1. The business eco-system: Your path to finding the pot of gold at the end of the rainbow! iL, 14. gold at the end of the rainbow! . The business eco-system: The business eco-system . The sun rise of your new business Accessing market opportunity: the initial rim of the wheel . Sales: the essential rim of the wheel . Strategy: the tactical rim on the wheel . Branding will make your blossoms bloom! . Stakeholders: the connective rim on the wheel . Ethics: the authentic rim on the wheel . Operations: the logistical rim on the wheel . New product: the tangible rim on the wheel . Let the fruits of your labor blossom: the new product/service launch event plan . Public relations: the sensational rim on the wheel . Mentor insights: the “Where the Rubber Meets the Road” spokes on the wheel About this author and acknowledgements 2. The mind of the entrepreneur: Your entrepreneurial journey begins by embarking on your own hero’s journey! 1. 2. 3. 4. Introduction Entrepreneur assessment survey Entrepreneurial mindset enhancing activities Chapter summary 3. Business models and marketing:an overview 1. 2. 3. 4. Learning Objectives What is a business model? Success factors Consumer marketing models OON AD UI 10. 11. . The marketing model . Identifying market needs . Business to business marketing models . Chapter summary . Market research to determine the potential market for funeral services in Monterrey, Mexico Discussion questions References 4. How to organize and lead an entrepreneurial venture — . Learning objectives . Introduction . Organizational issues . Organizational stages of growth . Flat versus tall organizations . Centralized versus decentralized organizations . Chapter summary . Discussion questions . References 5. Selecting and managing your team 1. 2. NID OF BRB W WO © Learning objectives Competitive advantage through human resource management . Providing employee voice and influence . Recruiting workers . Evaluating recruiting policies . Employee training . Aligning employee career development with organizational growth . Performance appraisal . Determining base pay 10. 11. Meaningful job design Termination 12 13 . Discussion questions . Exercise 14. References 6. Marketing on a global scale 1. 7.O NIOUBWNHOHRPRTD ON OU BW DN 8. Learning objectives . Defining marketing . The role of marketing in the firm: a basis for classification . Defining international marketing . The international marketing plan . The international marketing environment . Discussion question . References erations management . Learning objectives . What is operations management? . The input/output transformation model . Operations decisions . Chapter summary 8. Securing and managing external relationships . Learning objectives . Introduction to external relationships . Marketing exchanges and partnerships . Choosing the right relationship . Strategies for external relationships . Chapter summary . Exercises . References 9. Financial and managerial accounting; financing your organization . Learning objectives . Introduction . Basic types of accounts . Chart of accounts . Basic financial statements . A short history of accounting and double-entry bookkeeping 8. Ledgers 9. Advanced reports and analyses 10. Budgets 11. Chapter Summary 12. Discussion Questions 13. References 10. Leveraging with information technology 1. Learning Objectives . Introduction . IS tools for the Start-Up Organization . Moving Forward With Information Systems . Know What Your Customers Want . Using Information Technology Competitively . What is IS Risk Management . Chapter Summary . Discussion questions 10. References 11. Competitive intelligence 1. Learning objectives 2. Introduction 3. Definition 4. Importance and goals of competitive intelligence 5 6 NOUR WN WON ADU BW N . Information collection methods . The industry environment 7. 8. 2 10. Porter's 5 forces and the analysis of competitors Methods of evaluating competitors Chapter summary Reference 12. Business ethics in a nutshell 1. 2 a. What is ethics Management: the meta profession Corporate social responsibility 13. Adding products and services 1. . Introduction . Where does innovation come from? . Innovation through business models . Evaluating new products . When innovation fails: deleting products 10. WOMANAUKRWHN Learning objectives Chapter summary . Discussion questions References 14. International business for the entrepreneur . Introduction . Globalization: opportunities and threats to developing country business . Harnessing technology for global business success . Doing business across cultures . Political and legal risk in international business . Global marketing: Assessing potential markets overseas . Global finance: initial considerations . Organizational structure and human resource management . Corporate Social Responsibility and sustainable development in the global environment . Case: Built to Last by Jim Collins 11. Chapter summary 12. References 15. Growth strategies for start-ups 1. Learning objectives and overview . Definition and models . Growth problems . Chapter summary . References, and further literature wm BW N The business eco-system: Your path to finding the pot of gold at the end of the rainbow! Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) _ Exhibit Striking gold Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Dedication: In Memory of Nancy Wachs who believed in everyone’s Startup time! There are many ways to live your life. One of the most exciting yet challenging ways to live your life is to start your own business or work for someone who has their own startup. People who start their own businesses are known as entrepreneurs. Entrepreneurs throughout the world are extremely enthusiastic individuals who devise visionary methods to accomplish their new venture ideas while simultaneously convincing others to help. "Merriam-Webster Online defines the term “entrepreneur” as follows:“Etymology: French, from Old French, from entreprendre to undertake — more at enterprise Date: 1852 : one who organizes, manages, and assumes the risks of a business or enterprise”[footnote |" Merriam-Webster’s Online Dictionary, “Merriam-Webster Online,” http://www.merriam-webster.com/dictionary/entrepreneur (Assessed, August 30, 2008). Are entrepreneurs born or made? There is a long-standing discussion throughout the world that delves into whether you are born predisposed to become an entrepreneur or is it necessary for you to work and study hard to make yourself into one. There are many examples of individuals who were told they would never amount to anything and yet they went on to become very successful entrepreneurs. So, if you think that you are unlikely to be an entrepreneur, please realize it is possible for you to become an entrepreneur and to, potentially, even become a very successful one. With that said, there are characteristics and an overall mindset you can adopt that will help “predispose” you to having a greater opportunity of becoming a successful entrepreneur. Some of the most common characteristics of an entrepreneur include the following attributes: Example: "The Mindset of an Entrepreneur" Vision: Able to create and communicate an easily understandable mission for what the new venture does in order to successfully launch a new business. This is accomplished while inspiring others to join you in your new enterprise. Creativity: Ability to inject imagination and uniqueness into a new business venture. It takes skill and ingenuity to create a new venture equipped with strategies to outsmart the competition. Focus: Able to maintain the vision of the company with unwavering diligence. It’s very easy to get sidetracked especially if you find it necessary to evolve the original vision. Ironically, we have encountered many successful entrepreneurs who get bored easily... Passion: Desiring to succeed under your own steam [initiative] on a business venture... Drive: Possessing intrinsic energy to accomplish the business goal even in the face of adversity. Perseverance: Able to keep going even when faced with seemingly insurmountable obstacles. Opportunistic Nature: Sees the possibilities even before they exist. Can take advantage of an upcoming trend or unite unrelated processes to create a unique business venture... Problem Solving Ability: Thrives on coming up with solutions to complex challenges... Self-discipline: Able to be organized and regimented in pursuit of a successful business venture. Frugality: Knows how to stretch every cent so that expenditures are as low as possible. Empathy: Able to put yourself in another’s shoes and therefore able to show sensitivity and understanding