International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

1

Copyright c Collin Starkweather 2007. All rights reserved.

2

Contents
I International Business Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7
9 9 10 12 13 13 13 15 15 15 15 16 18 19 20 23 23 25 28 30 30 32 34 34 34 35 37 38 38 40 42

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

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . . .

. . .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . . . . . . . . . .1 Project Planning . . . . . .2. 4. . 6 Design of Goods and Services 6. . . . . . . . . . 4. 5. . . . . . . . . . . . . . . . . . .1. . . . . . . 4. . . . 6. . . . 5.4 3. . . .2 Focus Forecasting . .7 Cost-Time Trade-Offs and Project Crashing .1 Goods and Services Selection . . .3. . . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategy Development and Implementation . . . . . . . . . . . . .6. .1.2. . . . . . . .3. . . . . .3. . . . . . . . . . .3. . .5 Slack Time and Identifying the Critical Path . . . . . .3. . . . . . . . . . .1 The Project Manager . . 5. . . . . 3. 6. . . 4. . . . . . .3 Forecasting Approaches . . . . . . . . . . . . . . . . .6 Variability in Activity Times . . . . . . . . . . . . . 3. . . .3 Dynamics . . . .1 What is Forecasting? . . . 5. . . . . . .6 Associative Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . .1 Identify Critical Success Factors .3 3. . . . 5. . . . . . . . . . . . . . . . . . . . . . . . 3. .1 Qualitative Forecasting Methods . . . . . . . . . 4. . .3. 4. . . . . . . . . . . .3.3 Product-by-Value Analysis . . . . . . . 3. . . .1 Research . .2 Project Scheduling . . . . . . . . . . .4 4 Project Management 4. .3. . . . . . . . . . . . .5 Seasonal Variations in Data . . . . . . . . .2 Build and Staff the Organization . . . .2 The Work Breakdown Structure . . . . . . . . . . . . .2 Quantitative Forecasting Methods .1 PERT and CPM .3. . . . . . . . . . . . . . .2 Network Diagrams . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . . . . . .1 Product Life Cycles .4.1. . . . . . . .2 The Strategic Importance of Forecasting 5. .2. . . . 5.3. . . . . . . . . . . . . . . . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . .3 Measuring Forecast Error . . . . . 6. .1 Types of Forecasts . . . . . . . 4. . . . . . . .1 Probability of Project Completion . . . . . . . . . . . . . . . .2 Preconditions . . . . 5. 4. . 4. . . . . . . . . . . . . . . 5. . . . . . . . . . . 4. . . . . . . . . . . . . .2 Life Cycle and Strategy . . . CONTENTS .4 Adjusting for Trend . .1. . . . 5. .2 A Seven Step Forecasting System . . .1. . . . . . . .8 A Critique of PERT and CPM . . . . . . . . . . . . . 5. . . .4 Monitoring and Controlling Forecasts . .3 Project Controlling . . . . . . . . 3. . . .4. . . . . . . . . . . . .4 Determining the Project Schedule . . . . . . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . 92 7. . .3 Some Style Points 11. . . . . . . . . .2 Some Suggestions . . . . . . . . . . . . . Product Development . . .2. . .4 The First Minute is the Most Important . . . . . . . . . 11. . . . . . . . 104 9. . . . . . . . . . . . . . . . 12. . .1.2. . .2 Redefining and Expanding Your Niche . . . . . . . . . . . .2 Quality Function Deployment (QFD) .3 Be Familiar With All Equipment to be Used 12. . . . . . .3. . . . . . . . . . . . . . .2 Look and Feel . . . . . . . . . . . . . . . . 6. . Exactly? . . . . . . .1 Importance of New Products . . . . . . . .2 Know Your Outline Thoroughly . . . . . . . 104 10 Market Research 109 10. .3 Generating New Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CONTENTS 6. . . . Now What? . 6. . . . .1 Do It Until You Get It Right . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . . . . . .1 You’ve Got an Idea. . . . . . . . . . . . . .1 Characteristics of the Successful Entrepreneur . . . . . . . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. . . . . . . . . . . . . . . . . . . .2 The Plan Contents . .1 Sources of Secondary Research . . 111 11 The Business Plan 11. . . . . . . . . . .3. . . . . . . . . . . . . . . . . . .2. . . . . . . .2 6. . . . . . . . . . . . . .3.6 So What? . . . . . . . 94 7. . . . . .3 After the Presentation . . 99 9 Defining Your Market 101 9. .3 Setting Goals . . . . . . . 12. . . . . . . . . . 12 Presenting the Plan 12. . . . . . . . . . . . 12. . .1 The Presentation . . . . . 12.1 Product Development System . . . . . . . . . . 12. . . . . . . . . . 111 10. . . . . 12. . . . .5 Take Notes . . . . . . .3 Organizing for Product Development . . . .2. . . . . . . . .2 Research Methods . . . 101 9. . . .2 Are You Ready? .2. . . 6. . . . . . . . .1 Your Audience . . . . . . . . . 11. . . .1. . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 What Am I Researching.3. . . . . . . .1 Finding Your Niche . . . . . . .1. . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . . . . . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . 12. . . . . . .4 Manufacturability and Value Engineering . . . . . . . . . . . . .3 The Mission Statement . . . . . . . . . 6. . . . . . 110 10. . 6. . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . .

. . . . .5. . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . 13. 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . .4.2 Tracking Inventory . . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Finding People . . . . . . . . . . . . . . . . . . . . . . .1. . . . . . . . 14. . . .1 How to Hire . . . . . . . . . . . . . . . . . . . . . . .3 Computerized Inventory Control 13. . 13. . . . .1 Job Analysis .2 Payment Plans . .1 Inventory Turnover . . . . . . . . . . 14 Hiring Employees 14. . . . .5 Suppliers . . . . . . . . . . . . . . . 13. . . . . 13. . . . . . .1.1 Dealing with Suppliers . .3 Advertising the Job 14. . .1 Buying Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Inventory and Cash Flow . . . . . . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . . . . . . . . .3. . 13. . . . .5. . .2 Job Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . .6 13 Inventory Control 13. . . . . . . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . .1. . . .

Part I International Business Management 7 .

.

they are not allowed to drive or go out in public without covering their hair or face. they become increasingly important not only as a business entity. For multinationals. • Homosexuality is acceptable in Scandinavia but offensive in many other parts of the world. 9 . in some Islamic nations. but as leaders in the community. What may be perfectly acceptable to one culture may be abhorrent to another. • Married women are considered to be acting against the teachings of the Koran if they work outside the home.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.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. Furthermore. whether they are a small business owner who runs a restaurant or a multinational corporation like Microsoft or Lenovo.1.1 Culture and Ethics Side Note 1. Likewise. business ethics becomes more problematic as multinationals cross cultural boundaries. small business owners are leaders in their community whether they intend to be or not. 1. such as Saudia Arabia.

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. and Europe but a commonly accepted practice throughout the developing world.A. • However. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.A.S. 3. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.S.2. there is a perception in the West that Chinese are hard-working and smart. • Because of this. • In general. It is much harder for a Westerner to know when to trust a Chinese person than for a Chinese person to know when to trust another Chinese person. Definition 1. Why is corruption an important business issue? • See sidenote 1. Which brings us to the subject of this lecture: Ethics. . Westerners rely more on contracts. Easterners tend to trust people after observing a pattern of consistent behavior.2 Corporate Corruption Side Note 1.. which are more strictly enforced in the West.1. Note that during the industrialization of the U. Western business people may not initially trust their Chinese counterparts. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. This is something Chinese business people should be aware of. 2. • Because guanxi is less important in the West. 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.1 (Ethics) The study of morality and standards of conduct.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1.2.10 CHAPTER 1.A. Prison labor is also considered improper in the U.2. 1. child labor was widely used.S.

China continues a battle against corruption. 2006.2. .2 (Corruption) Corruption is of concern for business people because • It increases risk. 2006. – If business leaders cannot count on other business leaders and public officials to act in a fair and consistent way. investors in the United States had to reevaluate the risk associated with owning stock. these are all generalizations and individuals may differ significantly from their cultural affiliations. there are few if any issues which affect and infuriate so many in China as corruption.org.1 (Bribe) A price. witness. they must factor additional uncertainty into their calculations. September 20.2. . it is simply inefficient.”[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. • Of course.org/policy research/surveys indices/cpi. or other person in a position of trust. For example. Definition 1.2 Though things are improving. voter. – Executives who steal from their company do so at the expense of profits which would be realized by shareholders. – The impact of corporate corruption in the United States has been ∗ Increased costs in the form of the Sarbanes-Oxley (SOX) Act. Scandinavians are typically highly trustworthy1 but Italians are less so.transparency. • It increases the cost of doing business. WorldCom. . which requires strict monitoring and verification of financial information. September 20. Side Note 1. 2 Source: http://www. and Tyco.dict. Source: texttthttp://www. CORPORATE CORRUPTION 11 • Westerners from different countries can be quite different. reward. – In the wake of Enron. – 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). “. In the words of a Beijing correspondent for “The Economist” magazine. or favor bestowed or promised with a view to prevent the judgment or corrupt the conduct of a judge. • On a macroeconomic level. – A bribe is a business expense that goes to no productive purpose and decreases profits. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.1.2. gift.

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

This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion. • Many men do not understand why sexual harassment constitutes a problem. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. were not as highly regulated as banks.pdf. Moreover. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.4.fdic. Likewise. The government was compelled to provide public money to bail out the institutions. Savings and loan institutions. JAPAN 13 1. Hodgetts et al.4 1. with many men of the opinion that women were just biding their time until they marry and have children. and as a result made high risk investments in the late 1980s and early 1990s. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Better known is the case of Japanese banks. p. 5 1.gov/bank/analytical/banking/2000dec/brv13n2 2. This resulted in several banks being technically bankrupt [5. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. 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.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.S. 58].4. women have a difficult time being taken seriously.4..4.1. with many women finding their employment opportunities constrained.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. Side Note 1. also known as thrifts and which function like banks. the political scandals do not appear to have been fully acknowledged and addressed. Side Note 1.1 (The U.2 Women in the Workplace Sexual harassment has also become an issue in Japan. .4.

Side Note 1. gender. Are women with equal qualifications as men given equal pay and position? Take a show of hands. 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.4. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. hostile or offensive work environment.psu. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States. The victim does not have to be of the opposite sex.. a supervisor in another area. a co-worker. • The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. and for most public institutions and many large corporations. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. Definition 1.14 CHAPTER 1.S.4. • The harasser can be the victim’s supervisor. cite two cases in which foreign firms operating in the U.edu/harassment/legal. including but not limited to the following: • The victim as well as the harasser may be a woman or a man. requests for sexual favors.g. in the millions of dollars) to those who are successfully prosecuted. sexual harassment lawsuits result in significant penalties (e. or a non-employee. or other issues. yes or no. 6 Source: http://www. have paid substantial penalties as a result of sexual harassment or discrimination based on race. • The harasser’s conduct must be unwelcome. Furthermore. 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. Hodgetts et al. It is considered a very serious issue.de2. .1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances. an agent of the employer.

