International Business Management and Entrepreneurship Lecture Notes

Collin Starkweather1 Spring 2007

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Copyright c Collin Starkweather 2007. All rights reserved.

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

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

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. .1 Types of Forecasts . . . . .1. . . . . . .3. . . . . . 4. . . . 4. . Strategy Development and Implementation . . . . . 4.3 3. . . . . . . . . . . . . . . . . . . 4. . . . . .2 A Seven Step Forecasting System . . . . . . 5. . . . . . . . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. .3.3 Integrate OM With Other Activities Global Operations Strategy Options . . . . . . . . .2 Project Scheduling . . . . . . . . .3. . . 5. . . . . . . . . . . . . . . . . . . 3. .1. . . . . . . . . . . . . .5 Seasonal Variations in Data . 5. . . . . .4. . . . . . . . . 4. . . . . . . .2 The Strategic Importance of Forecasting 5. . . . . . .1.3 Project Controlling . . .1 Research . . . . . . . . .2. . . . . . . . . 4. . . . . . . . . . . . . . . . .4. . .2 Network Diagrams . . . . . . . . . . . . .1 Product Life Cycles . .3. . . . . . . 3. . . . .1 PERT and CPM . . . . 6. .3. . . . . . . . . . 4. . . . . . . . . 5. . . . . . . . . . .1 Adaptive Smooting . 6. . 5. . . . . . .2 Focus Forecasting . . .6 Variability in Activity Times . . . . . . . . . . . . . . . . . 4. . . .3 Product-by-Value Analysis .1 What is Forecasting? . . . 3. . .2. . . . . . 4. . . . . 5. . . . . . .3. . 3. . . . . . . . . . 4. . . . . . . . . . . . . . . . .6 Associative Models . . . . .4 4 Project Management 4. . .4 3. . . . .3 Dynamics . . . 5. . . .9 Using Microsoft Project for Managing Projects 5 Forecasting 5. . .2 Life Cycle and Strategy . . 4. . . . . . . . . . . . . . . . . . . .7 Cost-Time Trade-Offs and Project Crashing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Measuring Forecast Error . . . . . . . . . . . . . . . . . . . . . 5. . . . . . . . . . . . . . . . . . . . . . . . . 4. . . 5. . .4 Adjusting for Trend . . . . . 5. . . . . . . . .1 Goods and Services Selection . . . . . . . . . . . . . . .1 Project Planning . . . . . . . . . . . . . . .1 Identify Critical Success Factors . . . . . . . . . . .1.4 Monitoring and Controlling Forecasts . . . . . . . . . .1. . . . . . . . . . . . . .3. . . 43 43 43 44 44 45 45 45 49 50 50 51 52 54 54 55 56 57 58 59 61 62 63 65 65 66 67 67 68 70 71 72 73 75 76 79 80 80 81 82 82 82 83 3. . . . . . . . . . . . . .1 Qualitative Forecasting Methods . . .1 The Project Manager . . . .4 Determining the Project Schedule . . . .3. . . . . . . . . . 6 Design of Goods and Services 6. . . . . . . . . .5 Slack Time and Identifying the Critical Path . 5. . . . . . . . . . . . . . . .2 Preconditions . . .2 Quantitative Forecasting Methods . . . . .3 Forecasting Approaches . . . . . . . . . CONTENTS . . . . . . . .1. . . . . . . . .2. . . . . . . . . . . . . . .8 A Critique of PERT and CPM . . . . . . . . . . . 5. . . . . .3. .6. . . . . . . . . . . . . . .1 Probability of Project Completion . . . . . . .3. . . . . . . . 4. .2 Build and Staff the Organization . . . 3. . . . . . . .2 The Work Breakdown Structure . . .

. . . . . .1 What Am I Researching. . . 115 116 116 117 118 119 123 123 123 123 124 124 125 125 125 125 Together . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Research Methods . . . . . . . . . . . . . . . . . . . .5 Take Notes . . . . . . . Product Development . . . . .1 You’ve Got an Idea. . . . . . .3. . . 6. . . . . . . . . . . . . . . . . . .4 The First Minute is the Most Important . . . . . . . . . . . . . . . . . . . .2 Quality Function Deployment (QFD) . . 12.1 Product Development System . . . .1. . . . . . .1. . . . . . . . . . . . . .3 Organizing for Product Development . . . . . . . . . . .1 Importance of New Products . . . . . 6. . . .1 Do It Until You Get It Right . . .1 Sources of Secondary Research . . . . . . . . . . . . . . . . . . Exactly? . . . . .2 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Now What? . . . . . . . . .3 Setting Goals . . . .2. . . . . . . . . . . . . . . .1 Preparing to Put the Plan 11. .2 Know Your Outline Thoroughly . . . . . . . . . . . . . . . 11. . . . . . .2 The Plan Contents . . . . . . . . . . . . . . . 12. . .3 Some Style Points 11. . 6. . .3. . . . . . . . . . . . . . .2. .4 Manufacturability and Value Engineering . . . . . . . . .3 The Mission Statement . . . . . . . . . .2. . . . . . . . . . . . . . . . .2 Redefining and Expanding Your Niche . 12. . . . . . . . . . . . . . . . . . . . 11. . . . . . . . . . . . . . . . . . . . . . .3. . . . . . . . . . . . . 111 10. . . . . . .1 Characteristics of the Successful Entrepreneur . . . . . . . . .2 Look and Feel . . . .2 Are You Ready? .2 Some Suggestions . . . 95 8 Finding an Idea 97 8. . . . . . 12. . . . .3. . . . . 101 9. . . . . . . . . . . . . . . . . . . . . 111 11 The Business Plan 11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. . .2. . . . . . . .3 After the Presentation . . . . . . . . . . . . .1 Your Audience . . . . 99 9 Defining Your Market 101 9. . . . . . . . . . . . . . .1 Finding Your Niche . . . . . . . . . . 12 Presenting the Plan 12. . . . . . .2. . . . . . . . . .2. . 110 10. . . . . . . . . . 104 9. . . . . .1.3 Generating New Products . . . 12. . . .CONTENTS 6. . . . . . 104 10 Market Research 109 10. . . . 6. . . . . . . . . . . . 12. . . . . . . 92 7. . . . . . . . . . .6 So What? .2. . . . . . . . . . . . . .3 Be Familiar With All Equipment to be Used 12. .1 The Presentation . . . . . . . . . . . 94 7. . .2. . . . . . . . 6. 5 83 83 84 84 84 85 86 II Entrepreneurship 89 7 Introduction to Entrepreneurship 91 7. . .

. . . . . . . . . . . . 14 Hiring Employees 14. . .3.2 Tracking Inventory .1 Buying Inventory . . .1 Job Analysis . . 14. . . .1. . . . . . . . . . . . . . . . . . . . . . . . . . .5. . . . . . 14. . . . .5 Suppliers .1 How to Hire . . . . . . . . . . . . .4. . .4 Finding People . . . . . .3 Computerized Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Inventory Accounting . . .1 Dealing with Suppliers . . . . . . . . 13. . . . . . . .2 Payment Plans . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. . . . . . . . . . . . . . . . . 13. . . .1. . . . . . . . . . . . . . . . . . . . 13. . . . . . 13. . . . .1. .3 Advertising the Job 14.2 Job Description . . CONTENTS 127 128 128 129 130 131 131 132 132 133 135 136 136 136 138 138 . . . . . . . . . . . . . . . . . 13. . . .6 13 Inventory Control 13. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5. . . . . . . . . . . . . . . . . . . . . 14.1 Inventory and Cash Flow . . . . . . . . . .1. . . . . . . . . . . . . . . . .1 Inventory Turnover . .

Part I International Business Management 7 .

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

which are more strictly enforced in the West. Easterners tend to trust people after observing a pattern of consistent behavior. Why is corruption an important business issue? • See sidenote 1.2 Corporate Corruption Side Note 1.2. • Because guanxi is less important in the West.1 (The Importance of Cultural Differences to Business) Understanding cultural differences is very important for doing international business: 1. and Europe but a commonly accepted practice throughout the developing world. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY • Child labor is considered abhorrent in the U. • However. Definition 1. child labor was widely used.A. How do cultural perceptions influence international management when Easterners do business with Westerners? • Westerners do not understand guanxi. This is something Chinese business people should be aware of.1 (Ethics) The study of morality and standards of conduct. 3. Western business people may not initially trust their Chinese counterparts. 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. • In general. it is much harder to understand the many subtle clues that someone is trustworthy when they are from another culture.. What aspects of Western culture make it difficult for Chinese people to do business with Western people? • Are Americans perceived as being too focused on money? • Are Chinese people inclined to trust Westerners? • Westerners and Easterners build trust in different ways.2. Prison labor is also considered improper in the U. For example.A.1.A. Westerners rely more on contracts. Which brings us to the subject of this lecture: Ethics. 1. 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.S.10 CHAPTER 1.2. 2. Note that during the industrialization of the U. • Because of this. .S.S.

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

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

also known as thrifts and which function like banks. women have a difficult time being taken seriously.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. 5 1.4. .4. Side Note 1. The government was compelled to provide public money to bail out the institutions.pdf. 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. Savings and Loan Scandal) The issue somewhat resembles the Savings and Loan scandal in the U. Hodgetts et al. the political scandals do not appear to have been fully acknowledged and addressed. Moreover.1 (The U. were not as highly regulated as banks. with many men of the opinion that women were just biding their time until they marry and have children. 58].fdic. Likewise.S.. • Many men do not understand why sexual harassment constitutes a problem.1. This is exacerbated by the fact that • There is a discrepancy in perceptions of gender in Japan. which was insufficiently regulated and took on too much risky debt and did not write off bad loans in a timely manner. p.S. Savings and loan institutions. Side Note 1.4. with many women finding their employment opportunities constrained. Better known is the case of Japanese banks. JAPAN 13 1. This resulted in several banks being technically bankrupt [5.4.gov/bank/analytical/banking/2000dec/brv13n2 2. This resulted in the failure of 1043 institutions between 1986-1995 with losses estimated between $100 billion and $500 billion.1 Japan Political and Business Scandals Japan has been beset by both political and business scandals. • Prosecuting these kinds of issues can be expensive and time consuming and may not ultimately result in a significant financial penalty.4 1. Several cabinet members were forced to resign after accepting exhorbitant advisory fees or improper political donations.4. and as a result made high risk investments in the late 1980s and early 1990s.2 Women in the Workplace Sexual harassment has also become an issue in Japan.

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

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. Many people who are paid significant sums to lobby for Japan and Japanese firms are former highranking U. than any other. men are disproportionately represented in management positions. 1.5.4.5.5. with most in the top 20 among over 150 countries included in the survey. Side Note 1. They only have the power of persuasion. yes or no.dict. politicians. . Definition 1.2 Women in the Workplace in Europe France and Germany While legislation exists to guarantee equal treatment and equal opportunity for women in both France and Germany. at 40.4.1 Europe Bribes and Corruption Although most western European countries are not ranked highly on Transparency International’s poll of corruption (Italy..3 Lobbying by Japan Japan spends more money lobbying in the U. particularly in upper management.1 (Is Paying a Bribe Unethical?) Do you consider it unethical to pay a bribe if it is necessary to do business? Take a show of hands.1.4.5 1.S. with the purpose to influence their votes.org. there seems to be a glass ceiling due to social factors.S.5.7 Note that lobbyists do not have any formal power. in an extended sense. their attitudes towards bribery when working in foreign markets differs from that of the U.4 (Is this Ethical?) Do you consider it ethical for a former politician to charge high fees to lobby their former colleagues? 1. Side Note 1.S. 7 Source: http://www. Hodgetts et al. Although women have entered the workforce in large numbers in recent decades. to try to influence decision-makers in any circumstance. EUROPE 15 1.2 (Lobbying) To address or solicit members of a legislative body in the lobby or elsewhere. is the notable exception).

• Discrimination lawsuits are more commonplace in Great Britian.about..2 (Is There a Glass Ceiling for Women in China?) Is there a glass ceiling for women in China? Take a show of hands. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Definition 1. but there is a perception that there are risks and ethical considerations.5.6 Ethical Concerns in China MNCs see China as a place of tremendous opportunity. For those students who think so. yes or no.5. . 8 Side Note 1. 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.htm. One possibility is that highly qualified and talented women are being underpaid and placed in positions that underutilize their talents. 8 Source: http://careerplanning. Side Note 1.1 (Glass Ceiling) An invisible barrier that determines the level to which a woman or other member of a demographic minority can rise in an organization. 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. though compensation is limited relative to lawsuits filed in the U. Companies may be able to recruit more qualified women than men at a given wage level if they promote the company as taking a proactive stance on gender.5.S. • More British companies have actively sought to recruit and promote women into management.com/library/glossary/bldef-glassceiling.16 CHAPTER 1.