of what others are communicating in the startup environment... Social Responsibility: Ethics, caring and humanitarianism are characteristics that are commonly found in today’s entrepreneurs... Spirituality: We have found that successful entrepreneurs have often devoted time to spirituality development. Meditation and positive affirmations are two common examples of spirituality. Good Timing: Able to identify a market opportunity and know when it’s the optimum time to launch a new venture or expansion of an existing enterprise. Luck: Can a person be predisposed to be lucky: Is luck a human behavior or a karmic universal predisposition?” [footnote] “The Mindset of an Entrepreneur” is reprinted and adapted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, introduction pages xxviii-xxx. Read on: [link] is dedicated to this topic and delves deeply into “The mind of an entrepreneur”. Blog Back 1: Mindset Blog Back: Is an entrepreneur born or made? What characteristics are necessary for an entrepreneur to be successful and why? What additional entrepreneurial mindset characteristics could be added to the list and why? The business eco-system: The business eco-system Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) The business eco-system Whether you possess the characteristics of an entrepreneurial mindset, or work for someone who does, you can still be instrumental in starting a new venture by understanding the business eco-system. What is a business eco- system? A business eco-system is a set of business components that form the foundation of a new venture’s creation. Figuratively, the business eco- system is like a wheel that rolls your new venture forward which is why we represent the business eco-system in a wheel-shaped model . Exhibit BUSINESS ECO-SYSTEM WHEEL ‘Ss Ff —owrning Business eco-system wheel The Business Eco-system Wheel is reprinted and adapted from the Entrepreneurial Marketing Wheel with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Preface, page xxii. The sun rise of your new business Accessing market opportunity: the initial rim of the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) The sun rise of your new business Accessing market opportunity: the initial rim of the wheel Exhibit 7 Rising sun Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Market Opportunity is positioned at the top of the Business Eco-system Wheel for a reason. Every new venture starts with a single seed or kernel of an idea to do something in business that will result in money being exchanged. Since there is always some risk associated with starting a new business, you will have to take special care to plant the idea seeds of your new venture in a way that allows these seeds to some day bloom into a successful venture. When to plant your market opportunity seeds Without a doubt it’s challenging to know when to move forward and plant your new venture ideas in the “business garden” where you want to grow your career. Entrepreneurs who are considering moving forward with a new venture idea can utilize the following questions and the “Stop and Go Signs for Accessing Market Opportunity Matrix.” Example: “Stop and Go Signs for Accessing Market Opportunity Matrix” "Is there a customer for this product or service? Is there someone who will buy the product or service you're considering selling? You can't effectively answer this question until you have personally spoken to the potential customer and ascertained that this person will buy your product. You need to know as much about this customer as the customer knows about himself: What are the demographics of this customer? What influences his buying behavior? What factors could lead to this customer changing his mind about buying the product or services? What will be the impact of a crisis during an emerging trend? What will it cost to make a sale to this customer? If there is a common pitfall for entrepreneur, it's greatly underestimating the cost to acquire and repeatedly sell to a customer. The entrepreneurial marketer must account for every last expense it will take to make the sale. Commonly missed expenses include: staff time, travel and related expenses, overhead for office, payroll taxes, social security employer matching expenses (which occurs in the United States so your countries’ equivalent, ) unemployment payroll related expenses, marketing expenses, and the overall amount of time it takes to make a sale. Is my timing right for this market opportunity? You will have a brief window of opportunity to launch your new venture or expansion of an existing enterprise. Misjudging your timing is often the difference between success and failure with assessing market opportunity. If you are too early, you have the right product or service but your market is not ready for it yet. If you are too late, giant competitors may have acquired a loyal following, blocking new entries to the market. Can I sell this product or service for a profit? Even if you have an existing customer, and have accurately estimated what it will cost you to acquire that customer; you might not have a sustainable business model until revenues outweigh the expenses... You need to find the incremental steps you can take to get to profitability. This is not easy. Again, there is no road map, but remember that patience is needed to reach profitability.” (One solution that is becoming a common practice throughout many parts of the world is micro-financing. Micro-financing is where a small loan is made available to an entrepreneur in a developing country. While micro- financing is arguably one form of financing micro-financing has been documented to be a more sustainable form of financing because the amount of the loan is made in such a small (micro) amount that the recipient of the loan does not have to leverage the startup's best interests and assets in order to pay the loan back. The small amount of money loaned to the entrepreneur can usually be paid back from the revenues that the new venture is generating. Check out this micro financing website: http://www.acion.org.) “Be open and flexible and recognize that along the way to profitability you might stumble on to a product or service that is in higher demand than the original concept. When do I give up on my product or service? When should I pull up the roots of my new venture? In the characteristics of an entrepreneur...perseverance was listed. There is a point, however, where you need to “pull the plug” and refocus your energies. You know you have reached this point when: You have run out of resources and can’t further leverage any of the methods suggested in this book. The customers who said they would buy your product during your research phase are no longer interested. You can’t effectively market to your customer. It costs you more than you make to sell your product or service. During market opportunity assessment, there are times when the entrepreneur needs to “hit the brakes” and stop. Not stopping fast enough can lead to a failed business and/or bankruptcy. There are also times when an entrepreneur should “step on the accelerator” and drive on to new market opportunity territories. Knowing when to stop and go in your new venture market opportunity assessment isn’t easy. To help you decide when to move forward with and when to forego an opportunity, please see the “Stop and Go Signs for Assessing Market Opportunity Matrix." It's common for an entrepreneurial marketer to get caught up in what seems like a great idea or business concept. This matrix is a concise, easy to reference and somewhat simplistic way to make decisions on judging market opportunity. This matrix suggests four major causes for a new venture to not find a profitable market opportunity. Recognizing when you are on the verge of going through a Stop Sign without braking is critical. You can refer back to these stop signs in this matrix as constant reminders of when to turn your market opportunity strategy in another direction.” Exhibit Stop and Go Signs for Assessing Market Opportunity Matrix No Customers Customers’ Unprofitable Resources for the Purchase Sales of the Running Out Product Motivations Product Unknown Trends Indicate Timing Right Total Costs for Sales to Emerging Market to Attract Selling the Customers Opportunity Customers Product Known Yield for the Sustainable Product Profitable Results Stop and Go Signs for Assessing Market Opportunity Matrix “When to Access Market Opportunity” text and “Stop and Go Signs for Assessing Market Opportunity Matrix” adapted and reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Mini Module on Assessing Market Opportunity, pages