They only have the power of persuasion.5 1. 1. 7 Source: http://www. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.5. EUROPE 15 1.5. cites a study in which Europeans managers who were polled were much less likely to refuse to pay a bribe (or perceive it as unethical) than their American counterparts.4.1.S.dict.3 Lobbying by Japan Japan spends more money lobbying in the U.7 Note that lobbyists do not have any formal power. at 40.4.1 (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. Hodgetts et al.5.S. politicians.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere.org. Side Note 1.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany. men are disproportionately represented in management positions.. in an extended sense. particularly in upper management.4. their attitudes towards bribery when working in foreign markets differs from that of the U. with the purpose to influence their votes. is the notable exception). there seems to be a glass ceiling due to social factors. Definition 1. than any other. Although women have entered the workforce in large numbers in recent decades. . to try to influence decision-makers in any circumstance.S. with most in the top 20 among over 150 countries included in the survey.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. Side Note 1.5.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. yes or no.

com/library/glossary/bldef-glassceiling. .5. yes or no.5. For those students who think so. • Discrimination lawsuits are more commonplace in Great Britian.about. 8 Source: http://careerplanning. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents.16 CHAPTER 1.5.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands.S. • More British companies have actively sought to recruit and promote women into management.3 (Why Would a Company Actively Recruit and Promote Women?) Ask the class why a company would actively recruit and promote women even if not required to do so by legislation.. Side Note 1. 8 Side Note 1. but there is a perception that there are risks and ethical considerations.htm. 1.1 (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. though compensation is limited relative to lawsuits filed in the U. 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. 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.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.

and • A recent history of rapid economic development. 4.6. International corporate spying problems. Often. Bribery and other forms of corruption. An opaque legal system. executives.3 (Corporate Spying) Hodgetts et al. 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. • Note that for every corporate spy that is caught. 3. Prison labor. • A relatively stable government. Ethical considerations include 1.6. there are undoubtedly many others that get away with it. [5. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. company in Boulder was stolen and sold to a Chinese company. Side Note 1. 6. 5.S.S. pp.1 (Opportunity in China) Why do others consider Chinese to present greater opportunity than other places? • A very large population administered by a central government which can grant access to a wide variety of markets.2 (Piracy and Counterfeiting) Present sidenote at [5. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute.5 billion in sales annually. 7.6. 2.1. . p. • Yet another case in which software from a U. ETHICAL CONCERNS IN CHINA 17 Side Note 1. An activity related to corporate spying is the breaking of agreements by Chinese companies who go on to appropriate patents or capital from foreign firms. Side Note 1. An increase in crime and illegal business activities.6. Piracy and counterfeiting (see sidenote below). Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. 64]. Child labor.

1. and the environment.3 (Nongovernmental Organizations (NGOs)) Private.7. • CARE (promotes community development.7. health.2. and economic issues such as poverty. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. social justice. . Other companies. Definition 1. a grocery chain. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. See http://www. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.4 (Corruption) Though things are improving.7. Side Note 1.2. education. and emergency relief in the event of humanitarian disasters). political.7. and economic issues such as poverty. Definition 1.6. . health. political. In the words of a Beijing correspondent for “The Economist” magazine.2 (Nongovernmental Organizations (NGOs)) Private. . there are few if any issues which affect and infuriate so many in China as corruption. and promotion of social equity). social justice. “. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). not-for-profit organizations that seek to serve society’s interest by focusing on social. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. and the environment.18 CHAPTER 1.”[6] See also sidenote 1. such as education and health care.cfm for more detail. such as Whole Foods. provide relief in the event of humanitarian disasters. education. China continues a battle against corruption.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.. not-for-profit organizations that seek to serve society’s interest by focusing on social.benjerry.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm.7 Corporate Social Responsibility Definition 1.S.com/our company/our mission/index.

MNCs do not appear to have been significantly impacted.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. In fact. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).000 and $125. as it gives the U.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries.S. China ranked 78 out of 158. – Even socially responsible executives would consider the “bottom line” when making decisions. note that while U.2.1 Corruption and the FCPA Revisited Hodgetts et al. and • Rainforest Action Network (RAN). firms a reason to refuse to pay bribes. • And. executives may actually feel that it is the right thing to do.7. Both political groups and businesses are influenced by NGOs. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al.7. Executives are people. too. with a score of 3.1.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising.S. Side Note 1. as executives of publicly traded companies are ultimately responsible to their shareholders. In 2005.9 U. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20. many feel that it has had a net benefit. • Conservation International (promotes environmental conservation). last but note least. For example. but does not outlaw payments to political party leaders.7. Side Note 1. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery. 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.S. 1. • To prevent a boycott or other consumer defections.7. . firms are constrained by the FCPA with regards to bribery and other corrupt practices.

and not based on hard data. As more state-owned businesses become privatized and the size of the middle class increases. Side Note 1.0 is considered to be the borderline at which countries are considered to have a problem. 2006.html.7. malfeasance and diversion of corporate funds becomes increasingly difficult. With greater financial transparency.6 and 8.2 respectively. and Germany at 7. and Parmalat resulting in investors losing billions of dollars. the United States and Europe have recently been rocked by corporate corruption.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. more Chinese will own stock in companies. With more disciplined corporate governance.S. Scandinavian countries are at the top of the list. Tyco.N. 10 http://www. Moreover. Hong Kong is number 15.7. 1. Singapore is number 5 with a score of 9. but most important first step is to recognize that there is a problem. such as the U. The government recognizes that it is an issue and is taking action.3. WorldCom. .N. societies.10 Corruption is certainly not endemic to Asia.infoplease. It is a difficult problem to solve. Global Compact specifies 10 principles which MNCs should abide by: 1.4. 3. July 1. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. Side Note 1. I think corruption will diminish as China economically develops for several reasons: 1. It cannot be considered to be based on a scientific survey. with a score of 8.5 (Table 3-1: Principles of the Global Compact) The U. specify standards and codes of conduct in domestic and global operations. 5. slightly better than Sweden.4 (Some Opinions) Personally. 2. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. Important: Although it is widely cited. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. Support and respect the protection of international human rights.7. and the environment. 4.20 CHAPTER 1. Global Compact. better than the U. Commitments that many MNCs have signed on to. The government is actively addressing the issue of corruption.com/ipa/A0781359. with scandals such as Enron.

21 3. 8.1.7. 4. Undertake initiatives to promote greater environmental responsibility. Freedom of association and recognition of the right of collective bargaining (i. Elimination of all forms of forced and compulsory labor. 6.. Business should work against all forms of corruption. Elimination of child labor. A precautionary approach to environmental challenges. 9. 5. including extortion and bribery. . CORPORATE SOCIAL RESPONSIBILITY 2. Ensure that MNCs are not complicit in human rights abuses. Encourage development and dissemination of environmentally friendly technologies. 7. and 10. Elimination of discrimination with respect to employment and occupation.e. the right for unions to exist).

22 CHAPTER 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .

Chapter 2 Operations and Productivity This course is called International Enterprise Management. the efficient production of services will become more important. In business parlance. etc.” 2.1.1 Defining Operations Management Definition 2. pp.1 (Heizer Company Profile: Hard Rock Caf´) Review Heizer’s e company profile of the Hard Rock Caf´ [1. e • Hard Rock Caf´s are in most major cities in the U. As China develops. • They typically combine heavy merchandizing with the restaurant operation..1. 2–3]. In total. such as hotels. e they have restaurants in 38 countries. casinos. another name for enterprise management is “operations management.S. often abbreviated OM. much of it will focus on the “enterprise management” component. 23 . • They have also expanded into compelementary operations. is the set of activities that creates value in the form of goods and services by transforming inputs into outputs. and Beijing. Side Note 2.1 (Operations Management) Operations management. Note that the definition refers to both goods and services. While some aspects will focus on the “international” component of the name.

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

as the org chart determines executives’ authority and.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. known commonly in the U. OM is one of the most costly aspects of an organization. particularly when job titles are not clear. 7]. OM decisions have been divided into ten categories by Heizer [1. business community as “org charts.S. 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. location selection. layout design.2. 2. Planning.2.” • Every organization with more than a few employees has an organization chart. • They are often sources of conflict among management. scheduling. 5]. p. Definition 2. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. 6–7]. quality. p. pp. operations managers make decisions.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. Side Note 2. Organizing. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. process design. and 4. human resources and job design. . more generally. and maintenance. 2.2. supply-chain management. WHAT OPERATIONS MANAGERS DO 25 4.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. place in the heirarchy.2. 1.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. inventory.1. To accomplish these functions. Side Note 2. Staffing. 3. Controlling.

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

To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock. February 14. If demand rises above the historical average planning duration demand. • Reliability and stability of systems depends on well-planned maintenance schedules. The process is driven by a series of signals.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. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. and 1 Source: http://en. When implemented correctly.3 “Significant Events in Operations Management” [1.2. and efficiency. – Providing the proper training. such as the presence or absence of a part on a shelf. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. quality. • Eli Whitney (1800) is credited for popularizing interchangeable parts. He also believed that management is responsible for – Matching employees to the right job.wikipedia. . Definition 2. – Providing proper work methods and tools. Maintenance – Who is responsible for maintenance? When do we do maintenance? • Maintenance is one aspect of decision-making that is often overlooked and can contribute significantly to costs. one drawback of the JIT system is that the re-order level is determined by historical demand. 9]. 2007. 8].1 Side Note 2.2 (A Little History) Review Heizer figure 1.org/wiki/Just In Time %28business%29. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide.2.2. However. p. p. that tell production processes to make the next part.2. the firm could deplete inventory and cause customer service issues. • Frederick W. WHAT OPERATIONS MANAGERS DO 27 10. or Kanban. Kanban are usually simple visual signals. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. which relied upon standardization and quality control. New stock is ordered when stock reaches the re-order level. This saves warehouse space and costs.

2. 9] • Repair and maintenance. and other essentials for its citizens.2. • Trade. • Food and lodging. such as the legal profession or computer services in the financial industry.S. Bureau of Labor Statistics defines services to include [1. p.1 (Services) Those economic activities that typically produce an intangible product. economic output. However.S..3. shelter. In the U. The U. • In most western economies. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. Definition 2. 2 The average national private industry wage.28 CHAPTER 2. services account for over 70% of U. • In some service industries. average wages are below average2 in the U. • Transportation. services become increasingly important. • Government.S. the economy transitioned from agriculture to manufacturing around 1900.S. • Recently. the wages are considerably above average. Definition 2. p. Side Note 2. for others professional occupations. major contributions have come from the field of information sciences. .1 (Development of the Service Economy) Present Heizer figure 1.. such as retail.5 [1.3 (Information Sciences) The systematic processing of data to yield information. 11].3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food.3. • Insurance. Today. the services sector is by far the largest employer. Manufacturing was dominant until about 1950 or so.

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

and finished goods rapidly.30 CHAPTER 2. Operations managers are being challenged to produce biodegradable.2. Definition 2. brought about in part by the internet. parts. operations managers are responding by moving decision making to the individual employee. operations managers are increasingly responsible for innovations that move ideas. 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. or management).1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. it will continue to strongly impact the field. • Mass customization – With increases in technical capabilities and customerlevel information management. OPERATIONS AND PRODUCTIVITY 2. reusable.5. capital. .5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. p. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. • Empowered employees – With the rise of services and knowledge products. the next step in product development involves customizing products according to the customer’s preferences.2. 2.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. or recyclable products or to minimize packaging and other wasteful production steps. Trends that Heizer and Render identify [1. wherever and whenever needed. Globalization has been having a dramatic impact on operations management and in the future. • 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. • 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. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs.

. Consider today’s computers versus those from the 1970s. p. In order to improve productivity. 15].2.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Side Note 2.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1.4375 titles per labor-hour = 0.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. Also known as total factor productivity. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.25 titles per labor-hour = 0.5.97 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.4 (Total Factor Productivity) See definition 2.5.5.5. but overhead is no $800/day.5. THE PRODUCTIVITY CHALLENGE 31 Definition 2.0077 titles per labor-hour = 0.5. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity. Definition 2. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant. Side Note 2. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs). Definition 2.3.

