International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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4.3. . . . . . . . 4. .5 Slack Time and Identifying the Critical Path . . . . . . . . . . . . . . . . . . . . . . 5. . 3. . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . Strategy Development and Implementation .3. .2 Network Diagrams . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . .1 Research . . . . . . . . . . . . . . . . . . . . . . . .1. . .6 Variability in Activity Times . . . . . . . . . . .1 Project Planning . . 5. . . . . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . . . . . . . . . . . .2 Project Scheduling .1 The Project Manager . . . . . . . . . . . . . . . . . 5.4 Adjusting for Trend . . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . 4. . . 4. . . . 5. . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . 4. . . . . . 5. . . . . . . . . . . .4 3. . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . .1 Probability of Project Completion . . 5. .1 Qualitative Forecasting Methods . .2 Build and Staff the Organization . . . . . . . . .2 Life Cycle and Strategy . . . . . . . .2 Preconditions . .1. . 6. . . . . . . .2. . . . . . . . . .1 Product Life Cycles . . . . 4. . . . . .2 The Strategic Importance of Forecasting 5. . . . . . . 3. . . . . . . . . .3 Measuring Forecast Error . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . .1 Goods and Services Selection . . . . . . . .3 Forecasting Approaches . . . . . . . . . .1.3. . . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . . CONTENTS . . . . . . . . . . . . . .1.3. .3 Project Controlling .4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . .4.1. . . . . . . . . .3. . . . . 4. 5. . . . . .1 PERT and CPM . . . . . . . . . . . . . . .4 4 Project Management 4. . . . . . . . . . . . .2 Quantitative Forecasting Methods . . . . . . . . . . . . . . . 4. .1 Types of Forecasts . . . . . . . . .2. . . 5. . . . . .3 Product-by-Value Analysis . . .3. . . . . . .5 Seasonal Variations in Data . . . . . . . . . . . . . . . .1 Identify Critical Success Factors . . . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . .6 Associative Models . . . . . . .2 Focus Forecasting . . . . . . .8 A Critique of PERT and CPM . . .3 3. . . . . . . . . . . . . . . . . .2. . 6. . . . .1. . . . . . . . . . . . . .2 The Work Breakdown Structure . 6 Design of Goods and Services 6. . . . . . . . . .6. . 4. .4 Determining the Project Schedule .3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . 4.3. . . . . . . . . . . . . . . . 5.4 Monitoring and Controlling Forecasts . . . . . . . . . . . . . .1 Adaptive Smooting . . . . . 3. . . . . . . . . . . . . . . .1 What is Forecasting? . . . . . . . 3. . .3. . . . .3. . . . . . . .2 A Seven Step Forecasting System . . . . . . . . . . . . . . . . . . . . . . .1. . . . . .3 Dynamics . . . . .

. . . . . . . . . . . . . . . . . . . . . . . .3. . . 6. . . . . . . . . . . .5 Take Notes . . . . . .4 The First Minute is the Most Important . . . . . . . .2 Some Suggestions . . . .3 Be Familiar With All Equipment to be Used 12. . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . 12. . . . . . . . . . . . 94 7. . . .1. . . . . . . . . .3 Some Style Points 11. . . . . . 92 7. . . . . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . . . . . . . . . . . . .2 Research Methods . . . . . 12. . . . . . . 12. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 After the Presentation . . . . 12.2 The Plan Contents .1 Importance of New Products . . . . . . . . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . .2. . . . . . . . . .3. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . . . . . . . . . . . . . . . . 12. . . . . . . .1 Sources of Secondary Research . .2 Know Your Outline Thoroughly . . . . . . . . . . .1. . . . . . . . . .2 Quality Function Deployment (QFD) . . . . . . . . . . . . . . .1 Finding Your Niche . . . . . . 110 10. . . . . . . 104 9. . . . .2 Redefining and Expanding Your Niche . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . . . . . . . . . . . .2. . . .1 Preparing to Put the Plan 11.2.3. . .1. . . . . . .3 Setting Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 9 Defining Your Market 101 9. .3 Organizing for Product Development .6 So What? . . . . . . . .2 Look and Feel .2. . . . . . . . . . . . . Product Development . . . . . . . . . . . . . . . 11. . . . .CONTENTS 6. 6. . . 6. . .1 Your Audience . . . . . .1 Do It Until You Get It Right . . . . . . . . . .2 Are You Ready? .3 Generating New Products . . . . . . . .2 6. . . . . . 104 10 Market Research 109 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Presenting the Plan 12. . .2. Now What? . . . . . . . . 12. . . . . . . . . . . .1 The Presentation .2. . . . . . . . . . . .1 What Am I Researching. . . . 101 9.4 Manufacturability and Value Engineering . .3. . . . . .1 Product Development System . . . . 95 8 Finding an Idea 97 8. . . . . . . . . . .2. . . . . . . . . . . . . . . . . . Exactly? . . .1 Characteristics of the Successful Entrepreneur . . . 111 10. .3 The Mission Statement . . . . . 11. 6. . . . . . .1 You’ve Got an Idea.

. .1. . . . . . . .1 Dealing with Suppliers . . 13.5. . . . . . . . . .1. . . . . . . . . . . . .3 Computerized Inventory Control 13. .2 Tracking Inventory . . . . . . . . . . . . . . .4 Finding People . . . .1 Inventory and Cash Flow . . . . . . . .6 13 Inventory Control 13. . . . . . . . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 How to Hire . . . . . . . . . . . . . . . . . . . . . . . 14 Hiring Employees 14. . 13. . . . . . . . .1 Buying Inventory . 14. . . . . . . . . .5 Suppliers . . . . . . . . . . . . . . . . .1. . . . . . . . . . . . .5. . . . . . .2 Job Description . . . . . . . . .2 Payment Plans . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . .1 Job Analysis . . . .3. . . . . . . 14. . . . . . . . . . . . . .4 Inventory Accounting . . . . . . . . . . . . . . .4. . . . . . . . 13. . . . . . . . . . . . . . . .1. . . . . . . . . . 13. . . 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . 13. . . . .3 Advertising the Job 14. . . . . . . . . . .1 Inventory Turnover . .

Part I International Business Management 7 .

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

which are more strictly enforced in the West. child labor was widely used.2.S.1.A. 3.S. This is something Chinese business people should be aware of. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways.A. Note that during the industrialization of the U. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture. . Western business people may not initially trust their Chinese counterparts. Why is corruption an important business issue? • See sidenote 1. Easterners tend to trust people after observing a pattern of consistent behavior.. • In general. • However. 1.2.1 (Ethics) The study of morality and standards of conduct. Prison labor is also considered improper in the U. For example. 2. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. and Europe but a commonly accepted practice throughout the developing world. Westerners rely more on contracts. Definition 1. 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. • Because guanxi is less important in the West.10 CHAPTER 1.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. • Because of this.A.2 Corporate Corruption Side Note 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U.2. there is a perception in the West that Chinese are hard-working and smart. 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. Which brings us to the subject of this lecture: Ethics.S.

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

Parmalat. corporate malfeasance by the CFO and others at Enron precipitated the largest bankruptcy in history in the U.. the former CEO of WorldCom.1 (Sarbanes-Oxley Act (SOX)) As a result of Enron. .com/Research/15 Largest.S. Side Note 1. 2007. – WorldCom reportedly had over $103 billion in assets prior to bankruptcy. history. 3 Source: 4 Source: http://www. Criminal penalties if the CEO and CFO sign statements later found to be false or misleading.S. • WorldCom – Following the Enron scandal.com/Research/15 Largest. WorldCom declared bankruptcy in July 2002.3 The United States The United States has recently been rocked by a number of scandals in the business community. the SarbanesOxley Act (SOX) was passed in the U. • Tyco – The CEO of Tyco.bankruptcydata. – He was convicted in 2005 of stealing up to $600 from the company and was sentenced to between 8 and 25 years in prison. 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. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY 1. was convicted of fraud and conspiracy and sentenced to 25 years in jail. Dennis Kozlowski. In Scandinavia. scandals such as Enron.3. March 17. See sidebar 1.bankruptcydata. There is currently debate as to the effectiveness of the regulations relative to the costs. Qwest.4 – Bernard Ebbers.htm. and Tyco make it clear that even western developed economies have significant ethical shortcomings. was accused of looting the company to fund a lavish lifestyle.1. succeeding Enron as the largest bankruptcy in U. March 17. While western developed economies often cite a high ethical standard. Worldcom. • Enron – In December 2001. including a $2 million birthday party for his wife. Side Note 1.2. – WorldCom reportedly had over $63 billion in assets prior to bankruptcy. 2007.3 – Several Enron executives have since been sentenced to jail for fraud and other charges.S.12 CHAPTER 1.3.htm.S. http://www. specifying rigorous reporting requirements for corporate financial statements and requiring the CEO and CFO to approve and declare accurate public financial statements.2 (Cultural Heritage in the U. a high value is placed on honesty and personal integrity.

which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner.S. The government was compelled to provide public money to bail out the institutions. were not as highly regulated as banks. Better known is the case of Japanese banks.pdf.S. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. the political scandals do not appear to have been fully acknowledged and addressed.1 (The U. 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.4. Side Note 1. Moreover. . This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.fdic.4. 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. with many women finding their employment opportunities constrained. Likewise..gov/bank/analytical/banking/2000dec/brv13n2 2. • Many men do not understand why sexual harassment constitutes a problem. also known as thrifts and which function like banks. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.4. Hodgetts et al.2 (Sexual Harassment in the United States) Behavior considered socially acceptable elsewhere in the world may not be considered socially or legally 5 Source: http://www. Savings and loan institutions. 58].4. p.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals.4 1.1. Side Note 1. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U.2 Women in the Workplace Sexual harassment has also become an issue in Japan. JAPAN 13 1.4. This resulted in several banks being technically bankrupt [5. 5 1. women have a difficult time being taken seriously.

• The victim does not have to be the person harassed but could be anyone affected by the offensive conduct. 6 Source: http://www. It is considered a very serious issue. hostile or offensive work environment. or other issues. cite two cases in which foreign firms operating in the U. yes or no. sexual harassment lawsuits result in significant penalties (e. and for most public institutions and many large corporations. Hodgetts et al.. 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. considerable attention and training is given employees to inform them what is acceptable and unacceptable in the workplace. Furthermore. gender. 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. or a non-employee. have paid substantial penalties as a result of sexual harassment or discrimination based on race. Are women with equal qualifications as men given equal pay and position? Take a show of hands. • The harasser can be the victim’s supervisor.de2. • Unlawful sexual harassment may occur without economic injury to or discharge of the victim. unreasonably interferes with an individual’s work performance or creates an intimidating. a co-worker.3 (Sexual Harassment in China) Ask the students whether they perceive there is any gender discrimination in the workplace. The victim does not have to be of the opposite sex. in the millions of dollars) to those who are successfully prosecuted. . Side Note 1. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY acceptable in the United States.g.psu.edu/harassment/legal.1 (Sexual Harassment) The definition of sexual harassment given by the United States Equal Employment Opportunity Commission is as follows:6 Unwelcome sexual advances.S. • The harasser’s conduct must be unwelcome. a supervisor in another area.4.14 CHAPTER 1.4. This definition has been further elaborated: Sexual harassment can occur in a variety of circumstances. an agent of the employer. Definition 1.

Hodgetts et al. Definition 1. 7 Source: http://www. EUROPE 15 1.dict.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. their attitudes towards bribery when working in foreign markets differs from that of the U.4.7 Note that lobbyists do not have any formal power. particularly in upper management.5 1.5.S.. They only have the power of persuasion. with the purpose to influence their votes. Although women have entered the workforce in large numbers in recent decades. at 40. there seems to be a glass ceiling due to social factors.S. men are disproportionately represented in management positions. 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. than any other.4. Side Note 1. yes or no. 1. to try to influence decision-makers in any circumstance.3 Lobbying by Japan Japan spends more money lobbying in the U.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.1.4.5.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany.S. is the notable exception).2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. in an extended sense. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U.5. Side Note 1. with most in the top 20 among over 150 countries included in the survey.5.org. .1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy. politicians.

5.com/library/glossary/bldef-glassceiling.2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. . yes or no. but there is a perception that there are risks and ethical considerations. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. • More British companies have actively sought to recruit and promote women into management. though compensation is limited relative to lawsuits filed in the U. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1.S. • Discrimination lawsuits are more commonplace in Great Britian. 8 Side Note 1.about.5. what are the factors that contribute to the glass ceiling? • The perception among men of women in the workplace? • Educational opportunities for women? • Potential for networking? • Do you think that the status of women in the workplace is improving or will improve? Great Britian Things are generally considered better for women in Great Britian due to • Women have been more proactive in setting up organizations in Great Britian. Side Note 1. For those students who think so.5. 1.3 (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.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity..16 CHAPTER 1.htm.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 8 Source: http://careerplanning. 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.

Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. there are undoubtedly many others that get away with it.S. Side Note 1. Prison labor. • Yet another case in which software from a U.3 (Corporate Spying) Hodgetts et al. International corporate spying problems. Bribery and other forms of corruption. pp. [5. 7. Piracy and counterfeiting (see sidenote below). . • Note that for every corporate spy that is caught. executives.6. An opaque legal system. An increase in crime and illegal business activities. 6. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. 64]. Child labor. p. Often.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. 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. 3. ETHICAL CONCERNS IN CHINA 17 Side Note 1.S.6. Ethical considerations include 1. 5. 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 $1.1. 2. company in Boulder was stolen and sold to a Chinese company. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. • A relatively stable government.6. Side Note 1.2 (Piracy and Counterfeiting) Present sidenote at [5. 4.6. and • A recent history of rapid economic development.5 billion in sales annually.

China continues a battle against corruption. not-for-profit organizations that seek to serve society’s interest by focusing on social.1 (Corporate Social Responsibility (CSR)) The actions of a firm to benefit society beyond the requirments of the law and the direct interests of the firm. such as education and health care. education. . education. In the words of a Beijing correspondent for “The Economist” magazine. • CARE (promotes community development. health.7. political. and promotion of social equity). Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.S.7. a grocery chain. See http://www. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. provide relief in the event of humanitarian disasters.7 Corporate Social Responsibility Definition 1.4 (Corruption) Though things are improving. political. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition). Side Note 1.7.”[6] See also sidenote 1. . such as Whole Foods. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. and economic issues such as poverty.com/our company/our mission/index. health.cfm for more detail.18 CHAPTER 1.2.6. “.3 (Nongovernmental Organizations (NGOs)) Private. . and the environment.2 (Nongovernmental Organizations (NGOs)) Private.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement. 1. and economic issues such as poverty. there are few if any issues which affect and infuriate so many in China as corruption. social justice. and emergency relief in the event of humanitarian disasters). Definition 1. not-for-profit organizations that seek to serve society’s interest by focusing on social. and the environment. 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.. Definition 1. Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.2.benjerry. social justice. Other companies.7.

CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.7. A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. • And. For example.1. executives may actually feel that it is the right thing to do. Side Note 1.2 (Why Would a Company Listen to an NGO?) Why would a company take actions that could impact its profits to satisfy an NGO? • Good press and free advertising.S. and • Rainforest Action Network (RAN). China ranked 78 out of 158.000 and $125. Side Note 1.7.1 Corruption and the FCPA Revisited Hodgetts et al. with a score of 3.7. Hodgetts cites a case in which Citigroup (recall that Citigroup is one of the 10 largest MNCs in the world as of 2003) divested from certain financial projects identified by RAN as harmful to the environment.9 U. MNCs do not appear to have been significantly impacted. Both political groups and businesses are influenced by NGOs. 1. firms a reason to refuse to pay bribes. .S. – Even socially responsible executives would consider the “bottom line” when making decisions.2. many feel that it has had a net benefit. as it gives the U. too.7. A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. note that while U. Executives are people. firms are constrained by the FCPA with regards to bribery and other corrupt practices. last but note least. • To prevent a boycott or other consumer defections. but does not outlaw payments to political party leaders. • Conservation International (promotes environmental conservation). In 2005.S. In fact. as executives of publicly traded companies are ultimately responsible to their shareholders.

Hong Kong is number 15.10 Corruption is certainly not endemic to Asia. and Germany at 7. Support and respect the protection of international human rights. such as the U. Moreover. I think corruption will diminish as China economically develops for several reasons: 1. but most important first step is to recognize that there is a problem. the United States and Europe have recently been rocked by corporate corruption. The government recognizes that it is an issue and is taking action. With more disciplined corporate governance. and not based on hard data. 4. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. WorldCom.0 is considered to be the borderline at which countries are considered to have a problem.7. malfeasance and diversion of corporate funds becomes increasingly difficult. and the environment. 5.7. As more state-owned businesses become privatized and the size of the middle class increases.7.N. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. specify standards and codes of conduct in domestic and global operations. With greater financial transparency. July 1.2 respectively. and Parmalat resulting in investors losing billions of dollars.6 and 8. 2006. Side Note 1. Global Compact specifies 10 principles which MNCs should abide by: 1.5 (Table 3-1: Principles of the Global Compact) The U. 3. societies. more Chinese will own stock in companies.S.20 CHAPTER 1. It cannot be considered to be based on a scientific survey. The government is actively addressing the issue of corruption. Side Note 1. better than the U. slightly better than Sweden.3.N.4 (Some Opinions) Personally. Tyco. with scandals such as Enron. Commitments that many MNCs have signed on to. It is a difficult problem to solve. . These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. Global Compact. Important: Although it is widely cited.infoplease. Singapore is number 5 with a score of 9.html.com/ipa/A0781359.4. 2. Scandinavian countries are at the top of the list. with a score of 8. 1. 10 http://www.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities.

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

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

5]. and 4.2. more generally. Planning. particularly when job titles are not clear. 2. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. operations managers make decisions.S. and maintenance. • They are often sources of conflict among management. inventory. 3.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. 1. Side Note 2. To accomplish these functions.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. process design. place in the heirarchy.2. Service and product design – What good or service should we offer? How should we design these products? • Design typically determines the lower limit of cost and the upper limit of quality. Organizing. 2. Controlling. pp. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society. human resources and job design. 6–7]. business community as “org charts.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1. scheduling.2. known commonly in the U. quality. p.1.2. Staffing. location selection. OM is one of the most costly aspects of an organization.” • Every organization with more than a few employees has an organization chart. Side Note 2. Definition 2. 7]. supply-chain management. . p. as the org chart determines executives’ authority and. OM decisions have been divided into ten categories by Heizer [1. WHAT OPERATIONS MANAGERS DO 25 4. layout design.

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

Definition 2. the firm could deplete inventory and cause customer service issues. or Kanban. and 1 Source: http://en.2. quality. This saves warehouse space and costs. Kanban are usually simple visual signals. A related term is Kaizen which is an approach to productivity improvement literally meaning ”continuous improvement” of process. p. February 14.3 “Significant Events in Operations Management” [1.2. p. • Reliability and stability of systems depends on well-planned maintenance schedules.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. If demand rises above the historical average planning duration demand. that tell production processes to make the next part. such as the presence or absence of a part on a shelf. one drawback of the JIT system is that the re-order level is determined by historical demand. In recent years manufacturers have touted a trailing 13 week average is a better predictor than most forecastors could provide. • Frederick W. – Providing proper work methods and tools. New stock is ordered when stock reaches the re-order level. Taylor (1881) introduced science to management and is known as the “father of scientific management” [1. WHAT OPERATIONS MANAGERS DO 27 10. which relied upon standardization and quality control. To meet a 95% service rate a firm must carry about 2 standard deviations of demand in safety stock.wikipedia. 9]. and efficiency. The process is driven by a series of signals. He also believed that management is responsible for – Matching employees to the right job. . When implemented correctly. – Providing the proper training. JIT can lead to dramatic improvements in a manufacturing organization’s return on investment. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level.org/wiki/Just In Time %28business%29.2 (A Little History) Review Heizer figure 1.2. 2007.1 Side Note 2. 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. • Eli Whitney (1800) is credited for popularizing interchangeable parts. We will attempt to cover in detail topics relating to as many of these as possible as time permits during the semester.2. 8]. However.

1 (Services) Those economic activities that typically produce an intangible product. • Insurance.. 11]. such as the legal profession or computer services in the financial industry. Bureau of Labor Statistics defines services to include [1.S. services account for over 70% of U. services become increasingly important. for others professional occupations. the economy transitioned from agriculture to manufacturing around 1900. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. • Food and lodging. • In some service industries. . Definition 2.3 (Information Sciences) The systematic processing of data to yield information. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control. Side Note 2. economic output. the wages are considerably above average.S.5 [1. and other essentials for its citizens. p. • In most western economies. shelter.28 CHAPTER 2. • Recently. such as retail. Today. The U.S. 9] • Repair and maintenance.3.2. Manufacturing was dominant until about 1950 or so. However. 2 The average national private industry wage. In the U. major contributions have come from the field of information sciences. 2. the services sector is by far the largest employer. • Government.1 (Development of the Service Economy) Present Heizer figure 1.S.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. • Trade. Definition 2. average wages are below average2 in the U. • Transportation.3. p..

See definition 2. • Legal. • Services are often knowledge-based. • Services have inconsistent product definition. • Medical. • Services are typically intangible. • Other professional occupations.3.3 That is. • Services are more often unique. Consumers interact with those providing the service.3. When buying a computer. THE SERVICE SECTOR • Financial. Customers seek services through local intermediaries. Hospital care includes both health services and goods. you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. when going to a restaurant. Therefore it is difficult to automate.2 (Pure Service) A service that does not include a tangible product. 29 Side Note 2. . This is important insofar as there is no inventory. the purchase price may include installation services.2.3. • Services have a high consumer interaction. Legal advice is rarely identical for two clients. 3 Services that do not include a good as a component are called pure services. such as pharmaceuticals or medical supplies. • Services are often dispersed. • Real estate. Definition 2. • Entertainment. • Education.3. Note that many goods include services and many services include goods. a support contract in case you have problems or training to familiarize you with the features of the computer. • Services are often produced and consumed simultaneously.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. used in your treatment.2.

capital. parts. OPERATIONS AND PRODUCTIVITY 2.5.30 CHAPTER 2.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. • Empowered employees – With the rise of services and knowledge products. the next step in product development involves customizing products according to the customer’s preferences. • Supply-chain partnering – Shorter product life cycles as well as rapid changes in materials require more participation by suppliers and long-term relationship building by operations managers. • Rapid product development – The life span of products is decreasing and the need to rapidly develop and bring to market new products is consequently increasing. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. brought about in part by the internet. and finished goods rapidly.2.2. 2. or recyclable products or to minimize packaging and other wasteful production steps. p. • Mass customization – With increases in technical capabilities and customerlevel information management. wherever and whenever needed. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2. operations managers are responding by moving decision making to the individual employee. Globalization has been having a dramatic impact on operations management and in the future. operations managers are increasingly responsible for innovations that move ideas.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. reusable. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. it will continue to strongly impact the field. Definition 2. This can be done by producing more output with a given level of inputs or reducing the level of inputs used to produce a given level of output. Trends that Heizer and Render identify [1. . or management). Operations managers are being challenged to produce biodegradable.

5.2.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Side Note 2. p. THE PRODUCTIVITY CHALLENGE 31 Definition 2.5. 15]. .1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company. Also known as total factor productivity. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.97 titles per labor-hour 14 titles per day 32 labor-hours 8 $600+$400 14 Multifactor productivity with the old system: Multifactor productivity with the old system: titles per day $600+$800 titles per day Measuring productivity is not always a straightforward activity. In order to improve productivity. Definition 2.0077 titles per labor-hour = 0. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Definition 2.4 (Total Factor Productivity) See definition 2. but overhead is no $800/day.4375 titles per labor-hour = 0.5.25 titles per labor-hour = 0.5. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day.5. Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.3.5. Consider today’s computers versus those from the 1970s. Side Note 2.

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

“About Half of 17-Year-Olds in the U. The primary variables for improving labor productivity include 1.S. draw the rectangle on the blackboard. writing.” In the U. Cannot Correctly Answer Questions of This Type. and • Healthier workers as well as • A shorter work week.5. Social overhead that makes labor available. maintaining and enhancing the skills of labor. p. such as transportation and sanitation. Side Note 2.) Present Heizer figure 1.2.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. and math.S. . 2. About half of 17-year-olds cannot answer the following multiple-choice questions: 1.3 (The State of Education in the U. In developed nations. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. What is the area of a 4 × 6 meter rectangle. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3.8 [1. Which of the following is true about 84% of 100? 4 When presenting this question.. Diet of the labor force. 16]. Basic education appropraite for an effective labor force.5. and 4. and 33 3. there is considerable concern over teaching of basic skills such as mathematics to grade school children. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve.S. THE PRODUCTIVITY CHALLENGE • Better-nourished.