Side Note 1.3 (Corporate Spying) Hodgetts et al.1.S. • Note that for every corporate spy that is caught. International corporate spying problems.5 billion in sales annually. . pp. executives.2 (Piracy and Counterfeiting) Present sidenote at [5. Bribery and other forms of corruption.6. 64].6. ETHICAL CONCERNS IN CHINA 17 Side Note 1. 7. Child labor.6. company in Boulder was stolen and sold to a Chinese company. 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.S. 4.6. Prison labor. 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. An increase in crime and illegal business activities.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. [5. there are undoubtedly many others that get away with it. • Yet another case in which software from a U. Lack of action from Beijing may result in “tit-for-tat” retribution from the United States and others. • A relatively stable government. 2. 3. it is difficult for foreign firms to navigate the Chinese legal system in the case of a dispute. • Another case in which a Chinese spy in Hong Kong was caught evesdropping on U. 5. p. Side Note 1. 6. An opaque legal system. Ethical considerations include 1. Often. and • A recent history of rapid economic development. Piracy and counterfeiting (see sidenote below).

and the environment. 1.7 Corporate Social Responsibility Definition 1. such as education and health care.6. a grocery chain. such as Whole Foods. not-for-profit organizations that seek to serve society’s interest by focusing on social.3 (Nongovernmental Organizations (NGOs)) Private.S. and economic issues such as poverty. there are few if any issues which affect and infuriate so many in China as corruption.1 (Ben & Jerry’s) Review Ben & Jerry’s mission statement.2. Definition 1. political.18 CHAPTER 1.2 (Nongovernmental Organizations (NGOs)) Private. Side Note 1. China continues a battle against corruption. • CARE (promotes community development. education.7. . not-for-profit organizations that seek to serve society’s interest by focusing on social. provide relief in the event of humanitarian disasters.”[6] See also sidenote 1. health.7.1 (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. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY Side Note 1. Prominent NGOs include • Save the Children (provides support for the children afflicted by poverty and malnutrition).benjerry.cfm for more detail. and promotion of social equity). See http://www.com/our company/our mission/index.7. social justice. social justice.7. Other companies. health. and emergency relief in the event of humanitarian disasters). Farmers and urban entrepreneurs alike are subject to the rampant demands of petty officials.4 (Corruption) Though things are improving. and economic issues such as poverty. . “. In the words of a Beijing correspondent for “The Economist” magazine. political. ..2. 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. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U. education. • Oxfam (a confederation of charitable organizations that support the alleviation of poverty. Definition 1. and the environment.

A 10 indicates “squeaky clean” while a 0 represents highly 9 Hodgetts et al. executives may actually feel that it is the right thing to do. but does not outlaw payments to political party leaders. note two executives for Lockheed Martin were actually fined a substantial amount of money ($20.7. note that while U. as executives of publicly traded companies are ultimately responsible to their shareholders. as it gives the U. MNCs do not appear to have been significantly impacted. many feel that it has had a net benefit. China ranked 78 out of 158. • To prevent a boycott or other consumer defections. firms a reason to refuse to pay bribes. Both political groups and businesses are influenced by NGOs.1. Side Note 1. CORPORATE SOCIAL RESPONSIBILITY 19 • World Wildlife Fund (WWF) (promotes environmental conservation and protection for endangered species).7.9 U.1 Corruption and the FCPA Revisited Hodgetts et al. • Conservation International (promotes environmental conservation). A treaty was recently signed by 29 OECD (Organization of Economic Cooperation and Development) nations also outlaws bribery.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. For example.S. Side Note 1.7. Executives are people.2. • And.7. In fact. In 2005. and • Rainforest Action Network (RAN). 1.S.3 (Perceptions of Corruption) Transparency International ranks perceptions of corruption in 159 countries. too. – Even socially responsible executives would consider the “bottom line” when making decisions. 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.000 respectively) and one was sent to jail for bribing a member of the Egyptian parliament. last but note least.000 and $125. firms are constrained by the FCPA with regards to bribery and other corrupt practices. . with a score of 3.

Moreover. more Chinese will own stock in companies. It cannot be considered to be based on a scientific survey. WorldCom. The government recognizes that it is an issue and is taking action. BUSINESS ETHICS AND SOCIAL RESPONSIBILITY corrupt. These shareholders and their representatives will demand greater financial transparency and more disciplined corporate governance to mitigate risk. Side Note 1.5 (Table 3-1: Principles of the Global Compact) The U. with scandals such as Enron. specify standards and codes of conduct in domestic and global operations.S. July 1. Support and respect the protection of international human rights. better than the U.2 Response to Social Obligations MNCs are under increasing pressure to contribute positively to communities. 2. with a score of 8. Global Compact.2 respectively. With more disciplined corporate governance. Singapore is number 5 with a score of 9.0 is considered to be the borderline at which countries are considered to have a problem. societies. Tyco. Scandinavian countries are at the top of the list.7. . note that the Transparency International Corruption Perceptions Index is just that: An index of experts’ perceptions. Global Compact specifies 10 principles which MNCs should abide by: 1. Important: Although it is widely cited. Hong Kong is number 15. malfeasance and diversion of corporate funds becomes increasingly difficult.4 (Some Opinions) Personally.6 and 8. 4.20 CHAPTER 1.infoplease.7.N. companies will require more disciplined enforcement of property rights and bureaucratic governance to mitigate business risks. such as the U. and Germany at 7. and not based on hard data. and Parmalat resulting in investors losing billions of dollars. With greater financial transparency.html.com/ipa/A0781359. slightly better than Sweden. The government is actively addressing the issue of corruption. 1.4.10 Corruption is certainly not endemic to Asia. As more state-owned businesses become privatized and the size of the middle class increases.7. 2006.3. and the environment. but most important first step is to recognize that there is a problem. Commitments that many MNCs have signed on to. 5. the United States and Europe have recently been rocked by corporate corruption. 10 http://www. 3. It is a difficult problem to solve. Side Note 1. I think corruption will diminish as China economically develops for several reasons: 1.N.

and 10.1. CORPORATE SOCIAL RESPONSIBILITY 2. 4. . A precautionary approach to environmental challenges. Undertake initiatives to promote greater environmental responsibility. 21 3. Business should work against all forms of corruption. 5. Elimination of all forms of forced and compulsory labor. 7. including extortion and bribery.7. Elimination of discrimination with respect to employment and occupation. the right for unions to exist). Ensure that MNCs are not complicit in human rights abuses. Freedom of association and recognition of the right of collective bargaining (i. 8.. Elimination of child labor. Encourage development and dissemination of environmentally friendly technologies.e. 9. 6.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY .22 CHAPTER 1.

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

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

p.” • Every organization with more than a few employees has an organization chart. WHAT OPERATIONS MANAGERS DO 25 4. Staffing. OM is one of the most costly aspects of an organization. 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. Side Note 2. Controlling.2. Planning. 7].2. as the org chart determines executives’ authority and. business community as “org charts. 1. known commonly in the U. pp. We will focus on improving OM functions as a key to increasing profitability and enhancing service to society.1. and 4. quality. place in the heirarchy.1 (Ten Decision Categories) Review Heizer’s 10 decision categories [1.2 (Organization Charts) Review Heizer’s 3 sample organization charts [1. p. human resources and job design.2 What Operations Managers Do Operations managers focus on the four functions of the management process: 1. 6–7]. OM decisions have been divided into ten categories by Heizer [1.S. inventory. 5]. 2. supply-chain management. To accomplish these functions. 3. layout design.2. more generally. and maintenance.2.1 (Operations Decisions) The strategic decisions of OM (Operations Management) are product design. 2. location selection. Everything we study in this course will relate to improving our ability to make one of the ten types of management decisions. Definition 2. process design. • They are often sources of conflict among management. particularly when job titles are not clear. scheduling. operations managers make decisions. . Side Note 2. Organizing.

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

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

the services sector is by far the largest employer. p. economic output. • Trade. • In some service industries.3 The Service Sector As economies modernize and production is sufficient to guarantee a basic level of food. shelter. 11]. However. services account for over 70% of U.2..S.S. major contributions have come from the field of information sciences. The U. services become increasingly important.S. p. such as the legal profession or computer services in the financial industry. Definition 2.5 [1. Today. • In most western economies.. • Insurance. such as retail. 2. 9] • Repair and maintenance. and other essentials for its citizens. Side Note 2. for others professional occupations. Bureau of Labor Statistics defines services to include [1. average wages are below average2 in the U.28 CHAPTER 2.3. • Transportation.3 (Information Sciences) The systematic processing of data to yield information.3. Manufacturing was dominant until about 1950 or so.S. In the U. 2 The average national private industry wage.1 (Services) Those economic activities that typically produce an intangible product. OPERATIONS AND PRODUCTIVITY – Establishing legitimate incentives for work to be accomplished. • Government. the economy transitioned from agriculture to manufacturing around 1900. . • Recently. the wages are considerably above average. • Food and lodging.1 (Development of the Service Economy) Present Heizer figure 1. Definition 2. • Walter Shewhart (1924) provided the foundations for the use of statisics and sampling in quality control.

you enjoy both the food that you purchase and the service provided by the waiter or waitress who takes care of you. • Services have a high consumer interaction.3. • Services are often produced and consumed simultaneously. See definition 2. used in your treatment. • Services are typically intangible.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. This is important insofar as there is no inventory. Legal advice is rarely identical for two clients. when going to a restaurant. • Real estate. • Legal.3. • Other professional occupations. Consumers interact with those providing the service.2 (Pure Service) A service that does not include a tangible product. such as pharmaceuticals or medical supplies. 29 Side Note 2.2. .3. Note that many goods include services and many services include goods. • Services are more often unique. • Services are often dispersed. • Education. a support contract in case you have problems or training to familiarize you with the features of the computer. • Services have inconsistent product definition. When buying a computer. • Medical. THE SERVICE SECTOR • Financial.3 That is.3. 3 Services that do not include a good as a component are called pure services. the purchase price may include installation services.2. Customers seek services through local intermediaries. Hospital care includes both health services and goods. • Entertainment. Definition 2. Therefore it is difficult to automate. • Services are often knowledge-based.

5. operations managers are increasingly responsible for innovations that move ideas. Globalization has been having a dramatic impact on operations management and in the future.5 The Productivity Challenge One of the operation manager’s primary challenges is improving productivity. wherever and whenever needed.2. or recyclable products or to minimize packaging and other wasteful production steps. operations managers are responding by moving decision making to the individual employee. 13] for the future of operations management include • Global focus – Due to decreases in transportation and communications costs. Trends that Heizer and Render identify [1. 2. or management). p. • 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. parts. 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. • Mass customization – With increases in technical capabilities and customerlevel information management.4 Trends in Operations Management We talked a little about the history of operations management in sidenote 2.30 CHAPTER 2. and finished goods rapidly. it will continue to strongly impact the field. reusable.2. • Empowered employees – With the rise of services and knowledge products. Definition 2. • Environmentally sensitive production – Companies and their customers are becoming increasingly concerned with creating environmentally friendly products. . capital.1 (Productivity) The ratio of outputs (goods and services) divided by one or more inputs (such as labor. brought about in part by the internet. Operations managers are being challenged to produce biodegradable. OPERATIONS AND PRODUCTIVITY 2. the next step in product development involves customizing products according to the customer’s preferences. • Just-in-time performance – Inventory is costly and operations management practices are using just-in-time methods to reduce inventory costs. • 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.

2. Definition 2. Side Note 2.3. Definition 2. Also known as total factor productivity.1 (Measuring Productivity and Personal Incentives) While measuring enhanced productivity is important for the company.25 titles per labor-hour = 0. In order to improve productivity.4375 titles per labor-hour = 0.5. Collins Title Company has a staff of 4 working 8 hours per day at $640/day and overhead of $400/day.5.5. but overhead is no $800/day. the operations manager should also realize that increases in productivity are an important metric used to determine his or her advancement within the company.5.2 (Example: Calculating Productivity) Present Heizer’s example 2 [1. Labor productivity with the old system: Labor productivity with the new system: 8 titles per day 32 labor-hours = 0.4 (Total Factor Productivity) See definition 2. Managers who can document increases in productivity and their role in creating those increases also improve their own prospects for advancement within their organization. 15].5. . Consider today’s computers versus those from the 1970s.3 (Mulitfactor Productivity) Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs). Potential problems include • Quality – Quality may change while the quantity of inputs and outputs is constant.5.2 (Single-Factor Productivity) Indicates the ratio of one resource (input) to the goods and services produced (outputs).5. p. an operations manager should be able to measure productivity to accurately evaluate the success or failure of measures taken to improve productivity.0077 titles per labor-hour = 0. The company closes on 8 titles a day but purchased a system that will allow processing of 14 titles a day. THE PRODUCTIVITY CHALLENGE 31 Definition 2. Side Note 2.97 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.