xxxix- ie If you encounter any of the four Go Signs when you are assessing market opportunity, don’t take time out to pat yourself on the back. This is because if you look over your shoulder you may see someone else realizing what you have discovered. Keep “driving on” if you are encountering all Go Signs.” [footnote] “When to Access Market Opportunity” text and “Stop and Go Signs for Assessing Market Opportunity Matrix” adapted and reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Mini Module on Assessing Market Opportunity, pages xxxix-xli. Read on: [link] and [link] discuss market opportunity in greater detail. Blog Back 2: Go Signs Blog Back: Analyze your new venture’s market opportunity; do you have all “Go” signs? If you have all or some “Stop” signs what can you do to remove the roadblocks that are causing your “Stop” signs? Enter your Sales: the essential rim of the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Sales: the essential rim of the wheel Exhibit BUSINESS ECO-SYSTEM WHEEL Market The Business Eco-System Wheel and sales What will I sell? You can sell a product or service. A product is a physical item while a service is something you would implement or execute on behalf of someone else. Product ideas to consider selling e Hand-crafted art and artifacts for exporting e Fruit for selling at a fruit stand or using in the production of cosmetics e Honey that you produce as a bee keeper e Mustard condiments produced from mustard seeds e Handcrafted furniture e Paintings by emerging artists e Recycled goods made into products such as purses made from recycled juice and soda containers e A restaurant that offers food menus that others enjoy eating e Yogurt served in containers that are edible Ideas for services to consider offering e Providing education to children as well as adults in a school ¢ Purifying water at the site of wells that may be tainted with arsenic e Providing guide services to travelers ¢ Developing marketing campaigns for local businesses e Running food stands for others e Providing tailoring services e Manufacturing furniture for businesses and residences ¢ Offering cooking services to families e Selling wireless phones for phone corporations e Providing people to build buildings, houses, roads and or bridges ¢ Offering out-sourced from other countries call center services e Providing computer consulting services Places for inspiration "Kiva (www.kiva.org) is the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.” [footnote] Kiva provides a list of entrepreneurs who seek loans and a description of these entrepreneurs’ business concepts. Visit the Kiva website to read the inspirational stories of these entrepreneurs. http://www.kiva.org/app.php ?page=businesses.| footnote | Kiva, “About: What is Kiva?,” http://www.kiva.org/about (Accessed January 11, 2009). January 11, 2009). “Aid to Artisans (ATA), (http://www.aidtoartisans.org) an international nonprofit organization, is a recognized leader of economic development for the craft industry. By linking artisans to new markets and buyers to culturally meaningful and innovative products, ATA provides needed economic opportunities to artisans while preserving the beauty of global handmade crafts.”[ footnote | Aid to Artisans, “About Us,” http://www.aidtoartisans.org (Accessed January 12, 2009). Financing: the fundamental rim on the wheel One of the greatest talents that most successful entrepreneurs possess is the ability to persuade others to invest funds and resources in a startup during the idea creation phase of a new venture. You are not alone if you have major concerns about attracting the finances you need to get your startup idea “off the ground”. If you are reading this and thinking you do not know anyone who would consider investing in your startup we suggest transforming your thinking into a more constructive thought process in which you believe in yourself and your own ability to achieve financing. Financing opportunities e Micro-financiers (Do a Google search at www.google.com using the key word "micro-finance" to find potential micro-financiers that you may want to research as one method of financing your startup costs.) e Family traditionally is the first place to look for funds to pay for some of the startup costs associated with a new venture. Even if your family has no resources to offer you can still talk to family members about introducing you to people they know who might be able to help. More money then you can imagine has been raised in this manner. ¢ Friends, even casual acquaintances, can at times provide financing and resources for a startup. Even if a friend is not able to directly help, you should ask each friend or person you contact for help to also provide you with 3 names of others they know who may be able to help. e Governmental support is also a possibility. If applicable, you can also let the local non-governmental agency associated with what you are doing know your needs in case there is some support available. e Barter or trade is a method by which you could provide a needed service such as consulting/management advice in return for the resources needed for your startup. e Savings take a long time and effort to accumulate in the amount most people need to start a new venture. There are many risks involved and you may not ever be able to replenish the amount of money you took from your savings to invest in a startup. On the positive side though, if you use your own savings you do not have a loan to pay back. e Bank loans are not usually available to early-stage entrepreneurs unless you have a track record of a previous success and/or the assets to put up such as a home you own in return for securing the bank loan. ¢ Networking refers to attending events, conferences, seminars, and any activity where by you can meet others who might be able to help your further your startup's development. ¢ Online networks are online websites where you can connect with people you know to ultimately gain connections to people they know. One well-known online network is LinkedIn at www.linkedin.com. According to the About LinkedIn website, “LinkedIn is an online network of more then 30 million experienced professionals from around the world, representing 150 industries.”[ footnote] LinkedIn is available in English, French and Spanish. You can use the search field at the top of every LinkedIn web page to search for people and companies that might be willing to finance your startup. You can sign onto LinkedIn and connect with others that would in turn potentially be willing to connect you to the people you are trying to meet. LinkedIn, “About LinkedIn, http://www.linkedin.com/static? key=company_info&trk=hb_ ft abtli (Accessed August 15, 2008). e Memberships in community organizations may be a place where you can meet like-minded individuals interested in your startup idea. Use the opportunity to share some information about your startup with the people you meet. You may find others who want to help you make your startup a success. Read on: [link] contains more material on financing your business. Strategy: the tactical rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Strategy: the tactical rim on the wheel Strategy is the method you utilize to go about achieving the underlying goal of your startup. It’s recommended that prior to spending any money on your new venture that you first come up with the strategy or strategies you plan to utilize to make your startup successful. Devising the right strategy often requires a great deal of market research on the history of your competition, potential customer needs and wishes as well a taking into consideration the economic climate and cultural factors that could impact your startup. Examples of startup strategies: ¢ Low cost leader by charging less than the competition e Luxury cost leader by charging more than the competition e First to market by having your product or service in the market place prior to anyone else. This strategy is often referred to as the “first mover advantage.” ¢ Creating sustainable growth for a startup means that the new venture will eventually make more money then it takes to operate the company and that the profitability of this venture is possible over an extended period of time. ¢ Creating societal wealth means the company you are starting wants to create a product or service that will make the world a better place. The product or service you plan to create will enhance societal value. Educational institutions and schools are good examples. Another example is providing foods in the market place that are nutritional in value can have a major positive impact on a society’s health. ¢ Paradigm shifting brand for a startup means creating a product or service that revolutionizes the world! Examples include the first developers of airplanes that not only manufactured the airplane but also found a way to commercialize the product in the market place. An emerging product in this category is space ships. Although it may sound far-fetched today, there are several corporations today developing the design and plans for the day where by we get in our space ship the way we get in our car or on our bicycle. Some wealthy business owners are even today adding space ports to their garages. Read on: [link] and [link] both contain more information in setting your strategy. Blog Back 3: Strategy Blog Back: Imagine that you are starting a new venture utilizing the strategy of creating a paradigm shifting brand. What product and or service might you develop to implement such a strategy? comment on what you think of two other ideas that others shared regarding their paradigm shifting idea. Branding will make your blossoms bloom! Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Exhibit Mid day Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Branding: The memorable rim on the wheel Branding is the core foundation of your startup that is necessary to make your product or service blossom and grow. “Branding” is a commonly used marketing term that refers to a distinctive image, usually in the form of a logo or company mark that represents a company or product. In recent years a company’s brand has become an asset with a financial worth known as “brand equity”. The marketing use of the word “brand’ is borrowed from the process of burning a rancher’s mark into the hide of a calf for identification purposes. When building your brand, the following checklist is helpful for making your startup bloom. Branding coaching What is the meaning behind the message your product and/or service represents? Coaching: Try writing the history of why you are starting this venture and what is the deeper meaning behind why you are doing this and what you hope the legacy of the new venture will be in the market place. Review the history and pull out any information that seems relevant toward the meaning. Then write up some draft messages you hope to communicate when marketing the product or service. What is the brand essence of your new product or service? Coaching: The brand essence of your venture is the “heart and soul” behind the product and service you plan to develop; the core DNA of your product or service. The brand essence is the foundation of your brands true identity and the brand essence typically stays the same over time. An example of brand essence is the medical corporation International Patient Assistance Centre headquartered in Singapore. A review of the corporation’s website essence for the medical company is “dedicated and experienced patient care teams”. If you are not able to come up with the brand essence for your venture try reverse engineering the process by asking yourself what would you like the brand essence of your venture to be and then make a list of action items you would have to do to achieve creating a company with this type of brand essence. IPAC, International Patient Assistance Care, www.ipac.sg/en/About/ (Accessed January 2, 2009.) Example: What is the brand advantage? Coaching: What sets our brand apart from that of the competition? Try answering the following: “What is distinctive about the brand? What differentiates this brand from the competitor’s? How do customers perceive the brand? What emotion does the brand evoke? Who appreciates the brand? Why? What do customers get from the brand? Where do customers go to find the brand? What do customers see in the brand that the founders didn’t?”[footnote | “Understanding the Essence of Brand Advantages” questions reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Branding that Works, page 79. Source: “Understanding the Essence of Brand Advantages” questions reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Branding that Works, page 79. What can you do from the start to make sure that others cannot use the mark or brand name? Coaching: Investigate what the trade-marking regulations are for protecting your brand. What are the governmental processes for securing a trademark for your brand? “Trade marking” is the process one goes through to register with a government entity the text and or visual depiction of your business name and, if applicable, the business mark that accompanies the venture. A “logo” is the word utilized typically to describe the visual depiction of the business name. If you plan to trademark your logo or the text version of your business name for protection you can find out the necessary details of this process at the World Intellectual Property Organization at: the Madrid System for International Registration Marks explained further at:http://www.wipo.int/madrid/en/.[footnote] World Intellectual Property Organization, http://www.wipo.int/portal/index.html.en (Accessed January 11, 2009). World Intellectual Property Organization, “Madrid System for International Registration Marks,” http://www.wipo.int/madrid/en/ (Accessed January 11, 2009). As of October 27, 2008, countries’ statuses are listed regarding the Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks. View this information at: arks.pdf.[ footnote | World Intellectual Property Organization, “Madrid Agreement Concerning the International Registration of Marks and Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks,” arks.pdf (Accessed January 11, 2009). Looking for inspiration? You can find many examples of logos in the process of being trademarked in the United States through the United States Trademark and Patent Office website that posts online “The Trademark Gazette”. Here is an example of one issue of The Trademark Gazette: http://www.uspto.gov/web/trademarks/tmog/20081230 OG.pdf.[footnote | United States Trademark and Patent Office, “The Trademark Gazette,” http://www.uspto.gov/web/trademarks/tmog/20081230 OG.pdf (Accessed December 24, 2008). Once you have secured the trademark for your business name, you then process a legal standing to protect against other businesses using your company name in the category you are doing business in. Trademarks are considered assets to a business and have a monetary value if and when you want to sell or merge your venture. The Brand Identity Guide: A blueprint toward success Once you have developed your business name into a logo and are in the process of trade-marking that name, many entrepreneurs begin widespread use of the logo in marketing materials to raise awareness of their product or service to their targeted customers. Well-known branded businesses assign someone the task of making sure the logo is properly utilized, with the correct color ink, in the correct size, in the correct location of the page layout especially when used in conjunction with other logos. A style guide for the use of the logo is often called a “brand identity guide”. Blog Back 4: Brand Identity Blog Back: Brainstorm the development of a Brand Identity Guide to illustrate the use of your logo in any materials you or others create to market the product or service you would like to create. What is your brand essence? What is your brand advantage? What font and font size will you utilize for your logo? What if any visual image/drawing/illustration will accompany the text of your logo? What colors will you utilize for your logo? Using the pantone color chart, select the exact color(s) you wish to utilize. Will your logo be depicted differently if it’s used in a horizontal vs a vertical page lay out? What is the smallest size your logo can appear? What rules govern your logo’s use when it appears with logos from other companies such as may be the case with a sponsorship? In what countries would you like to trademark your logo? Is there anything else you would like to share about the brand you plan to create? Identity Guide. Stakeholders: the connective rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Stakeholders: the connective rim on the wheel Your brand cannot bloom unless you ensure that you develop your brand in a way that will please everyone who comes into contact with your business. The people who come in contact with your business’s brand are known as your startup’s stakeholders. Who will be your startup’s stakeholders? “Take aim” carefully as you decide. Consider establishing contacts with some of the following suggested stakeholder categories common to new venture enterprises mentioned in the “Startup Stakeholder Arrow”. Exhibit Startup Stakeholder Arrow Strategists: Strategic Partners Strategic Advisors . Chambers of Me ntors: Membership Organizations | Custom —————j External: Governmental: Local Angel Investors Regional Grants Federal Sponsors Government Unions Grassroots: United Nations ¢ Viral Suppliers/ Vendors Ministries * Influencers Shareholders: Consulates * Street Teams * Vested NGOs * Vesting * Owners “Startup Stakeholder Arrow” created by Molly Lavik, founder, Mentorography, Inc., January 12, 2009. Reprinted with permission from Mentorography, Inc. © 2009. All Rights Reserved. The stems of growing startups: definitions of “startup stakeholder arrow” selected terms Strategists: A strategist is a skilled person who may be adept at taking your overall vision for the business and developing the plan of action for achieving the overarching goals. Strategists are experts at coming up with the winning maneuvers for laying the foundation of having a successful venture. The term strategy was originally utilized to define military maneuver plans. Exhibit Mid Day (Adapted) Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Strategic advisors: Advisors are people typically with experience in an area that you wish to learn more about. Advisors impart valuable wisdom that you can utilize to learn valuable lessons regarding generating revenue and profits for your planned venture. Chambers of Commerce: Chambers of Commerce are large memberships of business federations representing hundreds and sometimes thousands of business owners. Network: Your business contacts that can help you today or in the future accomplish your goals. Entrepreneurs need vast networks of people's assistance to achieve the venture's goals. Financiers: Financiers are comprised of people or a business entity that provides financial resources for your new business to utilize. Micro-financiers: These are people who make cash loans in very small amounts to entrepreneurs in emerging countries to people who have very little if any resources. Often the people who receive micro-financed loans have little to no experience in business. A website where people can see micro-financing in action is located at: http://www.accion.org. Venture capitalists: These are people who have a high net worth of resources or are part of an institution that has a fund of high net worth. Venture capitalists seek out entrepreneurs who are starting new ventures that have an opportunity to make a large and fast return on the financial resources invested. The main category that venture capitalists have previously invested in has been the technology industry. A venture capitalist does not make any money until the new venture sells, merges or makes an initial public offering known as an IPO when for the first time that business offers common stocks to the public. Entrepreneurs have had a "love and hate" relationship with venture capitalists because if the new venture doesn't make the anticipated return on investment predicted the venture capitalists usually has the legal right to take over part or all of the ownership of the new venture leaving the entrepreneurship often out of the venture from that point forward. Venture capitalists also have the ability to provide the cash as well as mentoring resources needed for the new venture to thrive. Angel investors: These are private individuals that typically have large amounts of resources to invest in your startup. Angel Investors choose to invest in your startup because they share a common interest in what you are doing. Shareholders: A person who owns or holds stock in a business. Vesting: Vesting occurs when a person associated with a business venture is granted legally the right to possess stock-options if they work for a specified term. By way of example a person's stock options could vest over a three year period with the person earning stock-options incrementally and fully vesting in all the promised stock-options at the completion of the three year term. Mentors: These are role models who you can receive instruction, advice and coaching from regarding important lessons to follow to make your new venture a success. Ministries: These are offices that provide service to the country or state of origin. Consulates: These are the official offices of a government appointee. These offices can be located in the country of the government that made the appointment and or abroad NGOs: Stands for non-governmental organization and NGOs are run by people who are not part of the government although governments can partially fund an NGO as long as the funding government agency doesn't retain any type of representative or leadership role in the NGO. In the United States a type of NGO is referred to as a non-profit organization. NGOs typically have organization missions and goals that are dedicated to creating greater societal value versus existing to stay solely focused on generating profits. Ad agency: This is a company that you hire to develop for pay advertisements to ensure that your targeted market is aware and enticed to purchase your product or service. PR agency: A company that you hire to generate favorable publicity about your new business to people who have been found through market research potentially interested in buying your product or service eMarketers: A group of people that you hire to implement your digital media strategy for the online and potentially via cell phone marketing of your new business. eMarketers utilize ultimately any form of electronic media to promote and advertise your business. Netroots: This word is a newly coined termed that combines portions of the words Internet and grassroots to define a type of marketing that targets blogs and digital media in order to cause powerful action for achieving your new venture goals. The term originally described political action and has recently been utilized to describe business action. Bloggers: This term describes someone who keeps an online diary/journal/log of his or her activities or comments on others' activities. One of the most popular blogs in the world is about entrepreneurs and is kept by Guy Kawasaki called, How to Change the World: A practical blog for impractical people. Check it out: http://blog,guykawasaki.com. Social networks: These are websites dedicated to fostering a community of individuals around a topic. We mentioned LinkedIn earlier; Facebook is another social networking example. According to Facebook's website, "Millions of people use Facebook everyday to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet.”[ footnote | Facebook, “Molly Lavik,” http://www.facebook.com (Accessed December 24, 2009). Readers of this chapter are invited to join my Facebook page by registering to become a Facebook member at http://www.facebook.com (it is free and a social networking site) and then enter Molly Lavik into the search field and click on my name. Then select add as a friend. Texting: This is when you type in a message with photos or in some cases a video via a cell phone Grassroots: This is a powerful movement of every day people for a cause. Currently there is a grassroots movement to protect the environment throughout the world. Viral: This happens when a marketing message is transmitted through people excitedly and enthusiastically spreading the message by telling others who tell others who tell others and so forth. When a marketing message is spread via "word-of-mouth" the message is visually depicted as spreading in the same way a cold virus spreads and multiplies through a growing number of people in the wintertime. Marketers spend a great deal of money to attempt to initiate the spread of messages via word-of-mouth. However, it's easier said than done. An example of a marketing campaign that was spread via word-of-mouth was the marketing campaign for the film Slumdog Millionaire which is a film about a poor orphan from Mumbai India's slums who is a candidate for winning millions. Influencers: Persons who are copied for wearing or embracing a particular fashion or trend. Taste makers are often known as trend setters. Street teams: This term is used to describe a group of often young people between the ages of 15-25 years old, who travel up and down usually city streets actively promoting the product or service they are paid to market. Membership organizations: Trade and other forms of professional associations, unions, special interest groups and work related clubs that one can join. Community: The geographic, psychographic as well as online neighborhood in which your venture operates on a regular basis. Virtual: Pertaining to your image appearing