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 Goods and Services Selection . . . . . . . . . . . . . . . . .2 Focus Forecasting . . . . . . . . . . . . . . . . . .3 Forecasting Approaches . . . . . . . . . . . . . . . . . . . . . . . . . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . .3. 4. . . . . . . . . . . . . . . . . . . . .3 3. . . . . . . . . . . . .1 The Project Manager . . . . 4. . .1.3. . . . . . . . . . . . . . . . . . . . . 5.3. . . . . . 4. . . . .4. . .2. . . . . . . 6 Design of Goods and Services 6. . . . .3. . . . . CONTENTS . . . . . . .3 Measuring Forecast Error . . . . . . . . . . . . . . . . . . . 4. . . . . . . . 3. . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . .3. . . . . . . . . . . . . . .4 3. . . . . .1. . . . . . 4. . . . .3. . . . . . . . . . . . . 4. . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . .1 Research . . .3 Product-by-Value Analysis . . . . . . . . . . . 5. . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . .5 Seasonal Variations in Data . .1 Adaptive Smooting . . . . .2 The Strategic Importance of Forecasting 5. . . . 4. . . . . . . . . . . . .1 Product Life Cycles . . . . . . . . . . . . . .6. . . . . . . 5. .1. 5. . . .1 Probability of Project Completion . . . . . . . . . . . . . . . . 5. . . . . . . .1 PERT and CPM . . . .2 Network Diagrams . . . . .3. .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . 5.2 A Seven Step Forecasting System . . . . . . . . . . .1 Types of Forecasts . . .2 Quantitative Forecasting Methods . . 5. . . . .1 What is Forecasting? . . . . . . . . . . . .3 Project Controlling . . . . . . . .3. . . . . . . . . . . . . . . . 6.4 Adjusting for Trend . . . . . . . . . . .6 Variability in Activity Times . . . .3. . . . . . . 3. . . . .1. . . . .4 Monitoring and Controlling Forecasts . . . . 3. . . . . . . . .8 A Critique of PERT and CPM . . 6. . 4. . . . .2 Project Scheduling . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . 4.4 Determining the Project Schedule . . . . . . . . .2.1 Project Planning . . 3. .5 Slack Time and Identifying the Critical Path . 4. . 5. . . . . 5.3 Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . .1 Qualitative Forecasting Methods . . . .1 Identify Critical Success Factors . . . . . . .2 Life Cycle and Strategy .2. .2 The Work Breakdown Structure . . . . . 5. . . . . . . .2 Build and Staff the Organization . . Strategy Development and Implementation . . . . . . . . . . . . . . . . . .2 Preconditions . . . . . . . . .1. . . . .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . .6 Associative Models . . . . . . . 5. . . . .3. . . . .1. . . . . . . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . 4. . . . . . . . . 3. . . .

.1 Do It Until You Get It Right . . . . . . . 104 9.3. . . . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . .3 Some Style Points 11. . . . . . . . 12 Presenting the Plan 12. .2. .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . .1 Sources of Secondary Research . . . . . .1 Preparing to Put the Plan 11.2 6. . . . . . .2.4 Manufacturability and Value Engineering . . . . . . . . 6. . 12. . . . . . . . . . . . . . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . .1 What Am I Researching.1 Importance of New Products . . . . . . 6. . . 12. . . . . . . . . . 6. . . . . . . . .2 Are You Ready? . . . . . . . . . .3 After the Presentation . . .1. . . . . . . . . . . .3. . . .3 Setting Goals . . . . . . . 92 7. . .3 The Mission Statement . .2. . . . . . .6 So What? . . . . .2 Redefining and Expanding Your Niche . . . . . .4 The First Minute is the Most Important . .2 Research Methods . . . . . . . . . . . . . . . . . .1 Product Development System . . . .2 Look and Feel . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . .1 Your Audience . . . . . . . . . . . . .2. . . . . .2 The Plan Contents .CONTENTS 6. . . . . . . . . . . .2. . . . . . . . Now What? . . . . . . .1. 11.1 Finding Your Niche . . 12. . . . . . . . . 11. . . . . . . . . . . . . . 111 10. . . . . . Exactly? . . . . . . . . . .2. . . . . . . . . . . .1 The Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . 104 10 Market Research 109 10. . . . . . . . . . . . . . . . . . . . . 12. . . . . . 12. . . . . . . . . . . . . 101 9. . . 12. .3 Generating New Products .1 Characteristics of the Successful Entrepreneur . . . . . . Product Development . .2. . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . .3 Organizing for Product Development . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . 94 7. . . . . . . . . . . . .5 Take Notes . . . . . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . 12. .2 Know Your Outline Thoroughly . . . . . . . . . . . . . . . . 110 10. . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . .2 Some Suggestions . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . 99 9 Defining Your Market 101 9. . . . . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . .

. . . . . . . . .4. . . . . . . . . . . . . . . . . . . .1 Inventory Turnover . . . . . . . . . . . . . . . . . . . .1 Inventory and Cash Flow . . . . . . . . . . . . . . . . . . 13. . . . . .3 Computerized Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . .2 Tracking Inventory . . 14 Hiring Employees 14. . .1 Buying Inventory . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Job Description .5. . .6 13 Inventory Control 13. . . . . . . . . . . . .3 Advertising the Job 14. . . . . . . . . . .1. . . . . .5. . . . 14. . .1 Dealing with Suppliers . . . . . 13. . 13. . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . .1 How to Hire . . . . . . . . . . . . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Payment Plans .1 Job Analysis . . . .1.3. . . . . . . .5 Suppliers . . . . . . . . . . . . . . . . . .4 Inventory Accounting . . . 13. . . . . . . .4 Finding People . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . 13. .1. 13. . .

Part I International Business Management 7 .


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

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

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

htm. WorldCom declared bankruptcy in July 2002.bankruptcydata. a high value is placed on honesty and personal integrity.4 – Bernard Ebbers.S. was convicted of fraud and conspiracy and sentenced to 25 years in jail.3. March Largest. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. March 17. including a $2 million birthday party for his wife.htm. http://www. These regulations can impose significant costs (in the form of reporting burdens) on multinational firms operating in the United States. scandals such as Enron.S. Parmalat. the former CEO of WorldCom. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. the SarbanesOxley Act (SOX) was passed in the U. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. .com/Research/15 Largest. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U. Dennis Kozlowski. succeeding Enron as the largest bankruptcy in U.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. • WorldCom – Following the Enron scandal..) My cultural perspective is probably based as much on my family’s Scandinavian heritage as my upbringing in the United States.3 The United States The United States has recently been rocked by a number of scandals in the business community. In Scandinavia.1. Qwest. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy.2 (Cultural Heritage in the U. • Enron – In December 2001.bankruptcydata. See sidebar 1.2. While western developed economies often cite a high ethical standard.3.S. • Tyco – The CEO of Tyco. history. There is currently debate as to the effectiveness of the regulations relative to the costs. Side Note 1. 3 Source: 4 Source: http://www. and Tyco make it clear that even western developed economies have significant ethical shortcomings. Side Note 1.12 CHAPTER 1. Worldcom.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. 2007. 2007.S.

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

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

S. 7 Source: http://www.4.dict. Although women have entered the workforce in large numbers in recent decades. Side Note 1. They only have the power of persuasion. there seems to be a glass ceiling due to social factors. at 40.5. with the purpose to influence their votes. with most in the top 20 among over 150 countries included in the survey.4.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy.7 Note that lobbyists do not have any formal power. in an extended sense. EUROPE 15 1.5 1.3 Lobbying by Japan Japan spends more money lobbying in the U.5.1 (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. their attitudes towards bribery when working in foreign markets differs from that of the U.5. Side Note 1. Definition 1. 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. to try to influence decision-makers in any circumstance.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.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. 1. is the notable exception).. politicians.4. particularly in upper management.1. men are disproportionately represented in management positions.5.S. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. .org. than any other. Hodgetts et al.S. yes or no.

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.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands..5. but there is a perception that there are risks and ethical • Discrimination lawsuits are more commonplace in Great Britian. • More British companies have actively sought to recruit and promote women into management.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. though compensation is limited relative to lawsuits filed in the U. Side Note 1.about. 1. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. For those students who think so.5. 8 Side Note 1. yes or no.5.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 8 Source: http://careerplanning.16 CHAPTER 1.htm.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation. . 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.S.

63–64] take note of • A case in which an industrial spy from China was caught trying stealing cultures from Amgen for a drug with $1. 6.3 (Corporate Spying) Hodgetts et al. there are undoubtedly many others that get away with it. .S. 3. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 7. • Yet another case in which software from a U. Side Note 1.2 (Piracy and Counterfeiting) Present sidenote at [5. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. An increase in crime and illegal business activities. Prison labor. Piracy and counterfeiting (see sidenote below).6.1. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. An opaque legal system. Side Note 1. and • A recent history of rapid economic development.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. executives. pp. 5.S.5 billion in sales annually. company in Boulder was stolen and sold to a Chinese company. Ethical considerations include 1. Bribery and other forms of corruption.6. 2. 64]. International corporate spying problems. Child labor.6. • A relatively stable government. 4. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. • Note that for every corporate spy that is caught.6. 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. Often. p. [5.

such as education and health care. education.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.benjerry.S. In the words of a Beijing correspondent for “The Economist” magazine.7. social justice. Definition 1. not-for-profit organizations that seek to serve society’s interest by focusing on social. and promotion of social equity). a grocery chain. See http://www. Other companies. provide relief in the event of humanitarian disasters. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.”[6] See also sidenote 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials. and economic issues such as company/our mission/index. social justice. and emergency relief in the event of humanitarian disasters). education. and the environment.cfm for more detail. . 1. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty.2.6. and the environment..3 (Nongovernmental Organizations (NGOs)) Private. . such as Whole Foods. Definition 1.7. Side Note 1.18 CHAPTER 1.4 (Corruption) Though things are improving. 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. health. not-for-profit organizations that seek to serve society’s interest by focusing on social. . there are few if any issues which affect and infuriate so many in China as corruption.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. China continues a battle against corruption.7 Corporate Social Responsibility Definition 1. political. and economic issues such as poverty. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1.7. political.2 (Nongovernmental Organizations (NGOs)) Private. health. • CARE (promotes community development.2. “. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).

and • Rainforest Action Network (RAN). Executives are people.9 U. as executives of publicly traded companies are ultimately responsible to their shareholders. many feel that it has had a net benefit. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. For example. too.S.S. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species). A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.1 Corruption and the FCPA Revisited Hodgetts et al. Both political groups and businesses are influenced by NGOs. • To prevent a boycott or other consumer defections.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. In 2005. Side Note 1.7. but does not outlaw payments to political party leaders. • And.000 and $125. .7.7.2. – Even socially responsible executives would consider the “bottom line” when making decisions. last but note least. China ranked 78 out of 158. with a score of 3. Side Note 1. MNCs do not appear to have been significantly impacted.7. firms are constrained by the FCPA with regards to bribery and other corrupt practices.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment.1. 1. executives may actually feel that it is the right thing to do. firms a reason to refuse to pay bribes. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. note that while U. • Conservation International (promotes environmental conservation).S. as it gives the U. In fact.