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

The primary variables for improving labor productivity include 1.5.8 [1. maintaining and enhancing the skills of labor.5. Education of the labor force is a primary concern of developed nations given the speed with which technology and knowledge improve..3 (The State of Education in the U. Cannot Correctly Answer Questions of This Type. In developed nations.) Present Heizer figure 1. 2. Heizer notes that 38% of American job applicants tests for basic skills were deficient in reading. Social overhead that makes labor available. draw the rectangle on the blackboard. and 4. 16]. writing.4 • 4 square meters • 6 square meters • 10 square meters • 20 square meters • 24 square meters 2. Which of the following is true about 84% of 100? 4 When presenting this question.S. such as transportation and sanitation. What is the area of a 4 × 6 meter rectangle. . and • Healthier workers as well as • A shorter work week. Diet of the labor force. Side Note 2. and math. and 33 3.S.2. there is considerable concern over teaching of basic skills such as mathematics to grade school children. THE PRODUCTIVITY CHALLENGE • Better-nourished. “About Half of 17-Year-Olds in the U. About half of 17-year-olds cannot answer the following multiple-choice questions: 1. If 9y + 3 = 6y + 15 then y = • 1 • 2 • 4 • 6 3. Basic education appropraite for an effective labor force.” In the U.S. p.

management is considered as a separate input. 2.S. Developed economies (also known as post-industrial economies) require trained. According to Heizer [1. has increased at about an average of 1.5.3 Management Management is used to ensure that labor and capital are used effectively and efficiently. Definition 2. Side Note 2.S. education.4 Productivity and the Service Sector Historically.34 CHAPTER 2.5.4 (Management as an Input) Because this is a course in business management. and knowledgeable employees and operations managers are responsible for ensuring that technology.. Note that in classic economic analysis and other areas of business. in the U. productivity in the service sector has not increased as rapidly as with the production of goods. as well as capital. 2. U.2 Capital Capital investment in the U.5% after allowances for depreciation. however. 2. and because the author of the textbook is writing about operations management. graduate programs and the students they produce remain the best in the world. educated. management is not always identified separately from labor as an input. p. and the cost of capital depends on interest rates.6 (Knowledge Society) A society in which much of the labor force has migrated from manual work to work based on knowledge. 17]. OPERATIONS AND PRODUCTIVITY • It is greater than 100 • It is less than 100 • It is equal to 100 At the university level. Difficulties arise because service-sector work is . are utilized effectively.5.S. and knowledge. management accounts for over half the annual increase in productivity through the application of technology and utilization of knowledge.5. Note that there is a trade-off between capital and labor in most industries.5.

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

OPERATIONS AND PRODUCTIVITY .36 CHAPTER 2.

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

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

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.1. contributing member of our community and offering the Hard Rock family a fun. natural ingredients and promoting business practices that respect the Earth and the Environment. healthy.3. We will be helpful. such as Whole Foods. 3.1. • Social Mission – To operate the company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally. 2. • Economic Mission – To operate the Company on a sustainable financial basis of profitable growth. Merck.. We will strive to have a completely satisfied customer at the end of each transaction. nationally & internationally. increasing value for our stakeholders & expanding opportunities for development and career growth for our employees. Other companies. The Hard Rock Caf´. and professional to each other and the public. DEVELOPING MISSIONS AND STRATEGIES systems. give customers the opportunity to donate to charity every time they go to buy groceries (and many do) . courteous. Ben & Jerry’s ice cream company is considered a model of a socially responsible company in the U.S. A complete record of each shipment and delivery will be presented with our request for payment. a grocery chain. Ben & Jerrys is founded on and dedicated to a sustainable corporate concept of linked prosperity.2 (Ben & Jerry’s Mission Statement) Review Ben & Jerry’s mission statement. 39 Side Note 3. distribute & sell the finest quality all natural ice cream & euphoric concoctions with a continued commitment to incorporating wholesome. We are committed to being an important. 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. and nurturing work environment while ensuring our long-term success.

” Note that mission statements are used not only at the company-wide level. 2.1.3 (Sample Mission Statements) Present Heizer’s figure 2.com/our company/our mission/index. See http://www. Definition 3. more responsive products or services.2 Strategy Strategy involves concrete steps by which a company can achieve its mission.1.3 (Competitive Advantage) In operations management. Companies compete by trying to achieve a competitive advantage in one or more of at least three important dimensions: 1.3: “Sample Missions for a Company.2 (Strategy) How an organization expects to achieve its missions and goals. • Availability of complementary products. • Training. Cost leadership – Providing cheaper products. . be it • Product features. • The “look and feel” of the product. • Interoperability with other products. Responsiveness – By providing timelier. Side Note 3. Differentiation can arise from anything that the customer may value about a product or a services. and Major Departments in an Operations Function.benjerry. Definition 3.40CHAPTER 3. Differentiation – They make their product better. 3. but can be used at the department level and even at the project level.cfm for more detail. 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. the Operations Function. the creation of a unique advantage over competitors.1.1. Differentiation Producers can try to compete based on providing a product or service that is unique in some way.

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.

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

p. Recall the “org charts” in sidenote 2.3.3. GLOBAL OPERATIONS STRATEGY OPTIONS 45 Side Note 3. 3.4 Global Operations Strategy Options Scholars of operations management have identified four strategies for operations management in an international setting. 5 Management 6 Human Information Systems Resources.3 (Activity Mapping of Southwest Airlines’ Competitive Advantage) Present Heizer figure [1. Once CSFs are determined. MIS.2 (Identifying Critical Success Factors) It is a good idea to use the 10 decision categories in sidenote 2. and supporting activities. OM activities are most productive when they are integrated with other activities such as marketing. • Red arrows – critical success factors • Blue arrows – support activities 3.1 as a checklist to determine critical success factors.2. finance.5 and HR. Side Note 3.3. . Definition 3.3 (Activity Map) In operations management.3 Integrate OM With Other Activities In order to achieve its strategy.2 as examples of how firms organize their activities.1. CSFs. Southwest Airlines has a competitive advantage in providing low-cost airfares. an activity map can be used to link an organization’s competitive advantage to the CSFs.6 3.2 Build and Staff the Organization Building a competent staff is one of the most important functions of an operations manager and is critically important to the success of his or her strategy.4. a graphical link of competitive advantage.3.3. The figure provides an activity mapping of the activities that relate to SWA’s critical success factors. 39].3.

4. In the semiconductor industry.4. but a good strategy for cost reduction when products do not need to be adapted locally. Definition 3. See definition 3.4.4. • Texas Instruments is an example of a country with a global strategy.4. Global strategy – Not characterized by local responsiveness. franchises. Typically characterized by subsidiaries. Also one of the least profitable due to transport costs and little local responsiveness. as exports require little change in operations and licenses often leave risk with the licensee. and hamburgers without beef in India. Its menu reflects the country in which it operates.4.4.4. Only 10% of its work force is Swiss. See definition 3. International strategy – Often the easiest strategy. Definition 3. Multidomestic strategy – Exporting management talent and processes but not necessarily the product. or joint ventures with substantial independence.46CHAPTER 3. with beer on the menu in Germany. owning or controlling facilities in more than one country. See definition 3. 95% of its assets and 98% of its sales are made outside Switzerland.4. a strategy in which operating decisions are centralized and headquarters coordinates the standardization and learning between facilities. • Nestl´ is an example of a country with a transnational strategy. • McDonald’s is an example of a country with a multidomestic strategy. 42] Definition 3.4 (Multidomestic Strategy) In operations management. wine in France.5 (Global Strategy) In operations management. 2. Usually does not confer a cost advantage. 3. Definition 3. .5. a strategy that uses exports and licenses to penetrate the global arena. See definition 3.2 (Multinational Corporation (MNC)) A firm that has extensive involvement in international business. a strategy in which operating decisions are decentralized to each country to enhance local responsiveness.6. 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.3. p. products do not need to be localized.4. [1. OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT 1.4. Definition 3. Although e it is legally Swiss.1 (International Business) A firm that engages in cross-border transactions.3 (International Strategy) In operations management.

6]. including • Avon • Chevron • Citicorp • Coca-cola • Colgate Palmolive • Du Pont • Exxon-Mobil • Eastman Kodak • Gillette • Hewlett-Packard • McDonald’s • Motorola • Ralston-Purina • Texaco • 3M Company • Xerox . p.6 (Transnational Strategy) In operations management.4. Side Note 3.S. a strategy that combines the benefits of global scale efficiencies with the benefits of local responsiveness.. GLOBAL OPERATIONS STRATEGY OPTIONS 47 Definition 3.1 (Hodgetts Figure 1-1) Present Hodgetts figure 1-1 [5. Note that many companies that are well-known American brands are now making more money overseas than they do in the U.4.4.3.

OPERATIONS STRATEGY IN A GLOBAL ENVIRONMENT .48CHAPTER 3.

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.1 [1. Side Note 4. quality. and supplies are tasked to specific activities and activities are related to each other. money. regularly goes over schedule with flagship development projects such as updates to Microsoft Windows. Controlling – Monitoring of resources. and budgets. and Controlling) Present Heizer figure 3. Plans are also revised to meet changes in time and cost demands.0. Project management involves three phases: 1. Scheduling. p. and team organization. Side Note 4. 49]. Even Microsoft. the largest software company in the world.3 (Project Planning. 3. 46–47]. Scheduling – People. costs.0. Planning – Goal setting. 49 . 2.0. defining the project.Chapter 4 Project Management Side Note 4.4 (Personal Reflections on Software Project Management) My experience in project management is primarily in the field of software project management.2 (Company Profile: Bechtel) Discuss Heizer’s company profile of Bechtel [1. pp. The profile highlights the importance of project management in achieving competitive advantage. Project management is becoming more important as technology and globalization are making projects more complex and collapsing product life cycles.

1 Project Planning While many projects are run within an existing organization. 4. Side Note 4. 4. you are doing your job well if noone notices the project management. 69]. Definition 4. Moreover. PROJECT MANAGEMENT However. and/or 5. often times. The project cuts across organizational lines. p. If you become a project manager on projects of significant complexity. it is also an area in which there will continue to be high demand for qualified people. Project organizations work best when [1.” [1.1 (Project Organization) An organization formed to ensure that programs (projects) receive the proper management and attention. 2. 3. things you thought were certain turn out not to be. The responsibilities of project managers are to make sure that . In a sense. it is very obvious and can be very costly.1 The Project Manager As alluded to in sidenote 4. People will not come through with what they promised. See also Heizer sidenote “Project Management and Software Development. The project is temporary but critical to the organization. Work can be defined with a specific goal and deadline.0. you will be confronted with a daunting task.5 (Personal Advice on Project Management) Project management is a tricky profession. The work contains complex interrelated tasks requiring specialized skills. The job is unique or somewhat unfamiliar to the existing organization. a temporary project organization is formed to address a specific project.1. if things go wrong. Your job is to make things go smoothly and according to plan. 4.5. However.0. and you will be forced to improvise.50 CHAPTER 4.1. 48] 1. project managers are highly visible in a firm and have significant responsibilities. you should always expect the unexpected. p. You may be managing resources far in excess of your individual salary.

dividing a project into more and more detailed components. Approve graphic design for user account input web page 4. a web page takes about a day to build for an experienced team. The project is on or under budget. Complete graphic design for user account input web page 2.1. For example. Review graphic design for user account input web page 3.1. • Build the user account input web page is a much better task division than 1.4.1. 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). 51 4. in a software engineering project. All projects come in on time. In a project that includes allowing a user to enter personal information on a web page. Approve software architecture for user account input web page functionality .1. When dividing a project into tasks. The project meets its quality goals. PROJECT PLANNING 1. Side Note 4. People receive motivation and information necessary to do their jobs. a task that should only take a day or so. and 4. Definition 4. you have divided the tasks too finely.1 (Avoid Creating a WBS That is Too Detailed) A common error that inexperienced project managers make is to divide the project into too many tasks. 3.2 (Work Breakdown Structure (WBS)) In operations management. Complete software architecture for user account input web page functionality 5. 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. Review software architecture for user account input web page functionality 6.

3 [1. They will be useful for project scheduling. PROJECT MANAGEMENT 7. 50] concerning an example based on a simple work breakdown structure (WBS) for Windows XP. the work breakdown structure is not something you go to your office to do in isolation. of course. Activities (also known as “work packages”) to be completed Side Note 4. Scheduling serves to 1. Major tasks in the project 3. It arises from meeting and discussing the activities with engineering and technical staff as well as senior management. 4.2. Write software for user account input web page functionality 8. fill hundreds if not thousands of pages.2 Project Scheduling After dividing activities into a work breakdown structure (WBS).1.52 CHAPTER 4. Encourage realistic time and cost estimates for each activity .3 (Reality Check: WBS) In reality. it is time to assign people and materials and estimate the time and perhaps the cost of various activities. Subtasks in major tasks 4. Write software for user account input confirmation page functionality 9. Side Note 4. The actual WBS for Windows XP would.1. At the time you are creating the work breakdown structure. p.2 (Work Breakdown Structure) Present Heizer figure 3. which we will discuss next in section 4. Show the relationship between each activity to others and to the whole project 2. Project 2. you should also take note of time and cost estimates given by your technical staff. 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. Identify precedence relationships among activities 3.

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

Cost breakdowns for each task. 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. 7.1 (Program Evaluation and Review Technique (PERT)) A project management technique that employs three time estimates for each activity. is the money spent equal to. 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. Time analysis reports. is the project on schedule. Work status reports. were developed in the 1950s for project control. Cost distribution tables.54 CHAPTER 4. costs. Raw material and expenditure forecasts. behind schedule. 5. Control programs typically produce reports detailing 1. less than.3 Project Controlling Project control involves monitoring resources.3. 3. and budgets of projects.3. Definition 4. . and 8. Total program labor curves. quality. 4. 6. what is the best way to accomplish this goal at the least cost? 4. 4. PERT and CPM.1 PERT and CPM Two methods. Functional cost and hour summaries. 2. or ahead of schedule? • On any given date. Variance reports. PROJECT MANAGEMENT • What are the critical activities or tasks in the project – that is.

schedule.3.3. Compute the longest time path. Use the network to help plan.3 (Critical Path) The computed longest time path through a network. AON associates the activity with the node whereas AOA associates the activity with the arrow.3. Definition 4. Define the project and prepare the WBS. See also definition 4.1 (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. it will do for you automatically much of what we will go through manually in this class. Also. Draw the network connecting all of the activities. monitor. As the names describe.3. Develop the relationships among activities. and ontrol the project.3.3.2 (Example: AON and AOA) Present Heizer’s figure 3. Activity on Node (AON) and 2. Side Note 4. or the critical path. p. PROJECT CONTROLLING 55 Definition 4.3. . 6.4.2 Network Diagrams There are two approaches to visualizing activity networks: 1. in my experience.2. See also definition 4.3.3. through the network. Activity on Arrow (AOA).2 (Critical Path Method (CPM)) A project management technique that uses only one time factor per activity. Moreover.5 [1. 5. 4. Assign time and/or cost estimates to each activity. 4. They both follow six steps: 1. Side Note 4. 53]. 2. I have never needed to use PERT charts and have only produced them when I wanted something to show to upper management. 3. Gantt charts are the “go to” visualization method for even very complex projects. So there is no practical need if you are using modern software to take the time to separately create and update Gantt and PERT charts. Personally.