. or other commercial software available. A Toyota Corolla is a much different car than a Porsche 911 Turbo.) The screen had only one color. you had to write a program from scratch. – This can be a particular problem in the service industry. Capital. • Exogeneous factors – External elements may cause changes in productivity which the operations manager or other factors in the system under study is not responsible for. and the arts and science of management. the public provision of electricity is highly variable. 3. . 2.5. where quality and other factors vary widely or the level of service provision includes items difficult to measure. and was about the size of my hand. OPERATIONS AND PRODUCTIVITY – The first computer ever used had no internal memory.32 CHAPTER 2. Definition 2. of course. no word processors. capital. Labor. such as convenience or safety. (It used audio tapes for memory storage. – For example. Management. If you wanted the computer to do something. it may improve productivity. Labor productivity has increased due to • Better-educated. green.5.1 Productivity Variables Operations managers typically divide productivity variables into three categories: 1. There were. The electricity often goes out in the middle of the day and the current may vary in strength. spreadsheets. Labor In the U. about 10% of the annual improvement in productivity is due to increases in labor productivity. If the public electricity provision increases in quality.S. 2.5 (Productivity Variables) In operations management. • Units of measure – There may not be appropriate units of measure. – Not all cars are the same. in Cambodia. the three factors critical to productivity improvement – labor.

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

in the U. education. management is considered as a separate input.S. Side Note 2. Note that in classic economic analysis and other areas of business. productivity in the service sector has not increased as rapidly as with the production of goods. however. According to Heizer [1.. Definition 2. p. 17]. graduate programs and the students they produce remain the best in the world. educated.5.S. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level.5.5. U. Difficulties arise because service-sector work is . management is not always identified separately from labor as an input. and the cost of capital depends on interest rates.4 Productivity and the Service Sector Historically. Developed economies (also known as post-industrial economies) require trained. and knowledge. and because the author of the textbook is writing about operations management.S. has increased at about an average of 1. are utilized effectively.2 Capital Capital investment in the U. and knowledgeable employees and operations managers are responsible for ensuring that technology.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. 2.5.4 (Management as an Input) Because this is a course in business management. Note that there is a trade-off between capital and labor in most industries. 2. 2.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.34 CHAPTER 2. as well as capital.5% after allowances for depreciation.5. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.

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

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

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

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

See http://www. • The “look and feel” of the product.” Note that mission statements are used not only at the company-wide level. 2. but can be used at the department level and even at the project level. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. 3. be it • Product features.40CHAPTER 3.3 (Competitive Advantage) In operations management.1. .3 (Sample Mission Statements) Present Heizer’s figure 2.3: “Sample Missions for a Company. • Training. the creation of a unique advantage over competitors.1.com/our company/our mission/index. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. • Availability of complementary products.1. the Operations Function. Cost leadership – Providing cheaper products. Responsiveness – By providing timelier.2 (Strategy) How an organization expects to achieve its missions and goals.1. Side Note 3. 3.benjerry.cfm for more detail. • Interoperability with other products. Differentiation – They make their product better. Definition 3. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. Differentiation can arise from anything that the customer may value about a product or a services. more responsive products or services. and Major Departments in an Operations Function.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. Definition 3.

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

41

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

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

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

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

3.2

Issues in Operations Strategy

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

3.2. ISSUES IN OPERATIONS STRATEGY

43

3.2.1

Research

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

3.2.2

Preconditions

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

3.2.3

Dynamics

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

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

• Determine Corporate Mission. “Strategy Development Process. Weakness.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. Provide competitive advantage. then • Form a Strategy.” The process of developing a strategy involves the following steps: • Environmental Analysis. in particular. 2. Definition 3. 3. The operations manager’s job is a three-step process: 1.3. The purpose of this process is to 1.3.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Opportunities.1 (Strategy Development Process) Present Heizer figure 2. determining internal strengths and weaknesses and external opportunities and threats. and 3. Staff the organization with personnel that will get the job done.2 (Critical Success Factors) In operations management.3. and 3. Implement an OM strategy. Identify a strategy and critical success factors. then determine whether the organization does these things well (and.1 (SWOT Analysis) In operations management.44CHAPTER 3. These critical success factors are used to develop a competitive advantage. Increase productivity. Definition 3.6 [1. if the firm has a competitive advantage in these things) and where failures are most likely. and Threats) analysis to develop strategies. p. those activities or factors that are key to achieving competitive advantage. 2. Side Note 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Group the necessary activities into an organizational structure.3. . 37].

3. .3. 39]. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. Definition 3.4.3.3 (Activity Map) In operations management.3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. OM activities are most productive when they are integrated with other activities such as marketing. and supporting activities. Southwest Airlines has a competitive advantage in providing low-cost airfares.1 as a checklist to determine critical success factors.5 and HR. finance.3. 3.2. a graphical link of competitive advantage.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. 5 Management 6 Human Information Systems Resources. Once CSFs are determined.2 as examples of how firms organize their activities. Recall the “org charts” in sidenote 2.1. p. CSFs.3. • Red arrows – critical success factors • Blue arrows – support activities 3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.6 3. an activity map can be used to link an organization’s competitive advantage to the CSFs. Side Note 3.3 Integrate OM With Other Activities In order to achieve its strategy.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. MIS.

See definition 3. Transnational strategy – Exploits economies of scale and learning and responsiveness by recognizing that core competence does not reside in a “home” country but can exist anywhere in the organization.1 (International Business) A firm that engages in cross-border transactions.6. Definition 3.4. or joint ventures with substantial independence.4 (Multidomestic Strategy) In operations management. but a good strategy for cost reduction when products do not need to be adapted locally.3.4.4. products do not need to be localized. • McDonald’s is an example of a country with a multidomestic strategy.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. 4. See definition 3. 3. See definition 3. In the semiconductor industry.5 (Global Strategy) In operations management. franchises.5. [1. 2.4. a strategy that uses exports and licenses to penetrate the global arena. Global strategy – Not characterized by local responsiveness. Also one of the least profitable due to transport costs and little local responsiveness. See definition 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1.4. Definition 3.4. 42] Definition 3. • Texas Instruments is an example of a country with a global strategy. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.46CHAPTER 3.4. and hamburgers without beef in India. International strategy – Often the easiest strategy. with beer on the menu in Germany. as exports require little change in operations and licenses often leave risk with the licensee. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness. Only 10% of its work force is Swiss. 95% of its assets and 98% of its sales are made outside Switzerland.3 (International Strategy) In operations management. Definition 3. Typically characterized by subsidiaries. p. Definition 3.4. Usually does not confer a cost advantage. .4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. • Nestl´ is an example of a country with a transnational strategy.4. Its menu reflects the country in which it operates. Although e it is legally Swiss. wine in France. owning or controlling facilities in more than one country.

.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. p. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox .4. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.3.6 (Transnational Strategy) In operations management. Note that many companies that are well-known American brands are now making more money overseas than they do in the U. Side Note 3. 6].4.4.S.

48CHAPTER 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .

defining the project.3 (Project Planning. Controlling – Monitoring of resources. Project management involves three phases: 1. p. and budgets. Plans are also revised to meet changes in time and cost demands. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. and Controlling) Present Heizer figure 3. 2. 3. Scheduling – People. 49 . and supplies are tasked to specific activities and activities are related to each other. Planning – Goal setting. Even Microsoft. costs. quality. the largest software company in the world. 46–47]. and team organization. 49].Chapter 4 Project Management Side Note 4. The profile highlights the importance of project management in achieving competitive advantage.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1.1 [1.0. Scheduling.0.0. money. pp. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. Side Note 4. Software engineering is one of the most challenging areas in project management because of the complexity of software development and the significant amount of uncertainty associated with creating new algorithms or technical features. Side Note 4.

48] 1. a temporary project organization is formed to address a specific project. you are doing your job well if noone notices the project management. Side Note 4. The project is temporary but critical to the organization. you should always expect the unexpected. The work contains complex interrelated tasks requiring specialized skills. Work can be defined with a specific goal and deadline. See also Heizer sidenote “Project Management and Software Development.0. People will not come through with what they promised.” [1.0.1 The Project Manager As alluded to in sidenote 4. and/or 5.5. 4.1. You may be managing resources far in excess of your individual salary. 69]. it is also an area in which there will continue to be high demand for qualified people. often times. p. 3. 2. 4. Definition 4. Moreover. If you become a project manager on projects of significant complexity. project managers are highly visible in a firm and have significant responsibilities. Your job is to make things go smoothly and according to plan.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. if things go wrong.1 Project Planning While many projects are run within an existing organization. The project cuts across organizational lines.1. The job is unique or somewhat unfamiliar to the existing organization. However.5 (Personal Advice on Project Management) Project management is a tricky profession. In a sense. p. 4. it is very obvious and can be very costly. you will be confronted with a daunting task. PROJECT MANAGEMENT However.50 CHAPTER 4. and you will be forced to improvise. The responsibilities of project managers are to make sure that . Project organizations work best when [1. things you thought were certain turn out not to be.

1. The project is on or under budget. Complete software architecture for user account input web page functionality 5.1. in a software engineering project.4.1. a task that should only take a day or so. PROJECT PLANNING 1. In a project that includes allowing a user to enter personal information on a web page.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. People receive motivation and information necessary to do their jobs. and 4. Definition 4. The project meets its quality goals. When dividing a project into tasks. Approve software architecture for user account input web page functionality . All projects come in on time.2 (Work Breakdown Structure (WBS)) In operations management.2 The Work Breakdown Structure One of the first tasks involved in project management is to figure out how to divide the project into parts with a work breakdown structure (WBS). Review software architecture for user account input web page functionality 6. a web page takes about a day to build for an experienced team. Approve graphic design for user account input web page 4. Review graphic design for user account input web page 3. Complete graphic design for user account input web page 2. dividing a project into more and more detailed components.1. For example. 3. 51 4. Side Note 4. • Build the user account input web page is a much better task division than 1. you have divided the tasks too finely. ask yourself • Do I really need to spend the time to monitor each task I have identified? • Does the failure of this task cause significant problems completing the project on time or under budget or impact other tasks that cause problems? If the answer to these questions is no. 2.

of course. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. PROJECT MANAGEMENT 7. Project 2. Subtasks in major tasks 4. the work breakdown structure is not something you go to your office to do in isolation. 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. They will be useful for project scheduling. you should also take note of time and cost estimates given by your technical staff.2.1.52 CHAPTER 4. At the time you are creating the work breakdown structure.2 (Work Breakdown Structure) Present Heizer figure 3. The actual WBS for Windows XP would.3 (Reality Check: WBS) In reality.1. Encourage realistic time and cost estimates for each activity . Write software for user account input web page functionality 8. Write software for user account input confirmation page functionality 9. p. fill hundreds if not thousands of pages. Activities (also known as “work packages”) to be completed Side Note 4. Major tasks in the project 3. Scheduling serves to 1.3 [1. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. Side Note 4. 4.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). which we will discuss next in section 4. Identify precedence relationships among activities 3. Show the relationship between each activity to others and to the whole project 2. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management.

1 (Gantt Charts) Planning charts used to schedule resources and allocate time. For smaller projects. and material resources by identifying critical bottlenecks in the project Side Note 4. and 4. 2. Derives from the typical shape of a bottle. However.2. moeny. Perhaps they imagine that they are not doing their jobs professionally if they are not. PROJECT SCHEDULING 53 4. right by the bridge. and CPM tools for every project management activity.” This will give the class an idea of the look and feel of a typical Gantt chart. PERT. PERT. PERT and other formal documents.2.2. and CPM) Inexperienced project managers often feel the need to use Gantt. 3.4. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. the road bottlenecks. Overall project time is developed. 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 . these should be considered merely tools to be used when they are useful by saving time or energy. Activity time estimates are recorded. Definition 4. Gantt charts are perhaps the most widely used tool for ensuring that 1.2. – said of roads.4 [1. Definition 4. cost estimates. All activities are planned for. which becomes narrower as one approaches the neck of the bottle.2. MS Project’s Gantt chart functions demand you assign employees.2 (Using Gantt. Make better use of people. PERT and CPM help answer questions such as • When will the entire project be completed? . The order of performance is accounted for. 51]. and other values to each activity.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. Side Note 4. It can actually be quite time consuming to create and maintain Gantt charts. p. as.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3.