Side Note 1. Global Compact. slightly better than Sweden. Tyco. It cannot be considered to be based on a scientific survey.N. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. 10 http://www.7. 4.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. with a score of 8. 2. 3. Singapore is number 5 with a score of 9. and the environment.7.4. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. .20 CHAPTER 1. Commitments that many MNCs have signed on to. better than the U. specify standards and codes of conduct in domestic and global operations. Moreover. with scandals such as Enron. Scandinavian countries are at the top of the list. The government is actively addressing the issue of corruption. such as the U. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk.7. July 1. but most important first step is to recognize that there is a problem. WorldCom.2 respectively.0 is considered to be the borderline at which countries are considered to have a problem. more Chinese will own stock in Corruption is certainly not endemic to Asia. Support and respect the protection of international human rights.4 (Some Opinions) Personally. Global Compact specifies 10 principles which MNCs should abide by: 1.5 (Table 3-1: Principles of the Global Compact) The U.6 and 8. With greater financial transparency. and not based on hard data. and Germany at 7.S. malfeasance and diversion of corporate funds becomes increasingly difficult. Side Note 1. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. 1.3.N. 5.infoplease. With more disciplined corporate governance. societies.html. I think corruption will diminish as China economically develops for several reasons: 1. Hong Kong is number 15. and Parmalat resulting in investors losing billions of dollars. the United States and Europe have recently been rocked by corporate corruption. The government recognizes that it is an issue and is taking action. Important: Although it is widely cited. As more state-owned businesses become privatized and the size of the middle class increases. It is a difficult problem to solve. 2006.

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


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

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

2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. • They are often sources of conflict among management. 1.2. and 4.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. more generally.S.” • Every organization with more than a few employees has an organization chart. 3. pp.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. Definition 2. Planning. 5]. Staffing. . p. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. Side Note 2. 2. 7]. as the org chart determines executives’ authority and. Side Note 2. process design. location selection. supply-chain management. known commonly in the U. and maintenance.2.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. OM decisions have been divided into ten categories by Heizer [1. scheduling. business community as “org charts.2.2. To accomplish these functions. human resources and job design. quality. WHAT OPERATIONS MANAGERS DO 25 4. layout design. Controlling. OM is one of the most costly aspects of an organization. p.1. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. inventory. Organizing. operations managers make decisions. particularly when job titles are not clear. 6–7]. place in the heirarchy. 2. Service and product design – What good or service should we offer? How should we design these products? • Design typically determines the lower limit of cost and the upper limit of quality.

8. and inventory requirements. delivery. • Personnel costs are a significant part of most production or service processes. 7. personnel use. 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. capacity needs. technology decisions. 3. Layout design – How should we arrange the facility? How large must the facility be to meet our plan? • Involves materials flows. quality. Location – Where should we put the facility? • Location decisions are crucial. and price. production scheduling. and maintenance and determine much of the cost of a product or’s location decisions and Matt McAdams a posteriori assessment of the choices. . 4. 5. OPERATIONS AND PRODUCTIVITY 2. • Discuss Active. 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. 6. • Mutual trust between buyers and suppliers is crucial. Process and capacity design – What process and what capacity will these products require? • Process decisions commit management to specific technologies. Intermediate and short-term scheduling – Are we better off keeping people on the payroll during slowdowns? Which job do we perform next? • Feasible and efficient production schedules must be determined. material requirements planning. innovation. personnel levels. 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. 9.26 CHAPTER 2. Supply-chain management – Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program? • Managers must consider quality. and human resource planning.

2007. p. 8].2 (A Little History) Review Heizer figure 1.2. the firm could deplete inventory and cause customer service issues.2. • Reliability and stability of systems depends on well-planned maintenance schedules. – Providing the proper training. such as the presence or absence of a part on a shelf. If demand rises above the historical average planning duration demand. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1.2. This saves warehouse space and costs. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. quality. New stock is ordered when stock reaches the re-order level. • Eli Whitney (1800) is credited for popularizing interchangeable parts. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could In Time %28business%29. and 1 Source: http://en. The process is driven by a series of signals. – Providing proper work methods and tools. which relied upon standardization and quality control. Definition 2.wikipedia. When implemented correctly. that tell production processes to make the next part. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs.2. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. .1 Side Note 2. However.3 “Significant Events in Operations Management” [1.2 (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. Kanban are usually simple visual signals. or Kanban. 9]. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. WHAT OPERATIONS MANAGERS DO 27 10. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. one drawback of the JIT system is that the re-order level is determined by historical demand. p. and efficiency. February 14. He also believed that management is responsible for – Matching employees to the right job. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. • Frederick W.

services become increasingly important. the economy transitioned from agriculture to manufacturing around 1900. p. shelter. the wages are considerably above average.S. economic output. Side Note 2. • Transportation. In the U.28 CHAPTER 2.1 (Development of the Service Economy) Present Heizer figure 1. • Trade. Manufacturing was dominant until about 1950 or so. 9] • Repair and maintenance. the services sector is by far the largest employer. p. • In most western economies. • In some service industries. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. major contributions have come from the field of information sciences. The U.5 [1. such as the legal profession or computer services in the financial industry.. average wages are below average2 in the U. 2 The average national private industry wage.S.3. services account for over 70% of U.3.1 (Services) Those economic activities that typically produce an intangible product. However.3 (Information Sciences) The systematic processing of data to yield information. for others professional occupations. 11]. and other essentials for its citizens. • Government. • Recently. Definition 2. . • Food and lodging. 2. Bureau of Labor Statistics defines services to include [1.S.. Today.S. • Insurance.2. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. such as retail. Definition 2.

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

5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. . wherever and whenever needed. Trends that Heizer and Render identify [1.2.2. OPERATIONS AND PRODUCTIVITY 2. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. brought about in part by the internet. or recyclable products or to minimize packaging and other wasteful production steps.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. • Empowered employees – With the rise of services and knowledge products. 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. parts. • Mass customization – With increases in technical capabilities and customerlevel information management. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. and finished goods rapidly. 2. the next step in product development involves customizing products according to the customer’s preferences. operations managers are responding by moving decision making to the individual employee.30 CHAPTER 2. operations managers are increasingly responsible for innovations that move ideas. Definition 2. Operations managers are being challenged to produce biodegradable. • 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. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. p. or management). it will continue to strongly impact the field. Globalization has been having a dramatic impact on operations management and in the future.5. reusable. capital.

p.5.25 titles per labor-hour = 0.3. Side Note 2. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Definition 2. Definition 2. Side Note 2.0077 titles per labor-hour = 0.4375 titles per labor-hour = 0. 15]. but overhead is no $800/day. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.5.2.5. Consider today’s computers versus those from the 1970s. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. .4 (Total Factor Productivity) See definition 2.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.5. Also known as total factor productivity.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5.5.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.5.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day. In order to improve productivity.

S. Labor productivity has increased due to • Better-educated. If the public electricity provision increases in quality. A Toyota Corolla is a much different car than a Porsche 911 Turbo. you had to write a program from scratch. about 10% of the annual improvement in productivity is due to increases in labor productivity. where quality and other factors vary widely or the level of service provision includes items difficult to measure.32 CHAPTER 2. If you wanted the computer to do something. . in Cambodia. Management. There were. the three factors critical to productivity improvement – labor. or other commercial software available.) The screen had only one color. and the arts and science of management. of course. 2. no word processors. – This can be a particular problem in the service industry. the public provision of electricity is highly variable. Labor In the U. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory. capital. and was about the size of my hand. The electricity often goes out in the middle of the day and the current may vary in strength. Labor. (It used audio tapes for memory storage. – Not all cars are the same.5. 3. 2.5 (Productivity Variables) In operations management. Definition 2. it may improve productivity. green. • 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. Capital. spreadsheets.5. – For example.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. such as convenience or safety.. • Units of measure – There may not be appropriate units of measure.

THE PRODUCTIVITY CHALLENGE • Better-nourished. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. maintaining and enhancing the skills of labor.) Present Heizer figure 1.3 (The State of Education in the U. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. and math. .5.S. Cannot Correctly Answer Questions of This Type.8 [1.5. and 4.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve. and • Healthier workers as well as • A shorter work week. Side Note 2. Diet of the labor force.2. there is considerable concern over teaching of basic skills such as mathematics to grade school children.S.” In the U. 2. Which of the following is true about 84% of 100? 4 When presenting this question. “About Half of 17-Year-Olds in the U. such as transportation and sanitation. What is the area of a 4 × 6 meter rectangle. In developed nations. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading.S. 16]. Social overhead that makes labor available. draw the rectangle on the blackboard. The primary variables for improving labor productivity include 1. writing.. p. and 33 3. Basic education appropraite for an effective labor force.

management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.5. Side Note 2. in the U.S. Definition 2. 17]. education. p..2 Capital Capital investment in the U. management is not always identified separately from labor as an input.5.5% after allowances for depreciation.5. however. has increased at about an average of 1. 2. are utilized effectively. educated. management is considered as a separate input. Difficulties arise because service-sector work is . According to Heizer [1. 2.S. U.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.34 CHAPTER 2.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Developed economies (also known as post-industrial economies) require trained.4 (Management as an Input) Because this is a course in business management. 2. Note that there is a trade-off between capital and labor in most industries. Note that in classic economic analysis and other areas of business. as well as capital. productivity in the service sector has not increased as rapidly as with the production of goods.4 Productivity and the Service Sector Historically. and because the author of the textbook is writing about operations management. graduate programs and the students they produce remain the best in the world. and knowledge.5. and knowledgeable employees and operations managers are responsible for ensuring that technology. and the cost of capital depends on interest rates.S. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.5.

S. investment advice).6 Social Responsibility As discussed in chapter 1. • General ethical behavior concerning issues such as child labor and corruption. a haircut).S. the performance of a law firm)..2.5 (Service Productivity in the U. 35 3. SOCIAL RESPONSIBILITY 1.S. 5 In Japan. banking system is about 33% more productive than Germany’s. 4. government agencies.g. 2. telephone industry is twice as productive as Germany’s. Often an intellectual task performed by professionals (e. operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency. Typically labor-intensive (e. watchdog groups such as NGOs. Side Note 2.g. such as cleaning.5. but from customers. is twice as productive as in Japan.g.g. food preparation. Frequently individually processed (e. medical diagnosis). Difficult to evaluate for quality (e. Often difficult to automate (e. 2.) Productivity is highest in the U. We will discuss this challenge in more detail throughout the course. Low-productivity activities. 18] • Retailing in the U. teaching). and 5.g..6.5 • The U. and child care. legislation protects shopkeepers from discount retailers. Heizer notes [1. laundry service..S. p. and other stakeholders. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. in both overall and service productivity. and • The U. .S.. • Keeping the workplace safe. These challenges include such issues as • Maintaining a clean environment.. These demands come not only from the manager’s personal ethic.