Difficulties arise because service-sector work is . and the cost of capital depends on interest rates. has increased at about an average of 1. and because the author of the textbook is writing about operations management. Note that in classic economic analysis and other areas of business. 2. education. management is not always identified separately from labor as an input. educated. as well as capital. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.S. Note that there is a trade-off between capital and labor in most industries. U. According to Heizer [1.5% after allowances for depreciation.S. management is considered as a separate input.5. Side Note 2. 2.5.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. however.5. Definition 2.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge.5. graduate programs and the students they produce remain the best in the world. productivity in the service sector has not increased as rapidly as with the production of goods.S.4 Productivity and the Service Sector Historically. in the U.2 Capital Capital investment in the U. p. and knowledgeable employees and operations managers are responsible for ensuring that technology. Developed economies (also known as post-industrial economies) require trained.4 (Management as an Input) Because this is a course in business management.34 CHAPTER 2. 17]. are utilized effectively.. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. and knowledge. 2.5.

operations managers are also challenged to incorporate socially responsibility into their decision-making while at the same time considering profits and efficiency.2. food preparation. Difficult to evaluate for quality (e. p.S.. These demands come not only from the manager’s personal ethic.. in both overall and service productivity.S. • General ethical behavior concerning issues such as child labor and corruption.g.S. Typically labor-intensive (e. government agencies.5 • The U. .g.. laundry service. investment advice). a haircut)..) Productivity is highest in the U. Side Note 2.g. • Keeping the workplace safe. watchdog groups such as NGOs.. but from customers. 2. teaching).5 (Service Productivity in the U. These challenges include such issues as • Maintaining a clean environment.6. 5 In Japan. have also been growing in the service sector as more families are composed of two working parents and may bias productivity measures downward. Often difficult to automate (e. Frequently individually processed (e. banking system is about 33% more productive than Germany’s. and 5. 4.S. SOCIAL RESPONSIBILITY 1. telephone industry is twice as productive as Germany’s. Heizer notes [1.g. legislation protects shopkeepers from discount retailers.6 Social Responsibility As discussed in chapter 1.5.S. We will discuss this challenge in more detail throughout the course. Low-productivity activities. such as cleaning. 35 3. is twice as productive as in Japan. 2. 18] • Retailing in the U. medical diagnosis).g. and child care. and other stakeholders. the performance of a law firm). Often an intellectual task performed by professionals (e. and • The U.

36 CHAPTER 2. OPERATIONS AND PRODUCTIVITY .

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

Learn to Improve Operations – Firms can learn from efficient business practices in foreign markets. • Perfumers tend to concentrate in Grasse. p.1 (Mission) The purpose or rationale for an organization’s existence. I recommend that all companies draft a mission statement. global air-ground transportation of high-priority goods and documents that require rapid.1.1 Mission Whether large or small. Attract New Markets – Expansion into foreign markets can • Expand the life cycle of an existing product. Side Note 3. and • Increase sales.38CHAPTER 3. positive control of each package will be maintained utilizing real time electronic tracking and tracing . We will produce outstanding financial returns by providing totally reliable. Equally important. 3. FedEx is committed to our People-Service-Profit philosophy. Provide Better Goods and Services – For companies doing business in an international setting. 6. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT • Most shoe production takes place in South Korea and Guangzhou. an understanding of cultural differences in preferences is needed to best meet customer needs. 28] which includes mission statements for three multinational companies: 1. 4. 5. Definition 3. France. • Provide additional insights and opportunities.1 (Mission Statements for Three Organizations) Review Heizer figure 2. 3.1 Developing Missions and Strategies A mission allows managers to tell employees where the company is going whereas a strategy tells them how to get there. Attract and Retain Global Talent – By offering more employment opportunities.2 [1. competitively superior. global organizations can attract and retain better employees. Missions state the rationale for an organization’s existence. FedEx. 3.1.1. time-certain delivery.

2. A complete record of each shipment and delivery will be presented with our request for payment. Other companies. healthy.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. We will strive to have a completely satisfied customer at the end of each transaction. contributing member of our community and offering the Hard Rock family a fun. courteous. 39 Side Note 3. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. a grocery chain..1.3. We are committed to being an important. such as Whole Foods. We will be helpful. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . The Hard Rock Caf´. DEVELOPING MISSIONS AND STRATEGIES systems. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. 3. Merck.S. natural ingredients and promoting business practices that respect the Earth and the Environment.1. and professional to each other and the public. e Our Mission: To spread the spirit of Rock ’n’ Roll by delivering an exceptional entertainment and dining experience. Our mission consists of 3 interrelated parts: • Product Mission – To make. nationally & internationally. • 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. 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. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. and nurturing work environment while ensuring our long-term success.

1.” Note that mission statements are used not only at the company-wide level. Differentiation – They make their product better.3 (Sample Mission Statements) Present Heizer’s figure 2.cfm for more detail.benjerry. the creation of a unique advantage over competitors. • The “look and feel” of the product.1.1.com/our company/our mission/index.2 Strategy Strategy involves concrete steps by which a company can achieve its mission. 3. but can be used at the department level and even at the project level. 2. • Interoperability with other products.2 (Strategy) How an organization expects to achieve its missions and goals. See http://www. Differentiation Producers can try to compete based on providing a product or service that is unique in some way. the Operations Function. Definition 3. Definition 3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT or donate a fixed percentage of their profits to charity depending on which charities are most supported by their customers. • Training. Differentiation can arise from anything that the customer may value about a product or a services. Cost leadership – Providing cheaper products.1. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1. • Availability of complementary products.3: “Sample Missions for a Company. Side Note 3. more responsive products or services. and Major Departments in an Operations Function.40CHAPTER 3. be it • Product features. Responsiveness – By providing timelier. .3 (Competitive Advantage) In operations management. 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.

3.1 (Strategy Development Process) Present Heizer figure 2. Weakness. if the firm has a competitive advantage in these things) and where failures are most likely. • Determine Corporate Mission.44CHAPTER 3. The operations manager’s job is a three-step process: 1. Group the necessary activities into an organizational structure. and Threats) analysis to develop strategies.3. “Strategy Development Process. then determine whether the organization does these things well (and. determining internal strengths and weaknesses and external opportunities and threats. Staff the organization with personnel that will get the job done. and 3.3. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 3. Implement an OM strategy.1 (SWOT Analysis) In operations management.3 Strategy Development and Implementation Operations managers commonly use a SWOT (Strength. Identify a strategy and critical success factors. These critical success factors are used to develop a competitive advantage. Increase productivity. 2. those activities or factors that are key to achieving competitive advantage.” The process of developing a strategy involves the following steps: • Environmental Analysis.6 [1. p. The purpose of this process is to 1. Definition 3. Provide competitive advantage. 37]. Side Note 3.1 Identify Critical Success Factors A successful strategy must determine what factors are critical to success. Definition 3. 3. in particular. and 3. .3.2 (Critical Success Factors) In operations management. then • Form a Strategy. Opportunities. 2.

MIS. Recall the “org charts” in sidenote 2. Southwest Airlines has a competitive advantage in providing low-cost airfares.6 3. 39]. Once CSFs are determined.2 as examples of how firms organize their activities. Definition 3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting.3. 5 Management 6 Human Information Systems Resources. a graphical link of competitive advantage.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2.3. an activity map can be used to link an organization’s competitive advantage to the CSFs. finance. CSFs.5 and HR.4.1 as a checklist to determine critical success factors. • Red arrows – critical success factors • Blue arrows – support activities 3. OM activities are most productive when they are integrated with other activities such as marketing.2.3 (Activity Map) In operations management. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. and supporting activities.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3.3. 3. . Side Note 3.3.3.3.3 Integrate OM With Other Activities In order to achieve its strategy.1.2 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. p.

See definition 3. 42] Definition 3. • McDonald’s is an example of a country with a multidomestic strategy. owning or controlling facilities in more than one country. Also one of the least profitable due to transport costs and little local responsiveness. a strategy that uses exports and licenses to penetrate the global arena. In the semiconductor industry.4.4. Definition 3.3 (International Strategy) In operations management. 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. as exports require little change in operations and licenses often leave risk with the licensee. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1. See definition 3. International strategy – Often the easiest strategy. 4.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. products do not need to be localized. Definition 3. 2.46CHAPTER 3. See definition 3. .6. but a good strategy for cost reduction when products do not need to be adapted locally.4. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.4.4. Its menu reflects the country in which it operates. with beer on the menu in Germany. franchises. wine in France. • Nestl´ is an example of a country with a transnational strategy. Typically characterized by subsidiaries. and hamburgers without beef in India. Definition 3. • Texas Instruments is an example of a country with a global strategy. p. Global strategy – Not characterized by local responsiveness. 95% of its assets and 98% of its sales are made outside Switzerland.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. Although e it is legally Swiss. Usually does not confer a cost advantage.4.1 (International Business) A firm that engages in cross-border transactions. or joint ventures with substantial independence.4.4 (Multidomestic Strategy) In operations management.4. Definition 3.5. Only 10% of its work force is Swiss. [1.5 (Global Strategy) In operations management. Multidomestic strategy – Exporting management talent and processes but not necessarily the product.4. 3. See definition 3.3.

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

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

Project management involves three phases: 1. defining the project. and supplies are tasked to specific activities and activities are related to each other. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles. the largest software company in the world.1 [1. costs.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1.0. 3. Scheduling – People.0. and Controlling) Present Heizer figure 3. pp. quality. 49 . and team organization. 46–47]. Side Note 4. Side Note 4. 2.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management. money.3 (Project Planning. Scheduling.Chapter 4 Project Management Side Note 4. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Plans are also revised to meet changes in time and cost demands. p. Even Microsoft. and budgets. 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. Planning – Goal setting.0. 49]. Controlling – Monitoring of resources. The profile highlights the importance of project management in achieving competitive advantage.

In a sense. 3. it is very obvious and can be very costly. See also Heizer sidenote “Project Management and Software Development. Side Note 4. often times. 4.1 The Project Manager As alluded to in sidenote 4. 4. The project cuts across organizational lines. 69]. PROJECT MANAGEMENT However.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. p.0.5. Moreover. things you thought were certain turn out not to be.” [1.1 Project Planning While many projects are run within an existing organization. and you will be forced to improvise. Your job is to make things go smoothly and according to plan. However. you should always expect the unexpected. 2.1. Definition 4. it is also an area in which there will continue to be high demand for qualified people. The work contains complex interrelated tasks requiring specialized skills. you are doing your job well if noone notices the project management. People will not come through with what they promised. The job is unique or somewhat unfamiliar to the existing organization. If you become a project manager on projects of significant complexity. 4.1. a temporary project organization is formed to address a specific project. The project is temporary but critical to the organization.0. if things go wrong. you will be confronted with a daunting task. The responsibilities of project managers are to make sure that . Project organizations work best when [1. p. 48] 1. You may be managing resources far in excess of your individual salary. and/or 5. Work can be defined with a specific goal and deadline.5 (Personal Advice on Project Management) Project management is a tricky profession.50 CHAPTER 4. project managers are highly visible in a firm and have significant responsibilities.

The project is on or under budget. in a software engineering project. PROJECT PLANNING 1. Complete software architecture for user account input web page functionality 5.4. Review graphic design for user account input web page 3.1.2 (Work Breakdown Structure (WBS)) In operations management. a web page takes about a day to build for an experienced team.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. • Build the user account input web page is a much better task division than 1. dividing a project into more and more detailed components. 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. When dividing a project into tasks.1. 51 4. 2. Approve graphic design for user account input web page 4. Complete graphic design for user account input web page 2.2 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). All projects come in on time. and 4. In a project that includes allowing a user to enter personal information on a web page.1. 3. For example. Definition 4. The project meets its quality goals. a task that should only take a day or so. Approve software architecture for user account input web page functionality . People receive motivation and information necessary to do their jobs. Review software architecture for user account input web page functionality 6. Side Note 4.1. you have divided the tasks too finely.

p. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. They will be useful for project scheduling. Scheduling serves to 1. Encourage realistic time and cost estimates for each activity . the work breakdown structure is not something you go to your office to do in isolation. Subtasks in major tasks 4. Project 2. Write software for user account input confirmation page functionality 9. fill hundreds if not thousands of pages. of course. Major tasks in the project 3.1.2.2 (Work Breakdown Structure) Present Heizer figure 3.2 Project Scheduling After dividing activities into a work breakdown structure (WBS). Write software for user account input web page functionality 8. 4.52 CHAPTER 4. Show the relationship between each activity to others and to the whole project 2.1.3 (Reality Check: WBS) In reality. At the time you are creating the work breakdown structure. which we will discuss next in section 4. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. Side Note 4. you should also take note of time and cost estimates given by your technical staff. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. 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. PROJECT MANAGEMENT 7. Activities (also known as “work packages”) to be completed Side Note 4. The actual WBS for Windows XP would. Identify precedence relationships among activities 3.3 [1.

and other values to each activity. The order of performance is accounted for.” This will give the class an idea of the look and feel of a typical Gantt chart. However.2. which becomes narrower as one approaches the neck of the bottle.2 (Using Gantt. MS Project’s Gantt chart functions demand you assign employees.2. It can actually be quite time consuming to create and maintain Gantt charts. moeny. 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 . PROJECT SCHEDULING 53 4.1 (Gantt Charts) Planning charts used to schedule resources and allocate time. and CPM) Inexperienced project managers often feel the need to use Gantt. Definition 4. p. Perhaps they imagine that they are not doing their jobs professionally if they are not.1 (Gantt Chart of Service Activities for a Delta Jet) Present Heizer’s figure 3. the road bottlenecks. Activity time estimates are recorded. 51]. PERT.4. “Gantt Chart of Service Activities for a Delta Jet during a 60Minute Layover. 3. and CPM tools for every project management activity. these should be considered merely tools to be used when they are useful by saving time or energy. as. and material resources by identifying critical bottlenecks in the project Side Note 4.2. cost estimates. 2. PERT and CPM help answer questions such as • When will the entire project be completed? . Definition 4.4 [1. and 4. Derives from the typical shape of a bottle. right by the bridge. – said of roads. Overall project time is developed. Make better use of people.2 (Bottleneck) A location or situation in which otherwise rapid progress is impeded. PERT. PERT and other formal documents. All activities are planned for. Gantt charts are perhaps the most widely used tool for ensuring that 1.2. Side Note 4.2. For smaller projects.