Variance reports. 7.3. and 8. and budgets of projects. Cost distribution tables. 5. is the money spent equal to. 6.1 PERT and CPM Two methods. or grater than the budgeted amount? • Are there enough resources available to finish the project on time? • If the project is to be finished in a shorter amount of time.54 CHAPTER 4. Control programs typically produce reports detailing 1. Time analysis reports. quality. costs. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. behind schedule.3 Project Controlling Project control involves monitoring resources. 4. 4.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Cost breakdowns for each task. .3. PERT and CPM. or ahead of schedule? • On any given date. 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. Total program labor curves. is the project on schedule. Definition 4. were developed in the 1950s for project control. what is the best way to accomplish this goal at the least cost? 4. 3. Functional cost and hour summaries. less than. Work status reports. 2. Raw material and expenditure forecasts.

3. 4. 2.3. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management.5 [1. it will do for you automatically much of what we will go through manually in this class. Activity on Node (AON) and 2. AON associates the activity with the node whereas AOA associates the activity with the arrow. Define the project and prepare the WBS.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. Definition 4.3. Gantt charts are the “go to” visualization method for even very complex projects. They both follow six steps: 1. monitor. in my experience. Moreover. or the critical path. See also definition 4. Develop the relationships among activities.3. 4. p. through the network. Also. and ontrol the project. PROJECT CONTROLLING 55 Definition 4.2 (Example: AON and AOA) Present Heizer’s figure 3. 3. See also definition 4. 53].3.2. . Draw the network connecting all of the activities.3.3. 5. Activity on Arrow (AOA).3. Compute the longest time path. Assign time and/or cost estimates to each activity. Side Note 4. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts.4. 6.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity.3.2 Network Diagrams There are two approaches to visualizing activity networks: 1. Personally.3 (Critical Path) The computed longest time path through a network. Use the network to help plan. Side Note 4. schedule. As the names describe.

8 [1. LS = LF − Activity time. 1.1 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.9 [1. 54–55]. – If an activity is an immediate predecessor to more than one activity.6–3. its LF equals its LS of the activity that immediately follows it. their dependencies. We do this with a critical path analysis with involves a 2-step procedure.1 (Critical Path Analysis) In project management. Definition 4. 56]. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. In other words. – If an activity has multiple immediate predecessors.4. • Table 3. that is.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3. PROJECT MANAGEMENT Side Note 4. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. p. Follow with example 3 and figure 3.3. 4.56 CHAPTER 4. LF = min{LS of all immediate following activities}. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. that is. EF = ES + Activity time. pp. 2.4 Determining the Project Schedule Once we have identified all of our activities. ES = max{EF of all immediate predecessors}.3. its ES is the maximum of all EF values of its predecessors.3. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. its LF is the minimum of all LS values of all activities that immediately follow it. that is. analysis used to determine the project schedule. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed. . we must use time estimates of each activity to determine the overall schedule for the project. See also definition 4.

Note also that if we delay each activity by the amount of slack that activity has. These are called critical activities.3 and Heizer figure 3. Definition 4. the free time for an activity. the step that identifies all the earliest times that activities can be completed.4.3.13 [1.3 (Free Slack) In project scheduling. the time devoted to one of these activities must also be reduced. Note that activities A. they share total slack. 61] based on table 3.2 (Forward Pass) In project management scheduling. and • Includes only critical activities (see sidenote 4. . the time associated with a single activity.4.4.5.1. p. we may delay the project as a whole. E. 1 For example. Definition 4. or the amount of time an activity can be delayed without delaying the entire project.5.4.5. if we delay activities B and D by one week each. p. the time shared among more than one activity. “Notation Used in Nodes for Forward and Backward Pass. 2 For example.3 [1.1 When several noncritical activities appear successively in a path.4.1. we cannot complete the project in 15 weeks. If an activity2 does not impact the slack time of any other activity.4. Slack time is just Slack = LS − ES or Slack = LF − EF . and H have no slack time and cannot be delayed without delaying the entire project. in the example in sidenote 4. Also notable is that if the total time of the project needs to be reduced. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. activity F in sidenote 4. The critical path is one that • Begins at the first activity in the project.2 (Total Slack) In project scheduling. 57]. p.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity. 4. Side Note 4. • Terminates at the last.5.1 (Slack Time) In project scheduling. 60]. it is said to have free slack. C.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4.10 [1. Definition 4.1).” Then complete Heizer example 7 figure 3. G.

1 and 4.6.1 (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. the most probable activity completion time that could be obtained in a PERT network. In PERT.3 (Most Likely Time) In project scheduling. technical considerations that were unknown at the time the project schedule was drawn up. three time estimates are used: 1. unexpected complexities.2 and 4. which are labeled according to one of two notational conventions.6.6. However. the project manager pulls the number “out of the air” based on their experience managing related activities. etc. the “best” activity completion time that could be obtained in a PERT network.6. and the other uses β = β − 1 and α = α − 1 .6. The usual definition calls these alpha and beta.6. The beta distribution is used as a prior distribution for binomial proportions in . See also definitions 4.6. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. Definition 4.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time. Definition 4. See also definitions 4. we do not.3.6.58 CHAPTER 4.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution.6.6.. Beta distributions have two free parameters. Most likely time – The most realistic estimate of the time required to complete an activity. Definition 4. the “worst” activity completion time that could be obtained in a PERT network.2 (Pessimistic Time) In project scheduling. Definition 4. See also definitions 4.1 (Optimistic Time) In project scheduling. the time required to complete an activity is often uncertain due to supply problems.3. in most cases. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. In reality.1 and 4.6. Side Note 4. Effectively. PROJECT MANAGEMENT 4.2.

β) Γ(α)Γ(β) P (x) = (4.com/BetaFunction.3 The domain is [0. 4.6. p.00 week.β) with α = 1 and β ranging from 0.6. 62].wolfram.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. The expected activity time for activity F is 3 weeks5 and the variance is 1. 4. The variance of the activity time is Variance = [(b − a)/6]2 . 2007. 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. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. most likely. q) = (4.1) where B(p. 2.78 6 6 36 7 4 weeks. February 21. and pessimistic times of 1. Total project completion times follow a normal probability distribution and 2. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.00.4. 8 1.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic.25 to 3.html http://mathworld.78 weeks.6. and . 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1. Side Note 4. and 9 weeks. and pessimistic times of 1. 63] for activity F based on optimistic.1 Probability of Project Completion If we assume that 1. 4 See definition 4.com/BetaDistribution. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.wolfram. p.6. and 7. Activity times are statistically independent 3 Source: http://mathworld.html. The above plots are for various values of (α.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.1].4. most likely.

64].16.6.6.com/StandardDeviation. Side Note 4.4 (Using the Normal Table) Pass out Heizer Appendix I [1.html. two standard deviations approximately 95% of the time.76 weeks implies that the project will exceed the expected completion time by more than 1.wolfram. 9 For 10 See more information. 65] and figure 3. See definition 4.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time. and within 3 standard deviations approximately 99.5. p.6 (Standard Deviation) The standard deviation is the square root of the variance.6. 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.6.6. see http://mathworld. commonly also N written σ 2 .” Review Heizer example 10 [1. Note that the standard deviation of 1.60 CHAPTER 4.3) Definition 4.6. “What is the probability that a project will take more than X time to complete?” This can be answered by consulting the normal tables and using Z-values to estimate the answer based on the variance we showed how to calculate in section 4.6. .6. p.1. 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) (4.10 Determining Project Completion Time for a Given Confidence Interval A common question is.6.3 (Example: Project Variance) Review Heizer example 9 [1. See also 4.6.7% of the time. Side Note 4.76 weeks approximately 16% of the time. pp. the population variance var(X). definition 4. A2– A3] “Normal Curve Areas. Definition 4.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.

7. Step 1 – Compute the crash cost per week. Crashing a project involves a four step process: 1. it may result in the project being delayed. See definition 4. shortening activity time in a network to reduce time on the critical path so total completion time is reduced.1. . Since activity completion times are typically shortened by adding resources. Assuming linear costs. if certain activities off the critical path take the pessimistic time estimate or more to complete. and • The total cost of crashing is as small as possible. 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. When crashing a project. you will doubtless experience one or both of these eventualities many times in your career.7. the crash cost is typically higher than the normal cost. we need to ensure • The amount by which an activity is crashed is.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon. crash cost is the cost required to complete an activity in the shortest time possible. permissible and realistic. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4.1 (Crashing) In project management. crash time is the shortest duration of an activity. Definition 4. Definition 4.1.4) 11 Since crashing a project often involves adding additional resources to activities. 4. See definition 4.7.7.4. we want to do so in the least cost mannger possible. Project crashing is the name given to the process of rushing a project to completion.3 (Crash Cost) In project management. • The shortened durations will actually enable us to finish the project on time.2 (Crash Time) In project management.7.7.11 Definition 4. and if you become a project manager.

18–3. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. Step 3 – If there is only one critical path. If you accept the challenge and try to rush the project to please upper management. Step 4 – Update all activity times. select one activity from each such that • Each selected activity can still be crashed and • The total crash cost per period of all selected activities is smallest. the advice given in this section should be helpful. 4.2 (Example: Crashing a Project) Present Heizer example 12 [1.1 (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. At times this may be politically infeasible.5 and figures 3. you should be very wary of such pressure. PROJECT MANAGEMENT 2. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. Note that one activity may be on several critical paths. 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. 3. go to step 2. pp.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. As a project manager. stop. If there is more than one critical path. Side Note 4. If not.7.62 CHAPTER 4. Crash this activity by one period.19. Side Note 4. If the due date has been reached. 67–69] including table 3. Then crash each activity by one period. If you find yourself needing to rush a project.7. 4. Step 2 – Find the critical path(s) in the project network. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. • Advantages – Especially useful for large projects .

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

PROJECT MANAGEMENT .64 CHAPTER 4.

1. • Medium-range forecasts – Generally between 3 months and 3 years. primarily mathematical techniques.or long-range forecasts. Forecasts are classified by the future time horizon it concerns: • Short-range forecasts – Generally less than 3 months. – Job assignments. Side Note 5. even the best and most experienced managers need to use mathematical forecasts to supplement their intuition.1 What is Forecasting? Business is inherently unpredictable. However. Part of the job for business leaders is to make good decisions with limited information. Also uses different methodology.Chapter 5 Forecasting 5. – Workforce levels. Useful for 65 . pp. and – Production levels. Useful for – Purchasing. Definition 5. Part of good decision-making comes from years of experience. Tend to be more accurate than medium. – Job scheduling. 82–83].1 (Heizer Company Profile: Tupperware) Review Heizer’s company profile of the Tupperware [1.1.1 (Forecasting) The art and science of predicting future events.

3. housing starts. Growth.3 and 5. • Technological forecasts.1. Production planning and budgeting. .4. Cash budgeting. Product life cycles tend to follow four stages: 1. and 4. 5. Maturity.4. which impacts purchases of new plant and equipment as well as development of new products. FORECASTING • Long-range forecasts – Generally more than 3 years. Decline. Capital expenditures. In the first two stages. and Analyzing various operating plans.1.to long-range forecasts.2 and 5. Generally deals with more comprehensive issues than short-range forecasts. 2. Definition 5. planning indicators valuable in helping organizations prepare medium.1.1 Types of Forecasts Organizations typically use • Economic forecasts.1. Definition 5.2 (Economic Forecasts) In operations management. These may include inflation rates.1. Useful for – – – – Planning for new products. money supply. See also definitions 5. and Research and development. longer forecasts are needed.3 (Technological Forecasts) In operations management. See also definitions 5.1. and other economic indicators. Introduction. long-term forecasts concerned with the rates of technological progress. CHAPTER 5. These concern rates of technological progress. Facility locations or expansion.66 – – – – Sales forecasting. and • Demand forecasts.1.

and • Layoffs.2 and 5. • Training. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5. 4. and scheduling decisions and serve as inputs to financial. and • Loss of market share.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. 5. Select the forecasting models.2. 5. Capacity – Underestimating demand can result in • Undependable delivery. 2. Also called sales forecasts.4 (Demand Forecasts) In operations management. Select the items to be forecasted. Determine the time horizon of the forecast. capacity. • Loss of customers. 3. See also definitions 5. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. and personnel planning. 5.3. Make the forecast. Validate and implement the results. .1. marketing.1. 6. these drive a company’s production.1.1. 7.5. 3. Gather the data needed to make the forecast. Human resources – Anticipated demand is needed to estimate the need for • Hiring.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Determine the use of the forecast. projections of a company’s sales for each time period in the planning horizon. 2.