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

3.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there.1. I recommend that all companies draft a mission statement. 5. • Perfumers tend to concentrate in Grasse. competitively superior. 3.1 Mission Whether large or small. 28] which includes mission statements for three multinational companies: 1. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. • Provide additional insights and opportunities. and • Increase sales. Attract and Retain Global Talent – By offering more employment opportunities. France.1 (Mission Statements for Three Organizations) Review Heizer figure 2. Equally important.2 [1. 3. FedEx. global organizations can attract and retain better employees. an understanding of cultural differences in preferences is needed to best meet customer needs. Provide Better Goods and Services – For companies doing business in an international setting. FedEx is committed to our People-Service-Profit philosophy.1. global air-ground transportation of high-priority goods and documents that require rapid. We will produce outstanding financial returns by providing totally reliable. Definition 3. p. Side Note 3.38CHAPTER 3. Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. positive control of each package will be maintained utilizing real time electronic tracking and tracing .1. time-certain delivery.1 (Mission) The purpose or rationale for an organization’s existence. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. Missions state the rationale for an organization’s existence. 6. 4.

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

2.1.cfm for more detail. • Interoperability with other products. but can be used at the department level and even at the project level. Cost leadership – Providing cheaper products. .1.” Note that mission statements are used not only at the company-wide level. the creation of a unique advantage over competitors.1. See http://www.benjerry. 3.40CHAPTER 3. Differentiation can arise from anything that the customer may value about a product or a services. Side Note 3.2 (Strategy) How an organization expects to achieve its missions and goals. and Major Departments in an Operations Function. • The “look and feel” of the product. • Availability of complementary products. 3.3: “Sample Missions for a company/our mission/index.1. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Definition 3.3 (Sample Mission Statements) Present Heizer’s figure 2. • Training. Differentiation – They make their product better. Definition 3. more responsive products or services.3 (Competitive Advantage) In operations management. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. the Operations Function. 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. be it • Product features. Responsiveness – By providing timelier.

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.

37]. Definition 3. determining internal strengths and weaknesses and external opportunities and threats. “Strategy Development Process. if the firm has a competitive advantage in these things) and where failures are most likely. Group the necessary activities into an organizational structure. then determine whether the organization does these things well (and.3. These critical success factors are used to develop a competitive advantage. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3.6 [1. .44CHAPTER 3. p.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. Weakness. and 3. and Threats) analysis to develop strategies.1 (Strategy Development Process) Present Heizer figure 2.1 (SWOT Analysis) In operations management. those activities or factors that are key to achieving competitive advantage. Provide competitive advantage. Side Note 3. 3. Increase productivity. Definition 3. 2. in particular. 2.3. Opportunities.” The process of developing a strategy involves the following steps: • Environmental Analysis. and 3. Implement an OM strategy. Identify a strategy and critical success factors. then • Form a Strategy. • Determine Corporate Mission.2 (Critical Success Factors) In operations management.3. The operations manager’s job is a three-step process: 1.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. The purpose of this process is to 1. Staff the organization with personnel that will get the job done.3.

an activity map can be used to link an organization’s competitive advantage to the CSFs.2 as examples of how firms organize their activities. and supporting activities. Definition 3. OM activities are most productive when they are integrated with other activities such as marketing. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. 39]. Recall the “org charts” in sidenote 2.3.1. finance.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1.3. Side Note 3.1 as a checklist to determine critical success factors. Southwest Airlines has a competitive advantage in providing low-cost airfares. a graphical link of competitive advantage. 5 Management 6 Human Information Systems Resources. CSFs.2. Once CSFs are determined. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.3 Integrate OM With Other Activities In order to achieve its strategy.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3. MIS.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3.3. p.6 3.3. • Red arrows – critical success factors • Blue arrows – support activities 3.5 and HR.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.3 (Activity Map) In operations management.4. 3. .

Definition 3. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. 42] Definition 3.4. Also one of the least profitable due to transport costs and little local responsiveness.1 (International Business) A firm that engages in cross-border transactions. See definition 3. • Nestl´ is an example of a country with a transnational strategy.5 (Global Strategy) In operations management. In the semiconductor industry. • Texas Instruments is an example of a country with a global strategy. Definition 3.46CHAPTER 3.4. and hamburgers without beef in India.3 (International Strategy) In operations management. 95% of its assets and 98% of its sales are made outside Switzerland. 4. 3. Usually does not confer a cost advantage. 2. wine in France. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities.4. as exports require little change in operations and licenses often leave risk with the licensee. Definition 3. a strategy that uses exports and licenses to penetrate the global arena. Definition 3. • McDonald’s is an example of a country with a multidomestic strategy. franchises. products do not need to be localized. See definition 3.5. Only 10% of its work force is Swiss.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. but a good strategy for cost reduction when products do not need to be adapted locally.4 (Multidomestic Strategy) In operations management. with beer on the menu in Germany. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.4. p. .3.4. International strategy – Often the easiest strategy. owning or controlling facilities in more than one country. Its menu reflects the country in which it operates. or joint ventures with substantial independence.4. Typically characterized by subsidiaries. Although e it is legally Swiss.4.4. See definition 3. See definition 3.4. Global strategy – Not characterized by local responsiveness.4.6. [1.

4. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.3.S.4. p.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5..4. Side Note 3.6 (Transnational Strategy) In operations management. 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 . a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. 6].


Side Note 4. the largest software company in the world.0. Side Note 4. and team organization. Scheduling – People. defining the project. Controlling – Monitoring of resources.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. The profile highlights the importance of project management in achieving competitive advantage.Chapter 4 Project Management Side Note 4. 46–47]. and supplies are tasked to specific activities and activities are related to each other. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. pp. Even Microsoft.0. Plans are also revised to meet changes in time and cost demands. Project management involves three phases: 1. costs.0. 49 . 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. Scheduling.3 (Project Planning.1 [1. 2.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. p. and budgets. 49]. quality. 3. and Controlling) Present Heizer figure 3. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. money. Planning – Goal setting.

2.1 Project Planning While many projects are run within an existing organization. it is very obvious and can be very costly.1. Moreover. 3. if things go wrong. project managers are highly visible in a firm and have significant responsibilities. Definition 4. a temporary project organization is formed to address a specific project. 4. The project cuts across organizational lines. Project organizations work best when [1.1. The work contains complex interrelated tasks requiring specialized skills. things you thought were certain turn out not to be. you should always expect the unexpected. The project is temporary but critical to the organization. 69]. Work can be defined with a specific goal and deadline. p. The job is unique or somewhat unfamiliar to the existing organization. p.0.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention.” [1. If you become a project manager on projects of significant complexity. often times.50 CHAPTER 4.1 The Project Manager As alluded to in sidenote 4.0. However.5. you are doing your job well if noone notices the project management. You may be managing resources far in excess of your individual salary. and you will be forced to improvise. Your job is to make things go smoothly and according to plan. 4. 48] 1. See also Heizer sidenote “Project Management and Software Development. you will be confronted with a daunting task. it is also an area in which there will continue to be high demand for qualified people. 4. People will not come through with what they promised. The responsibilities of project managers are to make sure that .5 (Personal Advice on Project Management) Project management is a tricky profession. PROJECT MANAGEMENT However. In a sense. Side Note 4. and/or 5.

Review software architecture for user account input web page functionality 6.1.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks.1. Side Note 4. you have divided the tasks too finely. 2.4. People receive motivation and information necessary to do their jobs. Complete software architecture for user account input web page functionality 5. 51 4. 3. When dividing a project into tasks. All projects come in on time. a task that should only take a day or so. • Build the user account input web page is a much better task division than 1. In a project that includes allowing a user to enter personal information on a web page. Definition 4. The project meets its quality goals. Approve software architecture for user account input web page functionality . The project is on or under budget. 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. Approve graphic design for user account input web page 4. in a software engineering project.1. Review graphic design for user account input web page 3.2 (Work Breakdown Structure (WBS)) In operations management.1. dividing a project into more and more detailed components. For example. and 4. PROJECT PLANNING 1.2 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). Complete graphic design for user account input web page 2. a web page takes about a day to build for an experienced team.

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. Activities (also known as “work packages”) to be completed Side Note 4. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. you should also take note of time and cost estimates given by your technical staff. Write software for user account input web page functionality 8. They will be useful for project scheduling.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). At the time you are creating the work breakdown structure. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Write software for user account input confirmation page functionality 9. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.1. Subtasks in major tasks 4. which we will discuss next in section 4. PROJECT MANAGEMENT 7. the work breakdown structure is not something you go to your office to do in isolation. Side Note 4.3 (Reality Check: WBS) In reality.52 CHAPTER 4.3 [1. Major tasks in the project 3. 4.1. of course.2. Scheduling serves to 1. The actual WBS for Windows XP would.2 (Work Breakdown Structure) Present Heizer figure 3. Show the relationship between each activity to others and to the whole project 2. Encourage realistic time and cost estimates for each activity . fill hundreds if not thousands of pages. p. Project 2. Identify precedence relationships among activities 3.

and material resources by identifying critical bottlenecks in the project Side Note 4. 2.2. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. The order of performance is accounted for. It can actually be quite time consuming to create and maintain Gantt charts. as. PERT and CPM help answer questions such as • When will the entire project be completed? .4 [1. All activities are planned for. right by the bridge. Perhaps they imagine that they are not doing their jobs professionally if they are not. Make better use of people. and CPM tools for every project management activity. PERT and other formal documents. moeny. 51]. p. For smaller projects. Activity time estimates are recorded. Gantt charts are perhaps the most widely used tool for ensuring that 1. PERT.2. Overall project time is developed.4. and CPM) Inexperienced project managers often feel the need to use Gantt. Definition 4. 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 .2. these should be considered merely tools to be used when they are useful by saving time or energy.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. MS Project’s Gantt chart functions demand you assign employees. which becomes narrower as one approaches the neck of the bottle. Side Note 4. and 4.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. PROJECT SCHEDULING 53 4. the road bottlenecks.2. Definition 4.” This will give the class an idea of the look and feel of a typical Gantt chart.2 (Using Gantt.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. and other values to each activity. Derives from the typical shape of a bottle. – said of roads. 3.2. PERT. cost estimates. However.

and budgets of projects.3. 4. Control programs typically produce reports detailing 1. . Total program labor curves. were developed in the 1950s for project control. 5.3 Project Controlling Project control involves monitoring resources. is the project on schedule. Definition 4. Cost breakdowns for each task. is the money spent equal to. 4. what is the best way to accomplish this goal at the least cost? 4. less than.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. PERT and CPM. Variance reports. Cost distribution tables. 3. Raw material and expenditure forecasts. or ahead of schedule? • On any given date. 7. 2. Time analysis reports. behind schedule. 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. Work status reports.3.1 PERT and CPM Two methods. Functional cost and hour summaries. costs. and 8. quality. 6. 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.54 CHAPTER 4.