. Variance reports. Total program labor curves. Work status reports. quality. Cost distribution tables. 4.54 CHAPTER 4.3 Project Controlling Project control involves monitoring resources. 6. is the money spent equal to. Control programs typically produce reports detailing 1. 4. PERT and CPM. Functional cost and hour summaries. 3.3. what is the best way to accomplish this goal at the least cost? 4. and budgets of projects. is the project on schedule. 7.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. Raw material and expenditure forecasts. Definition 4. and 8. less than.3. Time analysis reports. 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. 2. 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. behind schedule. or ahead of schedule? • On any given date. costs.1 PERT and CPM Two methods. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is. were developed in the 1950s for project control. Cost breakdowns for each task. 5.

3. Activity on Node (AON) and 2. Compute the longest time path.2. schedule.3.3. Gantt charts are the “go to” visualization method for even very complex projects. it will do for you automatically much of what we will go through manually in this class.3. .3. As the names describe. monitor. Assign time and/or cost estimates to each activity. 4. p. Develop the relationships among activities. They both follow six steps: 1. Activity on Arrow (AOA).3.5 [1.1 (Reality Check: PERT and CPM) MS Project allows you to track relationships among activities and can produce either a Gantt or PERT chart from a single project data set. PROJECT CONTROLLING 55 Definition 4. Define the project and prepare the WBS. Personally. Also. 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. Draw the network connecting all of the activities. Side Note 4.2 (Example: AON and AOA) Present Heizer’s figure 3. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. AON associates the activity with the node whereas AOA associates the activity with the arrow.3 (Critical Path) The computed longest time path through a network. 53]. 5.4.2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Use the network to help plan. in my experience. Side Note 4. 6.2 Network Diagrams There are two approaches to visualizing activity networks: 1.3. 3. through the network. See also definition 4.3. and ontrol the project. Definition 4. Moreover. See also definition 4. or the critical path. 2. 4.3.

4.8 [1. PROJECT MANAGEMENT Side Note 4.9 [1. In other words.6–3. pp.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3.1 (Critical Path Analysis) In project management. analysis used to determine the project schedule.1 gives sufficient information to describe the network. • Table 3. – If an activity has multiple immediate predecessors. See also definition 4. LS = LF − Activity time. Definition 4. ES = max{EF of all immediate predecessors}. EF = ES + Activity time.4. LF = min{LS of all immediate following activities}. Follow with example 3 and figure 3. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time.4 Determining the Project Schedule Once we have identified all of our activities. 56]. its LF is the minimum of all LS values of all activities that immediately follow it. Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.56 CHAPTER 4. we must use time estimates of each activity to determine the overall schedule for the project. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. that is. that is. – If an activity is an immediate predecessor to more than one activity. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time.3. 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. their dependencies. its ES is the maximum of all EF values of its predecessors. 1. 2. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity. 54–55]. that is. . p.3. We do this with a critical path analysis with involves a 2-step procedure.3. its LF equals its LS of the activity that immediately follows it.

we cannot complete the project in 15 weeks.5.1. the time shared among more than one activity. The critical path is one that • Begins at the first activity in the project.1). 57].5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.3 and Heizer figure 3.1 (Slack Time) In project scheduling.2 (Forward Pass) In project management scheduling.13 [1. Also notable is that if the total time of the project needs to be reduced.5. 61] based on table 3. in the example in sidenote 4. If an activity2 does not impact the slack time of any other activity.3 (Free Slack) In project scheduling. E.5. or the amount of time an activity can be delayed without delaying the entire project.2 (Total Slack) In project scheduling. the time associated with a single activity. 4. they share total slack. 1 For example. These are called critical activities.4. Definition 4. 60]. • Terminates at the last. Definition 4.4. Note that activities A. Side Note 4.5. the step that identifies all the earliest times that activities can be completed.4. G.4. it is said to have free slack. and • Includes only critical activities (see sidenote 4.1.4. activity F in sidenote 4. the time devoted to one of these activities must also be reduced.1 When several noncritical activities appear successively in a path. and H have no slack time and cannot be delayed without delaying the entire project.10 [1.3.3 [1. p.4. Definition 4. Slack time is just Slack = LS − ES or Slack = LF − EF . if we delay activities B and D by one week each.” Then complete Heizer example 7 figure 3. 2 For example. SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4. . p. we may delay the project as a whole. the free time for an activity. Note also that if we delay each activity by the amount of slack that activity has.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. p. C. “Notation Used in Nodes for Forward and Backward Pass.

which are labeled according to one of two notational conventions.6. However. the “best” activity completion time that could be obtained in a PERT network.2 and 4. Side Note 4.3. the time required to complete an activity is often uncertain due to supply problems.6.6.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. Effectively.3 (Most Likely Time) In project scheduling.6. See also definitions 4. unexpected complexities. Definition 4. In reality.6.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.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. technical considerations that were unknown at the time the project schedule was drawn up.6.6. In PERT. three time estimates are used: 1. Optimistic time – The shortest amount of time an activity will take 1% of the time 2.1 (Optimistic Time) In project scheduling. Most likely time – The most realistic estimate of the time required to complete an activity. The usual definition calls these alpha and beta. Definition 4. Definition 4. See also definitions 4.6. Definition 4..6.3. etc. The beta distribution is used as a prior distribution for binomial proportions in . the project manager pulls the number “out of the air” based on their experience managing related activities.2. See also definitions 4. we do not. Beta distributions have two free parameters.2 (Pessimistic Time) In project scheduling. and the other uses β = β − 1 and α = α − 1 .1 and 4.58 CHAPTER 4. in most cases. the “worst” activity completion time that could be obtained in a PERT network.1 and 4. PROJECT MANAGEMENT 4. Pessimistic time – The longest amount of time an activity will take 1% of the time 3.6.6. the most probable activity completion time that could be obtained in a PERT network.

Activity times are statistically independent 3 Source: http://mathworld. and pessimistic times of 1.6.78 weeks. and pessimistic times of 1.4. and . 62].3 The domain is [0. 4 See definition 4. 4. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p.6.β) with α = 1 and β ranging from 0. and 9 weeks. p.6. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis.25 to 3. The above plots are for various values of (α. Total project completion times follow a normal probability distribution and 2.4.1) where B(p. q) = (4. β) Γ(α)Γ(β) P (x) = (4.wolfram.1]. The expected activity time for activity F is 3 weeks5 and the variance is 1. and the probability function P (x) and distribution function D(x) are given by (1 − x)β−1 xα−1 Γ(α + β) = (1 − x)β−1 xα−1 B(α. The variance of the activity time is Variance = [(b − a)/6]2 .2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. and 7.78 6 6 36 7 4 weeks.com/BetaDistribution. 2007.00 week. 5 t = a+4m+b = 1+4(2)+9 = 18 = 3 weeks 6 6 i h i6 h 2 (9−1) 2 6 Variance = (b−a) = = 64 = 1.6.html.com/BetaFunction. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.wolfram. most likely.00. most likely.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1. 4. February 21.html http://mathworld. 2. 8 1.1 Probability of Project Completion If we assume that 1. p. 63] for activity F based on optimistic. Side Note 4.

Side Note 4.3) Definition 4.7% of the time.6. See definition 4.6. the population variance var(X). Definition 4.6.76 weeks implies that the project will exceed the expected completion time by more than 1.10 Determining Project Completion Time for a Given Confidence Interval A common question is. 64].6.6. See also 4.com/StandardDeviation. 9 For 10 See more information. and within 3 standard deviations approximately 99. 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. Note that the standard deviation of 1. two standard deviations approximately 95% of the time.6.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.wolfram. p.6.60 CHAPTER 4.76 weeks approximately 16% of the time.16.” Review Heizer example 10 [1. see http://mathworld. .6 (Standard Deviation) The standard deviation is the square root of the variance. 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.1. pp. p.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. A2– A3] “Normal Curve Areas.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ. commonly also N written σ 2 .5.4 (Using the Normal Table) Pass out Heizer Appendix I [1. definition 4.html.3 (Example: Project Variance) Review Heizer example 9 [1. 65] and figure 3. Side Note 4.

crash cost is the cost required to complete an activity in the shortest time possible. we want to do so in the least cost mannger possible. and if you become a project manager.4.1. permissible and realistic. in fact. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. See definition 4. See definition 4.7 Cost-Time Trade-Offs and Project Crashing What happens when either the project is behind schedule or the deadlines have been moved up? Both scenarios are not uncommon.2 (Crash Time) In project management. When crashing a project.7. .7. crash time is the shortest duration of an activity. you will doubtless experience one or both of these eventualities many times in your career.3 (Crash Cost) In project management.7.4) 11 Since crashing a project often involves adding additional resources to activities. COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. Project crashing is the name given to the process of rushing a project to completion. • The shortened durations will actually enable us to finish the project on time. if certain activities off the critical path take the pessimistic time estimate or more to complete.7. Step 1 – Compute the crash cost per week. the crash cost is typically higher than the normal cost. and • The total cost of crashing is as small as possible. we need to ensure • The amount by which an activity is crashed is. Definition 4.11 Definition 4.1 (Crashing) In project management. Definition 4.7. Assuming linear costs. Since activity completion times are typically shortened by adding resources.7. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. it may result in the project being delayed. Crashing a project involves a four step process: 1.1. 4.

8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. If you find yourself needing to rush a project. Side Note 4.7.1 (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. stop. you should be very wary of such pressure. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic.2 (Example: Crashing a Project) Present Heizer example 12 [1. PROJECT MANAGEMENT 2. 67–69] including table 3. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period.7. as the negative impact on your career of tactfully pushing back against management is usually much less than the negative impact of a significant project delay or cost overrun. go to step 2.19.5 and figures 3. If not. 4. At times this may be politically infeasible. Step 3 – If there is only one critical path. Crash this activity by one period. 3. pp. If you accept the challenge and try to rush the project to please upper management. Step 4 – Update all activity times. 4.62 CHAPTER 4.18–3. If there is more than one critical path. Then crash each activity by one period. Side Note 4. • Advantages – Especially useful for large projects . Note that one activity may be on several critical paths. Step 2 – Find the critical path(s) in the project network. the advice given in this section should be helpful. As a project manager. If the due date has been reached. 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.

to mediumsized projects. Information on Achievo can be found at http://www.org/wiki/List of project management software for a list of project management software or ask Dr. It is perhaps the most widely known and featureful project management software available. You may also refer to http://en.achievo. Noncritical paths should be closely monitored as well. independent. pp.wikipedia.org/Planner.net.4. 70–74] with figures demonstrating MS Project functionality. they are often overkill for small. including open source software that is free.9 Using Microsoft Project for Managing Projects Present programs 3.org. 12 Recall sidenote 4.9.1. . There are a variety of alternatives. Information on Planner can be found at http://live. USING MICROSOFT PROJECT FOR MANAGING PROJECTS – Straightforward and not mathematically complex – Graphical tools help perceive relationships quickly and easily – Critical path and slack time analysis very helpful 63 – Project documentation and graphs identify who is responsible for various activities – Applicable to a wide variety of projects – Useful in monitoring both schedules and costs • Disadvantages – Project activities must be clearly defined. 4. However. Starkweather about his impression of various alternatives.7. Note that most project management textbooks refer to MS Project as the software of choice for project management.7 [1.1–3. and the relationships stable – Precedence relationships must be specified – Time estimates tend to be subjective and are subject to “fudging” by managers12 – The danger of too much emphasis on critical paths. it is relatively expensive and the features are so numerous and complex. Information on dotProject can be found at http://www.gnome.dotproject.

PROJECT MANAGEMENT .64 CHAPTER 4.

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

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

2. • Training. Human resources – Anticipated demand is needed to estimate the need for • Hiring.5. Select the forecasting models. .1. and scheduling decisions and serve as inputs to financial. and personnel planning. 4. marketing. capacity. 6. See also definitions 5. these drive a company’s production. Determine the use of the forecast. 3. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. 5. 7. 5.1. • Loss of customers. projections of a company’s sales for each time period in the planning horizon. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.4 (Demand Forecasts) In operations management.1.2 and 5. Select the items to be forecasted.3.1. Determine the time horizon of the forecast. Validate and implement the results. 3.2. and • Loss of market share. Gather the data needed to make the forecast. 5. and • Layoffs. 2.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1. Capacity – Underestimating demand can result in • Undependable delivery. Also called sales forecasts.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. Make the forecast.