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

9. · There are three problems with moving averages 1. and if they perceive there is an incentive to exaggerate. – Sales force composite ∗ You would be surprised how accurate your sales force can be. · See definition 5. · Useful as a starting point or sanity check for more sophisticated methods. 2.8. political. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. they will do so. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. . and · Respondents. · Requires less past data than moving averages. ∗ Moving averages · Simple. the naive approach. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand.3. ∗ However. 3. or other incentives to over or understate demand. · Staff personnel. for example. the more likely it is your results will be accurate.3. useful method if we can assume that market demands will stay fairly steady over time. Moving averages cannot pick out trends very well. ∗ The more independent your decision makers are from economic. Moving averages require more past data to work with than. Sales people typically respond to incentives. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. they may want you to think that they will be doing more business with you in the future to obtain price concessions today. · The simplest and easiest way to estimate demand. be sure that the sales force is clear that their incentive is to be as accurate as possible.5. · See definition 5. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. say.3.

4.10.3.3. See also definitions 5. 5.3.4.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. See also definition 5.3.3. and value system. 5.3.5.6 (Consumer Market Survey) In operations management. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand. a forecasting technique based on salespersons estimates of expected sales.3.3. Definition 5.3.5 (Sales Force Composite) In operations management.1 (Quantitative Forecasts) Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand. See also definitions 5. and 5.6.3.3. personal experiences. · See definition 5.3. FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans. 5.3. See also definitions 5.3.3.2. . 5.3.5.1.3. See also definitions 5. See also definition 5.6.4 (Delphi Method) In operations management. and 5.3.3 (Jury of Executive Opinion) In operations management. a forecasting technique using a group process that allows experts to make forecasts. Definition 5. Definition 5.3.3.3. 5.6.3.5. emotions.70 CHAPTER 5.3. and 5.4. Definition 5. and 5.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.1 Qualitative Forecasting Methods Definition 5.

Higher values give more weight to recent data. 5.11.8.05 to 0. and are appropriate to use when the underlying average .7. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period.3.3) The smoothing constant.3. FORECASTING APPROACHES 71 5.3.5. Definition 5.7. That is. See also definition 5.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.3.3. 5. See also definitions 5.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. Mathematically. and 5.3. Definition 5. α. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5. • Simple Moving Average – Mathematically. Moving averages can be either simple or weighted.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.3.10.2 Quantitative Forecasting Methods Definition 5.5.2) See also definition 5.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period.3.3. generally ranges from 0. a simple moving average is given by demand in previous n periods Moving average = (5. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.1) n • Weighted Moving Average – Mathematically.3.3.9.3. Definition 5.

See also definition 5.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.3 Measuring Forecast Error Once a forecast is made. exponential smoothing is equivalent to naive forecasting.3. 2. When α = 1. Mean absolute percent error (MAPE).3. such as the mean absolute deviation (see definition 5. Definition 5.7.7. and are appropriate to use when the underlying average is relatively stable.13. and 5. 5.3.3.3. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.8. Three popular measures are 1.3.3.0.72 CHAPTER 5.14. FORECASTING is likely to change.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. See also definition 5.3. it is good practice to compare the estimated value with the actual value as actual values become available. while lower values give more weight to past data.12. 5.12).3.3.15. Definition 5. Mean squared error (MSE).3.12 (Forecast Error) The forecast error (also known as forecast deviation) is defined as Forecast error = Actual demand − Forecast value = At − F t See definitions 5.4) definition 5. Definition 5. 3.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. Mean absolute deviation (MAD).13).3. . 1 See |actual − forecast| n (5.

Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.3. 100 n i=1 (forecast errors)2 n (5.3.11) .12. Mathematically.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.5) |actuali − forecasti |/actuali n (5.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.3.12.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. MSE is given by MSE = See also definition 5.7) or F ITt = Ft + Tt (5. Mathematically. Definition 5.3.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.6) 5. FORECASTING APPROACHES 73 Definition 5. MAPE is given by MAPE = See also definition 5.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. expressed as a percent of actual values.5.3.3.8) With smoothing constants α for the average and β for the trend.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (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.10. 3.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 2. 1.12) = 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.12.14) . the emponentially smoothed forecast for period t using equation 5. Compute the smoothed trend. Ordinary Least Squares Regression analysis is also useful for predicting trends. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable = y-axis intercept = the slope of the regression line = the independent variable (in this case. Calculate the forecast including trend. Tt with equation 5. It is also commonly called linear regression analysis.74 or CHAPTER 5. FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. time) (5. Compute Ft . by the formula F ITt = Ft + Tt .

then multiply it by the seasonal index for that month. Compute the average demand over all months. 2. In the U.3.. FORECASTING APPROACHES where b x y x ¯ y ¯ n = the slope of the regression line = known values of the independent variable = known values of the dependent variable = the average value of x = the average value of y = the number of observations 75 Then a is given by a = y − b¯. the multiplicative seasonal model. Most businesses experience a surge in sales around Christmas.5. 1. 4. 3.3. Recall that the equation 5. such as cars and washing machines. . The first step is to calculate the seasonal forecast. Deviations around the least squares line are assumed to be random.5 Seasonal Variations in Data In most businesses. the more uncertain it is.S. Definition 5. Estimate next year’s total annual demand. Compute a seasonal index for each season by dividing the historical demand by average demand.3. We do that with a 5-step process. 1. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. Divide this estimate of total annual demand by the number of seasons. This provides the seasonal forecast. 5. 3. Although there are many methods to accomodate seasonal demand. 5. demand is seasonal. to account for seasonal changes in demand in our forecasting. 2.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. ¯ x The least squares method has several drawbacks. consumers often make fewer purchases of durable goods. we will examine one model.13 assumes a linear relationship. Find the average historical demand for each season. during the summer months when it is common to take a vacation.

15) Side Note 5.3. is given by (y − yc )2 n−2 Sy.g.g.76 CHAPTER 5. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. but x will be something other than time.3. 106– 107].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. However... pp. We will use the same technique. FORECASTING 5.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. If there are published estimates you can cite (e. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.. 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.3.17) .x = (5.16 is y2 − a y − b n−2 xy Sy.1 (Example: Using OLS) Present Heizer example 12 [1.g. mathematically.x = (5.4. if you are uncertain about predictions of x. whatever uncertainties you may have transfer to your predicition of y. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e. It is also called the standard deviation of the regression and. average local salary) (5. Note that making predictions of future demand involves also making predictions about the independent variable x.

4 (Causation vs. stock markets. February 28. Historically. football in the U. nor does it imply that they will continue to be related. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.S. Correlation Coefficients for Regression Lines Definition 5.18) . changes in skirt lengths don’t cause stock market prices to rise and vice versa. but the relationship is coincidental. the average length of a woman’s skirt and stock market prices in the U. Certainly. Even the Year of the Pig correlates strongly with the U.S. the U. p.” the AFL (American Football Conference) and the NFC (National Football Conference).4 . “Four Values of the Correlation Coefficient. the note in the margin accompanying Heizer example 14 [1.3 (Examples of Correlation Coefficients) Present Heizer figure 4. Definition 5. pp.S.S.8599. FORECASTING APPROACHES 77 Side Note 5.3. “Distribution about the Point Estimate of $600 Million Payroll.10 [1. which is divided into two “conferences. p. Dow Jones Industrial Average and Standard and Poor 500.18.3. 108]. Correlation) Correlation merely means that the values of two variables are historically related. The correlation coefficient of variables x and y is given by r= See also definition 5. leading stock indexes.com/time/business/article/0. have been correlated. 109]. 4 Source: http://www. Since 1935. Other interesting correlations that have been identified over the years include banana prices and U.3. Side Note 5.S. or National Football League. It does not imply causation one way or the other.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. 107]. stock market prices as well as the winner of the Super Bowl. has risen.3. a football game played between two football conferences in the U.3.3. is monopolized by the NFL.5.2 with stock prices generally rising as skirts rise.3 and the U.” Note that the regression assumes a standard normal distribution about the estimate.html?xid=sitecnn-partner.S. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. 2007. stock market.00.1594488.2 (Distribution About the Point Estimate) Present Heizer figure 4.S.” Side Note 5.time.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. in all but one Year of the Pig.9 [1.3.

b1 . .3.3.18 and Heizer example 15 [1. 110]. p.3. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. p. we discussed a means by which we can attempt to predict the value of one variable using the value of another. . . (See definition 5.6.19 (Multiple Regression) A causal forecasting method with more than one independent variable. often the most difficult part of building a multiple regression model is to pick the independent variables. etc. you would use statistics software to calculate these values. .3.78 CHAPTER 5.” As the sidebar points out. if they are indeed related to the dependent variable. .3. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 . b1 . The multiple regression equivalent of equation 5. Side Note 5. b2 . .17. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. Adding additional independent variables as predictors. = the dependent variable (e.” For example.. 5 See definition 5. results in additional predictive accuracy as measured by r2 . The same technique can be applied to use several independent variables to predict the value of a dependent variable. . 110]. x2 .) It measures the percent of variation in the dependent variable (y) explained by the regression equation.g. . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. It is commonly simply called “R squared. b 2 . “What was the R squared of your regression?” Multiple Regression Analysis In section 5.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1.15 is given by y = a + b1 x1 + b2 x2 + .5 Definition 5.19) Determining the values of a. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. . In practice.

A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).1 (A Plot of Tracking Signals) Review Heizer figure 4. The tracking signals should also be compared as they are generated against limits.forecast| n where M AD = (5.1. Tracking signals are typically used monitor forecasts. This means that the observed value should be within 2 M ADs abut 89% of the time.6 standard deviations.20) A good tracking signal has about as much positive as negative error. 6 Recall definition 4.8 standard deviations.4.2 standard deviations.4 standard deviations. which correspond roughly to standard deviations. Definition 5.4.6 One M AD is equivalent to 0. If the tracking signals violate upper or lower limits. p.6.11 [1. 111].5. and 4 M ADs to 3. These limits are typically based on M ADs. and within 4 M ADs about 99. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . one of the most common problems with forecasting is a lack of follow-up.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.4.6. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. three M ADs about 98% of the time.4. three M ADs to 2. two M ADs to 1.9% of the time. though large errors may be a problem as well even if the positive and negative errors balance.2. In other words. Side Note 5. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts. the forecasting methodology needs to be modified. . Definition 5. MONITORING AND CONTROLLING FORECASTS 79 5.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series.