See also definition 4. p.2 (Example: AON and AOA) Present Heizer’s figure 3. Definition 4.5 [1. 6. schedule.3. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. it will do for you automatically much of what we will go through manually in this class. 5. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. Personally.3. through the network. Activity on Arrow (AOA). Define the project and prepare the WBS.3.4. Side Note 4. Moreover.2. 53]. . Activity on Node (AON) and 2. and ontrol the project. As the names describe. 4.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3. Assign time and/or cost estimates to each activity. Develop the relationships among activities. Compute the longest time path.3 (Critical Path) The computed longest time path through a network. in my experience.3. Draw the network connecting all of the activities. 4. They both follow six steps: 1. AON associates the activity with the node whereas AOA associates the activity with the arrow.3.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. PROJECT CONTROLLING 55 Definition 4. 3. 2.2 Network Diagrams There are two approaches to visualizing activity networks: 1. Also. or the critical path. See also definition 4. Use the network to help plan. Side Note 4.3.3. monitor. Gantt charts are the “go to” visualization method for even very complex projects.3.

56].1 gives sufficient information to describe the network. 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. that is. LF = min{LS of all immediate following activities}. that is. their dependencies. that is. – If an activity is an immediate predecessor to more than one activity. 54–55]. its LF equals its LS of the activity that immediately follows it. See also definition 4. In other words. LS = LF − Activity time. • Table 3. analysis used to determine the project schedule.3. 1. 2. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. 4.4 Determining the Project Schedule Once we have identified all of our activities. Definition 4.4. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.3. pp.9 [1. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.56 CHAPTER 4. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.8 [1. we must use time estimates of each activity to determine the overall schedule for the project.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. Follow with example 3 and figure 3. We do this with a critical path analysis with involves a 2-step procedure. its ES is the maximum of all EF values of its predecessors. EF = ES + Activity time. – If an activity has multiple immediate predecessors.3.6–3. . p. ES = max{EF of all immediate predecessors}. its LF is the minimum of all LS values of all activities that immediately follow it.1 (Critical Path Analysis) In project management. PROJECT MANAGEMENT Side Note 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.

Note also that if we delay each activity by the amount of slack that activity has. it is said to have free slack.3.5. E. “Notation Used in Nodes for Forward and Backward Pass. 60]. 57]. p. Note that activities A. G. p.4.” Then complete Heizer example 7 figure 3.4.3 [1.1. These are called critical activities. in the example in sidenote 4.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. 1 For example.5.5. and H have no slack time and cannot be delayed without delaying the entire project. • Terminates at the last. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. . or the amount of time an activity can be delayed without delaying the entire project. If an activity2 does not impact the slack time of any other activity. the free time for an activity. Definition 4.13 [1. Also notable is that if the total time of the project needs to be reduced. Side Note 4.3 (Free Slack) In project scheduling.4.3 and Heizer figure 3.1 (Slack Time) In project scheduling. Slack time is just Slack = LS − ES or Slack = LF − EF .1. the time shared among more than one activity. the time devoted to one of these activities must also be reduced.4.5. 2 For example. activity F in sidenote 4. they share total slack.2 (Total Slack) In project scheduling.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. p. the step that identifies all the earliest times that activities can be completed. if we delay activities B and D by one week each.2 (Forward Pass) In project management scheduling. 61] based on table 3. 4.4. C.1 When several noncritical activities appear successively in a path.1). we may delay the project as a whole. the time associated with a single activity. Definition 4.10 [1. The critical path is one that • Begins at the first activity in the project. Definition 4. and • Includes only critical activities (see sidenote 4.4. we cannot complete the project in 15 weeks.

3 (Most Likely Time) In project scheduling.6.3. In PERT. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. the project manager pulls the number “out of the air” based on their experience managing related activities. we do not. See also definitions 4.1 (Reality Check: Time Estimates) We define the optimistic and pessimistic times as if we know for certain what the probability distribution of possible completion times will be. in most cases. the “worst” activity completion time that could be obtained in a PERT network. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. which are labeled according to one of two notational conventions.6. three time estimates are used: and 4. technical considerations that were unknown at the time the project schedule was drawn up. Most likely time – The most realistic estimate of the time required to complete an activity.6. Definition 4.58 CHAPTER 4.6. However. unexpected complexities. Definition 4. PROJECT MANAGEMENT 4.6. In reality.6. See also definitions 4. Beta distributions have two free parameters.2 (Pessimistic Time) In project scheduling.6. the time required to complete an activity is often uncertain due to supply problems. the “best” activity completion time that could be obtained in a PERT network.1 (Optimistic Time) In project scheduling. The usual definition calls these alpha and beta. Effectively.6.2. Definition 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.. Side Note 4. See also definitions 4. Definition 4. The beta distribution is used as a prior distribution for binomial proportions in .1 and 4. and the other uses β = β − 1 and α = α − 1 .6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. the most probable activity completion time that could be obtained in a PERT network.6.1 and 4. etc.

most likely. Activity times are statistically independent 3 Source: http://mathworld.4.6. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. 2. The expected activity time for activity F is 3 weeks5 and the variance is 1.00. q) = (4.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.html.3 The domain is [0. The above plots are for various values of (α.25 to 3. 63] for activity F based on optimistic. and pessimistic times of 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.β) with α = 1 and β ranging from 0. and pessimistic times of 1.1) where B(p. p. and 7.78 6 6 36 7 4 weeks. 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 = 1.1 Probability of Project Completion If we assume that 1. 2007. The variance of the activity time is Variance = [(b − a)/6]2 . and .6.html http://mathworld.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. VARIABILITY IN ACTIVITY TIMES 59 Bayesian and 9 weeks.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.78 weeks. 8 1.wolfram. most likely.00 week.1].6. 4 See definition 4. February 21. Total project completion times follow a normal probability distribution and 2. β) Γ(α)Γ(β) P (x) = (4. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6. Side Note 4. 62].6. 4. 4.

3) Definition 4. is defined as σ 2 ≡ i=1 P (xi )(xi − µ)2 for a discrete distribution with 2 N possible values of xi and σ ≡ P (x)(x − µ)2 dx for a continuous distribution. commonly also N written σ 2 .5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. p.5.3 (Example: Project Variance) Review Heizer example 9 [1. See also 4. See definition 4. 64].6. Definition 4. Note that the standard deviation of 1. definition 4.6.6. 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. p. and within 3 standard deviations approximately 99.wolfram. 9 For 10 See more information.7% of the time.60 CHAPTER 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 4.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6 (Standard Deviation) The standard deviation is the square root of the variance.6. A2– A3] “Normal Curve Areas.76 weeks implies that the project will exceed the expected completion time by more than 1.10 Determining Project Completion Time for a Given Confidence Interval A common question is. 65] and figure 3.16. pp.6.6. Side Note 4.html.1. two standard deviations approximately 95% of the time.76 weeks approximately 16% of the time.6. .com/StandardDeviation.6.4 (Using the Normal Table) Pass out Heizer Appendix I [1. Side Note 4.6. see http://mathworld. the population variance var(X).” Review Heizer example 10 [1.

7. Project crashing is the name given to the process of rushing a project to completion.7. • The shortened durations will actually enable us to finish the project on time.7. Crashing a project involves a four step process: 1. See definition 4. Definition 4. we want to do so in the least cost mannger possible. Since activity completion times are typically shortened by adding resources. we need to ensure • The amount by which an activity is crashed is. in fact. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path.7. .1. crash cost is the cost required to complete an activity in the shortest time possible. Definition 4. the crash cost is typically higher than the normal cost.7. if certain activities off the critical path take the pessimistic time estimate or more to complete.1 (Crashing) In project management. See definition 4. you will doubtless experience one or both of these eventualities many times in your career.1. 4. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.2 (Crash Time) In project management. Step 1 – Compute the crash cost per week.7.11 Definition 4. it may result in the project being delayed. crash time is the shortest duration of an activity.3 (Crash Cost) In project management.4) 11 Since crashing a project often involves adding additional resources to activities. When crashing a project. Assuming linear costs. and • The total cost of crashing is as small as possible.4. permissible and realistic.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. and if you become a project manager.

you should be very wary of such pressure. Step 4 – Update all activity times. 4.5 and figures 3. 3. Note that one activity may be on several critical paths. If you accept the challenge and try to rush the project to please upper management. 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.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.62 CHAPTER 4. If not. Crash this activity by one period. go to step 2. At times this may be politically infeasible. pp. Step 2 – Find the critical path(s) in the project network.2 (Example: Crashing a Project) Present Heizer example 12 [1.7. as the negative impact on your career of tactfully pushing back against management is usually much less than the negative impact of a significant project delay or cost overrun. PROJECT MANAGEMENT 2. If the due date has been reached. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. As a project manager. Then crash each activity by one period.7. 67–69] including table 3. Step 3 – If there is only one critical path. If there is more than one critical path. 4. If you find yourself needing to rush a project.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. Side Note 4. stop.18–3. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. the advice given in this section should be helpful. • Advantages – Especially useful for large projects . Side Note 4.19. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates.

they are often overkill for small. Information on Planner can be found at http://live. Note that most project management textbooks refer to MS Project as the software of choice for project management. However. 70–74] with figures demonstrating MS Project functionality. including open source software that is free. pp.dotproject. It is perhaps the most widely known and featureful project management software mediumsized– of project management software for a list of project management software or ask Dr.9.9 Using Microsoft Project for Managing Projects Present programs 3. Starkweather about his impression of various alternatives. 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.achievo. Information on Achievo can be found at http://www. it is relatively expensive and the features are so numerous and complex.7. There are a variety of Noncritical paths should be closely monitored as well. 12 Recall sidenote 4. Information on dotProject can be found at http://www. You may also refer to http://en. 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.1.7 [1. .wikipedia. independent.gnome.


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

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

See also definitions 5. capacity. . and personnel planning. these drive a company’s production. Also called sales forecasts. and • Loss of market share. • Training. Human resources – Anticipated demand is needed to estimate the need for • Hiring. • Loss of customers.1. 5. 4. 2. 2. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 3. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. Select the items to be forecasted. 7. Validate and implement the results.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. and scheduling decisions and serve as inputs to financial. Make the forecast. Determine the time horizon of the forecast. 5. Select the forecasting models. Gather the data needed to make the forecast. marketing. Capacity – Underestimating demand can result in • Undependable delivery.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. projections of a company’s sales for each time period in the planning horizon.1. 6. 3.1.2 and 5.4 (Demand Forecasts) In operations management.2. Determine the use of the forecast.5. 5.1.3. and • Layoffs.