in a perceived manner, live, somewhere other then where you actually are currently located. The image would appear via a digital format such as through a web camera, simulated artificial intelligent agent and or three dimensional image such as a hologram image. Suppliers: Companies that provide valuable resources to your new business are true suppliers. Vendors: Typically the valuable resources are purchased from commercial resources known as vendors. Consumers: These are people who buy your product or service. Employees: These are individuals that work directly for you and are on your pay roll. Read on: Several subsequent chapters discuss the importance of stakeholders further. Blog Back 5: Stakeholder Blog Back: Decide how you want to “take aim” carefully here. Who will be on your Startup Stakeholder Arrow? Brainstorm ideas for who specifically you would aim to have for your Startup Stakeholder Arrow. Be sure to include exact names of businesses and people and titles for this list. Try to utilize all the aspects mentioned in the provided categories of the “Startup Stakeholder Arrow”. Stakeholder Arrow list. Ethics: the authentic rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Ethics: the authentic rim on the wheel Ethics refers to the “heart and soul” of the activities you engage in while starting your business. How authentic and truthful you are during the startup phase will set the stage for the future ethical threshold of your new venture. As the founder and chief visionary behind the concept you are bringing to market, it is your responsibility to create the values and company culture that will be your business. Once a company culture is set, it is virtually impossible to alter the path that you have set for your new venture to follow. One way to try to ensure the ethical standards of your company is to first make sure that you have a good moral compass. Your “moral compass” is the ethical stance you take on decisions and actions with your startup. Here are some questions to consider when developing your own moral compass: e What will the new venture’s code of ethics state? ¢ How will I make decisions for the startup that will limit my revenue potential but will ultimately be the correct action to take legally and ethically? e What can I do to ensure that the people I hire have good values? ¢ Who will I go to for advice when I have a moral/ethical dilemma? e Will I be capable of following the advice that I receive for taking the right ethical action? ¢ How will I know what is ethical and what is not? e What processes will I put in place to make sure that my staff and the stakeholders I associate the startup with are acting ethically at all times? e What will I do if a staff member or key stakeholder I’m associating with violates my new venture’s code of ethics? e Ina crisis how will I communicate to my stakeholders the situation in the most ethical manner possible? e How often will I cross check that I’m following my new venture’s code of ethics? e What seminars, classes and guidance can I find to make sure I’m acting ethically when running the startup? e What people can I go to in order to gain a role model/mentor for acting ethically with my startup? e If I end up doing something that was unethical what will be my process to correct the situation and to communicate the situation to my stakeholders? e Will I listen to my gut if I have a strange ethical reaction to someone or something? e Is there anything else I should ask myself to develop my moral compass? It turns out in business that self-awareness of one's action is a key component to understanding how to develop an ethical moral compass. Additionally, the translation of an entrepreneur’s moral compass into the development of a new venture leads to the establishment of the businesses’ company culture. The “company culture” is the values you decide to instill in the new venture. Making good: elements of a values-based company culture e Provide a safe work place and clean work environment. e Pay fair wages to all employees. Provide benefits of some kind for employees that may include health insurance, dental insurance, vision insurance, a retirement investment plan, a pension of partial salary to be paid once an employee retires, and reimbursement for continuous learning. Host employee appreciation events. Be respectful to all employees. Treat all stakeholders with respect and fairness. Have a suggestion box or method where by employees and stakeholders can make suggestions that you review and consider. Be a good corporate citizen by supporting some NGO/non-profit entities either by paying your employees to volunteer for these named causes or making cash donations or sponsorships to financially help support these organizations. This type of activity is known as CSR (Corporate Social Responsibility.) An example of a company that has been a good corporate citizen and routinely practices CSR is Grupo Bimbo which, according to the company’s website, was established in 1945 and is considered one of the most important bakeries in the world. In 2007, Grupo Bimbo’s net sales amounted to $ 6.7 billion dollars. In keeping with the company’s social responsibility, Grupo Bimbo participates in important community projects such as the reforestation of protected natural areas in Mexico as well as in a series of different projects for community welfare. You can read all about Grupo Bimbo’s Social Responsibility work in health, commitment to the environment, commitment to associates, and commitment to society at: http://www.grupobimbo.com/display.php?section=6 [footnote] Grupo Bimbo, “Social Responsibility,” December 28, 2009). Adopt a triple bottom line philosophy. “Triple bottom line” means your company cares equally not only about making a profit but also about taking care of the people associated with your company and conducting business in a way that is good for sustaining a healthy environment for the planet. So to summarize, the triple bottom line philosophy means you care equally about people, planet and profits. Develop sustainable business practices. One who cares about the environment of his business goes to the trouble and expense to make sure that he: o has a recycling program for not only garbage but also old electronic devices and toxic waste disposal from batteries and printers. o utilizes office cleaning supplies that are environmentally safe and don’t outgas. “Outgassing” is a term that refers to indoor air quality and describes the slow release of gas from a manufactured material such as furniture or carpets. Often the term is used to describe the potentially unhealthful attributes of a newly manufactured material as this gas is released indoors. © carries out office remodeling and construction in a safe for the environment fashion by using low VOC, (“Volatile organic compounds (VOCs) are emitted as gases from certain solids or liquids. VOCs include a variety of chemicals, some of which may have short- and long-term adverse health effects.”)[ footnote], paints that do not out gas as well as insulation made from recycled materials. U.S. Environmental Protection Agency, “Indoor Air Quality: An Introduction to Indoor Air Quality: Organic Cases (Volatile (Accessed January 16, 2009). © replaces company light bulbs and lighting fixtures with energy efficient light bulbs. © produces marketing materials that use soy-based ink and are printed on recycled paper stock. He uses the recycled logo mark on materials to communicate to stakeholders that he is concerned with sustaining the environment. °o works with vendors, suppliers and all of his stakeholders that support environmental protection tactics. © conserves energy and resources whenever possible. Moving to a four day a week, ten hour a day schedule can by way of example conserve energy and ultimately "“cut kilowatts to create a slender gas and electric bill”." o rewards employees for traveling to and from work in sustainable ways such as walking, riding a bicycle, taking public transportation and when appropriate car-pooling. o if applicable, purchases company vehicles that are electric or electric hybrids. o stays current with environmental literature to keep employee’s knowledge base strong on conserving energy. Going green on a shoe string You may be wondering what you are going to do take the ethical stance on your company’s proactive sustainability plans to protect the environment when you are in the startup phase of your venture. It happens that doing the right thing for the environment is not just good for the environment but it also can be profitable no matter what your socio-economic state is today