There is no single technique that should be used for all products or services. Definition 5. you should be aware of the criticism of focus forecasting.. is based on two principles: 1.” .4.4. Definition 5. 5. However.10) is automatically changed to keep errors to a minimum. 114]. which selects a model based on goodness-of-fit to a data set.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants.80 CHAPTER 5. FORECASTING 5. Side Note 5. “Summary of Forecasting Formulas.4. p. α in definition 5.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. Side Note 5.2 [1. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. changes need to be check with human eyeballs to ensure that the adjustments make sense.4.4.3.4. Sophisticated forecasting models are not always better than simple ones.2 Focus Forecasting Focus forecasting. you must make your own decision as to how you select the forecasting models that you use. In your career. 2.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. there has been much criticism of the approach to using models based on thier fit to the data. Note that even with computer monitoring.g.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4. 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.

pp. and design of products. 1 In this chapter. • Market share and dynamics.2. Product strategy2 defines the breadth of the product line and links product decisions to [1.1 .4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. Referring to services as products is common in the service industry. 124. • Product life cycle. as an intangible. For example. time permitting. They also use just-in-time production techniques. pp. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches.128] • Investment and cash flow. as products. the word “product” will refer to both goods and services. which.0.5 (Product Decision) The selection.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.1 Side Note 6. 81 . definition.0. Definition 6. which will be discussed in detail later in the semester. 2 Recall sidenote 2. is a service. 122–123]. insurance companies often refer to their policies. and • The organization’s capabilities.

. Introduction. • Growth phase – Effective capacity forecasting is necessary. – Process modification and enhancement.1 Product Life Cycles Product life cycles can be divided into four phases: 1. YouTube videos).g.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. low-cost. • Introductory phase – In the introductory phase.1. and – Supplier development. and innovative production is appropriate. Product strategy involves determining the best strategy for each product based on its position in the life cycle.g. . so high volume. and 4. products expenses are often high for – Research and development. 2. • Decline phase – Investment needs to be minimized and resources need to be redeployed.g. 6.. • Maturity phase – Competitors have entered or are entering the market. Maturity. restaurants or nightclubs).. years (e. Life cycles can be in the days or weeks (e. clothing fashions). often ruthlessly. DESIGN OF GOODS AND SERVICES 6.2 Life Cycle and Strategy Strategies change as products move through their life cycle. Growth. 3.82 CHAPTER 6.1. Decline. months (e. or even decades.

2.2 Generating New Products Most products have a limited life cycle.6. and if a company is to survive.2. such as consumer incomes. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers. as well as the total annual dollar contribution of the product.1 (Example: Brainstorming) Lead the class in a brainstorming session. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. 6. • Economic factors.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. are tied to product demand. • Technological change often drives product innovation.500 or 100.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Definition 6. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. 4 For 3 For .1. Ideas are not reviewed until after the brainstorming session. 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. it must regularly redesign existing products or bring new products to market. example.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm.2.2.3 • Political and legal change can also bring about business opportunities.1. 6. example.3 Product-by-Value Analysis For firms with many products. the development of cellular telephone technology or the internet. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. • Sociological and demographic change is also tied to product demand.000 yuan.4 Side Note 6. Definition 6. GENERATING NEW PRODUCTS 83 6.

1 (Product Development Stages) Present Heizer figure 5. Many successful companies rely on sales from products introduced within the past five years. 128]. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Side Note 6. and the organization’s capabilities.3. DESIGN OF GOODS AND SERVICES For example. p.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.3. p. Definition 6.3 [1.2 (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.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. 6.3 6. 128]. p. 6. Side Note 6. Each stage should have an accompanying review to determine whether to progress or not. the product life cycle.84 CHAPTER 6. A friend and coworker who was an engineer5 at a major engineering company has worked with engineers who through a 30-year or longer engineering career never worked on a product that was successfully brought to market.3.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. 129]. Determines what will satisfy the customer and 2. market dynamics. The house of quality is a graphic technique for defining the relationship between customer desires and a product.3.3.1 (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. Translates customer desires into a product design. .2 [1.2.

Product development is done by teams.3. bureaucratic companies and organizations.. Identify relationships between the firm’s hows. Evaluate competing products.2 (Example: House of Quality) Present Heizer example 1 [1.3.6 3.” 6 For example.3.3.6.com for more information.3. Note that it is not free or open source.2.g. identify the rows of the house in sidenote 6. • More common in large. and production departments.10 Side Note 6. An organization is divided into departments. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. which can be an advantage. .3.2. 1.3.. Relate customer wants to product hows. Identify customer wants. there are three popular methods by which organizations undertake product development.2. • Perhaps the most popular approach in the U. 10 The right-hand columns of the house in sidenote 6. Develop importance ratings. with product features. a research & development.7 4.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. See http://www. 2. e. p. • Fixed duties exist. 8 These are given on the roof of the house in sidenote 6. design engineering.3. as was the software described in section 4.9. 2. 7 In other words.3 Organizing for Product Development In the West.8 5. manufacturing engineering. 3.2. 130].2.qfdcapture.3. • Effective communication and coordination between separate departments can be problematic. create the columns of the house in sidenote 6.S. 6.9 6. In other words. Identify how the good or service satisfies customer wants. PRODUCT DEVELOPMENT 85 Side Note 6. Building the house of quality involves six steps: 1.

S.11 In Japan. it can also be problematic because teams. 6. use of participating teams in design and engineering activities. Side Note 6. purchasing. and production stages of product development. Definition 6. production.3. development. and use. but my personal impression is that formal QFD practices are not widespread in practice.4 (Concurrent Engineering) In project development.3. The goals of manufacturability and value engineering are 11 See definition 6. will often advocate for continuation of their project past the point that it is profitable for the company.86 CHAPTER 6.3.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering. because their fate is tied to a product. Some teams even include representatives from vendors.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. organizations are less structured and typically not divided into research and development.3.. etc.3.3. . engineering. Definition 6. quality assurance.4.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. maintainability.3. Side Note 6. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. production. engineering. These teams often include representatives from marketing. design. However. manufacturing. My experience may not be indicative of management practices in general in the U.S. Definition 6.. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. and field service personnel..3.

PRODUCT DEVELOPMENT 1. 2. 4. Robust design. Improvement of functional aspects of the product. 3. Standardization of components. Reduced complexity of the product. 5. and 7.6. Improved maintainability (serviceability) of the product. 87 . Improved job design and job safety. 6. Cost reduction.3.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

.

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

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

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

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

– Start with small goals. • Set both short-term goals and long-term goals. If your goal is to raise 1. your goal may not be realistic. If you talk to an entrepreneur who has not been successful. 7. • Be specific. When I talk to those who I know who have started businesses. “Achieve financial independence” is much better than “pay the bills. Like parents. Learning from failure is as important. if not more important. When setting goals. ask other entrepreneurs. it helps to set goals.3.3 Setting Goals With any major endeavor.7. marketing. 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. ask yourself the following questions: • Income – How much do you want to earn. although the successful ones generally view their experiences as positive on the whole.000 yuan and you’ve never had a job before. advertising.” you may not want to start a business that focuses on customer relationships.000. try to figure out why they were not successful. such as sales. 10. – Short-term goals are those that can be accomplished within a year.000 yuan by July 1” is a much better goal than “raise money. or 20 years to accomplish.1 (What’s It Really Like?) If you wonder what running a business is really like.” • Be realistic. than learning from success. and administration. “Raise 100. Move on to larger goals once the small goals have been met. it is common to exchange “war stories” about the difficult times and sacrifices. When setting goals. Consider at least a five-year time horizon. even the successful ones will probably focus on the negative. SETTING GOALS 95 If you are not a “people person.” • Be optimistic.3. • Analyze Your Professional Attributes – Be aware of where you need help. Side Note 7. . – Long-term goals are those that may take 5.

such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. Have the class write down their answers and evaluate their own EQ. The reasons given for adding or subtracting points are as interesting as the ultimate score.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. – Hours of work. 21]. Many people want to start their own business for ego gratification. How much is your ego worth? Side Note 7. .96 CHAPTER 7. 20. – Geographic location. pp.3.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4.3. and – Investment of personal assets. 18–20]. Eliminate question 1 and substract one point from the scoring given on p. pp. Side Note 7. Acknowledge this fact and factor it into your decisionmaking. 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.

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

etc.. • Etc. Side Note 8. • The ideas are easily copied and would be quickly appropriated by more able competitors. most ideas are not feasible because • They would not be profitable enough. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. . Those with nose piercings would not need to remove the piercing and risk it closing.98 CHAPTER 8.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself. • They require business relationships that the entrepreneur does not have. often one or more a day. pp. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing. It sounds silly. but it is a major complaint for female rock climbers. 28–29]. hollow tube. business ideas come at a rapid rate. • The business would involve too much risk. • They require expertise that the entrepreneur does not have. However.0. • 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. 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. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. Side Note 8.0. • They require more financing than the entrepreneur has access to. I continue to generate business ideas as a matter of habit. • A nose piercing that consists of a small. people have to remove nose piercings for work or social occasions.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4.. however. Often times. The tube could be made unobtrusive enough that it would not need to be removed for work.

home. the business took off. or health. After all. Now What? The number one trait needed by successful entrepreneurs is perseverance. 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. such as your family.com/find?s=all&q=never+say+die. Finally. 2007.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. Have students come up with examples of products that meet various criteria on the checklist.1. 35]. it is too risky. You should be realistic about risks. Warnings about risk are perhaps the criticism you should consider most carefully. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business. February 17. making just enough to get by but not much more.” Side Note 8. He ran the business as a one-man operation for years.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. while you should listen to criticism that others give.1. “Never say die. Have students fill out the form on their own time.imdb. His sales are now in the millions of dollars per year and the business is very profitable. that they will never make it. 2 http://www.2 is. p. . you will be spending years of your life trying to make the idea work. used as the title of at least 12 movies and television shows.” That is. computer-controlled security cameras. 33]. 8.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. A well-known phrase in English. in the wake of 9/11.8. you should have “thick skin. Entrepreneurs are often told their idea is flawed. or are otherwise discouraged. People thought he was going nowhere and generally dimissed his business. YOU’VE GOT AN IDEA. p. thinking that if he did not succeed after a couple of years. And you should not risk anything you can’t afford to lose. 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. However. you should not let it dissuade you.1. he would never succeed.1 You’ve Got an Idea. Side Note 8. Side Note 8.1. to be truly self-motivated and persistent in the way you need to succeed.

100 CHAPTER 8. FINDING AN IDEA .

but you should try to target your market as specifically as possible.0.2. 9.1. go through the following 7 steps: 1.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.0.” or business-to-consumer ventures. 101 . Businesses. When trying to identify your niche market.” or business-to-business ventures. Definition 9. your next step is to do some market research. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.0. See also 9.0. There are two broad categories of markets: 1. Not only do you need to decide whether you are marketing to businesses or consumers. See also 9.Chapter 9 Defining Your Market After coming up with your idea. Consumers and 2.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. Definition 9.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.

That is. I mean customers. DEFINING YOUR MARKET • The types of businesses and consumers you want to target in terms of age. Synthesize – Coalesce your ideas. “Selling maternity clothes to executive women” is much better than “selling clothes. • A friend in Chicago. . (b) Somebody else wants it.102 CHAPTER 9. 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. Describe the customer’s worldview – Talk to prospective customers and identify their main concerns. there is not already alot of competition. But do test your product before you go ahead full speed.” [4. the longer you wait to go into business in earnest. It is much better to target “pregnant women between 25 and 35 in households that earn more than 50. • The rule “do unto others as you would have them do unto you” is often called the Golden Rule. author of Nichecraft: Using Your Specialness to Focu coined what she calls the Platinum Rule: “Do unto others as they would do unto themselves. p. • 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. then asked them about customer reactions. Lynda C. 5. (e) It evolves. By someone else. • If your initial test does not go well. Test – Offer samples.” 2.000 per year. It should confirm to your long-term vision.” To focus your search for a niche. give a seminar. discard the idea and move on to the next one. Evaluation – Evaluate your niche against the criteria in step 4.. Falkenstein. (d) It’s one-of-a-kind. decided to start a business selling unique winter clothes for dogs. earnings. She started by making a few samples and giving them to friends with dogs. 6. If it does not sufficiently meet the criteria. Focus – Be specific. After all. • Don’t spend alot of money. (c) It’s carefully planned. etc. and other important demographics. 75] 4. Donna. That is. it allows you to branch off into other niches as the business grows. A good niche has five qualities (a) It takes you where you want to go. you need to stop and seriously reevaluate your plan.