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

– Sales force composite ∗ You would be surprised how accurate your sales force can be. for example. · See definition 5.3. · Requires less past data than moving averages. and · Respondents. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. · See definition 5. 2. they will do so. · The simplest and easiest way to estimate demand.3. political. ∗ The more independent your decision makers are from economic. Moving averages cannot pick out trends very well. say.3. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. . ∗ Moving averages · Simple. · Useful as a starting point or sanity check for more sophisticated methods. or other incentives to over or understate demand. 3. · There are three problems with moving averages 1. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. be sure that the sales force is clear that their incentive is to be as accurate as possible. the more likely it is your results will be accurate. and if they perceive there is an incentive to exaggerate.9. · Staff personnel. Sales people typically respond to incentives. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.5. the naive approach.8. Moving averages require more past data to work with than. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. ∗ However. useful method if we can assume that market demands will stay fairly steady over time.

∗ Trend projection – Associative models ∗ Linear regressions Definition 5.4 (Delphi Method) In operations management. a forecasting technique using a group process that allows experts to make forecasts. personal experiences.5.3 (Jury of Executive Opinion) In operations management.3.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.4. . emotions.4.3. See also definition 5. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.1. See also definitions and value system.3. Definition 5.3.5 (Sales Force Composite) In operations management. 5. 5. See also definitions 5.4.3. and 5. Definition 5. a forecasting technique based on salespersons estimates of expected sales. and 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition.5. Definition 5. See also definitions 5.6 (Consumer Market Survey) In operations management.70 CHAPTER 5.1 Qualitative Forecasting Methods Definition 5. 5. See also definitions 5. See also definition 5.3. Definition a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.3.10. and 5.3. · See definition 5.6.3. 5. and 5.3.

11.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.3. generally ranges from 0. 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 (5.2 Quantitative Forecasting Methods Definition 5. and 5.7.05 to 0.1) n • Weighted Moving Average – Mathematically. That is.5. Mathematically. and are appropriate to use when the underlying average .3. Definition 5.3.5. Higher values give more weight to recent data. 5. 5. See also definitions 5.3. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.7.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.3.10.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.3. FORECASTING APPROACHES 71 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.9.3. Definition 5.3.3) The smoothing constant.3. See also definition 5.8. • Simple Moving Average – Mathematically. Definition 5. 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. α.3.3. Moving averages can be either simple or weighted. a simple moving average is given by demand in previous n periods Moving average = (5.

and 5.14. and are appropriate to use when the underlying average is relatively stable.7.3. When α = 1. Definition 5. such as the mean absolute deviation (see definition 5. See also definition 5.3.15. Definition 5.3 Measuring Forecast Error Once a forecast is made.3.3. 3.3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.3. 5. 5.13).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.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. Mean squared error (MSE).3.3.4) definition 5.3.3. See also definition 5. 2.13.7. Three popular measures are 1.3. Mean absolute percent error (MAPE). 1 See |actual − forecast| n (5.3. FORECASTING is likely to change. Mean absolute deviation (MAD).12).12. .8. exponential smoothing is equivalent to naive forecasting. while lower values give more weight to past data.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5. it is good practice to compare the estimated value with the actual value as actual values become available.3.0. Definition 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.72 CHAPTER 5.

10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. expressed as a percent of actual values. Definition 5.3.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Mathematically.11) .15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.12.5) |actuali − forecasti |/actuali n (5.3. MSE is given by MSE = See also definition 5.3. 100 n i=1 (forecast errors)2 n (5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.8) With smoothing constants α for the average and β for the trend.3. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5. MAPE is given by MAPE = See also definition 5.3. FORECASTING APPROACHES 73 Definition (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.6) 5.3.7) or F ITt = Ft + Tt (5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Mathematically. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.

74 or CHAPTER 5. F ITt . The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. by the formula F ITt = Ft + Tt . Ordinary Least Squares Regression analysis is also useful for predicting trends. time) (5. 2.10. 1.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case.12. 3. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Compute Ft . the emponentially smoothed forecast for period t using equation 5. It is also commonly called linear regression analysis. Calculate the forecast including trend.14) . Tt with equation 5.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. Compute the smoothed trend.

FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. 5. 1. In the U.5 Seasonal Variations in Data In most businesses. demand is seasonal. Deviations around the least squares line are assumed to be random. This provides the seasonal forecast. Although there are many methods to accomodate seasonal demand. Definition 5. 4.S. Most businesses experience a surge in sales around Christmas. we will examine one model. 1. 3. 2. 2.3. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. the multiplicative seasonal model. Compute a seasonal index for each season by dividing the historical demand by average demand. Find the average historical demand for each season.3. Divide this estimate of total annual demand by the number of seasons. The first step is to calculate the seasonal forecast. during the summer months when it is common to take a vacation. the more uncertain it is. then multiply it by the seasonal index for that month.. We do that with a 5-step process.13 assumes a linear relationship. to account for seasonal changes in demand in our forecasting.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events.5. consumers often make fewer purchases of durable goods. 5. Compute the average demand over all months. Recall that the equation 5. such as cars and washing machines.3. 3. Estimate next year’s total annual demand. ¯ x The least squares method has several drawbacks. .

15) Side Note 5.3. 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. if you are uncertain about predictions of x.. pp.g.x = (5.x = (5. but x will be something other than time.76 CHAPTER average local salary) (5. It is also called the standard deviation of the regression and. We will use the same technique.g. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. FORECASTING 5. Note that making predictions of future demand involves also making predictions about the independent variable x.. 106– 107].. However. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. mathematically. whatever uncertainties you may have transfer to your predicition of y.16 is y2 − a y − b n−2 xy Sy.1 (Example: Using OLS) Present Heizer example 12 [1. If there are published estimates you can cite (e. is given by (y − yc )2 n−2 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 5.17) .6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5.g.

2 with stock prices generally rising as skirts rise. have been correlated.8599.5. It does not imply causation one way or the other. 4 Source: and the U.4 .18) .S. “Four Values of the Correlation Coefficient. which is divided into two “conferences.18.S.S.00. football in the U.3.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. changes in skirt lengths don’t cause stock market prices to rise and vice versa.1594488.3. in all but one Year of the Pig.2 (Distribution About the Point Estimate) Present Heizer figure 4. Correlation Coefficients for Regression Lines Definition 5.S. “Distribution about the Point Estimate of $600 Million Payroll. the U. has risen.10 [1.3.S. but the relationship is coincidental. Certainly. p. 2007. 109].3. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5.” Note that the regression assumes a standard normal distribution about the estimate. The correlation coefficient of variables x and y is given by r= See also definition 5. 107].3. Correlation) Correlation merely means that the values of two variables are historically related. pp.S. Dow Jones Industrial Average and Standard and Poor 500. a football game played between two football conferences in the U. stock market. p. Historically.S.3.3. February 28. nor does it imply that they will continue to be related. Side Note 5. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. stock market prices as well as the winner of the Super Bowl.” Side Note 5.9 [1.html?xid=sitecnn-partner. 108]. or National Football League. leading stock indexes.4 (Causation vs. is monopolized by the NFL. the note in the margin accompanying Heizer example 14 [1. the average length of a woman’s skirt and stock market prices in the U. FORECASTING APPROACHES 77 Side Note 5.3 (Examples of Correlation Coefficients) Present Heizer figure 4. Definition 5. Other interesting correlations that have been identified over the years include banana prices and U. stock markets. Even the Year of the Pig correlates strongly with the U.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.” the AFL (American Football Conference) and the NFC (National Football Conference).time. Since 1935.

if they are indeed related to the dependent variable. .3.17. p.6.78 CHAPTER 5. . x2 . . ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . = the dependent variable (e.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. b1 .g.3. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. The same technique can be applied to use several independent variables to predict the value of a dependent variable. p. . b1 . in a multiple regression analysis involves a complex formula which is beyond the scope of this class.3.5 Definition 5.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.19 (Multiple Regression) A causal forecasting method with more than one independent variable. Side Note 5. b 2 . 110]. etc. 5 See definition 5.” As the sidebar points out. . often the most difficult part of building a multiple regression model is to pick the independent variables. The multiple regression equivalent of equation 5. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. we discussed a means by which we can attempt to predict the value of one variable using the value of another. Adding additional independent variables as predictors. 110]. .” For example.3. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. you would use statistics software to calculate these values.15 is given by y = a + b1 x1 + b2 x2 + . (See definition 5.3. .18 and Heizer example 15 [1..19) Determining the values of a. It is commonly simply called “R squared. results in additional predictive accuracy as measured by r2 . . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. b2 . In practice. .

Definition 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. three M ADs to 2. and within 4 M ADs about 99. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).4. p. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.9% of the time. 6 Recall definition 4. one of the most common problems with forecasting is a lack of follow-up.6. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.4.6 One M AD is equivalent to 0.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. If the tracking signals violate upper or lower limits.2 standard deviations.11 [1.5. Definition 5. This means that the observed value should be within 2 M ADs abut 89% of the time. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . In other words.4. MONITORING AND CONTROLLING FORECASTS 79 5.8 standard deviations.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. two M ADs to 1. Side Note 5. three M ADs about 98% of the time. .1.forecast| n where M AD = (5.6. the forecasting methodology needs to be modified.20) A good tracking signal has about as much positive as negative error.2.4 standard deviations. though large errors may be a problem as well even if the positive and negative errors balance.1 (A Plot of Tracking Signals) Review Heizer figure 4. Tracking signals are typically used monitor forecasts. and 4 M ADs to 3. which correspond roughly to standard deviations.4. 111]. These limits are typically based on M ADs.6 standard deviations. The tracking signals should also be compared as they are generated against limits.

you must make your own decision as to how you select the forecasting models that you use.80 CHAPTER 5. α in definition 5.10) is automatically changed to keep errors to a minimum. Definition 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.4.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. changes need to be check with human eyeballs to ensure that the adjustments make sense. In your career. “Summary of Forecasting Formulas. there has been much criticism of the approach to using models based on thier fit to the data.2 [1.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. FORECASTING 5.4. 2.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. There is no single technique that should be used for all products or services. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.4.4.” .2 Focus Forecasting Focus forecasting.g. you should be aware of the criticism of focus forecasting. However. which selects a model based on goodness-of-fit to a data set. Note that even with computer monitoring.3.4.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. is based on two principles: 1. Definition 5. 5.. 114]. 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. Side Note 5.4. p. Sophisticated forecasting models are not always better than simple ones. Side Note 5.

time permitting. and design of products. and • The organization’s capabilities.2. Product strategy2 defines the breadth of the product line and links product decisions to [1. insurance companies often refer to their policies.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. pp. 81 . • Product life cycle. For example.0. 124. Definition 6.1 Side Note 6. is a service. Referring to services as products is common in the service industry. They also use just-in-time production techniques. • Market share and dynamics. 1 In this chapter. 2 Recall sidenote 2. as an intangible.5 (Product Decision) The selection. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. 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.128] • Investment and cash flow.1 . which will be discussed in detail later in the semester. which. definition. 122–123].0. as products. the word “product” will refer to both goods and services.

often ruthlessly.. Growth. Introduction. 6. YouTube videos).1. restaurants or nightclubs). • Growth phase – Effective capacity forecasting is necessary.g. • Introductory phase – In the introductory phase. Product strategy involves determining the best strategy for each product based on its position in the life cycle.82 CHAPTER 6.1 Product Life Cycles Product life cycles can be divided into four phases: 1. or even decades. and 4..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. so high volume.g.g. years (e.. clothing fashions). Maturity. low-cost. 2. months (e. • Decline phase – Investment needs to be minimized and resources need to be redeployed. products expenses are often high for – Research and development. . and innovative production is appropriate. Decline. and – Supplier development.2 Life Cycle and Strategy Strategies change as products move through their life cycle.1. Life cycles can be in the days or weeks (e. – Process modification and enhancement. • Maturity phase – Competitors have entered or are entering the market. 3. DESIGN OF GOODS AND SERVICES 6.