with your business. The recommended energy-saving tactics listed above will help you save money on your electric bill. By operating a sustainably- focused company you will be generating a growing amount of good will for your venture. And good will is something you can take to the bank! “Goodwill” is the difference between what your company is worth and what you are actually able to sell your venture for in the market place. The more goodwill you generate the higher value of your company in comparison to your competition. Some of the most environmentally conscious people in the world live in severely economically-challenged neighborhoods. Do not let your socio-economic status challenge the entrepreneurial ethics behind your startup. The goodwill you are generating from taking care of the environment could potentially come back to you in the form of good karma! Read on: You’|! find more discussion of a socially responsible organization in [link]. Blog Back 6: Moral Compass Blog back: Write a draft of your new venture’s code of ethics and a description of your moral compasses’ stances including what sustainable practices your venture will adopt to go green and have a triple bottom line focus. ethics, description of your moral compasses’ stances and green sustainability practices. Operations: the logistical rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) The operations of your business are the tactics and processes you implement to run your business. Water your plants: operations hydrate your startup Operations in a startup begin with the composition of a business plan. A new venture without a business plan is like a car without an engine; it exists but cannot get anywhere. In fact, researching and drafting the new venture’s business plan is probably the most important and necessary business practice you will ever under take. Business plans are usually written to obtain financing for a new venture. However, the business document and planning process provides a much more important function. This document will be your road map for getting your venture started. The findings of your research contained in your business plan can tell you from the beginning with pretty good certainty if your new business has a real chance of being successful financially and sustainable in the long run. Traditional sections contained in a business plan: ¢ Company Description gives a background to the history of your Startup and explains what your venture will do. e Statement of Mission or Mantra is a short phrase that explains the purpose of your new venture. e Products and or Services describe what you plan to sell. e Target Markets elaborate on whom you plan to sell to. e Marketing Strategy explains what unique maneuvers your venture will under-take to accomplish the businesses goals. ¢ Competitive Analysis documents who your main competitors are in the market place. e Management Teams are the names, titles and backgrounds of the people who will lead your venture to success. e Operations for Investors explains what tactics you will undertake to finance the venture and the exit strategy you plan to utilize for the initial investors to make a profit on their investment. e Financials document the forecasted sales and expenses for the first five years of the new venture. The financials should be accompanied by a detailed assumption log which summarizes where the numbers entered in your financial spreadsheets originally came from. Most investors want to see your financial documents include balance sheets, cash flows, income statements and key ratios such is when you anticipate breaking even. e Long-term Goals explain what you hope to eventually accomplish with the new venture. e Executive Summary which goes at the beginning of your business plan but is often written last should contain a brief summary of each of the above mentioned business plan sections. Executive summaries should be limited to two or less pages. The Executive Summary is often the most read portion of your business plan so it’s important to write and re-write this section until it’s absolutely perfect. Some entrepreneurs recommend that you draft the executive summary first and use this document as a planning document to cross check what you need in order to complete the business plan. After you have completed drafting your new venture’s business plan it may be time to establish the legal entity of your business. Check with your local government office to get directed to the rules and regulations and processes you need to follow in order to properly establish your business’s legal entity Some of the most universal company establishments are: ¢ sole proprietor e private limited company e state-owned enterprise e public-limited company « NGO e corporations If you can get the resources from family and friends to pay for an attorney to help you establish your business legal entity you may lessen some of the risks associated with starting a new venture. The type of business entity you form will more than likely impact the way in which you pay taxes on your products and services and file your country’s income tax filing. The definitions for the different forms of company establishments vary from country to country. You will want to check with the portion of your government that grants company established entities for clarification With a draft business plan in hand and your legal company business entity established it’s time to fully map out the operations/processes you plan to utilize to implement your business plan. It’s highly recommend that you make a Gantt chart to stay organized with the correct sequence and timing of each business activity. You can use Microsoft® Excel and setup columns that list: ° tasks e person(s) assigned to complete tasks e dates that tasks must be completed by as well as proper task sequence e an area to check off when a task has been effectively completed ¢ acomment section to keep a historic list of reactions to the considered tasks e and given your unique plans, you may choose to have additional columns. It is highly recommended that you post your new venture’s Operations Gantt Chart on a wall in a visible location so that as many people as possible have access to this information. This will allow others to make updates as well as understand what you are working on when they are considering interrupting you during the day. Keep an open mind as you implement your operational plans for the startup. Remain flexible to continuous updates. Remember a startup is an evolving operational process that will need fine turning along the way. Read on: Operations is the subject of [link] New product: the tangible rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) New product: the tangible rim on the wheel The new product can be a physical product and or a service offering. Developing a new product is an operational task that goes “above and beyond the call of duty” of utilizing the Operations Gantt chart described in the previous Operations section. Instead, we are recommending that you create a Process Mapping Guide in order to effectively develop your new product offerings. The following section describes in detail how to develop a Process Mapping Guide for your new product offerings A new product bud is blooming: introducing the “New Venture Instructional Manual to Operational Excellence” Example: “New Venture Instructional Manual to Operational Excellence” Start by process mapping all of the organization’s processes by creating a process log. Utilize a word processing software program which has auto shapes that features a “flowchart.” This will give you the software necessary for developing your process map. It does take a long time to process map the functions within an organization, even a newly formulated venture. It’s time well spent. Process mapping guide There are many books and publications about process mapping and there are multiple ways to process map. We are going to focus here on showing you how to map the processes that make up new product development and marketing. We suggest the following: Assemble the people who are involved in the development and marketing of a new product at your organization. Brainstorm a list of the day-to-day steps that are taken to develop and market a new product. Review the list with your board, strategic alliance partners, mentors, vendors, and family members for items that may have been missed. Take the final list and divide it into two categories: repetitive processes and rare processes. Repetitive processes are steps that are taken repeatedly when developing and marketing a new product such as manufacturing the