2. its LF is the minimum of all LS values of all activities that immediately follow it. that is. 54–55].3. ES = max{EF of all immediate predecessors}.56 CHAPTER 4. its ES is the maximum of all EF values of its predecessors. . Forward Pass – Uses the earlierst start time (ES) rule and earliest finish (EF) rule to determine the earliest times that activities can be completed.3.4. See also definition 4. that is. pp.4 Determining the Project Schedule Once we have identified all of our activities. LF = min{LS of all immediate following activities}. • Earliest Finish Rule: – The earliest finish time of an activity is the sum of its earliest start time and its activity time. analysis used to determine the project schedule. Follow with example 3 and figure 3. • Table 3. their dependencies. – If an activity has multiple immediate predecessors. PROJECT MANAGEMENT Side Note 4. • Latest Start Time Rule: – The latest start time of an activity is the difference of its latest finish time and its activity time. • Earliest Start Time Rule: – If an activity has only a single intermediate predecessor or its ES equals the EF of the predecessor. We do this with a critical path analysis with involves a 2-step procedure. 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.1 gives sufficient information to describe the network. p.1 (Critical Path Analysis) In project management. that is.8 [1. 4. 1. 56]. In other words.6–3. EF = ES + Activity time. its LF equals its LS of the activity that immediately follows it. Definition 4. – If an activity is an immediate predecessor to more than one activity. we must use time estimates of each activity to determine the overall schedule for the project.3 (Building Activity-on-Node and Activity-on-Arrow Diagrams) Present Heizer’s examples 1–2 with figures 3.9 [1.3. LS = LF − Activity time. • Latest Finish Time Rule: – If an activity is an immediate predecessor for just a single activity.

p. Definition 4. G. Side Note 4.4. and • Includes only critical activities (see sidenote 4. the free time for an activity. • Terminates at the last.5. activity F in sidenote 4.1 (Slack Time) In project scheduling.5 Slack Time and Identifying the Critical Path After we have calculated start and finish times we know the slack time for each activity.5.10 [1.2 (Forward Pass) In project management scheduling. they share total slack. Slack time is just Slack = LS − ES or Slack = LF − EF . p.1. the time associated with a single activity. the time devoted to one of these activities must also be reduced.4.1. Also notable is that if the total time of the project needs to be reduced. 4.” Then complete Heizer example 7 figure 3.5.3.3 [1. “Notation Used in Nodes for Forward and Backward Pass. Note also that if we delay each activity by the amount of slack that activity has. Note that activities A. we may delay the project as a whole.3 and Heizer figure 3. it is said to have free slack. or the amount of time an activity can be delayed without delaying the entire project.4. The critical path is one that • Begins at the first activity in the project.4.5. C. E.1 (Example of Determining the Project Schedule) Present an example of determining a project schedule based on those described in sidenote 4. Definition 4. p. 60]. 2 For example. and H have no slack time and cannot be delayed without delaying the entire project. 61] based on table 3. . SLACK TIME AND IDENTIFYING THE CRITICAL PATH 57 Definition 4.4. in the example in sidenote 4.2 (Total Slack) In project scheduling. we cannot complete the project in 15 weeks.1). if we delay activities B and D by one week each. the step that identifies all the earliest times that activities can be completed. the time shared among more than one activity.13 [1.1 When several noncritical activities appear successively in a path. 57].4.3 (Free Slack) In project scheduling. If an activity2 does not impact the slack time of any other activity. 1 For example. These are called critical activities. Definition 4.

Most likely time – The most realistic estimate of the time required to complete an activity. The beta distribution is used as a prior distribution for binomial proportions in . which are labeled according to one of two notational conventions. Pessimistic time – The longest amount of time an activity will take 1% of the time 3. the time required to complete an activity is often uncertain due to supply problems.6.6.2 (Pessimistic Time) In project scheduling.6.2 and 4. PROJECT MANAGEMENT 4.3. technical considerations that were unknown at the time the project schedule was drawn up.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.4 (Beta Distribution) A general type of statistical distribution which is related to the gamma distribution. The usual definition calls these alpha and beta. Definition 4. Side Note 4. However. In PERT. Definition 4. Definition 4.6. Definition 4.2. See also definitions 4.6 Variability in Activity Times We have so far assumed that the activities will take a fixed length of time.1 and 4. we do not.58 CHAPTER 4. unexpected complexities. in most cases.6. three time estimates are used: 1.. Effectively.6.6. etc. the project manager pulls the number “out of the air” based on their experience managing related activities.3.1 (Optimistic Time) In project scheduling. the “worst” activity completion time that could be obtained in a PERT network.1 and 4.6. Beta distributions have two free parameters.6. the most probable activity completion time that could be obtained in a PERT network. and the other uses β = β − 1 and α = α − 1 .6.6. See also definitions 4. In reality. Optimistic time – The shortest amount of time an activity will take 1% of the time 2. See also definitions 4.3 (Most Likely Time) In project scheduling. the “best” activity completion time that could be obtained in a PERT network.

β) Γ(α)Γ(β) P (x) = (4.4.2 (Calculating Expected Activity Time and Variance) Present Heizer example 8 [1.6.6.4.com/BetaFunction.78 6 6 36 7 4 weeks. and pessimistic times of 1. and pessimistic times of 1. 2007.6.html http://mathworld. 63] for activity F based on optimistic. February 21. 4. 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. and . 62]. and 7.78 weeks. 2.html.6. Based on a beta distribution4 the expected activity time is t = (a + 4m + b)/6.com/BetaDistribution.2) The beta distribution is commonly used in project scheduling to estimate activity time distributions in a PERT network [1.00 week. The expected activity time for activity F is 3 weeks5 and the variance is 1.1 Probability of Project Completion If we assume that 1.β) with α = 1 and β ranging from 0.wolfram.25 to 3.00. q) and Γ(p) are given by (p − 1)!(q − 1)! Γ(p)Γ(q) = Γ(p + q) (p + q − 1)! B(p. Total project completion times follow a normal probability distribution and 2.1) where B(p. VARIABILITY IN ACTIVITY TIMES 59 Bayesian analysis. The variance of the activity time is Variance = [(b − a)/6]2 .1].3 The domain is [0. q) = (4. most likely. 8 1. The above plots are for various values of (α. 4. p. Activity times are statistically independent 3 Source: http://mathworld. and 9 weeks.6 Have someone in the class compute the expected activity time7 and variance8 for activity E based on optimistic. Side Note 4. 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.wolfram. most likely. 4 See definition 4. p.

1.5 (Variance) For a single variate X having a distribution P (x) with known population mean µ.76 weeks approximately 16% of the time. Side Note 4.76 weeks implies that the project will exceed the expected completion time by more than 1. p.16.6. Note that the standard deviation of 1. 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. See also 4. . 64]. p. “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.” Review Heizer example 10 [1.10 Determining Project Completion Time for a Given Confidence Interval A common question is.60 CHAPTER 4.6. 9 For 10 See more information.6.com/StandardDeviation. definition 4. PROJECT MANAGEMENT then the total project completion time will simply the the sum of variances on the critical path 2 σp = Project variance = (variances of activities on critical path) (4. two standard deviations approximately 95% of the time.5.6.html.6. and within 3 standard deviations approximately 99. 65] and figure 3.9 An observation will fall within 1 standard deviation of the mean approximately 68% of the time.6. A2– A3] “Normal Curve Areas.6.3) Definition 4. see http://mathworld.6 (Standard Deviation) The standard deviation is the square root of the variance.4 (Using the Normal Table) Pass out Heizer Appendix I [1.7% of the time.6. See definition 4.6. Side Note 4.wolfram.6. Definition 4.3 (Example: Project Variance) Review Heizer example 9 [1. pp. commonly also N written σ 2 . the population variance var(X).

COST-TIME TRADE-OFFS AND PROJECT CRASHING Variability Off the Critical Path 61 Note that while we have focused on the critical path. and • The total cost of crashing is as small as possible. Crash cost per period = (Crash cost − Normal cost) (Normal time − Crash time) (4. it may result in the project being delayed.4) 11 Since crashing a project often involves adding additional resources to activities.2 (Crash Time) In project management.7.7. Project crashing is the name given to the process of rushing a project to completion. Step 1 – Compute the crash cost per week. See definition 4. the crash cost is typically higher than the normal cost.7. we need to ensure • The amount by which an activity is crashed is.1.7. .1 (Crashing) In project management.7.7. Assuming linear costs. See definition 4.1. • The shortened durations will actually enable us to finish the project on time. permissible and realistic. shortening activity time in a network to reduce time on the critical path so total completion time is reduced. you will doubtless experience one or both of these eventualities many times in your career. in fact.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. Definition 4. Crashing a project involves a four step process: 1. Definition 4. if certain activities off the critical path take the pessimistic time estimate or more to complete. 4. and if you become a project manager. crash time is the shortest duration of an activity. Since activity completion times are typically shortened by adding resources. crash cost is the cost required to complete an activity in the shortest time possible.4. we want to do so in the least cost mannger possible. When crashing a project.11 Definition 4.3 (Crash Cost) In project management.

pp.7. Note that one activity may be on several critical paths. 4.5 and figures 3. PROJECT MANAGEMENT 2.7. 4. go to step 2.8 A Critique of PERT and CPM There are both advantages and disadvantes to PERT. My personal advice is to try to resist pressure to compress your time estimates and let upper management know when their expectations are unrealistic. 67–69] including table 3. If you accept the challenge and try to rush the project to please upper management. Step 4 – Update all activity times. As a project manager. • Advantages – Especially useful for large projects . Then crash each activity by one period. 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.62 CHAPTER 4. Side Note 4. If the due date has been reached.19. Side Note 4. 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. Step 3 – If there is only one critical path.18–3. At times this may be politically infeasible. stop.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. If not. you should be very wary of such pressure. If you find yourself needing to rush a project. If there is more than one critical path. select the activity on this critical path that • Can still be crashed and • Has the smallest crash cost per period. Crash this activity by one period. they will probably blame you if the project is not completed on time despite the fact that they pressured you to change your estimates. the advice given in this section should be helpful. 3.2 (Example: Crashing a Project) Present Heizer example 12 [1. Step 2 – Find the critical path(s) in the project network.

Information on dotProject can be found at http://www. . It is perhaps the most widely known and featureful project management software available. including open source software that is free. pp.9.wikipedia.achievo. Note that most project management textbooks refer to MS Project as the software of choice for project management.org/wiki/List of project management software for a list of project management software or ask Dr. Information on Achievo can be found at http://www. Starkweather about his impression of various alternatives.1. 70–74] with figures demonstrating MS Project functionality. There are a variety of alternatives. Information on Planner can be found at http://live. they are often overkill for small.org.1–3. 4. You may also refer to http://en. 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.9 Using Microsoft Project for Managing Projects Present programs 3. it is relatively expensive and the features are so numerous and complex. Noncritical paths should be closely monitored as well.to mediumsized projects.7.7 [1.gnome. However.dotproject.net. 12 Recall sidenote 4. 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.org/Planner. independent.

64 CHAPTER 4. PROJECT MANAGEMENT .

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

66 – – – – Sales forecasting. See also definitions 5. and other economic indicators. Maturity. . • Technological forecasts. and 4. Generally deals with more comprehensive issues than short-range forecasts. Capital expenditures. Introduction.3 and 5.1. 2. These concern rates of technological progress.1. and Research and development. Decline. Product life cycles tend to follow four stages: 1.1. Useful for – – – – Planning for new products. In the first two stages. 3. housing starts. Definition 5. 5. See also definitions 5.1.1. long-term forecasts concerned with the rates of technological progress.4. Cash budgeting. longer forecasts are needed. CHAPTER 5.3 (Technological Forecasts) In operations management.to long-range forecasts.4.2 and 5. Growth. planning indicators valuable in helping organizations prepare medium.1 Types of Forecasts Organizations typically use • Economic forecasts. and Analyzing various operating plans. money supply. and • Demand forecasts.1. Production planning and budgeting.2 (Economic Forecasts) In operations management. Definition 5. which impacts purchases of new plant and equipment as well as development of new products.1. These may include inflation rates. Facility locations or expansion. FORECASTING • Long-range forecasts – Generally more than 3 years.