1 (Smaller is Bigger) When starting a business. This marketing technique has been widely used since the early 1980s in the U.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years. the more likely you are to score a hit.. Likewise. Go for it! – Implement your idea. It is better to do just one thing well than to do many things poorly.1. Definition 9. Many Western companies make the mistake of lumping together Japanese. buying a home.2. 9.. Definition 9.1. and cohort marketing. New marketing techniques include generational.1. As older people are more active than before. young adults in the Depression.1.1. FINDING YOUR NICHE 103 7. in the U. etc. many Eastern companies make the mistake of lumping together American and European customers. but their behavior differs significantly due to the different influences in their youth. Marketing to demographic groups has become much more refined in the last few decades.” That is.9. when many people were suffering from extreme poverty.) Using these new marketing techniques can allow you to narrow your market.1.S.1. For example. economic. Side Note 9. when the country was immersed in a war effort. many are choosing to start families later in life or even have children ten years or more apart.1. and the narrower your focus on your target. or retiring. If you did your homework. Side Note 9.1 (Generational Marketing) Marketing to consumers based on age as well as social. demographic. and psychological factors. you should practice extra caution to avoid stereotypes or other insensitive approaches. .. for example.S. are similar in age to those who came of age in World War II. and other Asian customers together. Definition 9. they try to satisfy all possible customers and end up trying to do too many things well.3. (See definitions 9. Korean. the World War II cohort. such as having children. This can be offensive and serve to alienate rather than appeal to your customer. Chinese.1. life stage. 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.1.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. the Depression-era cohort. many entrepreneurs make the mistake of being “all over the map. and 9.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. you should be able to enter your niche market with confidence.

p. • Convey the essence of your business’s goals and philosophies. p.104 CHAPTER 9. Every six months or so. The mission statement should • Be succinct. a few sentences at most. .” [4.2 Redefining and Expanding Your Niche Lynda C.2 [1. 79] 9.1 (Mission Statements for Three Organizations) Review Heizer figure 2. 28] which includes mission statements for three multinational companies: 1 See section 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. DEFINING YOUR MARKET 9.3 The Mission Statement Once you have a niche. Falkenstein states. you should. “Creating a niche is the difference between being in business and not being in business. Side Note 9. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business.3. create a mission statement.1. Falkenstein1 advises that you regularly reevaluate your niche.

competitively superior. global air-ground transportation of high-priority goods and documents that require rapid.9. THE MISSION STATEMENT 1.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. and nurturing work environment while ensuring our long-term success. time-certain delivery.3. Our mission consists of 3 interrelated parts: • Product Mission – To make. contributing member of our community and offering the Hard Rock family a fun. natural ingredients and promoting business practices that respect the Earth and the Environment. . A complete record of each shipment and delivery will be presented with our request for payment. healthy. 2. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. FedEx FedEx is committed to our People-Service-Profit philosophy. 105 Side Note 9. The Hard Rock Caf´ e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. We will strive to have a completely satisfied customer at the end of each transaction.3. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. We will produce outstanding financial returns by providing totally reliable. courteous. and professional to each other and the public. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. We are committed to being an important. We will be helpful. Equally important. 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.

products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9. See http://www. such as Whole Foods. processes.1. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. so do your partners. Answering the following questions can provide you with a clear picture of what your mission statement should include: • Who are your customers?2 • What image of your business do you want to convey? • What is the nature of your products and services? – What determines pricing and quantity? – What is your competitive edge? Price? Features? – Will this change over time? • What level of service do you provide? • What roles do you and your employees play? – You should develop a leadership that organizes. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers..cfm for more detail. Other companies. nationally & internationally. . challenges. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. a grocery chain.S. and recognizes outstanding employees. capital.com/our company/our mission/index. 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.benjerry. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed.106 CHAPTER 9.

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

DEFINING YOUR MARKET .108 CHAPTER 9.

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

110

CHAPTER 10. MARKET RESEARCH

10.1

What Am I Researching, Exactly?

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

10.2. RESEARCH METHODS

111

10.2

Research Methods

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

10.2.1

Sources of Secondary Research

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

definition 10.2.1.

112

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

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

RESEARCH METHODS 113 Side Note 10.2. . 102–103] The questionnaire supposes that someone is going to open an interior decoration business.10.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. pp.2.” [4.

114 CHAPTER 10. MARKET RESEARCH .

Definition 11. 1. including 115 . Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. Set up a timetable with specific steps to be accomplished in a specific period. and projected results of the new business. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. Your business plan should list obstacles that may arise and what will be done to address them.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.0. expected needs. and so should you be. 4. No commitment or dedication – Entrepreneurs must be ready and willing to demonstrate a personal and financial commitment to the success of the venture. Those who provide financing are aware of these pitfalls. 2. In terms of sanity checking. 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. 3. It must describe current status. 5. Every aspect of the venture should be covered.

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

e. i.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person. Determine the characteristics of the venture and its industry. 11. the trash can. p.11. Determine the quality of the entrepreneurs.. 4. 2. you will not even get your foot in the door and be invited to present your plan to investors. thorough and careful. Read the latest balance sheet. p. including debt or equity financing required. Read the plan over casually.2 5. 301]: • Appearance – It should look good.1. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color. Establish the unique details of this venture.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. Kuratko suggests the following [3. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. – Binding and printing should not be sloppy. 1.1. Determine the financial structure of the plan. 2 Do not underestimate the importance of this step. While the initial read-through might be only a five-minute perusal. They will want to see something that reflects that you are neat. bear in mind that once the plan is advanced to the next stage of financing. 300]. . 3. 6. 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. but not too good. but should not be too lavish. other financing professionals may spend more time analyzing the details of the plan. not ostentatious. If you cannot impress the financier with these three steps. or spendthrift. pretentious. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Note that less than a minute on average is devoted to each step.

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

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

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

For example. which investors will use to estimate debt/equity ratios. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. a balance sheet containing projected balances is called a pro forma balance sheet. First sales and first deliveries. etc.2. Design or research difficulties. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. detailing projected inflows and outflows. Ordering production quantities of materials. Appendix – If there are documents. Difficulty purchasing parts or materials. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. Costs exceeding estimates. Receipt of first orders. current ratios. working capital. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. (c) A cash-flow statement. Unexpected competitions. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. of the risks than you are. Hiring of sales representatives.11. 11.2. (b) An income statement.com. . detailing projected profits and losses. Side Note 11. and Payment of first accounts receivable. 8. inventory turnover. Product display at trade shows. 9. include an appendix. or more aware. These might include • • • • • • • • • • Incorporation of the new venture.com) Discuss the growth of Active.2. Risks might include • • • • • Negative industry trends. Your investors are probably as aware. Signing up distributors and dealers. Definition 11. Try to be honest and realistic..1 (Pro Forma) A latin term that means projected. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. as opposed to actual. Critical-Risks Segment – Discuss business risks and the ways you might address them. Completion of prototypes. Completion of design and development. What happens if the management team changes? What will happen to the company assets if ownership changes? 10.2 (The Growth of Active.

THE BUSINESS PLAN .122 CHAPTER 11.

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

3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to.2. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving.2. 12.”2 [2. they may have another version of PowerPoint. • Bring paper copies3 of your presentation in case all else fails. and you don’t want something as silly as a burned-out light bulb to cost you an investor. 2 This originally comes from an American classic. Post a copy of your presentation in a secure location on your homepage just in case.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.D.D. Bring at least twice as many as you expect there to be people in the room. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. PRESENTING THE PLAN times. • Test the equipment the day before. Adobe Reader. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. • Bring a backup thumb drive with your presentation on it.2. the lawyer joke. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. “His lips are moving. Guy Kawasaki likes to tell a different version of an old joke.” 3 Color copies! . 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. 44] Side Note 12.124 CHAPTER 12. • Bring your own laptop. The original joke goes. of course. There will always be glitches. Most Ph. In retrospect. candidates give their “job talk” half a dozen times to other students before giving it in an interview situation. I had given it over a dozen times. You don’t want to try to figure out other people’s equipment. is. By the time I gave my job talk to my eventual employer. Most graduates get between 5 and 15 interviews when they graduate. and even if you can figure it out. “How can you tell when a lawyer is lying?” The answer. p. I don’t think it was quite right until somewhere between the 8th and 10th time. Lexecon.1 (The Job Talk) Every Ph. 12.

It is easy for things to get lost in the heat of the moment. 12. AFTER THE PRESENTATION 125 Side Note 12.6 So What? When you are planning your presentation. 12. “So what?” If you cannot answer this question simply and easily. You should be prepared for the unexpected. Guy Kawasaki recommends you set a timer [2. and although you go into each presentation . At my company in Chicago. p. Ask them what your company will do. • Taking notes also makes you look conscientious.2. If they cannot explain it clearly. everyone brought a pen and paper. Everyone. I was shocked to find out the day I arrived that the conference room reserved for the class did not have internet access even though I had sent them e-mails ahead of time specifically indicating that the conference room would need to have internet access.3.2.12. • Your audience may ask you several questions at once. you need to change or eliminate the statement. In general. They may ask you something you want to respond to in an e-mail later. They may ask you something that makes you want to change your presentation. you are not presenting it well. but in reality. Many people feel as if taking notes makes them look stupid. I always bring a pen and paper to meetings. it is quite the opposite. ask yourself after every statement you make.2. so write things down to make sure you don’t forget.3 After the Presentation Each presentation will be different.5 Take Notes Have a pen and paper ready and take notes during the pitch. 45]. Give your presentation to friends or family.2.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 12. and each investor will respond differently. Much of the material required use of the internet. Stop when it goes off. 12. where some of the smartest people in the world worked.

p.” .5 [3.1 (What to Do When You’re Turned Down) Present Kuratko table 10. Be prepared for rejection and do not consider it the end of the road. PRESENTING THE PLAN with only success on your mind. Each negative comment gives you an opportunity to change an investor’s opinion. Each time your are rejected improves your future opportunities.126 CHAPTER 12. Remember that persistence is the most important character trait of entrepreneurs. 321]: “What to do when a venture capitalist turns you down: Ten questions.3. you should also realize that most most comments will be negative and most presentations are rejected. Side Note 12.

Chapter 13

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

128

CHAPTER 13. INVENTORY CONTROL

13.1

Inventory and Cash Flow

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

13.2

Tracking Inventory

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

13.3. COMPUTERIZED INVENTORY CONTROL • Dollar-control Systems

129

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

13.3

Computerized Inventory Control

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

section 13.3 below.

Definition 13.1 (Turnover) When you have replaced 100% of your original inventory. 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. if you perform an inventory count four times a year.3. • Security – To prevent theft.3. the count cycle is the amount of time between counting inventory. 13. For example. the delivery cycle is the amount of time between placing an order and receiving it.2 (Order Cycle) In inventory management. and • Improve pricing accuracy. INVENTORY CONTROL When considering the purchase of a POS. 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. To improve efficiency of inventory control.130 • Maintain a sales history.3. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet.4 (Delivery Cycle) In inventory management. you have “turned over” your inventory. Definition 13. • Updating product information – At the time a sale is entered.3 (Count Cycle) In inventory management. Definition 13.1 Inventory Turnover Typically.3. such as for volume discounts for preferred customers. CHAPTER 13. Definition 13. your count cycle is 12 weeks. be sure it’s not easy to “hack” the system. these systems should automatically update inventory and accounting records. the order cycle is the amount of time it takes to process paperwork and place orders. work with suppliers to improve delivery times and count inventory more often. .3. a high inventory turnover is a mark of a well-managed inventory system.