2. to inherently nonlinear systems. track the actual outcomes and compare them to the forecasts. statisticians) embarrassed in front of a room full of people when presenting numerical results that don’t actually make sense based on some simple logic checks. – After making a forecast. – If you do not truly understand the mathematics. • Using models that are more sophisticated than the user’s understanding. • Lack of support for the forecasts.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. it is a bit of an art that mixes both. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. 5. – Before you show your numbers to others.D. – You should be able to explain how and why you arrived at each and every number that you forecast. budgets for a department in which I worked were forecast based on a regression analysis with 3 observations. figure out whether an improvement to the forecasting methodology can be made. use something simpler. – If someone challenges your forecast and you do not have supporting logic or documentation. • Lack of sanity checking. ask yourself if they make sense. based on a linear model. In practice. Any quantitative approach should be complemented with a qualitative “reality check. – On a number of occasions. – In one case. – Many people try to apply ordinary least squares (OLS) regression techniques. • Lack of follow-up. FORECASTING Side Note 5. . I have seen otherwise competent people (including Ph.1 (The Most Common Errors in Forecasting Methodology) In my experience. you will be unable to defend your numbers. – If they do not match.68 CHAPTER 5.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach.

· See definition 5. the naive approach.5. be sure that the sales force is clear that their incentive is to be as accurate as possible. or other incentives to over or understate demand. and · Respondents. they will do so. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. for example. Moving averages cannot pick out trends very well.3.3. the more likely it is your results will be accurate. – Sales force composite ∗ You would be surprised how accurate your sales force can be. . · Useful as a starting point or sanity check for more sophisticated methods. useful method if we can assume that market demands will stay fairly steady over time. · See definition 5. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data. ∗ Moving averages · Simple. say. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. ∗ However. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers.3.8. · Requires less past data than moving averages. political. 3. ∗ The more independent your decision makers are from economic. they may want you to think that they will be doing more business with you in the future to obtain price concessions today.9. Sales people typically respond to incentives. · There are three problems with moving averages 1. Moving averages require more past data to work with than. 2. and if they perceive there is an incentive to exaggerate. · The simplest and easiest way to estimate demand. · Staff personnel.

FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.3.3. See also definitions 5. and value system.3. and 5.3. 5.3. 5. Definition 5. and 5. Definition 5.3.5 (Sales Force Composite) In operations management. See also definitions 5. a forecasting technique based on salespersons estimates of expected sales.3.3.3.6.3.4. personal experiences. Definition 5. Definition 5.6. See also definition 5.3. 5.70 CHAPTER 5.4. and 5. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.3.3.3. and 5. 5.6 (Consumer Market Survey) In operations management.3.2. See also definition 5. a forecasting technique that takes the opinion of a small group of high-level managers and results in a group estimate of demand.3.3.1.3.10.3.4 (Delphi Method) In operations management.3.6.3 (Jury of Executive Opinion) In operations management.5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. a forecasting technique using a group process that allows experts to make forecasts. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5. 5.4.3.5.3.1 Qualitative Forecasting Methods Definition 5.3. See also definitions 5. .3. · See definition 5.1 (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 5.5. emotions.

3. a simple moving average is given by demand in previous n periods Moving average = (5. FORECASTING APPROACHES 71 5.3.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period. 5. Definition 5.9. See also definition 5.2) See also definition 5. Moving averages can be either simple or weighted.3.1) n • Weighted Moving Average – Mathematically. Mathematically. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.3.3) The smoothing constant. generally ranges from 0. and 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. Definition 5. and are appropriate to use when the underlying average .3.3. α.3.2 Quantitative Forecasting Methods Definition 5. • Simple Moving Average – Mathematically.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.8. Higher values give more weight to recent data.5.3. Definition 5.3.7. That is.10. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. See also definitions 5.7.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function. 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 (5.11.05 to 0. 5.5.3.

3. Definition 5. 1 See |actual − forecast| n (5.12.14.3.3. Mean absolute deviation (MAD).7. 3.11 (Trend Projections) A time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts.3 Measuring Forecast Error Once a forecast is made.3. and 5. and are appropriate to use when the underlying average is relatively stable. such as the mean absolute deviation (see definition 5. 5.3.72 CHAPTER 5. The value is computed taking the sum of the absolute values of the forecast errors and dividing by the number of periods: MAD = See also definition 5.3.4) definition 5.12).7. Mean squared error (MSE).15.3. FORECASTING is likely to change.3. See also definition 5.3.3. Three popular measures are 1. See also definition 5. .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 5.3. When α = 1. 2.13. while lower values give more weight to past data.3.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5.13). Mean absolute percent error (MAPE).8. Definition 5. 5. exponential smoothing is equivalent to naive forecasting. Definition 5. it is good practice to compare the estimated value with the actual value as actual values become available.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model.0.

Mathematically.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.12. expressed as a percent of actual values.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values.3. Mathematically.10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.8) With smoothing constants α for the average and β for the trend.3.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3. 100 n i=1 (forecast errors)2 n (5.3.5) |actuali − forecasti |/actuali n (5.5.12. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5.3.7) or F ITt = Ft + Tt (5.6) 5.11) .4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. MAPE is given by MAPE = See also definition 5.3. MSE is given by MSE = See also definition 5. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5. Definition 5. FORECASTING APPROACHES 73 Definition 5.

Calculate the forecast including trend. by the formula F ITt = Ft + Tt . FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5. Ordinary Least Squares Regression analysis is also useful for predicting trends.74 or CHAPTER 5. Tt with equation 5. 1. 3. time) (5.10.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. 2.12) = exponentially smoothed forecast of the data series in period t = exponentially smoothed trend in period t = actual demand in period t = smoothing constant for the average(0 ≤ α ≤ 0) = smoothing constant for the trend(0 ≤ α ≤ 0) To compute a trend-adjusted exponentially smoothed forecast. Compute the smoothed trend. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. Compute Ft . 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. F ITt .12.14) . It is also commonly called linear regression analysis. the emponentially smoothed forecast for period t using equation 5.

1.3. We do that with a 5-step process. consumers often make fewer purchases of durable goods. 5. Deviations around the least squares line are assumed to be random. such as cars and washing machines. we will examine one model.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events. 1.13 assumes a linear relationship. . Find the average historical demand for each season. Most businesses experience a surge in sales around Christmas. 4. Definition 5. In the U. to account for seasonal changes in demand in our forecasting. 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 first step is to calculate the seasonal forecast. 3. ¯ x The least squares method has several drawbacks. then multiply it by the seasonal index for that month. Although there are many methods to accomodate seasonal demand. 2. Divide this estimate of total annual demand by the number of seasons. 3. Compute the average demand over all months.3.. 5. Compute a seasonal index for each season by dividing the historical demand by average demand. It cannot be used to predict too many periods into the future as the further into the future the prediction is made.3.S. the multiplicative seasonal model.5 Seasonal Variations in Data In most businesses. This provides the seasonal forecast. 2. during the summer months when it is common to take a vacation. demand is seasonal. Recall that the equation 5.5. the more uncertain it is. Estimate next year’s total annual demand.

We will use the same technique.g. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.g. 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. but x will be something other than time. pp.3.76 CHAPTER 5. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.g. 106– 107].. mathematically. If there are published estimates you can cite (e.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. whatever uncertainties you may have transfer to your predicition of y.1 (Example: Using OLS) Present Heizer example 12 [1..17) .4.x = (5.3. However. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. average local salary) (5. Note that making predictions of future demand involves also making predictions about the independent variable x. It is also called the standard deviation of the regression and.15) Side Note 5.. FORECASTING 5.x = (5. is given by (y − yc )2 n−2 Sy.16) where y yc n = y-value of each data point = computed value of the dependent variable = the number of data points An equivalent formulation to equation 5. if you are uncertain about predictions of x.16 is y2 − a y − b n−2 xy Sy.

00. the U.3 (Examples of Correlation Coefficients) Present Heizer figure 4. It does not imply causation one way or the other.time. stock market prices as well as the winner of the Super Bowl. 107].10 [1. Historically.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. Definition 5. Certainly.2 (Distribution About the Point Estimate) Present Heizer figure 4.9 [1. which is divided into two “conferences.3. the average length of a woman’s skirt and stock market prices in the U. Correlation Coefficients for Regression Lines Definition 5. a football game played between two football conferences in the U.3 and the U.S. The correlation coefficient of variables x and y is given by r= See also definition 5.18. Since 1935.3.3.1594488. nor does it imply that they will continue to be related.3. the note in the margin accompanying Heizer example 14 [1. have been correlated. Even the Year of the Pig correlates strongly with the U.” Side Note 5. “Distribution about the Point Estimate of $600 Million Payroll. 4 Source: http://www.3. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1. changes in skirt lengths don’t cause stock market prices to rise and vice versa.” the AFL (American Football Conference) and the NFC (National Football Conference).3. stock market. 109]. p.8599.18) . Other interesting correlations that have been identified over the years include banana prices and U.S. Dow Jones Industrial Average and Standard and Poor 500.S. in all but one Year of the Pig. pp.5. Side Note 5. has risen. “Four Values of the Correlation Coefficient.” Note that the regression assumes a standard normal distribution about the estimate. stock markets.S.2 with stock prices generally rising as skirts rise.S. p. is monopolized by the NFL.S.4 (Causation vs. football in the U. FORECASTING APPROACHES 77 Side Note 5.com/time/business/article/0. February 28. but the relationship is coincidental. Correlation) Correlation merely means that the values of two variables are historically related.4 . 108].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. leading stock indexes. 2007.html?xid=sitecnn-partner.S.3. or National Football League. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5.

19) Determining the values of a.” For example.) It measures the percent of variation in the dependent variable (y) explained by the regression equation.15 is given by y = a + b1 x1 + b2 x2 + .5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. b2 . The same technique can be applied to use several independent variables to predict the value of a dependent variable. b1 .” As the sidebar points out. . .. p. x2 . etc. (See definition 5.3. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. .5 Definition 5. .78 CHAPTER 5. .18 and Heizer example 15 [1. = the dependent variable (e. The multiple regression equivalent of equation 5. . It is commonly simply called “R squared.3. In practice. Side Note 5.g. 110]. . “Forecasting Manpower with Multiple Regression at TransAlta Utilities. . b1 .3.6.3. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5. 5 See definition 5. 110]. if they are indeed related to the dependent variable. we discussed a means by which we can attempt to predict the value of one variable using the value of another. results in additional predictive accuracy as measured by r2 .3. Adding additional independent variables as predictors.19 (Multiple Regression) A causal forecasting method with more than one independent variable. . FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. often the most difficult part of building a multiple regression model is to pick the independent variables. you would use statistics software to calculate these values. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .17. p. b 2 . “What was the R squared of your regression?” Multiple Regression Analysis In section 5.

1 (Tracking Signal) A measurement of how well the forecast is predicting actual values. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual .4 standard deviations.4. MONITORING AND CONTROLLING FORECASTS 79 5. 6 Recall definition 4. and within 4 M ADs about 99.4.1 (A Plot of Tracking Signals) Review Heizer figure 4. If the tracking signals violate upper or lower limits. . This means that the observed value should be within 2 M ADs abut 89% of the time. Definition 5.4.2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. though large errors may be a problem as well even if the positive and negative errors balance.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5.forecast| n where M AD = (5. Definition 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 tracking signals should also be compared as they are generated against limits. These limits are typically based on M ADs. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).8 standard deviations.6 standard deviations.1.9% of the time.6. Tracking signals are typically used monitor forecasts. and 4 M ADs to 3.11 [1.2.6. 111]. the forecasting methodology needs to be modified. p. one of the most common problems with forecasting is a lack of follow-up.2 standard deviations. In other words. three M ADs to 2.4. three M ADs about 98% of the time. which correspond roughly to standard deviations.6 One M AD is equivalent to 0.20) A good tracking signal has about as much positive as negative error. Side Note 5. two M ADs to 1. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions.5.

4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application. Definition 5. Note that even with computer monitoring.g.4.4.4. “Summary of Forecasting Formulas.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings. p. you should be aware of the criticism of focus forecasting.4. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit.. 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. Definition 5.4. 114].2 Focus Forecasting Focus forecasting.1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. 2. However. FORECASTING 5.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e. which selects a model based on goodness-of-fit to a data set.3. is based on two principles: 1.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.80 CHAPTER 5. Side Note 5. In your career.10) is automatically changed to keep errors to a minimum. There is no single technique that should be used for all products or services. changes need to be check with human eyeballs to ensure that the adjustments make sense.2 [1. Sophisticated forecasting models are not always better than simple ones. 5. you must make your own decision as to how you select the forecasting models that you use.4. there has been much criticism of the approach to using models based on thier fit to the data. Side Note 5. α in definition 5.” .