6. 4. A SEVEN STEP FORECASTING SYSTEM 67 Definition 5.1. Determine the use of the forecast. Supply-chain management – Accurate forecasts are essential for • Good supplier relations and • Ensuring price advantages for materials and parts. and scheduling decisions and serve as inputs to financial. Determine the time horizon of the forecast. 2. 5.2 The Strategic Importance of Forecasting We will examine the impact of product forecasting in 1. and • Loss of market share.2.5. • Training. and personnel planning.2 A Seven Step Forecasting System Heizer recommends the following seven steps for forecasting: 1.1. 5. 3. Validate and implement the results. capacity. 3. See also definitions 5. . 5. Select the items to be forecasted. marketing.1. Capacity – Underestimating demand can result in • Undependable delivery. Human resources – Anticipated demand is needed to estimate the need for • Hiring. Select the forecasting models. Make the forecast.1. projections of a company’s sales for each time period in the planning horizon. 2.3. these drive a company’s production. Gather the data needed to make the forecast. 7. • Loss of customers. and • Layoffs.4 (Demand Forecasts) In operations management. Also called sales forecasts.2 and 5.

use something simpler. – You should be able to explain how and why you arrived at each and every number that you forecast. – On a number of occasions. based on a linear model. . 5. – If someone challenges your forecast and you do not have supporting logic or documentation. the most common errors I have seen with forecasting involve: • Trying to use regression analysis with too few observations. it is a bit of an art that mixes both. In practice. – If you do not truly understand the mathematics. • Using models that are more sophisticated than the user’s understanding.” • Qualitative Methods – Popular qualitative methods include – Jury of executive opinion ∗ Often this method is used in combination with qualitative models. FORECASTING Side Note 5.68 CHAPTER 5. 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. – In one case. • Lack of follow-up. • Lack of support for the forecasts. – Before you show your numbers to others. ask yourself if they make sense.1 (The Most Common Errors in Forecasting Methodology) In my experience.D. – Many people try to apply ordinary least squares (OLS) regression techniques. statisticians) embarrassed in front of a room full of people when presenting numerical results that don’t actually make sense based on some simple logic checks. Any quantitative approach should be complemented with a qualitative “reality check. • Lack of sanity checking. I have seen otherwise competent people (including Ph.3 Forecasting Approaches Forecasting can use a qualitative or quantitative approach. – If they do not match. you will be unable to defend your numbers.2. track the actual outcomes and compare them to the forecasts. – After making a forecast. to inherently nonlinear systems.

they may want you to think that they will be doing more business with you in the future to obtain price concessions today. – Consumer market survey ∗ You will often find that your customers will have incentives to inflate their estimates of demand. ∗ Moving averages · Simple. – Sales force composite ∗ You would be surprised how accurate your sales force can be.9. . useful method if we can assume that market demands will stay fairly steady over time. · There are three problems with moving averages 1. or other incentives to over or understate demand. the naive approach.3. · See definition 5.3. the more likely it is your results will be accurate. 3.8. · See definition 5. Moving averages require more past data to work with than. · Requires less past data than moving averages. political. for example. · Staff personnel. • Quantitative Methods – Popular quantitative methods include – Time-series models ∗ Naive approach · Simply assumes demand this period equals demand last period. ∗ Exponential smoothing · More sophisticated than the naive approach or moving averages. 2. FORECASTING APPROACHES – Delphi method 69 ∗ Participants in the Delphi method include · Decision makers. ∗ However. Sales people typically respond to incentives. ∗ The more independent your decision makers are from economic. say. · The simplest and easiest way to estimate demand. and if they perceive there is an incentive to exaggerate.3. Moving averages cannot pick out trends very well. and · Respondents. be sure that the sales force is clear that their incentive is to be as accurate as possible.5. they will do so. · Useful as a starting point or sanity check for more sophisticated methods. Increasing the size of n smoothes out fluctuations better but makes the method less sensitive to real changes in data.

FORECASTING · Referred to as exponential because errors in past prediction exponentially reduce in importance.6. Definition 5.3.3.3. See also definitions 5.5. personal experiences.70 CHAPTER 5.3.5 (Sales Force Composite) In operations management.3.6.3. and 5.1 Qualitative Forecasting Methods Definition 5. and 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. 5. See also definitions 5. 5.6 (Consumer Market Survey) In operations management.3.3. Definition 5.2.3. a forecasting technique using a group process that allows experts to make forecasts.3.3. emotions. 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. a forecasting technique that solicits input from customers or potential customers regarding future purchase plans.3.4 (Delphi Method) In operations management. 5.4.3.3.5.6.3.3. a forecasting technique based on salespersons estimates of expected sales. 5.2 (Qualititative Forecasts) Forecasts that incorporate such factors as the decision maker’s intuition. · See definition 5.3.3. and 5. Definition 5.5.3.3. See also definition 5. .4. 5.3.3. ∗ Trend projection – Associative models ∗ Linear regressions Definition 5.3 (Jury of Executive Opinion) In operations management.3. and value system.10. and 5. See also definitions 5. See also definitions 5. See also definition 5.1.3.4.

3. generally ranges from 0. exponential smoothing is given by Ft = Ft−1 + α(At−1 − Ft−1 ) where Ft Ft−1 α At−1 = new forecast = previous forecast = smoothing (or weighting) constant (0 ≤ α ≤ 1) = previous period’s actual demand (5.3. That is. Mathematically. a simple moving average is given by demand in previous n periods Moving average = (5.5.3.10. FORECASTING APPROACHES 71 5.3. 5.3. • Simple Moving Average – Mathematically. Definition 5.3. and are appropriate to use when the underlying average .7.9 (Moving Averages) A forecasting method that uses an average of the n most recent periods of data to forecast the next period.5. Definition 5.3. See also definitions 5.7 (Time Series) A forecasting technique that uses a series of past data points to make a forecast.9.3.2) See also definition 5.2 Quantitative Forecasting Methods Definition 5.3) The smoothing constant.1) n • Weighted Moving Average – Mathematically.8. Higher values give more weight to recent data.11. Ft = At−1 where Ft is the forecast demand for the current time period and At−1 is the actual demand last period. Moving averages can be either simple or weighted.7. Definition 5. 5.3.10 (Exponential Smoothing) A weighted moving-average forecasting technique in which data points are weighted by an exponential function.3.8 (Naive Approach) A forecasting technique that assumes demand in the next period is equal to demand in the most recent period. α. See also definition 5.3.05 to 0. and 5.3. a weighted moving average is given by Weighted moving average = (weight for period n)(demand in period n) weights (5.

3. Three popular measures are 1.12 (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. 5.14.3.3.72 CHAPTER 5. 5. and are appropriate to use when the underlying average is relatively stable. See also definition 5. Mean absolute deviation (MAD).12.3.8.13 (Mean Absolute Deviation (MAD)) A measure of the overall forecast error for a model. 1 See |actual − forecast| n (5. exponential smoothing is equivalent to naive forecasting. while lower values give more weight to past data.7. . Definition 5.4) definition 5.1 Forecasters often choose the smoothing constant that minimizes forecast error (see definition 5. 2. it is good practice to compare the estimated value with the actual value as actual values become available. 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 5.3.3.3. 3. Mean absolute percent error (MAPE). such as the mean absolute deviation (see definition 5.3.3. FORECASTING is likely to change.15.3 Measuring Forecast Error Once a forecast is made.13).0. and 5.3.3.13. Mean squared error (MSE).7.11 (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.3.12).3. When α = 1. See also definition 5. Definition 5. Definition 5.

10) The trend Tt is given by Tt = β(Forecast this period−Forecast last period)+(1−β)(Trend estimate last period) (5. 100 n i=1 (forecast errors)2 n (5.5.11) .12.10) can be modified to include a trend by using the formula Forecast including trend = exponentially smoothed forecast+exponentially smoothed trend (5. Mathematically. Ft = α(Actual demand last period)+(1−α)(Forecast last period+Trend estimate last period) (5.5) |actuali − forecasti |/actuali n (5. Mathematically.4 Adjusting for Trend There are a variety of ways to adjust forecasts for trends. Since we have already discussed exponential smoothing we may as well discuss how to make adjustments to the exponential smoothing technique for trend. expressed as a percent of actual values.3. MSE is given by MSE = See also definition 5. MAPE is given by MAPE = See also definition 5.3.12.3.8) With smoothing constants α for the average and β for the trend.6) 5.9) or Ft = α(At−1 ) + (1 − α)(Ft−1 + Tt−1 ) (5.3. Exponential Smoothing with Trend Adjustment The forecasting technique of exponential smoothing (see definition 5.3.15 (Mean Absolute Percent Error (MAPE)) THe average of the absolute differences between the forecast and actual values. FORECASTING APPROACHES 73 Definition 5.14 (Mean Squared Error (MSE)) The average of the squared differences between the forecasted and observed values.7) or F ITt = Ft + Tt (5.3.3. Definition 5.

3. 2. It is also commonly called linear regression analysis. Compute the smoothed trend. Compute Ft . Tt with equation 5.12. 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. Ordinary Least Squares Regression analysis is also useful for predicting trends.14) . FORECASTING Tt = β(Ft − Ft−1 ) + (1 − β)Tt−1 where Ft Tt At α β (5.10.74 or CHAPTER 5. The most commonly used regression technique is called ordinary least squares (OLS) regression analysis and assumes a linear relationship between dependent and independent variables. F ITt . Calculate the forecast including trend.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.13) The values of a and b can be calculated with the formula xy − n¯y x¯ x2 − n¯2 x b= (5. time) (5. by the formula F ITt = Ft + Tt . 1. the emponentially smoothed forecast for period t using equation 5.

5.5 Seasonal Variations in Data In most businesses. 4. 2. 1.5.3. such as cars and washing machines. to account for seasonal changes in demand in our forecasting. we will examine one model. 3. Find the average historical demand for each season. Although there are many methods to accomodate seasonal demand. then multiply it by the seasonal index for that month. . Divide this estimate of total annual demand by the number of seasons. Compute a seasonal index for each season by dividing the historical demand by average demand..S. Recall that the equation 5. 3.3. ¯ x The least squares method has several drawbacks. 2. 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¯. This provides the seasonal forecast. We do that with a 5-step process. demand is seasonal. It cannot be used to predict too many periods into the future as the further into the future the prediction is made. the multiplicative seasonal model. Compute the average demand over all months. The first step is to calculate the seasonal forecast.3. Estimate next year’s total annual demand. Most businesses experience a surge in sales around Christmas. during the summer months when it is common to take a vacation. 5. Definition 5. Deviations around the least squares line are assumed to be random. 1. In the U.13 assumes a linear relationship. the more uncertain it is. consumers often make fewer purchases of durable goods.16 (Seasonal Variations) Regular upward or downward movements in a time series that tie to recurring events.

mathematically. is given by (y − yc )2 n−2 Sy.16 is y2 − a y − b n−2 xy Sy. whatever uncertainties you may have transfer to your predicition of y. If there are published estimates you can cite (e. but x will be something other than time. 106– 107].g.x = (5.. the local Chamber of Commerce or a state government agency may publish estimates of future salary levels) they will often be helpful.76 CHAPTER 5. Standard Error of the Estimate The standard error of the estimate is a measure of the degree of accuracy of the estimate of y in a regression model. sales) = y-axis intercept = the slope of the regression line = the independent variable (e. pp.3.3.4. 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 5.3. y = a + bx ˆ where y is pronounced “y hat” and ˆ y ˆ a b x = the dependent variable (e.6 Associative Models OLS With a Single Independent Variable We briefly discussed ordinary least squares (OLS) regression analysis in section 5. average local salary) (5.17) .x = (5. if you are uncertain about predictions of x. However..g.1 (Example: Using OLS) Present Heizer example 12 [1..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. FORECASTING 5.g. We will use the same technique.

stock markets. p. in all but one Year of the Pig.3. “Four Values of the Correlation Coefficient.S.S.3 (Examples of Correlation Coefficients) Present Heizer figure 4. have been correlated. February 28. leading stock indexes. “Distribution about the Point Estimate of $600 Million Payroll.3 and the U.com/time/business/article/0. Even the Year of the Pig correlates strongly with the U. the U.3.9 [1. FORECASTING APPROACHES 77 Side Note 5.” the AFL (American Football Conference) and the NFC (National Football Conference). Correlation Coefficients for Regression Lines Definition 5.3. which is divided into two “conferences.S.4 .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.3. changes in skirt lengths don’t cause stock market prices to rise and vice versa. a football game played between two football conferences in the U.18. Since 1935.5. stock market. 108]. 4 Source: http://www.8599.18) .html?xid=sitecnn-partner.S. the note in the margin accompanying Heizer example 14 [1.” Side Note 5.00. Correlation) Correlation merely means that the values of two variables are historically related.17 (Correlation Coefficient) A measure of the strength of the relationship between two variables. pp.2 (Distribution About the Point Estimate) Present Heizer figure 4.3.S.S. the average length of a woman’s skirt and stock market prices in the U. nor does it imply that they will continue to be related.S. has risen. 2007. 3 Professional 2 See n [n x2 −( xy − x)2 ] [n x y y2 −( y)2 ] (5. Certainly. Side Note 5. Definition 5. It does not imply causation one way or the other. p. Other interesting correlations that have been identified over the years include banana prices and U.4 (Causation vs. football in the U.2 with stock prices generally rising as skirts rise. stock market prices as well as the winner of the Super Bowl.3. Dow Jones Industrial Average and Standard and Poor 500. The measure expresses the degree of strength of the linear relationship and is usually denoted with the letter r where 0 ≤ r ≤ 1.3. is monopolized by the NFL. but the relationship is coincidental. The correlation coefficient of variables x and y is given by r= See also definition 5. Historically.10 [1. 107].time. 109].1594488. or National Football League.” Note that the regression assumes a standard normal distribution about the estimate.

