3. . 6.9.6 3. design engineering. • Effective communication and coordination between separate departments can be problematic. 7 In other words. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.10 Side Note 6.S. 8 These are given on the roof of the house in sidenote 6.8 5.3. 2.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.” 6 For example.g.2 (Example: House of Quality) Present Heizer example 1 [1.3. which can be an advantage.2. Develop importance ratings. • More common in large.

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

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


Part II Entrepreneurship 89 .


you will have to decide that you have done as much as you can do and simply take action. . but the humor in the statement lay in the fact that there is some truth to it. Realism) Most people perceive those who start businesses as risk-takers. ultimately. but also realistic. fear of failure and other insecurities dissuade most people from ever starting a business. “Every journey .7 (Confidence vs. starting a business simply involves taking the first step.” At its core. you should be confident.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. See also sidenote 7. must begin with a single step. difficult undertaking. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge.” He was joking. who has started two businesses and been CEO of three startups once told me. While it is important to be realistic about risks when starting a business. people who can tolerate a high degree of risk.0. taking that first step can be extremely daunting. In fact. Side Note 7.6 (Business Failures) A friend and former colleague. then taking another step.0. Matt McAdams.” However. However. As a Chinese philosopher once said. that is. then another. doing it is simple.0. Side Note 7.7. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . . “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. Most businesses fail within the first 18 months. If you start a small business.

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

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

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

When setting goals.” you may not want to start a business that focuses on customer relationships. or 20 years to accomplish.000 yuan by July 1” is a much better goal than “raise money. Consider at least a five-year time horizon. SETTING GOALS 95 If you are not a “people person. • Set both short-term goals and long-term goals. ask other entrepreneurs. Like parents. such as sales. Move on to larger goals once the small goals have been met. 7. Side Note 7.3. When I talk to those who I know who have started businesses. If you talk to an entrepreneur who has not been successful.000 yuan and you’ve never had a job before. it is common to exchange “war stories” about the difficult times and sacrifices. – Long-term goals are those that may take 5. although the successful ones generally view their experiences as positive on the whole.3 Setting Goals With any major endeavor. “Achieve financial independence” is much better than “pay the bills. When setting goals. If your goal is to raise 1.1 (What’s It Really Like?) If you wonder what running a business is really like. . • Be specific.7. – Short-term goals are those that can be accomplished within a year. try to figure out why they were not successful. 10. • Analyze Your Professional Attributes – Be aware of where you need help. Learning from failure is as important. ask yourself the following questions: • Income – How much do you want to earn. – Start with small goals. marketing.3. it helps to set goals.” • Be realistic. even the successful ones will probably focus on the negative. “Raise 100.000. 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.” • Be optimistic. if not more important. your goal may not be realistic. than learning from success. and administration. advertising.

Acknowledge this fact and factor it into your decisionmaking. How much is your ego worth? Side Note 7. The reasons given for adding or subtracting points are as interesting as the ultimate score.96 CHAPTER 7. pp.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. Have the class write down their answers and evaluate their own EQ. 18–20]. Eliminate question 1 and substract one point from the scoring given on p. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. – Hours of work. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel. and – Investment of personal assets. 20. 21]. Side Note 7. Many people want to start their own business for ego gratification.3. – Geographic location. . pp.3.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely.

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

28–29].. • They require business relationships that the entrepreneur does not have. It sounds silly. • The ideas are easily copied and would be quickly appropriated by more able competitors. However. • 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. most ideas are not feasible because • They would not be profitable enough. • The business would involve too much risk. hollow tube. but it is a major complaint for female rock climbers. Side Note 8. pp. business ideas come at a rapid rate.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. people have to remove nose piercings for work or social occasions. Often times. etc. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself.0. • A nose piercing that consists of a small..5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. often one or more a day. The tube could be made unobtrusive enough that it would not need to be removed for work. Those with nose piercings would not need to remove the piercing and risk it closing.98 CHAPTER 8. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. however. Side Note 8.0. I continue to generate business ideas as a matter of habit. . • Etc. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. • They require expertise that the entrepreneur does not have. • They require more financing than the entrepreneur has access to.