1 In this chapter. the word “product” will refer to both goods and services. pp.5 (Product Decision) The selection. and design of products. • Market share and dynamics. 2 Recall sidenote 2. Referring to services as products is common in the service industry.128] • Investment and cash flow. as an intangible. For example. 81 . and • The organization’s capabilities.0. time permitting.Chapter 6 Design of Goods and Services Many companies derive a competitive advantage by using product strategies to efficiently produce a variety of products and/or services to meet changing customer demand or target specific consumer niches. which will be discussed in detail later in the semester. They also use just-in-time production techniques. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. 124.1 . is a service. insurance companies often refer to their policies. as products. Definition 6. which. • Product life cycle. Product strategy2 defines the breadth of the product line and links product decisions to [1. definition. pp.1 Side Note 6. 122–123].4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1.2.0.

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

• Technological change often drives product innovation.1. are tied to product demand.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. the development of cellular telephone technology or the internet. Definition 6. • Economic factors.4 Side Note 6. 6. example.3 Product-by-Value Analysis For firms with many products.2. 6.1.000 yuan. • Sociological and demographic change is also tied to product demand.6.2. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12. it must regularly redesign existing products or bring new products to market. example. as well as the total annual dollar contribution of the product. Brainstorming should be done understanding the following factors • Understanding the customer is the primary issue in new-product development. Definition 6. GENERATING NEW PRODUCTS 83 6. and if a company is to survive.500 or 100.2.2 Generating New Products Most products have a limited life cycle. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s.3 • Political and legal change can also bring about business opportunities. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.1 (Brainstorming) A team technique to generate creative ideas on a particular subject.2. 4 For 3 For .1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. Ideas are not reviewed until after the brainstorming session. such as consumer incomes. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted.1 (Example: Brainstorming) Lead the class in a brainstorming session.

6. Side Note 6.3. Each stage should have an accompanying review to determine whether to progress or not. Definition 6.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1. Many successful companies rely on sales from products introduced within the past five years.3.3.2 [1.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace. 128]. . p.3 [1.3. and the organization’s capabilities.2. market dynamics. 6.3 6. Definition 6. 128]. Translates customer desires into a product design. DuPont estimates that it takes 250 ideas to yield one marketable product [1. 129]. p. 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. DESIGN OF GOODS AND SERVICES For example.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. Determines what will satisfy the customer and 2.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5.84 CHAPTER 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow.1 (Product Development Stages) Present Heizer figure 5. The house of quality is a graphic technique for defining the relationship between customer desires and a product.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. Side Note 6. the product life cycle. p.

• “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. Product development is done by teams. Building the house of quality involves six steps: 1. Identify customer wants. Identify how the good or service satisfies customer wants. 10 The right-hand columns of the house in sidenote 6. with product features. manufacturing engineering.2.qfdcapture.9. as was the software described in section 4. PRODUCT DEVELOPMENT 85 Side Note 6.” 6 For example. Identify relationships between the firm’s hows.3. In other words. Evaluate competing products.g. 2. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6.6 3. • Perhaps the most popular approach in the U. bureaucratic companies and organizations.6.2. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.3.2. Relate customer wants to product hows. create the columns of the house in sidenote 6. p. e. there are three popular methods by which organizations undertake product development.2. 8 These are given on the roof of the house in sidenote 6.S. 3. 7 In other words. and production departments. An organization is divided into departments.2 (Example: House of Quality) Present Heizer example 1 [1. 2.8 5. 130]. a research & development.2.3..7 4. • More common in large.3..3 Organizing for Product Development In the West.3.9 6. which can be an advantage.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions. 6.3. Note that it is not free or open source. See http://www. Develop importance ratings.10 Side Note 6. .3. identify the rows of the house in sidenote 6. 1. • Fixed duties exist.3.3. • Effective communication and coordination between separate departments can be problematic.com for more information. design engineering.

.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. but my personal impression is that formal QFD practices are not widespread in practice.4 (Concurrent Engineering) In project development. etc. production. These teams often include representatives from marketing. maintainability. Side Note 6. engineering.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6. Definition 6. design. However. quality assurance.3. will often advocate for continuation of their project past the point that it is profitable for the company.. 6. The goals of manufacturability and value engineering are 11 See definition 6.3. purchasing.S. Definition 6. Side Note 6.3. and I believe it is an incentive-compatible means to maximize the probability of successful development of a product because the success of the team is tied to that of the product.S. and field service personnel. it can also be problematic because teams. Definition 6.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U..3. and production stages of product development.3. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used..1) was implicitly included in the product specification phase of operations management at the companies I have worked for. organizations are less structured and typically not divided into research and development.3. production.3.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research.3. because their fate is tied to a product. use of participating teams in design and engineering activities.11 In Japan. and use. engineering. development. My experience may not be indicative of management practices in general in the U. Some teams even include representatives from vendors.4.86 CHAPTER 6. manufacturing.

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

88 CHAPTER 6. DESIGN OF GOODS AND SERVICES .

Part II Entrepreneurship 89 .

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

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

– For now. you may not be prepared to start a company. month after month.1 (A Selfish Act) Bear in mind that starting a business can be a very selfish act. friends and family are the most important concerns in their life.1. week after week. “When are you coming home for dinner?” or criticizing you for ignoring them. Side Note 7. we suffered a database corruption that resulted in my practically living at work for three weeks . take note of this information. CHARACTERISTICS OF THE SUCCESSFUL ENTREPRENEUR 93 Side Note 7.com and Absolute Performance included • Regular 70 hour weeks • Incidents that demand devotion to the company over and above the call of duty.1. If you are not prepared to redefine relationships relative to your business life. friends. or angel investors. for example. it may be difficult to keep the necessary focus on the business. It may be useful later in your career. 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. possibly even years at a time. the techniques used to acquire financing from venture capitalists can be put to good use obtaining debt financing or convincing family.7.1. Often. we will discuss venture capital. – However.com management and Jerry’s difficulty balancing work and family life. Discuss the impact of the demands of a startup on the marriages of Active. Putting in long hours is not something that is done once in a while. 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.com. If after many long hours at work your family will be asking you. • Among the means by which you can to raise money.2 (Personal Experience with the Impact of Startups on Relationship) My personal experiences with the work schedule demanded by startup companies as experienced at Active. • Some of the information is intended for those who have an established career and real-world experience to draw upon. – Additionally. For many people. at Active. You may lose friends because you do not have the time to maintain the friendship. but something you may need to do day after day. the use of venture capital will probably increase over time in China. Venture capital financing is common in the United States but is not yet a common means of financing in China.

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

ask yourself the following questions: • Income – How much do you want to earn.3. your goal may not be realistic. although the successful ones generally view their experiences as positive on the whole.1 (What’s It Really Like?) If you wonder what running a business is really like. such as sales. Learning from failure is as important. it helps to set goals. marketing. SETTING GOALS 95 If you are not a “people person. ask other entrepreneurs.7. Side Note 7. If your goal is to raise 1. . When setting goals. – Start with small goals. • Be specific. – Short-term goals are those that can be accomplished within a year. even the successful ones will probably focus on the negative. When setting goals. try to figure out why they were not successful. • Set both short-term goals and long-term goals. Like parents. it is common to exchange “war stories” about the difficult times and sacrifices. – Long-term goals are those that may take 5. • Analyze Your Professional Attributes – Be aware of where you need help.3. 7.000 yuan by July 1” is a much better goal than “raise money. 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. 10. If you talk to an entrepreneur who has not been successful. advertising. if not more important.000 yuan and you’ve never had a job before.3 Setting Goals With any major endeavor.” • Be optimistic. “Raise 100. When I talk to those who I know who have started businesses. than learning from success. Move on to larger goals once the small goals have been met.000. or 20 years to accomplish.” you may not want to start a business that focuses on customer relationships. “Achieve financial independence” is much better than “pay the bills. and administration. Consider at least a five-year time horizon.” • Be realistic.

3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely.3.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4.3. 21]. 18–20]. Many people want to start their own business for ego gratification. Side Note 7. – Hours of work. Have the class write down their answers and evaluate their own EQ. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. How much is your ego worth? Side Note 7. Acknowledge this fact and factor it into your decisionmaking. Eliminate question 1 and substract one point from the scoring given on p. 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. The reasons given for adding or subtracting points are as interesting as the ultimate score. pp. pp. . and – Investment of personal assets. 20.96 CHAPTER 7. – Geographic location.

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

• The ideas are easily copied and would be quickly appropriated by more able competitors.98 CHAPTER 8. • The business would involve too much risk.5 (A Worksheet for Generating Ideas) Hand out Lesonsky’s “Things About Me Work Sheet” [4. • They require business relationships that the entrepreneur does not have. Side Note 8. etc. I continue to generate business ideas as a matter of habit.0. FINDING AN IDEA • Trackvia arose because Matt felt that small businesses had the need to manage data but did not have the resources to develop expertise in database management. However. people have to remove nose piercings for work or social occasions. So he decided to build a simple system that would allow small businesses and individuals to securely manage data online. • A nose piercing that consists of a small. . 28–29]. It sounds silly.. but it is a major complaint for female rock climbers. Studs and other decorative pieces could be designed that would be interchangeable by inserting them in the tube. • They require more financing than the entrepreneur has access to. often one or more a day. • 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. hollow tube. • Etc. Side Note 8. My recent ideas include: • A rock climbing belt for women which doesn’t have to be removed for the woman to relieve herself.0.6 (Some Personal Observations About Generating Ideas) I have found among those that are of an entrepreneurial bent. Often times. Those with nose piercings would not need to remove the piercing and risk it closing. The tube could be made unobtrusive enough that it would not need to be removed for work. business ideas come at a rapid rate. • They require expertise that the entrepreneur does not have. most ideas are not feasible because • They would not be profitable enough.. pp. however. nose piercings take a long time to heal and removing a piercing often results in the skin closing and needing a repiercing.

p.2 (Checklist for Evaluating Ideas) Present Lesonsky’s “Checklist for Evaluating Ideas” [4. Entrepreneurs are often told their idea is flawed. Finally. People thought he was going nowhere and generally dimissed his business. home. you will be spending years of your life trying to make the idea work. However. it is too risky. Have students fill out the form on their own time.1 (Security Cameras) Recount the story of Miles’ friend who started a business selling coordinated. thinking that if he did not succeed after a couple of years. he would never succeed. You should be realistic about risks. “Never say die. .1. you should have “thick skin. or are otherwise discouraged. you should not let it dissuade you. After all.1. such as your family. 2007. His sales are now in the millions of dollars per year and the business is very profitable. NOW WHAT? 99 The idea itself is only a small part of the ultimate success of a business.1. 2 http://www. in the wake of 9/11.com/find?s=all&q=never+say+die. 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. 33].1 You’ve Got an Idea. or health.” That is. computer-controlled security cameras.2 is. 8. Side Note 8.imdb. He ran the business as a one-man operation for years.8. February 17. Warnings about risk are perhaps the criticism you should consider most carefully. making just enough to get by but not much more.1. 35]. 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. used as the title of at least 12 movies and television shows. A well-known phrase in English. that they will never make it. And you should not risk anything you can’t afford to lose.3 (Business Comparison Work Sheet) Present Lesonsky’s “Business Comparison Work Sheet” [4. YOU’VE GOT AN IDEA. Now What? The number one trait needed by successful entrepreneurs is perseverance. Side Note 8. the business took off. to be truly self-motivated and persistent in the way you need to succeed. while you should listen to criticism that others give. Have students come up with examples of products that meet various criteria on the checklist. p.” Side Note 8.

100 CHAPTER 8. FINDING AN IDEA .

2 (B2C) Businesses whose customers are primarily consumers are called “B2C.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B. When trying to identify your niche market. Definition 9.Chapter 9 Defining Your Market After coming up with your idea.” or business-to-business ventures.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. See also 9.1. Definition 9.” or business-to-consumer ventures. your next step is to do some market research. Businesses. There are two broad categories of markets: 1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve. Consumers and 2. 9.2. go through the following 7 steps: 1.0. Not only do you need to decide whether you are marketing to businesses or consumers.0.0. See also 9. but you should try to target your market as specifically as possible.0. 101 .