• Sociological and demographic change is also tied to product demand.2. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. the development of cellular telephone technology or the internet. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.2. 6. Definition 6. example.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated.1.2.3 Product-by-Value Analysis For firms with many products. are tied to product demand.1 (Example: Brainstorming) Lead the class in a brainstorming session.3 • Political and legal change can also bring about business opportunities. it must regularly redesign existing products or bring new products to market.500 or 100. Definition 6.000 yuan. • Economic factors.2 Generating New Products Most products have a limited life cycle.6. as well as the total annual dollar contribution of the product. GENERATING NEW PRODUCTS 83 6. such as consumer incomes. example. 4 For 3 For .1 (Brainstorming) A team technique to generate creative ideas on a particular subject.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. 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. • Technological change often drives product innovation. and if a company is to survive. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.1. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development.2. 6. Ideas are not reviewed until after the brainstorming session.4 Side Note 6.

Many successful companies rely on sales from products introduced within the past five years. and the organization’s capabilities.3.3. . p. Each stage should have an accompanying review to determine whether to progress or not. Translates customer desires into a product design.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.3. 128]. 129].1 (Product Development Stages) Present Heizer figure 5. Side Note 6. Definition 6. DuPont estimates that it takes 250 ideas to yield one marketable product [1. 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.2 [1. 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 128]. p. DESIGN OF GOODS AND SERVICES For example.2.3 6.3. p.3. Side Note 6.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. the product life cycle.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. market dynamics.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. Definition 6. 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Determines what will satisfy the customer and 2.3 [1.84 CHAPTER 6.

bureaucratic companies and organizations. 10 The right-hand columns of the house in sidenote 6. design for more information.2. Evaluate competing products. Identify how the good or service satisfies customer wants.3.3.3. there are three popular methods by which organizations undertake product development.3. Product development is done by teams. which can be an advantage.g. In other words. create the columns of the house in sidenote 6.” 6 For example. • Effective communication and coordination between separate departments can be problematic. 130].S. a research & development. 2.10 Side Note 6. Building the house of quality involves six steps: 1. Note that it is not free or open source. manufacturing engineering. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams.9 6.3.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.3.8 5. Develop importance ratings. 6. PRODUCT DEVELOPMENT 85 Side Note 6. Identify customer wants. e. and production departments. 3. Relate customer wants to product hows. 1. as was the software described in section 4. identify the rows of the house in sidenote 6.6.9. with product features. 7 In other words. • Perhaps the most popular approach in the U. An organization is divided into departments.3 Organizing for Product Development In the West.qfdcapture.2 (Example: House of Quality) Present Heizer example 1 [1. Identify relationships between the firm’s hows.2. p.3. • Fixed duties exist. • More common in large..2. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.2.6 3.3. 2.7 4. See http://www.3. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.2. .. 8 These are given on the roof of the house in sidenote 6.

Some teams even include representatives from vendors. etc. because their fate is tied to a product. production.. but my personal impression is that formal QFD practices are not widespread in practice.4 (Concurrent Engineering) In project development. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product.3. organizations are less structured and typically not divided into research and development.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. .3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.3. Definition 6. design. maintainability. The goals of manufacturability and value engineering are 11 See definition 6. Definition 6.3.3. 6.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. engineering. engineering.86 CHAPTER 6. development. use of participating teams in design and engineering activities. purchasing. Side Note 6.1) was implicitly included in the product specification phase of operations management at the companies I have worked for.3. These teams often include representatives from marketing. Definition 6.3. quality assurance.4.3. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.11 In Japan. manufacturing. production. My experience may not be indicative of management practices in general in the U.. it can also be problematic because teams. and use. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used. However. and production stages of product development.. Side Note 6. and field service personnel.S.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. will often advocate for continuation of their project past the point that it is profitable for the company.S.3.

Robust design. 6.3. Cost reduction. 5. Improvement of functional aspects of the product. 4. 3. Standardization of components. Reduced complexity of the product. 2. Improved maintainability (serviceability) of the product. 87 . and 7. Improved job design and job safety. PRODUCT DEVELOPMENT 1.6.


Part II Entrepreneurship 89 .


who has started two businesses and been CEO of three startups once told me. but the humor in the statement lay in the fact that there is some truth to it. but also realistic. Side Note 7. ultimately. .7. While it is important to be realistic about risks when starting a business.” However. studies have found that most successful entrepreneurs are actually unrealistically confident 91 . must begin with a single step. then another. you will have to decide that you have done as much as you can do and simply take action.” He was joking. See also sidenote 7. then taking another step. Matt McAdams. doing it is simple. starting a business simply involves taking the first step. “None of the other CEOs respect you until you’ve driven a couple of businesses into the ground. If you start a small business.7 (Confidence vs.0.0. As a Chinese philosopher once said. difficult undertaking. people who can tolerate a high degree of risk. “Every journey . Side Note 7. In fact.0.” At its core. Most businesses fail within the first 18 months.6 (Business Failures) A friend and former colleague. taking that first step can be extremely daunting. fear of failure and other insecurities dissuade most people from ever starting a business. The best way to overcome that fear is to address any concerns or uncertainties by preparing as much as possible before “taking the plunge.Chapter 7 Introduction to Entrepreneurship Although starting a business is usually a complex. However. you should be confident. that is. Realism) Most people perceive those who start businesses as risk-takers. .

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

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 difficult to keep the necessary focus on the business. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.7. take note of this information. friends. you may not be prepared to start a company.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. at Active. the use of venture capital will probably increase over time in China. “When are you coming home for dinner?” or criticizing you for ignoring them. for example. friends and family are the most important concerns in their life. You may lose friends because you do not have the time to maintain the friendship. Venture capital financing is common in the United States but is not yet a common means of financing in China. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family. Side Note 7. we suffered a database corruption that resulted in my practically living at work for three weeks . It may be useful later in your career. – However. The discussion of entrepreneurship and starting and managing a business will contain some information that may not be relevant to you as a student at this • Some of the information is intended for those who have an established career and real-world experience to draw upon.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. or angel and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty. – Additionally. For many people. month after month. Often. week after week. we will discuss venture capital. If you are not prepared to redefine relationships relative to your business life. If after many long hours at work your family will be asking you. • Among the means by which you can to raise money. but something you may need to do day after day. Putting in long hours is not something that is done once in a while. possibly even years at a management and Jerry’s difficulty balancing work and family life. – For now. Discuss the impact of the demands of a startup on the marriages of Active.

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

000. • Analyze Your Professional Attributes – Be aware of where you need help. your goal may not be realistic. if not more important. such as sales. 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. If you talk to an entrepreneur who has not been successful. If your goal is to raise 1. – Long-term goals are those that may take 5.000 yuan by July 1” is a much better goal than “raise money. ask other entrepreneurs. When setting goals. Like parents. When I talk to those who I know who have started businesses. • Set both short-term goals and long-term goals.3. than learning from success.” • Be optimistic. Learning from failure is as important.3 Setting Goals With any major endeavor.3. try to figure out why they were not successful.” you may not want to start a business that focuses on customer relationships. Move on to larger goals once the small goals have been met.7. SETTING GOALS 95 If you are not a “people person. “Achieve financial independence” is much better than “pay the bills. marketing.1 (What’s It Really Like?) If you wonder what running a business is really like. even the successful ones will probably focus on the negative. 10.000 yuan and you’ve never had a job before. Consider at least a five-year time horizon.” • Be realistic. When setting goals. – Start with small goals. advertising. 7. ask yourself the following questions: • Income – How much do you want to earn. it is common to exchange “war stories” about the difficult times and sacrifices. although the successful ones generally view their experiences as positive on the whole. “Raise 100. or 20 years to accomplish. and administration. – Short-term goals are those that can be accomplished within a year. • Be specific. it helps to set goals. Side Note 7. .

Eliminate question 1 and substract one point from the scoring given on p. 20. Have the class write down their answers and evaluate their own EQ. 18–20].3. How much is your ego worth? Side Note 7. pp. Side Note 7. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. . – Geographic location.96 CHAPTER 7.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. The reasons given for adding or subtracting points are as interesting as the ultimate score. Acknowledge this fact and factor it into your decisionmaking.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. and – Investment of personal assets. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely.3. pp. INTRODUCTION TO ENTREPRENEURSHIP • Lifestyle – Would you be happy traveling frequently? What about your family? Are you willing to invest your personal assets? What do you want in terms of – Travel. – Hours of work. Many people want to start their own business for ego gratification. 21].

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

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

or health. His sales are now in the millions of dollars per year and the business is very profitable. A well-known phrase in English. the business took off. Have students come up with examples of products that meet various criteria on the checklist. Side Note 8. or are otherwise discouraged.1. You should be realistic about risks.” Side Note 8. 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. February 17. to be truly self-motivated and persistent in the way you need to succeed. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. that they will never make People thought he was going nowhere and generally dimissed his business. p.8.1. he would never succeed.1. “Never say die.1. used as the title of at least 12 movies and television shows. computer-controlled security cameras. you will be spending years of your life trying to make the idea work. Entrepreneurs are often told their idea is flawed. such as your family. YOU’VE GOT AN IDEA. Now What? The number one trait needed by successful entrepreneurs is perseverance. . After all. 2 http://www. Warnings about risk are perhaps the criticism you should consider most carefully.” That you should not let it dissuade you. p. 33]. in the wake of 9/11. it is too risky.1 You’ve Got an Idea. home. making just enough to get by but not much more. Have students fill out the form on their own time. He ran the business as a one-man operation for years. 2007. Side Note 8. Finally. And you should not risk anything you can’t afford to lose. 8.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. you should have “thick skin. You have to think long and hard about why your idea might not work and satisfy yourself that you will be able to address all the weaknesses in your idea. thinking that if he did not succeed after a couple of years. 35].2 is.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. However. while you should listen to criticism that others give.