you should have “thick skin. while you should listen to criticism that others give.1. thinking that if he did not succeed after a couple of years. Warnings about risk are perhaps the criticism you should consider most carefully. Now What? The number one trait needed by successful entrepreneurs is perseverance. . Have students come up with examples of products that meet various criteria on the checklist.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. Side Note 8. A well-known phrase in English. home. 8. You should be realistic about risks. that they will never make it. 2 http://www. His sales are now in the millions of dollars per year and the business is very profitable.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. Entrepreneurs are often told their idea is flawed. p. Have students fill out the form on their own time. in the wake of 9/ People thought he was going nowhere and generally dimissed his business. used as the title of at least 12 movies and television shows.1.1. such as your family. or are otherwise discouraged.8.” That is. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. making just enough to get by but not much more. or health. he would never succeed.1 You’ve Got an Idea. to be truly self-motivated and persistent in the way you need to succeed.1. it is too risky. He ran the business as a one-man operation for years. February 17.2 is. the business took off. “Never say die. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your YOU’VE GOT AN IDEA. p. 2007. 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. And you should not risk anything you can’t afford to lose.” Side Note 8. Side Note 8.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. computer-controlled security cameras. 35]. After all. However. you will be spending years of your life trying to make the idea work. you should not let it dissuade you. 33]. Finally.


See also 9.0.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. your next step is to do some market research.0.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. 101 .1. See also 9. Consumers and 2.Chapter 9 Defining Your Market After coming up with your idea. When trying to identify your niche market.” or business-to-business ventures.0.” or business-to-consumer ventures.2. 9. 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.0. Definition 9. There are two broad categories of markets: 1. go through the following 7 steps: 1.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. Businesses. Definition 9. but you should try to target your market as specifically as possible.

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

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

” [4.1. Falkenstein states.2 [1. p. Falkenstein1 advises that you regularly reevaluate your niche. p. DEFINING YOUR MARKET 9. 79] 9. • Convey the essence of your business’s goals and philosophies. Side Note 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. a few sentences at most. “Creating a niche is the difference between being in business and not being in business. Every six months or so.2 Redefining and Expanding Your Niche Lynda C. you should.3 The Mission Statement Once you have a niche. 28] which includes mission statements for three multinational companies: 1 See section 9.104 CHAPTER 9. The mission statement should • Be succinct.1 (Mission Statements for Three Organizations) Review Heizer figure 2.3. create a mission statement. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.

The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. THE MISSION STATEMENT 1. competitively superior. 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. and nurturing work environment while ensuring our long-term success.3. 2.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We will be helpful. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. We are committed to being an important. We will produce outstanding financial returns by providing totally reliable. . 105 Side Note 9. courteous. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. time-certain delivery. 3.3.9. FedEx FedEx is committed to our People-Service-Profit philosophy. Equally important. A complete record of each shipment and delivery will be presented with our request for payment. 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. healthy. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. and professional to each other and the public. global air-ground transportation of high-priority goods and documents that require rapid. Our mission consists of 3 interrelated parts: • Product Mission – To make. We will strive to have a completely satisfied customer at the end of each transaction.

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

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


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




What Am I Researching, Exactly?

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




Research Methods

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


Sources of Secondary Research

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

definition 10.2.1.


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

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

” [4. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.10. . pp.2.2. RESEARCH METHODS 113 Side Note 10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.


and projected results of the new business. Your business plan should list obstacles that may arise and what will be done to address them. 5. It must describe current status. Lack of demonstrated experience – Entrepreneurs must give evidence of personal experience or experience on their team in both the business and technical skills that are necessary for a successful venture. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. 2. 4. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. Set up a timetable with specific steps to be accomplished in a specific period. Definition 11.4 (Business Plan) A business plan is a written document that details a proposed venture.0. Those who provide financing are aware of these pitfalls. Every aspect of the venture should be covered. including 115 . 3. expected needs.Chapter 11 The Business Plan The business plan is an essential document not only to seek funding but to provide a sanity check and to give you a framework for developing your business. and so should you be. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. 1. In terms of sanity checking. No realistic goals – Your business plan should help you ascertain whether your goals are realistic.