18 and Heizer example 15 [1.5 (Example: Multiple Regression at TransAlta Utilities) Present Heizer sidebar [1. Side Note 5. . . The multiple regression equivalent of equation 5.” For example. often the most difficult part of building a multiple regression model is to pick the independent variables.3. Adding additional independent variables as predictors.3. you would use statistics software to calculate these values. “Forecasting Manpower with Multiple Regression at TransAlta Utilities. if they are indeed related to the dependent variable. FORECASTING The coefficient of determination is simply r2 where r is the correlation coefficient. .19) Determining the values of a. ˆ where y is pronounced “y hat” and ˆ y ˆ a x1 .) It measures the percent of variation in the dependent variable (y) explained by the regression equation. b 2 . .. . = the dependent variable (e.6. It is commonly simply called “R squared. The same technique can be applied to use several independent variables to predict the value of a dependent variable.g.15 is given by y = a + b1 x1 + b2 x2 + . (See definition 5. in a multiple regression analysis involves a complex formula which is beyond the scope of this class. p. . 110]. In practice.5 Definition 5. b1 . . etc. . results in additional predictive accuracy as measured by r2 . p. “What was the R squared of your regression?” Multiple Regression Analysis In section 5. x2 . 5 See definition 5.17. b2 . . b1 .3.3. we discussed a means by which we can attempt to predict the value of one variable using the value of another.” As the sidebar points out. sales) = y-axis intercept = values of the independent variables = coefficients of the independent variables (5.3.78 CHAPTER 5.19 (Multiple Regression) A causal forecasting method with more than one independent variable. 110].

Side Note 5.20) A good tracking signal has about as much positive as negative error. and within 4 M ADs about 99.4.6.2 standard deviations.6 One M AD is equivalent to 0.5.4 Monitoring and Controlling Forecasts As mentioned in sidenote 5. These limits are typically based on M ADs. Definition 5. . This means that the observed value should be within 2 M ADs abut 89% of the time. the forecasting methodology needs to be modified.9% of the time. 111].8 standard deviations. (Tracking signal) RSF E M AD (actual demand in period i − forecast demand in period i) = M AD = |actual . Definition 5.forecast| n where M AD = (5. In other words.11 [1. three M ADs about 98% of the time. MONITORING AND CONTROLLING FORECASTS 79 5. though large errors may be a problem as well even if the positive and negative errors balance.1 (Tracking Signal) A measurement of how well the forecast is predicting actual values.6.1.4. p. 6 Recall definition 4.4 standard deviations. two M ADs to 1. A tracking signal is computed as a running sum of the forecast errors (RSFE) divided by the mean absolute deviation (MAD).2 (Bias) A forecast that is consistently higher or consistently lower than actual values of a time series. then forecasts need to be adjusted or the underlying operations need to be evaluated to determine why there was a deviation from the forecasts.4. Do forecasts actually manage to predict future behavior? Errors can be very costly and if models are not accurate in their predictions. which correspond roughly to standard deviations.4.1 (A Plot of Tracking Signals) Review Heizer figure 4.2. and 4 M ADs to 3.6 standard deviations. The tracking signals should also be compared as they are generated against limits. one of the most common problems with forecasting is a lack of follow-up. If the tracking signals violate upper or lower limits. three M ADs to 2. Tracking signals are typically used monitor forecasts.

p.4 (Focus Forecasting) Forecasting that tries a variety of computer models and selects the best one for a particular application.10) is automatically changed to keep errors to a minimum. Sophisticated forecasting models are not always better than simple ones. Definition 5. 2.2 [1.80 CHAPTER 5.3.4. Many feel that a model should be selected based on the logical relationship of the variables and that focus forecasting is a fundamentally flawed in its approach.4. Definition 5. is based on two principles: 1.4. Note that even with computer monitoring. which selects a model based on goodness-of-fit to a data set. FORECASTING 5. there has been much criticism of the approach to using models based on thier fit to the data. Typically adjustments are made to minimize error forecasts and adjusted whenever the computer notes a tracking signal outside of an established control limit. There is no single technique that should be used for all products or services. 5. Side Note 5. changes need to be check with human eyeballs to ensure that the adjustments make sense. you must make your own decision as to how you select the forecasting models that you use.4. 114]. you should be aware of the criticism of focus forecasting.. α in definition 5. “Summary of Forecasting Formulas.g.3 (Summary of Forecasting Forumlas) Distribute Heizer table 4.4.2 Focus Forecasting Focus forecasting.” .1 Adaptive Smooting Adaptive smoothing uses computer monitoring to control exponential smoothing by adjusting smoothing constants. In your career.2 (Reality Check: Focus Forecasting) Although focus forecasting is often used in business settings.4. Side Note 5. However.3 (Adaptive Smoothing) An approach to exponential smoothing forecasting in which the smoothing constant (e.

• Market share and dynamics.4 (Heizer Company Profile: Regal Marine) Review Heizer’s company profile of Regal Marine [1. time permitting. Definition 6. 122–123]. 1 In this chapter. Referring to services as products is common in the service industry. definition. as an intangible. They also use just-in-time production techniques. the word “product” will refer to both goods and services. Regal Marine competes in part by quickly designing and building new models to appeal to a variety of market niches. 2 Recall sidenote 2. and design of products.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. 124.5 (Product Decision) The selection. which will be discussed in detail later in the semester. pp. pp.128] • Investment and cash flow. For example.1 Side Note 6. insurance companies often refer to their policies.0. which. is a service. Product strategy2 defines the breadth of the product line and links product decisions to [1.2. as products.0.1 . • Product life cycle. 81 . and • The organization’s capabilities.

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

6.500 or 100. GENERATING NEW PRODUCTS 83 6. example.3 • Political and legal change can also bring about business opportunities. the development of cellular telephone technology or the internet.1 (Example: Brainstorming) Lead the class in a brainstorming session.2.1 (Product-by-Value Analysis) A listing of products in descending order of their individual dollar contribution to the firm. it must regularly redesign existing products or bring new products to market. Brainstorm on possible new products that students believe could be profitable and developed and brought to market for less than $12.1 (Brainstorming) A team technique to generate creative ideas on a particular subject. 4 For 3 For . example. Operations managers must pay attention to the market and needs and preferences of “leading edge” consumers.000 yuan. Definition 6.1.1. • Sociological and demographic change is also tied to product demand. such as consumer incomes. • Economic factors.2. • Technological change often drives product innovation. 6. a product-by-value analysis can identify the critical few products in which additional resources should be invested and the trivial many from which resources should be diverted.2. Ideas are not reviewed until after the brainstorming session. 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. deregulation of the telecommunications industry with the breakup of AT&T in the late 1970s. and if a company is to survive.4 Side Note 6. are tied to product demand.2.2 Generating New Products Most products have a limited life cycle. 6.3 Product-by-Value Analysis For firms with many products.1 Importance of New Products The need for companies to cultivate the ability to introduce new products cannot be overstated. Definition 6.

3 [1. Side Note 6.2 (Percent of Sales from Products Recently Introduced) Present Heizer figure 5. Many successful companies rely on sales from products introduced within the past five years.3 6.3. DuPont estimates that it takes 250 ideas to yield one marketable product [1. Definition 6.1 Product Development Product Development System Recall that product strategies link product decisions to cash flow. p. 129]. the product life cycle. 128]. and the organization’s capabilities.” 5 His name is Gary Brosz and he was an engineer at Ball Aerospace.2 [1.2 (House of Quality) A part of the quality function that utilizes a planning matrix to relate customer “wants” to “how” the firm is going to meet those “wants.3.3. Each stage should have an accompanying review to determine whether to progress or not. Side Note 6. DESIGN OF GOODS AND SERVICES For example.3. .3. p. Translates customer desires into a product design. 6. 6.1 (Product Development Stages) Present Heizer figure 5. p. 128].2. 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. Determines what will satisfy the customer and 2. The house of quality is a graphic technique for defining the relationship between customer desires and a product. Definition 6.84 CHAPTER 6.1 (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. market dynamics.2 Quality Function Deployment (QFD) Quality function deployment (QFD) describes either of two processes: 1.

6 3. An organization is divided into departments. 1. 7 In other words.2.3 (QFD Software) A commercial software product called QFD Capture Software can be used to perform QFD functions.3. • “Product development teams” are also sometimes called “design for manufacturability teams” or “value engineering teams. there are three popular methods by which organizations undertake product development. bureaucratic companies and organizations. Identify relationships between the firm’s hows. 10 The right-hand columns of the house in sidenote 6. Product development is done by teams.2. • More common in large.. e.3.qfdcapture. manufacturing engineering.3. 130]. See http://www.9 6.S. identify the rows of the house in sidenote 6. • Fixed duties exist.3. a research & development.10 Side Note 6.com for more information.3.. and production departments. 8 These are given on the roof of the house in sidenote 6. Identify customer wants.8 5.3. 2.2. .6. with product features. design engineering.3.7 4.” 6 For example. 6. create the columns of the house in sidenote 6. Identify how the good or service satisfies customer wants. 9 Weighted customer ratings are given on the bottom of the house in sidenote 6. Building the house of quality involves six steps: 1. Relate customer wants to product hows.3. PRODUCT DEVELOPMENT 85 Side Note 6.3.2. An operations manager is assigned as the product “champion” who takes the product through the organization from concept through production.2 (Example: House of Quality) Present Heizer example 1 [1.9. as was the software described in section 4. • Effective communication and coordination between separate departments can be problematic.2. • Perhaps the most popular approach in the U. In other words. Develop importance ratings. Evaluate competing products. Note that it is not free or open source. 3. which can be an advantage. p.g. 2.3 Organizing for Product Development In the West.

purchasing.5 (Manufacturability and Value Engineering) Activities that help improve a product’s design. Definition 6.3. The goals of manufacturability and value engineering are 11 See definition 6.86 CHAPTER 6.11 In Japan.4 (Concurrent Engineering) In project development.3. . but my personal impression is that formal QFD practices are not widespread in practice. DESIGN OF GOODS AND SERVICES • Use of these teams is often called concurrent engineering.3. it can also be problematic because teams. and field service personnel. However. I have never heard of or actually worked at a company where QFD or the house of quality tool has been used.. production. Definition 6. organizations are less structured and typically not divided into research and development. quality assurance.4 Manufacturability and Value Engineering Manufaturability and value engineering activities concern improvement of design and specifications at the research. Some teams even include representatives from vendors. Side Note 6. These teams often include representatives from marketing. Side Note 6.3 (Product Development Teams) Teams charged with moving from market requirements for a product to achieving product success.3. because their fate is tied to a product.3. and use.5 (Personal Observations Regarding Product Development Teams) The use of product development teams is common in the U. engineering.3. 6..S.1) was implicitly included in the product specification phase of operations management at the companies I have worked for. development. will often advocate for continuation of their project past the point that it is profitable for the company.3.4 (Personal Observations Regarding QFD) Quality function deployment (see definition 6.4. etc. maintainability. design. engineering. manufacturing. and production stages of product development. My experience may not be indicative of management practices in general in the U. production. 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. use of participating teams in design and engineering activities.S. Definition 6..3.

4. Improved job design and job safety. Reduced complexity of the product. Robust design. Standardization of components.3. and 7. Improvement of functional aspects of the product. PRODUCT DEVELOPMENT 1. Improved maintainability (serviceability) of the product. 2. 87 . 3.6. Cost reduction. 6. 5.

DESIGN OF GOODS AND SERVICES .88 CHAPTER 6.

Part II Entrepreneurship 89 .

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

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

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

• During one “crunch time. and – Accomplishments that require expertise or special knowledge. might last four to six hours. We didn’t. depending on the complexity of the push. we had to update the web site late at night when our customers were not using it in case something went wrong. the first thing you should do is look in the mirror. interests.” there were so many engineers sleeping at the office at Active. and experience match the kind of talents your business would require? • Analyze Your Personal Attributes – As yourself about yourself. There were far more divorces that occured among management at Active.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. – Educational background. – Hobbies.com than average in the population at large. 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. This kind of event was not uncommon at Absolute Performance. e e Include – Skills.com management and the family life of the CEO of Absolute Performance. – The CEO of Absolute Performance once told a customer that the company’s product could parse XML files. 7. The “code push” would often start at midnight and. Do your skills. – At Active.94 CHAPTER 7.2 Are You Ready? If you are thinking about starting your own business. Try to realistically evaluate your own strengths and weaknesses. INTRODUCTION TO ENTREPRENEURSHIP • Many all-nighters. for example. – Are you friendly and self-motivated? – Are you a hard worker? – Do you have common sense? .com. • Create a Personal R´sum´ – List your personal and professional experiences.