1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.0. go through the following 7 steps: 1. When trying to identify your niche market. your next step is to do some market research. Definition 9. See also 9.2.” or business-to-consumer ventures. 101 .Chapter 9 Defining Your Market After coming up with your idea.0.” or business-to-business ventures. Definition 9. Businesses.1. There are two broad categories of markets: 1.0. but you should try to target your market as specifically as possible. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. 9.0. Not only do you need to decide whether you are marketing to businesses or consumers. See also 9.2 (B2C) Businesses whose customers are primarily consumers are called “B2C. Consumers and 2.

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

.. This marketing technique has been widely used since the early 1980s in the U. For example. many entrepreneurs make the mistake of being “all over the map.9. Likewise. Definition 9. Marketing to demographic groups has become much more refined in the last few decades. they try to satisfy all possible customers and end up trying to do too many things well. when the country was immersed in a war effort. you should practice extra caution to avoid stereotypes or other insensitive approaches. the Depression-era cohort. Side Note 9. (See definitions 9. and other Asian customers together. New marketing techniques include generational.) Using these new marketing techniques can allow you to narrow your market.1. Chinese. the more likely you are to score a hit. and psychological factors. life stage. for example. are similar in age to those who came of age in World War II.1. and the narrower your focus on your target. Side Note 9. but their behavior differs significantly due to the different influences in their youth. many Eastern companies make the mistake of lumping together American and European customers. FINDING YOUR NICHE 103 7. the World War II cohort.1.2. when many people were suffering from extreme poverty.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. Many Western companies make the mistake of lumping together Japanese.1. and cohort marketing. This can be offensive and serve to alienate rather than appeal to your customer. . Definition 9. Someone who is starting a family at age 20 has much in common with someone starting a family at age 35 even though their ages may be quite different.1.1. young adults in the Depression. many are choosing to start families later in life or even have children ten years or more apart.” That is. economic.1 (Generational Marketing) Marketing to consumers based on age as well as social. such as having children. and 9. As older people are more active than before. It is better to do just one thing well than to do many things poorly. If you did your homework..1 (Smaller is Bigger) When starting a business.S. you should be able to enter your niche market with confidence.1. 9. demographic. Definition 9. in the U.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.1.1. Go for it! – Implement your idea. or retiring.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.3.S.1. buying a home. etc. Korean.

. The mission statement should • Be succinct. you should. Side Note 9.2 [1.3. a few sentences at most. Falkenstein1 advises that you regularly reevaluate your niche. 79] 9. create a mission statement.104 CHAPTER 9. DEFINING YOUR MARKET 9.2 Redefining and Expanding Your Niche Lynda C. Every six months or so. 28] which includes mission statements for three multinational companies: 1 See section 9. Falkenstein states.1. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.” [4.3 The Mission Statement Once you have a niche. p. “Creating a niche is the difference between being in business and not being in business. p.1 (Mission Statements for Three Organizations) Review Heizer figure 2. • Convey the essence of your business’s goals and philosophies. • 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.

courteous. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems.9.3. We will be helpful. healthy. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. 3. Our mission consists of 3 interrelated parts: • Product Mission – To make. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. competitively superior. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. contributing member of our community and offering the Hard Rock family a fun. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. global air-ground transportation of high-priority goods and documents that require rapid. We will produce outstanding financial returns by providing totally reliable. 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.3. and professional to each other and the public. A complete record of each shipment and delivery will be presented with our request for payment. THE MISSION STATEMENT 1. time-certain delivery. We are committed to being an important. 105 Side Note 9. natural ingredients and promoting business practices that respect the Earth and the Environment. and nurturing work environment while ensuring our long-term success. FedEx FedEx is committed to our People-Service-Profit philosophy. . We will strive to have a completely satisfied customer at the end of each transaction. 2. Equally important.

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

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


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




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.

.2.10. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire.2. RESEARCH METHODS 113 Side Note 10. pp.” [4.


1. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. 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. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed.4 (Business Plan) A business plan is a written document that details a proposed venture. Set up a timetable with specific steps to be accomplished in a specific period. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. Definition 11. Those who provide financing are aware of these pitfalls. In terms of sanity checking. It must describe current status. and so should you be. Your business plan should list obstacles that may arise and what will be done to address them. 3. expected needs. and projected results of the new business. 2. Every aspect of the venture should be covered. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. 4.0.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. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. including 115 . 5.

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

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

You should use this to keep track of who has which copy.3 • The Cover and Title Page – The cover should have the name of the company. – 40 pages is ideal. and full contact information4 for the company. If you write to much. 4 Phone number. The benefits to customers. 6. 5 I suggest the lower-right corner. The venture’s objectives in 3 to 5 years. they will not read it. – Inside the front cover should be a title page repeating the cover information. 4. THE BUSINESS PLAN – It should be no more than 50 pages. p. 3 Note that for this class. 5. The amount of financing needed.1. 3.118 CHAPTER 11. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. Its products or services.3 Some Style Points Kuratko also recommends that you [3. and/or web site. the date of the plan. e-mail address. and How investors will benefit. a number should be in a corner5 indicating the copy number. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. The company’s current status. 7. address. 11. – It should explain 1. 2. • The Executive Summary – Two or three pages immediately following the title page. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. . 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. – It is worth repeating: Keep it down to at most two or three pages. though you should not put it in the same corner as page numbers appear. The financial forecasts. – On the title page.

” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. Business Description – Name the business. 2.” or “them. which describes the 10 sections of a typical business plan. Present a focused plan. Use the spell checker on your word processor to check for spelling mistakes. p. Include any pictures or designs that would be helpful. • Orient the Plant Toward the Future – Create an air of excitement. copyrights.” “they. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar. is it based on a family name? Does it include technical terms you need to identify? . so be sure the writing is finely crafted. use “he. be sure to include them in the business description.6 Note any industry developments and describe the business thoroughly. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed. but it is the first thing that your audience will read. and tell why it is named what it is. or other special market advantages you have. 11. trademarks. 305]. • Do Not Overdiversify – Don’t try to be all things to all people.1 (10 Sections of a Business Plan) Present Kuratko Table 10. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. • Identify the Target Market – Market research should support a focused customer niche.” “we.2 [3. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems. Executive Summary – This should be the last thing you write. • If there are patents. 6 E..” Instead.2 The Plan Contents Side Note 11.2. Some details on each section of the business plan: 1.2.” or “us. The executive summary gives readers their first impression.11. Your credibility is established in part by the credibility of your plan.g. • Keep the Plan Written in the Third Person – Do not use “I.

(c) Marketing Strategy – Your marketing strategy should be described based on research. • Local taxes and zoning requirements. if you are going to market leases on equipment where previously only sales were allowed. and customer availability and proximity. radio. 7. their job descriptions and responsibilities.120 CHAPTER 11. (a) Market Niche – Define your market niche. (b) Competitive Analysis – Assess the strengths and weaknesses of the competition. 4. warranty. 6. Gross profit margin should be discussed. 9 Research and Development . and • Possible support of local banks. • Features of the product to be emphasized in your sales efforts. cost. Management Segment – Key personnel. Justify any price increases over competitors based on newness. This should be an honest assessment. if the promotional campaign will be a significant portion of expenses. • Any innovative sales or marketing concepts that will enhance customer acceptance. testing. such as equipment. service. In addition. that your sales estimates are reasonable. THE BUSINESS PLAN 3. offices. 5. Research. Marketing Segment – You must convince investors that a market exists. etc. including • The kinds of customer groups to be initially targeted. including the type of media8 and. should be described. (e) Advertising Plan – Discuss any promotional campaign. Operations Segment – First. and project status should be discussed. or internet. quality. pay and ownership (such e e as stock agreements) should be described. Any risks should also be detailed. Costs should be detailed for all major expenses. and Development – If R&D9 is to be performed. supplier. • Methods of identifying and contacting customers. describe the location of the new segment. • The Kinds of customer groups to be targeted as the business matures. Important aspects of location include • Labor. television. how and when expenses will be incurred. etc.. Financial Segment – The financial segment should include 7 For example. and r´sum´s should be given.7 (d) Pricing Policy – Compare your pricing policy with competitors. time. storage. In addition. facilities requirements. Design. 8 Such as magazines. and that you can beat the competition. Discuss the growth of Active. . Completion of prototypes. detailing projected inflows and outflows. Hiring of sales representatives. Signing up distributors and dealers. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. and Payment of first accounts receivable. Definition 11. 9. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. current ratios. Your investors are probably as aware. Completion of design and development. Receipt of first orders. For example. Costs exceeding estimates. Risks might include • • • • • Negative industry trends. Critical-Risks Segment – Discuss business risks and the ways you might address them. working capital. of the risks than you are. which investors will use to estimate debt/equity ratios. 8. Product display at trade shows. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. or more aware. (b) An income statement. a balance sheet containing projected balances is called a pro forma balance sheet.11. as opposed to actual. (c) A cash-flow statement. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.2. 11. Appendix – If there are documents.1 (Pro Forma) A latin term that means projected. Design or research difficulties. Unexpected competitions. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. include an appendix.2. inventory turnover. Side Note These might include • • • • • • • • • • Incorporation of the new venture. First sales and first deliveries..2. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. Ordering production quantities of materials. Difficulty purchasing parts or materials. Try to be honest and realistic.2 (The Growth of Active. detailing projected profits and losses.


author of The Art of the Start. 123 . anyone who will listen. 12.Chapter 12 Presenting the Plan 12.1.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches. Present it to your friends. 12. pp.1 The Presentation Side Note 12. your business class. The presentation of your plan is an ongoing process.1 Do It Until You Get It Right This is perhaps the most important piece of advice. This means that you should not count on presenting your plan to your most critical investor for the first time. your dog. 62]. The first time you present your plan. and Potential Partner Pitch [2. not a one-time event.1 You will have to pitch to many medium-size fish before you are ready for the big fish. recommends twenty-five times [2. p. Sales Prospect Pitch. you will probably not do a good job. Present it many 1 Guy Kawasaki. local business associations. 51–56]. Your presentation should evolve over time as you listen to your audience and receive feedback. You will probably have to present it at least ten times before it is ready for the medium-sized fish. your family. Do not be dismayed.2.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch.

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

At my company in Chicago. and although you go into each presentation . “So what?” If you cannot answer this question simply and easily. where some of the smartest people in the world worked. 12. They may ask you something you want to respond to in an e-mail later.6 So What? When you are planning your presentation. Guy Kawasaki recommends you set a timer [2. Many people feel as if taking notes makes them look stupid.2. it is quite the opposite. but in reality. Ask them what your company will do.3. 12.5 Take Notes Have a pen and paper ready and take notes during the pitch. you are not presenting it well. I always bring a pen and paper to meetings.2.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. • Taking notes also makes you look conscientious. Everyone. you need to change or eliminate the statement. 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. and each investor will respond differently. • Your audience may ask you several questions at once. p. AFTER THE PRESENTATION 125 Side Note 12.2. everyone brought a pen and paper. You should be prepared for the unexpected. In general. Much of the material required use of the internet.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.2. Stop when it goes off. Give your presentation to friends or family. ask yourself after every statement you make. If they cannot explain it clearly. 12. so write things down to make sure you don’t forget. 12. They may ask you something that makes you want to change your presentation. It is easy for things to get lost in the heat of the moment. 45].12.3 After the Presentation Each presentation will be different.