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

– Binding and printing should not be sloppy. p.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person..e. other financing professionals may spend more time analyzing the details of the plan. 11. but should not be too lavish. 4. Note that less than a minute on average is devoted to each step. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly.1.2 5. Kuratko suggests the following [3. If you cannot impress the financier with these three steps. 2 Do not underestimate the importance of this step. 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.11. you will not even get your foot in the door and be invited to present your plan to investors. 6. but not too good. Read the latest balance sheet. Establish the unique details of this venture. 3. 1. p.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. 300]. the trash can. pretentious. Determine the financial structure of the plan. . or spendthrift. 2. While the initial read-through might be only a five-minute perusal. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Read the plan over casually. including debt or equity financing required. 301]: • Appearance – It should look good. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. They will want to see something that reflects that you are neat. Determine the characteristics of the venture and its industry. not ostentatious. thorough and careful. i. Determine the quality of the entrepreneurs.1. bear in mind that once the plan is advanced to the next stage of financing.

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

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

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

(c) A cash-flow statement.2.2. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. . Unexpected competitions. Side Note 11. Receipt of first orders. detailing projected profits and losses.2. Completion of such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. Signing up distributors and dealers. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. 11. 9. and Payment of first accounts receivable. as opposed to actual. Design or research difficulties. Difficulty purchasing parts or materials.1 (Pro Forma) A latin term that means projected. detailing projected inflows and outflows. Hiring of sales representatives. a balance sheet containing projected balances is called a pro forma balance sheet. current ratios. Costs exceeding estimates. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors.. Appendix – If there are documents. inventory turnover. of the risks than you are. Critical-Risks Segment – Discuss business risks and the ways you might address them. Completion of design and development. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Ordering production quantities of materials. (b) An income statement. First sales and first deliveries. Definition 11. which investors will use to estimate debt/equity Discuss the growth of Active. working capital. include an appendix. or more aware. For example. Risks might include • • • • • Negative industry trends.11. Try to be honest and realistic.2 (The Growth of Active. 8. These might include • • • • • • • • • • Incorporation of the new venture. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. etc. Your investors are probably as aware. Product display at trade shows.


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

In retrospect. is. Most graduates get between 5 and 15 interviews when they graduate. Bring at least twice as many as you expect there to be people in the room. Most Ph. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. You don’t want to try to figure out other people’s equipment.2.2. I don’t think it was quite right until somewhere between the 8th and 10th time.124 CHAPTER 12.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. PRESENTING THE PLAN times. 44] Side Note 12. By the time I gave my job talk to my eventual employer.”2 [2. • Bring a backup thumb drive with your presentation on it. 12. 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. of course.1 (The Job Talk) Every Ph. 12. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. p. Lexecon.D. Adobe Reader.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. • Bring your own laptop.” 3 Color copies! . candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. and even if you can figure it out. Guy Kawasaki likes to tell a different version of an old joke. and you don’t want something as silly as a burned-out light bulb to cost you an investor. • Test the equipment the day before. 2 This originally comes from an American classic. Post a copy of your presentation in a secure location on your homepage just in case. they may have another version of PowerPoint.D. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out.2. There will always be glitches. I had given it over a dozen times. The original joke goes. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. the lawyer joke. • Bring paper copies3 of your presentation in case all else fails. “How can you tell when a lawyer is lying?” The answer. “His lips are moving.

Stop when it goes off. It is easy for things to get lost in the heat of the moment. ask yourself after every statement you make. 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. 12.3 After the Presentation Each presentation will be different. AFTER THE PRESENTATION 125 Side Note 12. p. If they cannot explain it clearly. At my company in Chicago. so write things down to make sure you don’t forget. 45].4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation.2.3. “So what?” If you cannot answer this question simply and easily. Give your presentation to friends or family. 12. I always bring a pen and paper to meetings.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. Guy Kawasaki recommends you set a timer [2. where some of the smartest people in the world worked. Many people feel as if taking notes makes them look stupid. They may ask you something that makes you want to change your presentation. and each investor will respond differently.6 So What? When you are planning your presentation. Everyone. you are not presenting it well. and although you go into each presentation . everyone brought a pen and paper. you need to change or eliminate the statement. Ask them what your company will do. 12.2. • Your audience may ask you several questions at once. Much of the material required use of the internet. In general. • Taking notes also makes you look conscientious.5 Take Notes Have a pen and paper ready and take notes during the pitch. They may ask you something you want to respond to in an e-mail later. 12. it is quite the opposite.2.2. You should be prepared for the unexpected.12. but in reality.