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

or retiring. buying a home.1. when many people were suffering from extreme poverty. such as having children. the more likely you are to score a hit. you should be able to enter your niche market with confidence.1. Go for it! – Implement your idea. Side Note 9.. for example. Korean. 9. As older people are more active than before.1. This can be offensive and serve to alienate rather than appeal to your customer.S..1.2.1 (Smaller is Bigger) When starting a business.1. 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.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.S.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. Many Western companies make the mistake of lumping together Japanese.1 (Generational Marketing) Marketing to consumers based on age as well as social. in the U. life stage. and other Asian customers together. are similar in age to those who came of age in World War II. FINDING YOUR NICHE 103 7. Definition 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.3. economic. you should practice extra caution to avoid stereotypes or other insensitive approaches. Likewise. New marketing techniques include generational.1. and cohort marketing. For example. many entrepreneurs make the mistake of being “all over the map. young adults in the Depression. demographic. and 9.1.” That is. the Depression-era cohort. (See definitions 9. and psychological factors.1. etc. Definition 9. If you did your homework. This marketing technique has been widely used since the early 1980s in the U. . they try to satisfy all possible customers and end up trying to do too many things well. and the narrower your focus on your target.. many Eastern companies make the mistake of lumping together American and European customers. Definition 9. Marketing to demographic groups has become much more refined in the last few decades. It is better to do just one thing well than to do many things poorly.1.1. Chinese.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life.) Using these new marketing techniques can allow you to narrow your market. Side Note 9. the World War II cohort. but their behavior differs significantly due to the different influences in their youth.9.

create a mission statement. Falkenstein1 advises that you regularly reevaluate your niche.1. . Side Note 9. Every six months or so.3 The Mission Statement Once you have a niche. The mission statement should • Be succinct.1 (Mission Statements for Three Organizations) Review Heizer figure 2.3. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business. a few sentences at most. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally. 28] which includes mission statements for three multinational companies: 1 See section 9. 79] 9.” [4.2 Redefining and Expanding Your Niche Lynda C. DEFINING YOUR MARKET 9. • Convey the essence of your business’s goals and philosophies. Falkenstein states.2 [1. p. p. you should. “Creating a niche is the difference between being in business and not being in business.104 CHAPTER 9.

Our mission consists of 3 interrelated parts: • Product Mission – To make. 105 Side Note 9. . FedEx FedEx is committed to our People-Service-Profit philosophy. healthy.3. We will produce outstanding financial returns by providing totally reliable. Equally important. 2.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. 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. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity. THE MISSION STATEMENT 1. 3.9. competitively superior. global air-ground transportation of high-priority goods and documents that require rapid. A complete record of each shipment and delivery will be presented with our request for payment. 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 be helpful. We are committed to being an important. natural ingredients and promoting business practices that respect the Earth and the Environment.3. We will strive to have a completely satisfied customer at the end of each transaction. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. and professional to each other and the public. courteous. time-certain delivery. positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. contributing member of our community and offering the Hard Rock family a fun. and nurturing work environment while ensuring our long-term success. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth.

benjerry.cfm for more detail. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. • What kind of relationship will you maintain with suppliers? – Remember that when you succeed. • How do you differ from competitors? – Why would your customers prefer your product to a competitor’s? • How will you use technology. DEFINING YOUR MARKET • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally. challenges. capital. a grocery chain. processes.1. Answering the following questions can provide you with a clear picture of what your mission statement should include: • Who are your customers?2 • What image of your business do you want to convey? • What is the nature of your products and services? – What determines pricing and quantity? – What is your competitive edge? Price? Features? – Will this change over time? • What level of service do you provide? • What roles do you and your employees play? – You should develop a leadership that organizes. .S. products and services to reach your goals? • What philosophies or values guided the responses to the previous questions? 2 Recall section 9.106 CHAPTER 9. Other companies. See http://www. so do your partners.com/our company/our mission/index. such as Whole Foods. and recognizes outstanding employees. nationally & internationally.. 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.

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

108 CHAPTER 9. DEFINING YOUR MARKET .

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

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.

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

114 CHAPTER 10. MARKET RESEARCH .

Your business plan should list obstacles that may arise and what will be done to address them.0. Set up a timetable with specific steps to be accomplished in a specific period. It must describe current status.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. 4. and projected results of the new business. No realistic goals – Your business plan should help you ascertain whether your goals are realistic. expected needs. and so should you be. 5. 3. 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. Definition 11. including 115 . 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.4 (Business Plan) A business plan is a written document that details a proposed venture. 1. Failure to anticipate roadblocks – You should know what the possible “show stoppers” are in your business. the business plan should help you avoid five pitfalls that would limit your opportunity to succeed. No market niche – Many entrepreneurs propose an idea without knowing who the potential customers will be. Every aspect of the venture should be covered.

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

11..2 5. 4. Read the plan over casually. i. While the initial read-through might be only a five-minute perusal. you will not even get your foot in the door and be invited to present your plan to investors. 2. – Binding and printing should not be sloppy. PREPARING TO PUT THE PLAN TOGETHER 117 minutes with your business plan before deciding to give you an audience or place you in the “circular file. Establish the unique details of this venture. 6. pretentious. but should not be too lavish. Note that less than a minute on average is devoted to each step. not ostentatious. Determine the characteristics of the venture and its industry. Determine the quality of the entrepreneurs. 300]. including debt or equity financing required. or spendthrift. but not too good. • Length 1 The “circular file” refers to the circular paper filing system that sits under every desk. Read the latest balance sheet.2 Look and Feel The way your plan looks and feels will give investors their first impression of you as a person.11. 301]: • Appearance – It should look good. other financing professionals may spend more time analyzing the details of the plan. 3.e.1. Determine the financial structure of the plan. 2 Do not underestimate the importance of this step. – Kuratko suggests a plastic spiral binding holding together a pair of cover sheets of a single color.1. They will want to see something that reflects that you are neat. p. – Staples are too cheap while professional bookbinding might give the impression that you spend too lavishly. 1.”1 Many venture capitalists use the following six step process to evaluate a business plan [3. the trash can. If you cannot impress the financier with these three steps. thorough and careful. p. . bear in mind that once the plan is advanced to the next stage of financing. Kuratko suggests the following [3.

2. 4 Phone number. – On the title page. 6. p. the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. It should also serve as a reminder not to make too many copies or your investors may think that others have turned down your plan. – Inside the front cover should be a title page repeating the cover information. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. The benefits to customers. • The Executive Summary – Two or three pages immediately following the title page. . You should use this to keep track of who has which copy. THE BUSINESS PLAN – It should be no more than 50 pages. address. though you should not put it in the same corner as page numbers appear. 5 I suggest the lower-right corner. – 40 pages is ideal. the date of the plan.3 Some Style Points Kuratko also recommends that you [3. e-mail address. Its products or services. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. 7. they will not read it.3 • The Cover and Title Page – The cover should have the name of the company. and full contact information4 for the company. If you write to much. – It should explain 1. and/or web site. The company’s current status. 3. The financial forecasts. – It is worth repeating: Keep it down to at most two or three pages. 11.118 CHAPTER 11. 3 Note that for this class.1. The amount of financing needed. 5. and How investors will benefit. a number should be in a corner5 indicating the copy number. 4. The venture’s objectives in 3 to 5 years.

or other special market advantages you have. • Identify the Target Market – Market research should support a focused customer niche.2.6 Note any industry developments and describe the business thoroughly. Some details on each section of the business plan: 1. • If there are patents.2. • Orient the Plant Toward the Future – Create an air of excitement. p. • Highlight Critical Tasks – This part of the plan demonstrates your ability to analyze and address potential problems.11. 2. Use the spell checker on your word processor to check for spelling mistakes.2 The Plan Contents Side Note 11. Business Description – Name the business. be sure to include them in the business description. so be sure the writing is finely crafted. trademarks.2 [3. copyrights. which describes the 10 sections of a typical business plan. but it is the first thing that your audience will read. Your credibility is established in part by the credibility of your plan. use “he. and tell why it is named what it is.1 (10 Sections of a Business Plan) Present Kuratko Table 10.” “we. • Do Not Overdiversify – Don’t try to be all things to all people. 6 E. • Give Evidence of an Effective Team – Be sure that your audience knows that your people have the skills to succeed.” or “them.” • Capture the Reader’s Interest – Be sure your title page and executive summary capture the reader’s interest quickly. The executive summary gives readers their first impression.” Instead. Present a focused plan. 11. THE PLAN CONTENTS 119 • Organize and Package the Plan Appropriately – Organize things logically and present a neat package with proper grammar.” or “us..g.” “they. Include any pictures or designs that would be helpful. 305]. • Keep the Plan Written in the Third Person – Do not use “I. Executive Summary – This should be the last thing you write. • Avoid Exaggeration – Your sales and revenue estimates should be well researched. is it based on a family name? Does it include technical terms you need to identify? .

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

including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew. Signing up distributors and dealers. Risks might include • • • • • Negative industry trends. Difficulty purchasing parts or materials. 8. Side Note 11. Completion of prototypes. . Critical-Risks Segment – Discuss business risks and the ways you might address them. a balance sheet containing projected balances is called a pro forma balance sheet. Hiring of sales representatives. etc. as opposed to actual. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. detailing projected profits and losses. Design or research difficulties.11. Ordering production quantities of materials. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. THE PLAN CONTENTS 121 (a) A pro forma balance sheet. inventory turnover. First sales and first deliveries. Receipt of first orders. (c) A cash-flow statement. detailing projected inflows and outflows. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. which investors will use to estimate debt/equity ratios. Costs exceeding estimates. Definition 11. of the risks than you are.com. Completion of design and development. 11.2. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. Unexpected competitions.1 (Pro Forma) A latin term that means projected. Appendix – If there are documents. Your investors are probably as aware. include an appendix. current ratios. These might include • • • • • • • • • • Incorporation of the new venture. or more aware. (b) An income statement. 9.2.2 (The Growth of Active. Product display at trade shows.com) Discuss the growth of Active. and Payment of first accounts receivable. Try to be honest and realistic. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. working capital.2. For example..

THE BUSINESS PLAN .122 CHAPTER 11.

1 Do It Until You Get It Right This is perhaps the most important piece of advice. 12. you will probably not do a good job. your dog. and Potential Partner Pitch [2.Chapter 12 Presenting the Plan 12. not a one-time event. pp. local business associations.2. You will probably have to present it at least ten times before it is ready for the medium-sized fish. Present it many 1 Guy Kawasaki. This means that you should not count on presenting your plan to your most critical investor for the first time. 62]. Sales Prospect Pitch. p. recommends twenty-five times [2. Your presentation should evolve over time as you listen to your audience and receive feedback. Do not be dismayed. Present it to your friends. 123 .1 You will have to pitch to many medium-size fish before you are ready for the big fish. The presentation of your plan is an ongoing process. your business class. The first time you present your plan. anyone who will listen. your family. 12.1 The Presentation Side Note 12. 51–56]. author of The Art of the Start.1.1 (What Goes Into the Presentation) Present Kawasaki’s Investor Pitch.2 Some Suggestions These suggestions come from those who have experience both giving and listening to business pitches.

of course. Most graduates get between 5 and 15 interviews when they graduate. The original joke goes. Most Ph. Post a copy of your presentation in a secure location on your homepage just in case. • Bring your own laptop.2.2. 2 This originally comes from an American classic. Guy Kawasaki likes to tell a different version of an old joke. p.1 (The Job Talk) Every Ph. “How can you tell when a lawyer is lying?” The answer. the lawyer joke. they may have another version of PowerPoint.D. graduate in economics puts together a “job talk” in which they present their dissertation to prospective employers. and you don’t want something as silly as a burned-out light bulb to cost you an investor.124 CHAPTER 12.2 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. I had given it over a dozen times. 44] Side Note 12. “How can you tell if an entrepreneur is pitching?” The answer: “His lips are moving. PRESENTING THE PLAN times.3 Be Familiar With All Equipment to be Used Never count on technology working the way you want it to. “His lips are moving. • Test the equipment the day before. 12. In retrospect. • Bring paper copies3 of your presentation in case all else fails. There will always be glitches. is. • Be sure that someone knows where to get an extra light bulb if the bulb in the projector burns out. Only when you are consistently getting a good response from your audience and are comfortable with the presentation is it time to take it to investors. I don’t think it was quite right until somewhere between the 8th and 10th time. 12. or other software you use that unexpectedly ruins the careful formatting you have in your electronic documents. You don’t want to try to figure out other people’s equipment.”2 [2. Adobe Reader.2. Bring at least twice as many as you expect there to be people in the room. Lexecon. By the time I gave my job talk to my eventual employer. • Bring a backup thumb drive with your presentation on it.” 3 Color copies! . candidates give their “job talk” half a dozen times to other students before giving it in an interview situation.D. and even if you can figure it out.

p. In general. so write things down to make sure you don’t forget. Ask them what your company will do. 12. 12.3.12. It is easy for things to get lost in the heat of the moment. “So what?” If you cannot answer this question simply and easily. Everyone. everyone brought a pen and paper. You should be prepared for the unexpected. If they cannot explain it clearly. 12. you are not presenting it well. Much of the material required use of the internet. 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.2. where some of the smartest people in the world worked. Give your presentation to friends or family. AFTER THE PRESENTATION 125 Side Note 12. • Taking notes also makes you look conscientious. but in reality.2. and although you go into each presentation . you need to change or eliminate the statement. and each investor will respond differently. At my company in Chicago. Stop when it goes off.6 So What? When you are planning your presentation. Many people feel as if taking notes makes them look stupid.3 After the Presentation Each presentation will be different.5 Take Notes Have a pen and paper ready and take notes during the pitch. Guy Kawasaki recommends you set a timer [2.2. • Your audience may ask you several questions at once.2. I always bring a pen and paper to meetings. 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. 12.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. 45]. ask yourself after every statement you make. it is quite the opposite.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics.