4.2 See also 13. first out) assumes that you sell the least recently purchased inventory first. The author is unfamiliar with Chinese tax codes. Definition 13. In other words.1 Buying Inventory In the process of putting together your business plan.1. but you should at least know about LIFO and FIFO. . first out) assumes that you sell the most recently purchased inventory first. Many businesses also measure turnover by measuring sales per square foot (or square meter).4.4.S.2.4. Calculate your sales per square meter once per month. In deciding which to use. 13.3. First Out)) FIFO (first in. you must estimate your inventory value when you file your taxes.5 (Needs Period) In inventory management.13.2. 13. LIFO and FIFO are two accounting methods used to do this.4 Inventory Accounting Your accountant will typically handle inventory accounting. Definition 13. First Out)) LIFO (last in. least this is true in the U.4. 13. follow the recommendation of your accountant. it values your remaining inventory based on the prices of the least recently purchased items. and delivery cycle.4.. The author is unfamiliar with Chinese tax codes. which may result in higher taxes.4. See definitions 13.3.3. You should know how many sales per square meter per year you need to survive. If there is inflation. it values your remaining inventory based on the prices of the most recently purchased items. INVENTORY ACCOUNTING 131 Definition 13. which allows you to pay less taxes on your inventory.1 (LIFO (Last In. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. and 13. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. 2 At 3 At least this is true in the U. If there is inflation.3 See also 13.S. In the U. the needs period is the sum of the count cycle. order cycle.3.2 (FIFO (First In.S. After you have been in business your inventory control system should give you a better idea of stocking levels.3.

5 Suppliers Suppliers can be divided into four categories: 1. Their prices are higher than a manufacturers. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . INVENTORY CONTROL Definition 13. courteous and firm with your suppliers. 13.1 Dealing with Suppliers The most important thing about a supplier is reliability. 13. Manufacturers – Note that some manufacturers refuse to fill small orders.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. 2.” .4. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. author of Start Your Own Business.actual inventory .132 CHAPTER 13. • Some suppliers demand a minimum number of items per order.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. and they will respond in kind.5. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. Rieva Lesonsky. says. – The minimum may be higher for first orders to cover the cost of setting up a new account. Import sources – They operate like domestic wholesalers. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. usually one. Independent craftspeople 4. Distributors – Also known as wholesalers. “Be open. three or four months. 3. brokers or jobbers.

• Sometimes if an order is large enough. and • Allowances before you make a decision.d. 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. do not falsify or misrepresent your financial statements.o.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.13. and • The need to be firm but fair. Side Note 13.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. customers may be required to pay upon receipt of goods.)) Cash on delivery.S. Discuss • Their negotiating technique when discussing pricing. the supplier will pay for freight.1 (COD (or c. Tips for dealing with suppliers: 1. it is considered a felony. At least in the U.5. Suppliers sometimes try to complicate pricing to their advantage. Be sure to add up • Costs. personal interaction can work wonders.5. If you don’t have trade references or a credit rating (as is the case with many starting businesses) you may find smaller suppliers more accomodating than large suppliers. Whatever you do. If you are dealing with a reticent large supplier. basis until you have proven yourself reliable.d.5. you should know who is liable for damage to goods in transit. they will put you on a c.o. If a supplier does not extend credit.. Definition 13. If a supplier is uncertain about you. SUPPLIERS 133 13.5. You can also present your financial statements and prospects for success. 2. Ask about the freight policy before ordering. • Discounts. . • For items being shipped. I regularly had to deal with food vendors.

May 19.3 (FOB Destination (or f. See also definition 13.6 See also definition 13.5.5.com/reference/glossary/glossary efg. 2007. Destination)) Free on board destination. May 19. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Specify a cancellation date on your order forms. Be aware of your supplier’s priorities.7 4 Source: 5 Source: http://www. . Seattle” to indicate that an item being shipped from Seattle is free on board.2 (FOB (or f. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. May 19. The FOB term requires the seller to clear the goods for export. 3. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. 7 Source: http://en. Definition 13.4 (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.b.abcsmallbiz. 5. 6 Source: http://www.com/shippers/glossary.5. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. This differs from a forward order where stock is available but delivery is postponed for other reasons.wikipedia.b. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.html.3. 5 FOB Destination changes the location where title and risk pass.roadway. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. Definition 13.)) Free on board.134 CHAPTER 13.com/jargon.5.4 Colloquially. Definition 13. 2007. Under this arrangement. As opposed to FOB.5.o. May 19.epoi.html.org/wiki/Backorder.o.2.html. http://www.o. 2007. people often say something like “f. INVENTORY CONTROL • Depending on whether the supplier pays frieght. 2007.b.

337]. Side Note 14. p. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs). besides being bad for business.0. The benefits of finding the right person for a job cannot be overstated. they are often emotionally draining for the manager as well as the employee involved. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. • Temporary employees (temps).0. On the other hand.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. a bad hire. 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 . • Part-time employees.3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4. and • Independent contractors.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. Side Note 14.

you’ll be grateful to have spent the time to go through a more formal process. lifting. If you call someone a Vice President but don’t compensate them as such. by the time you hire your 40th employee. HIRING EMPLOYEES 14. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists.1 Job Analysis Before creating a job description. etc. selling. • If you have do terminate the employee.1. However.2 Job Description Side Note 14. they will soon expect compensation commensurate with their job title. then want to hire someone else later at a position above them in the company. 14. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. • How the job will be done. you have nothing to offer. creating a job description. you will likely find that they will come to you at some point to demand a vice president’s salary.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. Cleaning.. and recruiting.1 How to Hire Hiring involves analyzing the job requirements. this can create several problems: • Even if the employee is grateful to have an inflated job title at first.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.1.1.1. . but personality traits. writing reports. If you give someone a job as Vice President. Side Note 14. Not only education and skills. 14.136 CHAPTER 14. you need to consider • The physical or mental tasks involved. programming. • You may not leave enough buffer above the employee. an employee with an inflated job title may expect an inflated severance package.

If you hire someone at the highest level of their competency.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4.1) and should include the personal requirements expected of an employee [4. it includes • The job title. and • Job summary with major and minor duties. Side Note 14. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. • A salary range.1 (Job Description) Job descriptions should include • A job title. p. If.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. Part of retaining quality employees is the prospect of advancement. you hire someone as Director who is not qualified to be a director.14.1.1.1. 338]. then they go on to a Director position at another company. • Physical or other special requirements associated with the job. you may find it difficult to give them a promotion later. for example. and • A summary description of the position. Definition 14.1. It also includes • Any educational requirements. you may find they are tempted to leverage that job title to seek employment elsewhere. • Desired experience. • Who the person reports to. and • Any occupational hazards. .1. • The position of that employee in the corporate heirarchy. 339]. HOW TO HIRE 137 • There is little room for advancement. • If you give someone an inflated job title but do not offer a salary commensurate with the title. Definition 14. You may actually be doing your employee a disservice by inflating their job title. p. • Benefits. • Specialized skills or knowledge. Like a job description.

applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. • List the top 4 or 5 skills that are most essential to the job.S. companies. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. 2 See sidenote 14. if you are looking for an accountant. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process..” or people who may not have them will just try to fake those personality traits in the interview. • Be sure to list appropriate contact information.1. HIRING EMPLOYEES 14. such as “outgoing” or “detailoriented. For example.3 Advertising the Job When you write an advertisement. – For professional positions. With e-mail. Many American companies are no longer providing phone numbers.138 CHAPTER 14.5.2 Side Note 14.4 Finding People There are many possible sources of applicants. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. – For other positions. due to the number of applicants for competitive positions. • Do not ask for specific personality traits. • Do not list requirements other than educational or experience-related ones. It also makes it easy to receive and process a large number of applications with a minimum of effort.1.S.1. e-mail addresses have become perhaps the most popular way to get applicant information at U. particularly those that advertise on web sites. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job.4 (Using an E-mail Address) For professional positions.1. 14. .

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. 6.S. 3. but when looking at a resume. particularly in the high-tech industry. Software” category.” And 921 in “Engineering. Searching on Monster. You narrow down the 10 candidates to 3.com with the keyword “java” will demonstrate just how widely used online tools are.” 665 in “Internet/E-Commerce. you will get several candidates for any job you are offering. for professional positions.. 5.. You hire the preferred candidate. about 10 or so.314 listings in the “Computers. 4. • Focus on the skills that a person can bring to your company. You can evaluate their personality during the interview. 2.dice. the hiring process proceeds as follows: 1. For any job. In the U. You conduct a second round of interviews with the remaining 3 candidates. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. be sure that a candidate can provide what you are looking for.S.000 hits searching just the “Information Technology” search category. There were 4.14. Screening People Reviewing resumes and applications is an art. To “weed out” candidates. You interview the candidates.monster. 3 Java is a programming language.com or http://www. Try to perform a search on a job sites such as http://www.3 Generally. most professional associations’ job banks are now online.” . 159 in “Financial Services. • Industry Publications – Most trade publications take ads for job openings. If you are lucky.1. • Online – In the U.com with the keyword Java on May 19. many positions are being filled online. not a science. 2007 turned up more than 5. You narrow the number of resumes down to about 10. You check references.

that is a very good sign that they are a survivor. this indicated to us that the applicant was not being truthful. • Don’t necessarily discard resumes with some gaps. Of those we looked at. 344–345]. CHAPTER 14. • Work experience – As for salary information when asking about work experience • Availability. Due to this. • Educational background. phone number. From the hiring process at Active. • Special skills. Side Note 14.4 were not experienced enough. did not match our requirements closely enough. Applications should ask for things such as • Name. and • References. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references.com) In the hiring process at Active. I have some personal recommendations: • Always check references. so many resumes came in that an administrative assistant was asked to perform the first screening. address.6 (Hiring at Active.5 (Job Application) Present Lesonsky’s sample job application [4.com. If an applicant indicated they were an expert with too many technologies. • On the other hand. 4 It takes time to become an expert with any sufficiently compex technology. Side Note 14. or were too experienced. including when an applicant can work and the hours they can work. if a person survives downsizing or other major changes at their former employers.140 • Look for patterns in their career.1. I learned that people lie on their resumes all the time. we tossed those that had spelling or grammatical mistakes.1. and e-mail address. listed expertise in too many subject areas. • Rely on your intuition.com. That typically indicates that someone cannot supply enough positive references. . She simply passed along resumes that contained certain keywords that we were looking for. pp.

race. Ever. • Do not hire people who are discovered to be lying on their resume. • Sex. 347] • Age or date of birth. such as through a “Green Card.14. • Whether the applicant has every been treated for drug or alcohol addiction. • Marital status. then go home and play on computers in their spare time. color. or • If a person is a citizen. and 5 I don’t mean play in the sense that they were playing video games – they were networking their house or setting up interesting web sites or doing other productive activities. 6 Employers can. p. • Disabilities of any kind.” .7 (No-nos) In the U. They were the type of people who would write software all day. • How many days the applicant was sick in the previous year.1. Get clarification on anything that you think may be suspect.S. however.1.5 Side Note 14. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field.6 Questions that are not explicitly prohibited. ask prospective employees whether they can submit proof that they have the legal right to work in the United States. Not also that many of the best people we hired were not the best on paper. employers may not ask about anything not related to the job. creed. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. Though laws undoubtedly differ in China. including [4.. Several of the engineers I hired did not finish their undergraduate degree. • Maiden name (for female applicants). • Whether the applicant has every been arrested. religion. However.S.. • Ask people questions about their resume during the interview. but which can get employers in legal trouble. • Whether the applicant has every been treated by a psychologist or psychiatrist. include • Whether the applicant has children. or national origin. in the U. their love of and devotion to learning technology far exceeded most university graduates who were computer science majors simply because they thought it would make them money.

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

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

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

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

Sign up to vote on this title
UsefulNot useful