Each negative comment gives you an opportunity to change an investor’s opinion. PRESENTING THE PLAN with only success on your mind.5 [3. Be prepared for rejection and do not consider it the end of the road.” .126 CHAPTER 12. Remember that persistence is the most important character trait of entrepreneurs. Side Note 12.3. p. 321]: “What to do when a venture capitalist turns you down: Ten questions.1 (What to Do When You’re Turned Down) Present Kuratko table 10. you should also realize that most most comments will be negative and most presentations are rejected. Each time your are rejected improves your future opportunities.

Chapter 13

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




Inventory and Cash Flow

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


Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems


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


Computerized Inventory Control

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

section 13.3 below.

3 (Count Cycle) In inventory management. be sure it’s not easy to “hack” the system. 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.2 (Order Cycle) In inventory management. if you perform an inventory count four times a year. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons. you have “turned over” your inventory. Definition 13. . Definition 13. a high inventory turnover is a mark of a well-managed inventory system. To improve efficiency of inventory control.1 Inventory Turnover Typically. Definition 13.4 (Delivery Cycle) In inventory management.130 • Maintain a sales history. • Updating product information – At the time a sale is entered. For example. these systems should automatically update inventory and accounting records.1 (Turnover) When you have replaced 100% of your original inventory. the order cycle is the amount of time it takes to process paperwork and place orders. INVENTORY CONTROL When considering the purchase of a POS. such as for volume discounts for preferred customers. 13. your count cycle is 12 weeks.3.3. work with suppliers to improve delivery times and count inventory more often. the delivery cycle is the amount of time between placing an order and receiving it.3. CHAPTER 13.3. • Security – To prevent theft. the count cycle is the amount of time between counting inventory. and • Improve pricing accuracy.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. Definition 13.

first out) assumes that you sell the most recently purchased inventory first.. 13. First Out)) FIFO (first in. LIFO and FIFO are two accounting methods used to do this. The author is unfamiliar with Chinese tax codes. After you have been in business your inventory control system should give you a better idea of stocking levels. follow the recommendation of your accountant. 13. 13.2. Definition 13. . and delivery cycle.3.S. you must estimate your inventory value when you file your taxes.4. order cycle. Calculate your sales per square meter once per month. which may result in higher taxes. and but you should at least know about LIFO and FIFO.1 (LIFO (Last In. the needs period is the sum of the count cycle. In deciding which to use.3. first out) assumes that you sell the least recently purchased inventory first.3 See also 13.1 Buying Inventory In the process of putting together your business plan. If there is inflation. it values your remaining inventory based on the prices of the most recently purchased items. The author is unfamiliar with Chinese tax codes.S.2.4. Definition 13.5 (Needs Period) In inventory management. least this is true in the U. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. First Out)) LIFO (last in.2 See also 13. In the U. 2 At 3 At least this is true in the U.2 (FIFO (First In.4. You should know how many sales per square meter per year you need to survive. Many businesses also measure turnover by measuring sales per square foot (or square meter). INVENTORY ACCOUNTING 131 Definition 13.3.4. which allows you to pay less taxes on your inventory.13. See definitions 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.1.S.3. If there is inflation. In other words.4 Inventory Accounting Your accountant will typically handle inventory accounting.4. it values your remaining inventory based on the prices of the least recently purchased items.

Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. – 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. Distributors – Also known as wholesalers. “Be open. Independent craftspeople 4. Manufacturers – Note that some manufacturers refuse to fill small orders. Their prices are higher than a manufacturers. three or four months. 2.132 CHAPTER 13. 13.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period.1 Dealing with Suppliers The most important thing about a supplier is reliability. INVENTORY CONTROL Definition 13. Rieva Lesonsky. 3. • Some suppliers demand a minimum number of items per order.actual inventory .” . Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands.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. says. usually one. courteous and firm with your suppliers. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . brokers or jobbers.5. author of Start Your Own Business. and they will respond in kind.4. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Import sources – They operate like domestic wholesalers. 13.