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

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.

130 • Maintain a sales history.1 Inventory Turnover Typically. these systems should automatically update inventory and accounting records. your count cycle is 12 weeks. Definition 13. Definition 13.3.3. INVENTORY CONTROL When considering the purchase of a POS.2 (Order Cycle) In inventory management. • 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. 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. such as for volume discounts for preferred customers. For example.4 (Delivery Cycle) In inventory management. a high inventory turnover is a mark of a well-managed inventory system. work with suppliers to improve delivery times and count inventory more often. Definition 13. if you perform an inventory count four times a year. CHAPTER 13. the count cycle is the amount of time between counting inventory.3. Definition 13. be sure it’s not easy to “hack” the system. 13. and • Improve pricing accuracy. the delivery cycle is the amount of time between placing an order and receiving it.3. • Security – To prevent theft. the order cycle is the amount of time it takes to process paperwork and place orders.3. you have “turned over” your inventory.1 (Turnover) When you have replaced 100% of your original inventory. .3 (Count Cycle) In inventory management. • Updating product information – At the time a sale is entered. 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.

INVENTORY ACCOUNTING 131 Definition 13. 13. You should know how many sales per square meter per year you need to survive. but you should at least know about LIFO and FIFO.4.2 See also 13. 13.2.4. First Out)) LIFO (last in. If there is inflation. 2 At 3 At least this is true in the U.3. which allows you to pay less taxes on your inventory.1 Buying Inventory In the process of putting together your business plan. least this is true in the U.3. The author is unfamiliar with Chinese tax codes.4.2 (FIFO (First In. See definitions 13. . which may result in higher taxes.3.3.1. After you have been in business your inventory control system should give you a better idea of stocking levels. you must estimate your inventory value when you file your taxes.4. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume. it values your remaining inventory based on the prices of the most recently purchased items. In deciding which to use.3. first out) assumes that you sell the least recently purchased inventory first. order cycle.5 (Needs Period) In inventory management. Needs Period = Count Cycle + Delivery Cycle + Order Cycle.3 See also 13.4 Inventory Accounting Your accountant will typically handle inventory accounting. and 13. and delivery cycle. Definition 13.13.4. follow the recommendation of your accountant. In other words.4. LIFO and FIFO are two accounting methods used to do this.1 (LIFO (Last In. In the U. it values your remaining inventory based on the prices of the least recently purchased items. Many businesses also measure turnover by measuring sales per square foot (or square meter).4.S. the needs period is the sum of the count cycle. first out) assumes that you sell the most recently purchased inventory first. The author is unfamiliar with Chinese tax codes. Definition 13. 13.S. Calculate your sales per square meter once per month. First Out)) FIFO (first in..S. If there is inflation.2.

3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. brokers or jobbers.” .1 Dealing with Suppliers The most important thing about a supplier is reliability. • Some suppliers demand a minimum number of items per order. – The minimum may be higher for first orders to cover the cost of setting up a new account. Rieva Lesonsky. Independent craftspeople 4. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. 13. Their prices are higher than a manufacturers. three or four months. courteous and firm with your suppliers.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. author of Start Your Own Business. Import sources – They operate like domestic wholesalers. 2. 3.4. usually one. INVENTORY CONTROL Definition 13. Distributors – Also known as wholesalers.5. and they will respond in kind.actual inventory . says. “Be open.132 CHAPTER 13.5 Suppliers Suppliers can be divided into four categories: 1. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense. Manufacturers – Note that some manufacturers refuse to fill small orders. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. 13.

d. . do not falsify or misrepresent your financial statements. • Sometimes if an order is large enough. Definition 13. If you are dealing with a reticent large supplier. Tips for dealing with suppliers: 1.5. it is considered a felony. you should know who is liable for damage to goods in transit. 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. Whatever you do. basis until you have proven yourself reliable.S.5. If a supplier does not extend credit. Ask about the freight policy before ordering. If a supplier is uncertain about you. and • The need to be firm but fair. You can also present your financial statements and prospects for success. Be sure to add up • Costs. SUPPLIERS 133 13.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree. 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. I regularly had to deal with food vendors.5. they will put you on a c.)) Cash on delivery. Side Note 13. • For items being shipped.13. Suppliers sometimes try to complicate pricing to their advantage.1 (COD (or c.d.o.o.. the supplier will pay for freight. • Discounts. At least in the U.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references.5. customers may be required to pay upon receipt of goods. and • Allowances before you make a decision. Discuss • Their negotiating technique when discussing pricing. personal interaction can work wonders. 2.

Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt. Seattle” to indicate that an item being shipped from Seattle is free on board.b.3.5.6 See also definition 13.html.org/wiki/Backorder.b. Specify a cancellation date on your order forms.b. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. 6 Source: http://www. May 19. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point.5. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. 3.)) Free on board.wikipedia. 2007. 5 FOB Destination changes the location where title and risk pass. 2007. 7 Source: http://en.4 Colloquially.134 CHAPTER 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.abcsmallbiz.5. See also definition 13.html. people often say something like “f.html. 2007.2 (FOB (or f.com/reference/glossary/glossary efg. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.roadway. As opposed to FOB.com/shippers/glossary.o. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.5.o. Be aware of your supplier’s priorities.2. May 19. 5.epoi. Under this arrangement.5. May 19. The FOB term requires the seller to clear the goods for export. Definition 13. Definition 13. . http://www.com/jargon. Destination)) Free on board destination. INVENTORY CONTROL • Depending on whether the supplier pays frieght. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract.o.3 (FOB Destination (or f. This differs from a forward order where stock is available but delivery is postponed for other reasons.7 4 Source: 5 Source: http://www. Definition 13. May 19. 2007.

The benefits of finding the right person for a job cannot be overstated. and • Independent contractors.Chapter 14 Hiring Employees Hiring is perhaps the most important task for any entrepreneur. besides being bad for business. Side Note 14. • Part-time employees.0. 337]. 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 . • Temporary employees (temps).0. Side Note 14. On the other hand. While reprimanding or terminating ineffective employees and downsizing are necessary business decisions. This chapter will cover the ins and outs of hiring • Full-time employees (FTEs).3 (Job Analysis) Present Lesonsky’s sample “Job Analysis” form [4.2 (Tip: A Personal Note Concerning Personnel Management) By far the most stressful decisions I have made in my management career have concerned firing or laying off employees. p. they are often emotionally draining for the manager as well as the employee involved.

. • How the job will be done.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. 14.2 (Tip: Job Title Inflation) Inexperienced employers are often tempted to inflate the job title of the position they are trying to hire in an attempt to lure candidates. you have nothing to offer. you need to consider • The physical or mental tasks involved.1 How to Hire Hiring involves analyzing the job requirements.1 Job Analysis Before creating a job description. 14. However.1. this can create several problems: • Even if the employee is grateful to have an inflated job title at first. If you call someone a Vice President but don’t compensate them as such.136 CHAPTER 14..1. you’ll be grateful to have spent the time to go through a more formal process.1. lifting. If you give someone a job as Vice President. Will the person use a computer? What software do they need to do? Will they be welding? What kind of welding equipment will they need to be familiar with? • The reason the job exists. you will likely find that they will come to you at some point to demand a vice president’s salary. an employee with an inflated job title may expect an inflated severance package.2 Job Description Side Note 14. etc. What are the goals for the employee and how does the job relate to other jobs in the company? • The qualifications needed. and recruiting. HIRING EMPLOYEES 14. writing reports. • If you have do terminate the employee. by the time you hire your 40th employee. Not only education and skills. they will soon expect compensation commensurate with their job title. Side Note 14. creating a job description. selling.1. then want to hire someone else later at a position above them in the company. Cleaning. but personality traits. • You may not leave enough buffer above the employee. programming.

It also includes • Any educational requirements. HOW TO HIRE 137 • There is little room for advancement.1. . and • A summary description of the position. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. If. • Who the person reports to.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. • Specialized skills or knowledge. • If you give someone an inflated job title but do not offer a salary commensurate with the title. 339]. you may find they are tempted to leverage that job title to seek employment elsewhere.1. it includes • The job title.1. • Benefits. Side Note 14. Definition 14.1) and should include the personal requirements expected of an employee [4. you hire someone as Director who is not qualified to be a director. you may find it difficult to give them a promotion later.1.14. p. • The position of that employee in the corporate heirarchy. • Physical or other special requirements associated with the job. Definition 14. p.1 (Job Description) Job descriptions should include • A job title. Like a job description.1. • A salary range. 338]. • Desired experience. for example. If you hire someone at the highest level of their competency. and • Any occupational hazards. You may actually be doing your employee a disservice by inflating their job title. Part of retaining quality employees is the prospect of advancement. and • Job summary with major and minor duties. then they go on to a Director position at another company.

you don’t get calls from aggressive applicants who are trying to circumvent the hiring process.S.3 Advertising the Job When you write an advertisement.1. • List the top 4 or 5 skills that are most essential to the job. HIRING EMPLOYEES 14.1. due to the number of applicants for competitive positions. e-mail addresses have become perhaps the most popular way to get applicant information at U. • Be sure to list appropriate contact information. – Keep in mind that many qualified applicants may not answer an ad if you list skills that are not particularly necessary for the job. • Do not list requirements other than educational or experience-related ones.1.2 Side Note 14.1.4 (Using an E-mail Address) For professional positions. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application. With e-mail.4 Finding People There are many possible sources of applicants. – For other positions. • Do not ask for specific personality traits. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U. such as “outgoing” or “detailoriented. 14. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting. particularly those that advertise on web sites. .” or people who may not have them will just try to fake those personality traits in the interview..S. For example. – For professional positions. 2 See sidenote 14. companies.5. It also makes it easy to receive and process a large number of applications with a minimum of effort. Many American companies are no longer providing phone numbers. if you are looking for an accountant. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number.138 CHAPTER 14.

monster. particularly in the high-tech industry. 2.1.S.314 listings in the “Computers. You check references. You narrow the number of resumes down to about 10. You can evaluate their personality during the interview.dice. 2007 turned up more than 5. • Online – In the U. 3 Java is a programming language. Searching on Monster. you will get several candidates for any job you are offering.com with the keyword Java on May 19. If you are lucky. You interview the candidates. Software” category.000 hits searching just the “Information Technology” search category. most professional associations’ job banks are now online. • Focus on the skills that a person can bring to your company. 6. There were 4. for professional positions. 159 in “Financial Services. 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.. To “weed out” candidates.3 Generally. you need to narrow down the number of applicants to those you can interview in a reasonable time frame.com with the keyword “java” will demonstrate just how widely used online tools are.com or http://www. Try to perform a search on a job sites such as http://www.14. be sure that a candidate can provide what you are looking for. 4. • Industry Publications – Most trade publications take ads for job openings.” 665 in “Internet/E-Commerce. You narrow down the 10 candidates to 3. not a science. You conduct a second round of interviews with the remaining 3 candidates. about 10 or so. In the U. 5.” And 921 in “Engineering. 3.” .S. You hire the preferred candidate. For any job. but when looking at a resume.. Screening People Reviewing resumes and applications is an art. the hiring process proceeds as follows: 1. many positions are being filled online.

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

• Do not hire people who are discovered to be lying on their resume.. such as through a “Green Card.7 (No-nos) In the U. • Whether the applicant has every been treated by a psychologist or psychiatrist.. • Ask people questions about their resume during the interview.S. and 5 I don’t mean play in the sense that they were playing video games – they were networking their house or setting up interesting web sites or doing other productive activities. including [4.14. 6 Employers can. However. • Maiden name (for female applicants). Get clarification on anything that you think may be suspect. race. however. but which can get employers in legal trouble. creed. in the U. Though laws undoubtedly differ in China. their love of and devotion to learning technology far exceeded most university graduates who were computer science majors simply because they thought it would make them money. or • If a person is a citizen. • Whether the applicant has every been treated for drug or alcohol addiction. Ever. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. • How many days the applicant was sick in the previous year. They were the type of people who would write software all day. include • Whether the applicant has children. color. p.1.6 Questions that are not explicitly prohibited.1. then go home and play on computers in their spare time. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. • Marital status. • Sex. Several of the engineers I hired did not finish their undergraduate degree.” . ask prospective employees whether they can submit proof that they have the legal right to work in the United States. religion. employers may not ask about anything not related to the job. Not also that many of the best people we hired were not the best on paper. 347] • Age or date of birth. or national origin. • Disabilities of any kind. • Whether the applicant has every been arrested.S.5 Side Note 14.

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

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

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

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

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