“Achieve financial independence” is much better than “pay the bills.” • Be optimistic.000. “Raise 100. advertising. • Set both short-term goals and long-term goals. ask yourself the following questions: • Income – How much do you want to earn. or 20 years to accomplish. marketing. • Analyze Your Professional Attributes – Be aware of where you need help. When I talk to those who I know who have started businesses. such as sales. If you talk to an entrepreneur who has not been successful. even the successful ones will probably focus on the negative. • Be specific. if not more important.3. If your goal is to raise 1. 7. Like parents.000 yuan by July 1” is a much better goal than “raise money. Consider at least a five-year time horizon.” you may not want to start a business that focuses on customer relationships. – Start with small goals.7. When setting goals. it helps to set goals. SETTING GOALS 95 If you are not a “people person. Learning from failure is as important. When setting goals. and administration.000 yuan and you’ve never had a job before. although the successful ones generally view their experiences as positive on the whole. Side Note 7. – Long-term goals are those that may take 5. – Short-term goals are those that can be accomplished within a year. 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. ask other entrepreneurs. Move on to larger goals once the small goals have been met. try to figure out why they were not successful. your goal may not be realistic.” • Be realistic.3 Setting Goals With any major endeavor.3.1 (What’s It Really Like?) If you wonder what running a business is really like. it is common to exchange “war stories” about the difficult times and sacrifices. than learning from success. .

How much is your ego worth? Side Note 7. Have the class write down their answers and evaluate their own EQ. • Type of work – Do you want to work indoors or outdoors? Would you rather work with people or remotely. Eliminate question 1 and substract one point from the scoring given on p. . 21]. and – Investment of personal assets.3 (Personal Goals and Objectives Worksheet) Hand out Lesonsky’s “Personal Goals and Objectives” worksheet [4. Side Note 7.96 CHAPTER 7. 18–20]. 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. Many people want to start their own business for ego gratification. The reasons given for adding or subtracting points are as interesting as the ultimate score. pp. – Hours of work. such as over the phone or internet? How much do you want to work with computers? • Ego gratification – Be realistic. – Geographic location. pp.3.2 (Your Entrepreneurship Quotient (EQ)) Present Lesonsky’s “EQ” quiz [4. 20.3. Acknowledge this fact and factor it into your decisionmaking.

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

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

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

FINDING AN IDEA .100 CHAPTER 8.

0. but you should try to target your market as specifically as possible.1 (B2B) Businesses whose customers are primarily other businesses are called “B2B.0.1. Make a wish list – Who do you want to do business with? Identify • Geographic area you want to serve.” or business-to-business ventures.0.2. 101 . When trying to identify your niche market.” or business-to-consumer ventures.0. go through the following 7 steps: 1.Chapter 9 Defining Your Market After coming up with your idea. Definition 9. See also 9. 9. Consumers and 2. There are two broad categories of markets: 1. your next step is to do some market research. Definition 9.2 (B2C) Businesses whose customers are primarily consumers are called “B2C.1 Finding Your Niche Finding a niche can be a more daunting task than you might think. Not only do you need to decide whether you are marketing to businesses or consumers. Businesses. See also 9.

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

are similar in age to those who came of age in World War II.S.2 (Caveat: Marketing to Demographic Groups) When marketing to demographic groups. buying a home.3 (Cohort Marketing) Marketing to people based on the groups or “cohorts” they were part of during their formative years.” That is.1. life stage. etc. you should practice extra caution to avoid stereotypes or other insensitive approaches.1 (Generational Marketing) Marketing to consumers based on age as well as social. when the country was immersed in a war effort. and other Asian customers together. Many Western companies make the mistake of lumping together Japanese.1. economic. in the U. . 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.9. when many people were suffering from extreme poverty. they try to satisfy all possible customers and end up trying to do too many things well.. Definition 9.1. the more likely you are to score a hit. It is better to do just one thing well than to do many things poorly. New marketing techniques include generational. Side Note 9. Chinese. As older people are more active than before. or retiring.1. you should be able to enter your niche market with confidence.) Using these new marketing techniques can allow you to narrow your market. If you did your homework. FINDING YOUR NICHE 103 7. demographic. Side Note 9.1. and the narrower your focus on your target.2. the Depression-era cohort. For example. and 9.1.. Likewise. and cohort marketing. This marketing technique has been widely used since the early 1980s in the U. for example.1 (Smaller is Bigger) When starting a business. Definition 9.1.1.2 (Life Stage Marketing) Marketing to consumers based on what they are doing at a given period in life. This can be offensive and serve to alienate rather than appeal to your customer. young adults in the Depression. many are choosing to start families later in life or even have children ten years or more apart. but their behavior differs significantly due to the different influences in their youth. many entrepreneurs make the mistake of being “all over the map.1.3. Marketing to demographic groups has become much more refined in the last few decades. such as having children. (See definitions 9. and psychological factors. Korean.. Definition 9. the World War II cohort. Go for it! – Implement your idea.1.S. many Eastern companies make the mistake of lumping together American and European customers. 9.

you should. • Convey the essence of your business’s goals and philosophies.3 The Mission Statement Once you have a niche. create a mission statement.3.1 (Mission Statements for Three Organizations) Review Heizer figure 2. DEFINING YOUR MARKET 9. p. Side Note 9. Falkenstein1 advises that you regularly reevaluate your niche. Every six months or so. “Creating a niche is the difference between being in business and not being in business. . p. a few sentences at most.1.2 [1.104 CHAPTER 9. ask yourself • Who are your target clients? • Who aren’t your target clients? • Do you refuse business if it falls outside your niche? Generally.” [4. 79] 9. • How do clients perceive your business niche? What do they think your business stands for? • Is your niche evolving? • Does your niche offer customers what they want? • Do you have a plan that effectively conveys the need for your niche product to the right market? • Can you confidently predict the life cycle of your niche? • How can your niche be expanded into a variety of products or services? • Do you have a sense of passion with respect to your niche? • Does your niche feel comfortable and natural? • How will pursuing your niche contribute to achieving the goals you have set for your business.2 Redefining and Expanding Your Niche Lynda C. 28] which includes mission statements for three multinational companies: 1 See section 9. The mission statement should • Be succinct. Falkenstein states.

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

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

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

DEFINING YOUR MARKET .108 CHAPTER 9.

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

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. pp.10. RESEARCH METHODS 113 Side Note 10. 102–103] The questionnaire supposes that someone is going to open an interior decoration business.6 (Sample Mail Questionnaire) Pass out Lesonsky’s “Sample Direct Mail Questionnaire. .” [4.2.

MARKET RESEARCH .114 CHAPTER 10.

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

• Management. “Who is going to be reading the plan?” If you present your plan to venture capitalists or financiers. CHAPTER 11. or investment prospectus. Failing in business is very costly.116 • The project. • The business plan quantifies objectives. They may spend no more than five . 11. • Marketing.1 11.1 Preparing to Put the Plan Together Your Audience The first question you should ask yourself is. • Critical risks. It provides a variety of other benefits.1. • The analyses included in the plan force the entrepreneur to closely scrutinize the assumptions about the venture’s success or failure. • Financing. it will help you maximize your venture’s chances for success. loan proposals. • It is a tool to communicate with outside financial sources and internal management for guiding the venture to success. and • Milestones or a timetable. • Research and development. • The effort and discipline needed to put together the business plan will force the entrepreneur to view the proposed venture critically and objectively. and while a business plan will not guarantee success. • The business plan allows outside evaluators (such as investors) to critically evaluate the proposed venture. THE BUSINESS PLAN A business plan is also known as a venture plan. • Manufacturing. you will likely be giving your plan to read many business plans per day. allowing the entrepreneur to track results by measurable benchmarks.

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

the business plan is expected to be less than Kuratko’s recommended length – no more than 20 pages. If you write to much. 5 I suggest the lower-right corner. 4 Phone number. a number should be in a corner5 indicating the copy number. 7. e-mail address. . they will not read it. – 40 pages is ideal. THE BUSINESS PLAN – It should be no more than 50 pages. and full contact information4 for the company. though you should not put it in the same corner as page numbers appear. address. and How investors will benefit. 302]: • Keep the Plan Short – People who read the plan are generally pressed for time. 3 Note that for this class. You should use this to keep track of who has which copy. The amount of financing needed. 2. – Inside the front cover should be a title page repeating the cover information.1. 3. • The Executive Summary – Two or three pages immediately following the title page. 11.118 CHAPTER 11.3 Some Style Points Kuratko also recommends that you [3.3 • The Cover and Title Page – The cover should have the name of the company. 4. • Table of Contents – The Table of Contents should list each of the business plan’s sections and mark pages for each section. – It should explain 1. – It is worth repeating: Keep it down to at most two or three pages. 5. 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. – On the title page. and/or web site. p. The benefits to customers. the date of the plan. 6. Its products or services. The venture’s objectives in 3 to 5 years. The financial forecasts. The company’s current status.

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

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

9. Completion of design and development.. current ratios. Completion of prototypes. 11. Signing up distributors and dealers. including the important milestones and when (and in what order) they were reached and changes in management and governance as the company grew.com) Discuss the growth of Active. Unexpected competitions. include an appendix.2. Receipt of first orders. Risks might include • • • • • Negative industry trends. etc. which investors will use to estimate debt/equity ratios. Side Note 11. such as blueprints or r´sum´s you would e e like to include which are not core to the business plan. Costs exceeding estimates. as opposed to actual. Design or research difficulties. (c) A cash-flow statement. Appendix – If there are documents. Difficulty purchasing parts or materials. First sales and first deliveries. Critical-Risks Segment – Discuss business risks and the ways you might address them. Ordering production quantities of materials. and Payment of first accounts receivable.2.2. Try to be honest and realistic. Harvest Strategy Segment – Detail how your company will adapt as the company grows and develops. or more aware.11. For example. THE PLAN CONTENTS 121 (a) A pro forma balance sheet.2 (The Growth of Active. . detailing projected inflows and outflows. inventory turnover. Your investors are probably as aware. Hiring of sales representatives. Definition 11. of the risks than you are.com. These might include • • • • • • • • • • Incorporation of the new venture. working capital. Discounting them as trivial or claiming that you can overcome any risk will not endear you to investors. Product display at trade shows. detailing projected profits and losses. What happens if the management team changes? What will happen to the company assets if ownership changes? 10. (b) An income statement. a balance sheet containing projected balances is called a pro forma balance sheet. Milestone Schedule Segment – Detail milestones with a timetable for various activities to be accomplished. 8.1 (Pro Forma) A latin term that means projected.

122 CHAPTER 11. THE BUSINESS PLAN .

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

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

At my company in Chicago. 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. I always bring a pen and paper to meetings. • Taking notes also makes you look conscientious. AFTER THE PRESENTATION 125 Side Note 12. Many people feel as if taking notes makes them look stupid. In general. They may ask you something that makes you want to change your presentation. and each investor will respond differently.3 After the Presentation Each presentation will be different. ask yourself after every statement you make. It is easy for things to get lost in the heat of the moment. Stop when it goes off.2. Much of the material required use of the internet. Give your presentation to friends or family. but in reality. 12. “So what?” If you cannot answer this question simply and easily. 45].2. p.4 The First Minute is the Most Important Your audience should know what you do within the first minute of your presentation. it is quite the opposite. Everyone.2. If they cannot explain it clearly. 12.3. They may ask you something you want to respond to in an e-mail later.6 So What? When you are planning your presentation. you are not presenting it well. so write things down to make sure you don’t forget. • Your audience may ask you several questions at once. you need to change or eliminate the statement. 12.5 Take Notes Have a pen and paper ready and take notes during the pitch. and although you go into each presentation .2. 12. You should be prepared for the unexpected. where some of the smartest people in the world worked.2 (A Presentation in Copenhagen) I flew all the way to Copenhagen once to hold a 3-day workshop on mathematical modeling in economics. everyone brought a pen and paper.12. Ask them what your company will do. Guy Kawasaki recommends you set a timer [2.

321]: “What to do when a venture capitalist turns you down: Ten questions. Remember that persistence is the most important character trait of entrepreneurs.1 (What to Do When You’re Turned Down) Present Kuratko table 10.5 [3.3.126 CHAPTER 12. p.” . Side Note 12. PRESENTING THE PLAN with only success on your mind. you should also realize that most most comments will be negative and most presentations are rejected. 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. Each time your are rejected improves your future opportunities.

Chapter 13

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

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.

the delivery cycle is the amount of time between placing an order and receiving it. For example. • Updating product information – At the time a sale is entered.4 (Delivery Cycle) In inventory management.2 (Order Cycle) In inventory management. CHAPTER 13. be sure it’s not easy to “hack” the system. • Taxes – Be sure you can support the local tax system or multiple tax rates if you deal in more than one state or on the internet.3. and • Improve pricing accuracy. Definition 13. • Security – To prevent theft.3. your count cycle is 12 weeks.1 Inventory Turnover Typically. the order cycle is the amount of time it takes to process paperwork and place orders. INVENTORY CONTROL When considering the purchase of a POS. .3.130 • Maintain a sales history. such as for volume discounts for preferred customers. Note that there are both off-the-shelf POS systems available in the market and industry-specific systems useful for all sorts of businesses ranging from book stores to auto repair shops to dry cleaners to beauty salons. To improve efficiency of inventory control. Definition 13. these systems should automatically update inventory and accounting records. Definition 13. a high inventory turnover is a mark of a well-managed inventory system. consider the following features: • Ease of use – Does it have a friendly and easy-to-use interface? • Entry of sales information – Is it easy to enter sales information? • Pricing – You should be able to set up multiple prices for each item. if you perform an inventory count four times a year.3 (Count Cycle) In inventory management. work with suppliers to improve delivery times and count inventory more often.3. you have “turned over” your inventory. Definition 13.1 (Turnover) When you have replaced 100% of your original inventory. 13. the count cycle is the amount of time between counting inventory.3.