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

. 6 Source: http://www. May 19. May 19.134 CHAPTER 13. 2007.roadway.b.html. Seattle” to indicate that an item being shipped from Seattle is free on board.5.7 4 Source: 5 Source: http://www. 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.epoi. 5 FOB Destination changes the location where title and risk pass.5.5. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery efg.)) Free on board.wikipedia. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.5.2. The FOB term requires the seller to clear the goods for export. 7 Source: http://en. Destination)) Free on board destination. 5. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? Definition 13. Definition 13. This differs from a forward order where stock is available but delivery is postponed for other reasons. Definition 13.3.6 See also definition 13. May 19. Be aware of your supplier’s priorities. it may be worthwhile to cancel backorders and bundle them with a subsequent (FOB Destination (or f. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. May 19. 2007.abcsmallbiz.html.2 (FOB (or f. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.html. Specify a cancellation date on your order forms. 2007. 2007. INVENTORY CONTROL • Depending on whether the supplier pays frieght.4 Colloquially.o. As opposed to FOB.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.5. Under this arrangement. people often say something like “f.b. 3.b. See also definition 13.

• Part-time employees.0. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). besides being bad for business.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. a bad hire. they are often emotionally draining for the manager as well as the employee involved. 135 . Side Note 14. The benefits of finding the right person for a job cannot be overstated. can take a tremendous personal toll on the entrepreneur as he or she is faced with the prospect of stressful personnel management duties such firing the employee. Side Note 14.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4.2 (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.0. • Temporary employees (temps). While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. p. 337]. On the other hand. and • Independent contractors.

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

You may actually be doing your employee a disservice by inflating their job title.1) and should include the personal requirements expected of an employee [4. and • Any occupational hazards.1. Like a job description.1.1. • The position of that employee in the corporate heirarchy.1.14. Side Note 14. then they go on to a Director position at another company. and • A summary description of the position. • If you give someone an inflated job title but do not offer a salary commensurate with the title. . 339]. • Benefits. you may find it difficult to give them a promotion later. It also includes • Any educational requirements. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. If you hire someone at the highest level of their competency. you hire someone as Director who is not qualified to be a director. • Specialized skills or knowledge. HOW TO HIRE 137 • There is little room for advancement. p.1. • Physical or other special requirements associated with the job.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. Part of retaining quality employees is the prospect of advancement. • A salary range.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. If. 338]. you may find they are tempted to leverage that job title to seek employment elsewhere. p. and • Job summary with major and minor duties. • Who the person reports to. for example. it includes • The job title.1 (Job Description) Job descriptions should include • A job title. Definition 14. Definition 14. • Desired experience.

” or people who may not have them will just try to fake those personality traits in the interview. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.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.1. For example. e-mail addresses have become perhaps the most popular way to get applicant information at U. • Do not list requirements other than educational or experience-related ones. due to the number of applicants for competitive positions. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. 14.S. if you are looking for an accountant.5. • Do not ask for specific personality traits. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U.4 (Using an E-mail Address) For professional positions. Many American companies are no longer providing phone numbers. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. such as “outgoing” or “detailoriented.S.1.2 Side Note 14.4 Finding People There are many possible sources of applicants.1.138 CHAPTER 14. With e-mail. companies. 2 See sidenote 14.1. particularly those that advertise on web sites.. – For other positions. – For professional positions. • List the top 4 or 5 skills that are most essential to the job. • Be sure to list appropriate contact information. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. . HIRING EMPLOYEES 14.

3 Generally. • Focus on the skills that a person can bring to your company. 3.1.14. not a science. 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 Java is a programming language.” And 921 in “Engineering. If you are or http://www. You narrow down the 10 candidates to 3. Screening People Reviewing resumes and applications is an with the keyword Java on May 19.S.. 2007 turned up more than 5. 6. you will get several candidates for any job you are offering. You conduct a second round of interviews with the remaining 3 candidates. You can evaluate their personality during the You narrow the number of resumes down to about 10. for professional positions. be sure that a candidate can provide what you are looking for. 4. but when looking at a resume.000 hits searching just the “Information Technology” search category. many positions are being filled online. 159 in “Financial Services. In the U. about 10 or so. You hire the preferred candidate. Searching on Monster. You interview the candidates.dice. the hiring process proceeds as follows: 1. • Online – In the U. Try to perform a search on a job sites such as http://www. most professional associations’ job banks are now online. 5. Software” with the keyword “java” will demonstrate just how widely used online tools are. you need to narrow down the number of applicants to those you can interview in a reasonable time frame.S. • Industry Publications – Most trade publications take ads for job openings. particularly in the high-tech industry. You check references. 2.314 listings in the “Computers.” 665 in “Internet/E-Commerce. For any job.” .. To “weed out” candidates. There were 4.

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

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

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

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

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

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

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