” . Remember that persistence is the most important character trait of entrepreneurs. PRESENTING THE PLAN with only success on your mind. Each time your are rejected improves your future opportunities. Side Note 12.3. p. 321]: “What to do when a venture capitalist turns you down: Ten questions. Be prepared for rejection and do not consider it the end of the road.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.126 CHAPTER 12.5 [3. Each negative comment gives you an opportunity to change an investor’s opinion.

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.

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

S. In the U.1 Buying Inventory In the process of putting together your business plan. You should know how many sales per square meter per year you need to survive. and delivery cycle.3. which allows you to pay less taxes on your inventory.3.2. 13. Definition 13.3.4. it values your remaining inventory based on the prices of the least recently purchased items. 2 At 3 At least this is true in the U. In other words. least this is true in the U. first out) assumes that you sell the least recently purchased inventory first. first out) assumes that you sell the most recently purchased inventory first. it values your remaining inventory based on the prices of the most recently purchased items. Many businesses also measure turnover by measuring sales per square foot (or square meter).1.4. First Out)) LIFO (last in. 13.4.2 (FIFO (First In. LIFO and FIFO are two accounting methods used to do this. In deciding which to use. See definitions 13. The author is unfamiliar with Chinese tax codes.1 (LIFO (Last In.4. the needs period is the sum of the count cycle.4. The author is unfamiliar with Chinese tax codes.S.4 Inventory Accounting Your accountant will typically handle inventory accounting.S.3. INVENTORY ACCOUNTING 131 Definition 13.3.4. follow the recommendation of your accountant. First Out)) FIFO (first in. which may result in higher taxes. After you have been in business your inventory control system should give you a better idea of stocking levels. Definition 13. If there is inflation. you must estimate your inventory value when you file your taxes.2. 13. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.5 (Needs Period) In inventory management.. and 13.2 See also 13. order cycle. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.13. If there is inflation.4. .3 See also 13. Calculate your sales per square meter once per month. but you should at least know about LIFO and FIFO.

5. 13. author of Start Your Own Business. Independent craftspeople 4.132 CHAPTER 13. – The minimum may be higher for first orders to cover the cost of setting up a new account. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. 3. 13.” .5 Suppliers Suppliers can be divided into four categories: 1. Rieva Lesonsky. usually one. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Distributors – Also known as wholesalers. courteous and firm with your suppliers. Import sources – They operate like domestic wholesalers. Manufacturers – Note that some manufacturers refuse to fill small orders. “Be open.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.4.1 Dealing with Suppliers The most important thing about a supplier is reliability. says. 2. and they will respond in kind. • Some suppliers demand a minimum number of items per order. INVENTORY CONTROL Definition 13.actual inventory . brokers or jobbers. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Their prices are higher than a manufacturers. three or four months.

and • The need to be firm but fair.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. 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. SUPPLIERS 133 13. the supplier will pay for freight. . If a supplier does not extend credit.d.13. personal interaction can work wonders. you should know who is liable for damage to goods in transit. You can also present your financial statements and prospects for success. Suppliers sometimes try to complicate pricing to their advantage. it is considered a felony. they will put you on a c.5.d. Whatever you do. • Discounts. Discuss • Their negotiating technique when discussing pricing. do not falsify or misrepresent your financial statements.5. • For items being shipped. Ask about the freight policy before ordering. 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.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. Be sure to add up • Costs. If a supplier is uncertain about you. 2. I regularly had to deal with food vendors. basis until you have proven yourself reliable. customers may be required to pay upon receipt of goods.o. Side Note 13.5.)) Cash on delivery. At least in the U.S. If you are dealing with a reticent large supplier. • Sometimes if an order is large enough..o. and • Allowances before you make a decision. Definition 13.5.1 (COD (or c. Tips for dealing with suppliers: 1.

5.3 (FOB Destination (or f. This differs from a forward order where stock is available but delivery is postponed for other reasons.5.html.b. 5 FOB Destination changes the location where title and risk pass. Specify a cancellation date on your order forms. 2007. 7 Source: http://en.abcsmallbiz. Definition 13. INVENTORY CONTROL • Depending on whether the supplier pays frieght.)) Free on board.epoi.b. May 19.5.2. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Under this arrangement.5. 3. Be aware of your supplier’s priorities.134 CHAPTER 13.7 4 Source: 5 Source: http://www. people often say something like “f.4 Colloquially.wikipedia. As opposed to FOB.o.html. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.b. Definition 13. 2007. Seattle” to indicate that an item being shipped from Seattle is free on board. Definition 13. 2007. 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.roadway.o. The FOB term requires the seller to clear the goods for export. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. http://www. May 19. 5. See also definition 13. .com/jargon.3.2 (FOB (or f. 2007. May 19. Destination)) Free on board destination. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the May 19.6 See also definition 13. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4.4 (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.html. it may be worthwhile to cancel backorders and bundle them with a subsequent efg. 6 Source: http://www.

Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. Side Note 14. Side Note 14. 337]. • Temporary employees (temps).0. they are often emotionally draining for the manager as well as the employee involved.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4.0. On the other hand. • Part-time employees. a bad hire.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. and • Independent contractors. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). 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. 135 . While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. p. besides being bad for business.

you’ll be grateful to have spent the time to go through a more formal process. an employee with an inflated job title may expect an inflated severance package. If you call someone a Vice President but don’t compensate them as such. creating a job description.2 Job Description Side Note 14. Cleaning.136 CHAPTER 14. • If you have do terminate the employee. selling. 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. 14. and recruiting. If you give someone a job as Vice President. then want to hire someone else later at a position above them in the company.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. etc.1. you have nothing to offer. by the time you hire your 40th employee.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. writing reports. lifting. you need to consider • The physical or mental tasks involved. HIRING EMPLOYEES 14. Not only education and skills. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. they will soon expect compensation commensurate with their job title. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. Side Note 14. you will likely find that they will come to you at some point to demand a vice president’s salary. However.1..1. . programming.1 How to Hire Hiring involves analyzing the job requirements. • How the job will be done. • You may not leave enough buffer above the employee.1.1 Job Analysis Before creating a job description. 14. but personality traits.

p. and • Any occupational hazards. Definition 14. • If you give someone an inflated job title but do not offer a salary commensurate with the title.1) and should include the personal requirements expected of an employee [4.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. Side Note 14. it includes • The job title.1 (Job Description) Job descriptions should include • A job title. • A salary range. 339]. • Who the person reports to.1. If you hire someone at the highest level of their competency. • Physical or other special requirements associated with the job. then they go on to a Director position at another company. and • Job summary with major and minor duties. you may find they are tempted to leverage that job title to seek employment elsewhere. Part of retaining quality employees is the prospect of advancement. you hire someone as Director who is not qualified to be a director.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. 338]. you may find it difficult to give them a promotion later. HOW TO HIRE 137 • There is little room for advancement. If. • Desired experience. Definition 14. for example. Like a job description.14. • Benefits. You may actually be doing your employee a disservice by inflating their job title.1. . their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career.1. It also includes • Any educational requirements.1. and • A summary description of the position. • The position of that employee in the corporate heirarchy. • Specialized skills or knowledge. p.1.

S. 2 See sidenote 14.” or people who may not have them will just try to fake those personality traits in the interview.4 (Using an E-mail Address) For professional positions. if you are looking for an accountant. 14. – For other positions. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.1. e-mail addresses have become perhaps the most popular way to get applicant information at U.1.5. HIRING EMPLOYEES 14.2 Side Note 14.3 Advertising the Job When you write an advertisement. companies. . such as “outgoing” or “detailoriented.138 CHAPTER 14.4 Finding People There are many possible sources of applicants. due to the number of applicants for competitive positions. For example. With e-mail. It also makes it easy to receive and process a large number of applications with a minimum of effort. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. • Be sure to list appropriate contact information.1. Many American companies are no longer providing phone numbers.. • Do not list requirements other than educational or experience-related ones.S. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U.1. • Do not ask for specific personality traits. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. – For professional positions. • List the top 4 or 5 skills that are most essential to the job. particularly those that advertise on web sites.

Try to perform a search on a job sites such as http://www.S. 2007 turned up more than 5. 3.. 2. for professional positions.314 listings in the “Computers. with the keyword “java” will demonstrate just how widely used online tools are. You conduct a second round of interviews with the remaining 3 or http://www. You check references.3 Generally.000 hits searching just the “Information Technology” search You narrow the number of resumes down to about 10. be sure that a candidate can provide what you are looking for. most professional associations’ job banks are now online. about 10 or so. the hiring process proceeds as follows: 1. 4.1.14. many positions are being filled online. • Focus on the skills that a person can bring to your company. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. • Industry Publications – Most trade publications take ads for job openings.. You can evaluate their personality during the interview. 159 in “Financial Services. Software” category.S. 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. 5.” And 921 in “Engineering. particularly in the high-tech industry. not a science.dice. You narrow down the 10 candidates to 3. Searching on Monster. Screening People Reviewing resumes and applications is an art. you will get several candidates for any job you are offering. 3 Java is a programming language. You interview the with the keyword Java on May 19. In the U. You hire the preferred candidate. For any job. • Online – In the U.” 665 in “Internet/E-Commerce. To “weed out” candidates. but when looking at a resume. There were 4. If you are lucky.” .

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

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

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

They were not hired. they will have questions about the company and the position. test to see how employees solved problems. give them time to ask you questions. • Have you hired people before? If so. • Things the candidate seems reluctant to talk about. Be wary of answers that subtly indicate that there may have been a problem with the candidate. such as their posture. with many companies like Google incorporating these kinds of questions into their standard interview process. Finally.1.14. 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. HOW TO HIRE • What interest you most about this company? This position? • Describe three situations where your work was criticized.9 (The I. • Whether the candidate can think on their feet. Test) At Active. Lesonsky tells of one supervisor who was asked about . what did you look for? Things to watch out for include • A bad attitude regarding the candidate’s previous employer. After your questions. attentiveness.S. take a few minutes to write down your how many handshakes are there? Checking References One thing that far too few employers do is check references. do not give bad references to avoid potential lawsuits. the CTO liked to ask questions like you would find on an I. Most supervisors.. but there references were poor.Q.1. 143 • The candidate’s general demeanor. at least in the U. I have interviewed people who looked great on paper. This has become popular recently in the U. If the candidate is really interested in the position.. gave a strong interview. Side Note 14.Q. and general tidiness in their appearance. after you finish the interview. • 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.

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

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

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