13.4.4 Inventory Accounting Your accountant will typically handle inventory accounting.1 (LIFO (Last In. you should arrive at a basic assessment of the stock levels you’ll need for monthly or seasonal sales volume.5 (Needs Period) In inventory management. You should know how many sales per square meter per year you need to survive. follow the recommendation of your accountant.4.3 See also 13.S. In deciding which to use. first out) assumes that you sell the most recently purchased inventory first.3. In the U.S. first out) assumes that you sell the least recently purchased inventory first. First Out)) LIFO (last in. The author is unfamiliar with Chinese tax codes. In other words. it values your remaining inventory based on the prices of the least recently purchased items. 13. If there is inflation. See definitions 13. 13. After you have been in business your inventory control system should give you a better idea of stocking levels.3. Needs Period = Count Cycle + Delivery Cycle + Order Cycle. which allows you to pay less taxes on your inventory.2.4. and delivery cycle. the needs period is the sum of the count cycle.2 (FIFO (First In. First Out)) FIFO (first in. order cycle. .2. Calculate your sales per square meter once per month. and 13.3. LIFO and FIFO are two accounting methods used to do this.2 See also 13. Definition 13.1.13. 2 At 3 At least this is true in the U. The author is unfamiliar with Chinese tax codes. Many businesses also measure turnover by measuring sales per square foot (or square meter). Definition 13. but you should at least know about LIFO and FIFO. least this is true in the U. INVENTORY ACCOUNTING 131 Definition 13.1 Buying Inventory In the process of putting together your business plan.S.4. you must estimate your inventory value when you file your taxes. it values your remaining inventory based on the prices of the most recently purchased items. which may result in higher taxes.3.4. If there is inflation.4.4.3..

• Some suppliers demand a minimum number of items per order.” . and they will respond in kind. author of Start Your Own Business.4.3 (Open-to-Buy) The open-to-buy is the amount budgeted for inventory purchases for a given period. Their prices are higher than a manufacturers. 3. says. three or four months. Import sources – They operate like domestic wholesalers. Note that it is not uncommon that • Some suppliers require a minimum order for merchandise. 13. 13. Open-to-buy can be calculated with the following formula: Planned inventory + planned sales . courteous and firm with your suppliers. Good suppliers will help you by providing products and even creative solutions to help meet your customers’ demands. – The minimum may be higher for first orders to cover the cost of setting up a new account. usually one. Manufacturers – Note that some manufacturers refuse to fill small orders.132 CHAPTER 13.5. 2.1 Dealing with Suppliers The most important thing about a supplier is reliability. “Be open.5 Suppliers Suppliers can be divided into four categories: 1. Independent craftspeople 4.actual inventory . brokers or jobbers. Distributors – Also known as wholesalers. INVENTORY CONTROL Definition 13. Rieva Lesonsky. Leave room for unanticipated items in your budget and feel free to exceed or fall short of your budget according to your business sense.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.

o. At least in the U.d. and • The need to be firm but fair.13. Suppliers sometimes try to complicate pricing to their advantage.1 (COD (or c. Discuss • Their negotiating technique when discussing pricing. you should know who is liable for damage to goods in transit. If a supplier does not extend credit. personal interaction can work wonders. the supplier will pay for freight. 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. 2.5.5. SUPPLIERS 133 13. it is considered a felony.5. You can also present your financial statements and prospects for success. If you are dealing with a reticent large supplier. I regularly had to deal with food vendors. customers may be required to pay upon receipt of goods. Tips for dealing with suppliers: 1.1 (Tip: Sending it Back) While managing at a housing company while getting my undergraduate degree.)) Cash on delivery. 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. • Discounts. Be sure to add up • Costs.S.. basis until you have proven yourself reliable. If a supplier is uncertain about you.o. and • Allowances before you make a decision. • Sometimes if an order is large enough. Whatever you do. they will put you on a c. . Side Note 13.5.2 Payment Plans Suppliers of expensive equipment or merchandise may require credit references. do not falsify or misrepresent your financial statements.d. • For items being shipped. Ask about the freight policy before ordering. Definition 13.

o. 2007.2. http://www.html. Do they fill orders in the order that they come in or do they give preferential treatment to larger orders? 4. This differs from a forward order where stock is available but delivery is postponed for other reasons.html. The FOB term requires the seller to clear the goods for export.o.4 Colloquially.o.7 4 Source: 5 Source: http://www. Be aware of your supplier’s priorities.5. 3.5.b. INVENTORY CONTROL • Depending on whether the supplier pays frieght. FOB destination indicates that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. 5 FOB Destination changes the location where title and risk pass.134 CHAPTER 13. May 19. Definition 13. .2 (FOB (or f.com/reference/glossary/glossary efg.5. 7 Source: http://en.3 (FOB Destination (or f.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.6 See also definition 13. Definition 13.roadway.5. May 19.wikipedia. it may be worthwhile to cancel backorders and bundle them with a subsequent orders. Definition 13. 2007.abcsmallbiz. Under this arrangement.com/shippers/glossary.org/wiki/Backorder. 5. May 19. As opposed to FOB. Inform all your employees who might receive shipments to carefully inspect all items that are delivered before you sign the delivery receipt.5. 2007. May 19. See also definition 13. 2007. Specify a cancellation date on your order forms.)) Free on board.b. title and risk remain with the seller until they have delivered the freight to the delivery location specified in the contract. 6 Source: http://www.html. people often say something like “f. Destination)) Free on board destination. This means that the buyer has to bear all costs and risks to loss of or damage to the goods from that point. International Term of Sale that means the seller fulfills his or her obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.com/jargon.epoi.b. Seattle” to indicate that an item being shipped from Seattle is free on board.3.

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

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

339].1 (Job Description) Job descriptions should include • A job title. • Who the person reports to. and • Any occupational hazards. you hire someone as Director who is not qualified to be a director.1. You may actually be doing your employee a disservice by inflating their job title. you may find it difficult to give them a promotion later. Part of retaining quality employees is the prospect of advancement.3 (Job Description) Present Lesonsky’s sample “Job Description” form [4. • Specialized skills or knowledge. 338]. for example.14.2 (Job Specification) Job specifications are similar to job descriptions (see definition 14. Like a job description. • Physical or other special requirements associated with the job.1. Definition 14.1. • If you give someone an inflated job title but do not offer a salary commensurate with the title. their lack of qualifications may be obvious to their new employer and result in their termination or other harm to their career. it includes • The job title. then they go on to a Director position at another company. and • Job summary with major and minor duties. p. • Desired experience. • Benefits. Definition 14. Side Note 14. you may find they are tempted to leverage that job title to seek employment elsewhere. It also includes • Any educational requirements. and • A summary description of the position.1. • A salary range.1) and should include the personal requirements expected of an employee [4. • The position of that employee in the corporate heirarchy.1. If. p. . If you hire someone at the highest level of their competency. HOW TO HIRE 137 • There is little room for advancement.

– For other positions. you don’t get calls from aggressive applicants who are trying to circumvent the hiring process. . 14. e-mail addresses have become perhaps the most popular way to get applicant information at U. particularly those that advertise on web sites.S. HIRING EMPLOYEES 14. don’t list “familiarity with Quickbooks”1 if you really just want someone who is familiar with accounting.1.4 (Using an E-mail Address) For professional positions.1. if you are looking for an accountant.3 Advertising the Job When you write an advertisement. Many American companies are no longer providing phone numbers. companies. you may have applicants schedule an appointment by e-mail or over the phone and come in to fill out an application.S. With e-mail. 2 See sidenote 14.4 Finding People There are many possible sources of applicants. For example.5.1. such as “outgoing” or “detailoriented.” or people who may not have them will just try to fake those personality traits in the interview.138 CHAPTER 14. • List the top 4 or 5 skills that are most essential to the job. It also makes it easy to receive and process a large number of applications with a minimum of effort. – 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 ask for specific personality traits. applicants should be given at least an e-mail address and mailing address to send resumes and other documents and possibly a phone number. • Do not list requirements other than educational or experience-related ones. due to the number of applicants for competitive positions. – For professional positions.1.. • Your Personal and Professional Network • University and College Placement Offices 1 Quickbooks is the most popular accounting software package for small businesses in the U.2 Side Note 14. • Be sure to list appropriate contact information.

dice.com with the keyword Java on May 19.1. 159 in “Financial Services.monster. you will get several candidates for any job you are offering. be sure that a candidate can provide what you are looking for.. 3 Java is a programming language. You interview the candidates. You narrow the number of resumes down to about 10. not a science. Searching on Monster.com or http://www.” . You hire the preferred candidate. you need to narrow down the number of applicants to those you can interview in a reasonable time frame. You conduct a second round of interviews with the remaining 3 candidates. For any job. but when looking at a resume. If you are lucky. 2007 turned up more than 5. You check references.314 listings in the “Computers. 2. You can evaluate their personality during the interview.S. about 10 or so. 3. You narrow down the 10 candidates to 3. There were 4.000 hits searching just the “Information Technology” search category. 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. for professional positions. 6.com with the keyword “java” will demonstrate just how widely used online tools are. Software” category.” 665 in “Internet/E-Commerce.S..14. many positions are being filled online. Try to perform a search on a job sites such as http://www. • Focus on the skills that a person can bring to your company. Screening People Reviewing resumes and applications is an art. • Online – In the U.3 Generally.” And 921 in “Engineering. To “weed out” candidates. In the U. 4. • Industry Publications – Most trade publications take ads for job openings. the hiring process proceeds as follows: 1. 5. most professional associations’ job banks are now online. particularly in the high-tech industry.

Side Note 14. I learned that people lie on their resumes all the time. if a person survives downsizing or other major changes at their former employers. listed expertise in too many subject areas.com. and e-mail address. CHAPTER 14.1. • Rely on your intuition. so many resumes came in that an administrative assistant was asked to perform the first screening.5 (Job Application) Present Lesonsky’s sample job application [4. • Special skills. 344–345]. did not match our requirements closely enough. .com) In the hiring process at Active. Applications should ask for things such as • Name. From the hiring process at Active. • On the other hand. Side Note 14. 4 It takes time to become an expert with any sufficiently compex technology. HIRING EMPLOYEES – Do they change jobs too quickly? • Throw out applications if someone cannot provide enough references. Of those we looked at.6 (Hiring at Active. She simply passed along resumes that contained certain keywords that we were looking for.4 were not experienced enough. we tossed those that had spelling or grammatical mistakes.1. and • References. • Don’t necessarily discard resumes with some gaps. including when an applicant can work and the hours they can work. address. • Educational background. that is a very good sign that they are a survivor. I have some personal recommendations: • Always check references.140 • Look for patterns in their career. • Work experience – As for salary information when asking about work experience • Availability. this indicated to us that the applicant was not being truthful. If an applicant indicated they were an expert with too many technologies. Due to this. or were too experienced. That typically indicates that someone cannot supply enough positive references. pp. phone number.com.

religion.5 Side Note 14..S. such as through a “Green Card. creed. Not also that many of the best people we hired were not the best on paper. including [4.1.. color. include • Whether the applicant has children. They were the type of people who would write software all day.6 Questions that are not explicitly prohibited. p. 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. • Whether the applicant has every been treated for drug or alcohol addiction. race. 6 Employers can.7 (No-nos) In the U. • Whether the applicant has every been arrested. • Marital status. 347] • Age or date of birth.” . • Do not hire people who are discovered to be lying on their resume. Several of the engineers I hired did not finish their undergraduate degree. 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. Get clarification on anything that you think may be suspect. • Maiden name (for female applicants). • Sex. ask prospective employees whether they can submit proof that they have the legal right to work in the United States.1. Ever. employers may not ask about anything not related to the job. or national origin.14. HOW TO HIRE 141 • Ask the person questions they would only know if they are competent in their field. • Ask people questions about their resume during the interview. there are certain things you may not discuss with a job applicant in order to avoid discrimination and other issues. • Disabilities of any kind. or • If a person is a citizen.S. • How many days the applicant was sick in the previous year. However. however. in the U. but which can get employers in legal trouble. then go home and play on computers in their spare time. • Whether the applicant has every been treated by a psychologist or psychiatrist. Though laws undoubtedly differ in China.

A friend from Texas was asked this question when he interviewed with Moe torola to be a supervisor in a manufacturing plant in Austin. Be sure to ask open-ended questions.” 9 This is a very typical job interview question in the United States. 8 In 7 Taken . a recent debate. You should do the same. Discuss the job and the company. “bowling. friendly.” or “Tell me about a problem that you solved at your last job and the way you solved it. Texas.8 (Your R´sum´) Discuss with students how to put together an e e effective resume when they graduate. the Democratic party’s candidates for President of the United States in the 2008 election were asked what their perfect job would be. He got the job. Begin with some small talk. Good candidates will do their best to put their best foot forward.142 CHAPTER 14. Hopefully they will be neat and clean. 349]. p. such as “Tell me about your last position.1. 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. Curiously. Then ask them about their skills and background.” The interviewer laughed out loud. Side Note 14. “President of the United States. Here are some suggestions for questions to ask the candidate:7 • If you could design the perfect job for yourself. only one of them answered. and demonstrate good communication skills. You want the candidate to talk enough to give you a detailed impression. HIRING EMPLOYEES • If a worker was ever injured on the job or filed for worker’s compensation. 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. First impressions are the most important. The Interview Remember that the candidate will be interviewing you as much as you will be interviewing them. He answered.

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

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

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

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