product. Rare processes occur infrequently. Analyze the rare processes list to see if any of the items mentioned can be combined with or woven into the repetitive processes. Rare processes can drain resources and are often not budgeted for. If you can combine a rare process with a repetitive process, you have taken a valuable step toward improving the operational excellence of your business. Make a flowchart of the processes within your organization from the list that was prepared and fine-tuned. This is where you take what might be explained in several paragraphs of text and drill it down to several flowchart icons. See [link]. Process Mapping Diagram Exhibit Prepare for Naming Brainstorm Company Names with All Stakeholders Is the Name Ideal? Document the Comments Made on Potential Names Evaluate Finalize the Name Company Name The Process Mapping Diagram was developed by Molly Lavik, October 6, 2002 There is a growing trend for corporations to organize their management systems by processes instead of products. Large and mid-size corporations are making this shift to achieve cost savings. Once you have completed your process log you must repeat the analysis phase. Gather your resident experts as well as some new mentors and outside board members to analyze the firm’s processes. Look for current processes that could be streamlined. Because areas to streamline are difficult to see, keep re-examining what has been documented in the process log. Upon exhaustive examination of every possible streamlined scenario, the solution to achieving operational excellence will come into focus. Stay open and flexible to these new ideas. Log the new process innovations. Embrace the new processes and apply them throughout the organization with the committed support of top management. This can be the most challenging step and requires a change Management campaign. A change management campaign is the internal communication campaign that is targeted at a venture’s employees regarding a shift in the way a business is managed. This means you have to take a hands-on role in communicating the changes throughout the organization, making sure that everyone understands the new game plan, and why it is necessary. Inevitably, some won’t be willing to go along with the new program and you may need to help them find employment elsewhere. One negative person can delay the whole group’s transformation.”[ footnote | “Process Mapping Guide” text and “Process Mapping” Image reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Module on Savvy Strategies for Marketing New Products, pages 188-190. Source: “Process Mapping Guide” text and “Process Mapping” Image reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Module on Savvy Strategies for Marketing New Products, pages 188-190. After your new product bud has bloomed through the implementation of a process mapping guide you are ready to launch your new product offering into the market place. You should consider planning a New Product Launch Event. Read on: Adding Products or Services is discussed further in [link]. Let the fruits of your labor blossom: the new product/service launch event plan Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Let the fruits of your labor blossom: the new product/service launch event plan Exhibit Sunny day Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Your new business may be built around a product or service or both as we earlier discussed. We will discuss, by way of example, a new product launch event but it’s worth noting that the same general principles apply whether you are planning a new product or new service launch event. Events organized around a new product/service launch are typically postponed or cancelled because the new product/service does not turn out as anticipated. Build this scenario into any planned event so that you can recoup some of the costs if the event needs to be cancelled. Example: “Checklist for a New Product Launch Event Is the new product going to be fully functional in time for the event? What is your backup plan? Have you assembled a well-connected board of advisers to help with the production of the event? Have you determined your budget for the new product launch event? Is there anyone you can bring in to cosponsor the event to help defray the cost? Have you hired someone to be responsible for the myriad of details that must come together in order for a new product launch event to be called a success? Have you prepared a detailed spreadsheet, with deadlines, of all the items that need to take place for the event to come together and assigned each item to a responsible person? Have you devised the best forum for the new product launch event? Is the event scheduled during an industry tradeshow where every- one will already be assembled and you can easily fold your event into the bigger show, leveraging all the resources available at that event? Have you outlined how you are going to communicate your new product message at the launch event? (There is nothing worse than producing an expensive new product launch event that everyone may enjoy but attendees leave not having any idea what brand was being promoted.) Have you invited your targeted press to cover the new product event? Do you have a contingency plan if few people respond to your invitation to the new product launch event? Do you have takeaway logo items, commonly referred to as premiums, for attendees so they can be reminded of the new product? Have you decided how you will measure and evaluate your brand building strategy?” [footnote | “New Product Launch Event Plan” text reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Module on Savvy Strategies for Marketing New Products, pages 191-192. Source: “New Product Launch Event Plan” text reprinted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, Module on Savvy Strategies for Marketing New Products, pages USMS 2 Read on: Launching your business is the topic of [link], [link], [link], and [link]. Blog Back 7: Launch Plan Blog back: Develop a plan for your new product launch. Include the name and description of the venue you plan to showcase your new product as well as a detailed budget of the researched expenses and a forecast of the media coverage you hope to gain during the launch event. plan. Public relations: the sensational rim on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Public relations: the sensational rim on the wheel Public relations are the activities one engages in to generate excitement about your new venture so that editorial coverage will occur. Editorial coverage is thought to be much more valuable then advertising in media because people perceive editorial coverage as authentic and of interest. Startups need to generate a great deal of excitement known as “buzz” in order to make the case for media coverage. Because entrepreneurs normally don’t have much if any marketing budgets to initially launch his or her new venture, relying on public relations coverage becomes essential for the success of a new venture. In order to increase your chances for coverage of the new venture you will want to make sure that communications with the media include information about your new venture that is written in what is known as a “tight” manner including, if possible, the following attributes: ¢ concise/brief summary e straight-forward e timely and quite current e a first of its kind if possible e attention-grabbing e authentic and truthful ¢ tying-in if possible with an emerging trend e remarkable e and absolutely accurate The public relations practitioner’s tool kit Press releases: Newsworthy text regarding the “Who, What, Where, and When” of the story you are pitching to the media. Video News Releases (VNRs): Usually responsible for coordinating the video production of news announcements known as VNRs which are sent to television/broadcasting stations with the intention of gaining news coverage Newswire services: The Public Relations practitioner works with a company known as a newswire service to disseminate news announcements to targeted media. One example is CSRwire service found at: http://www.csrwire.com which specializes in disseminating news releases from corporate socially responsible companies often engaged in many CSR pursuits. [footnote | CSRwire, “Home Page,” http://www.csrwire.com (Accessed on August 15, 2008). News agencies: The public relations practitioner is in direct contact with news services that cover large batches of news happenings in specific regions. MEMERCOPRESS is an example of a news agency. According to this news agency’s website, "MERCOPRESS is a news agency concentrating on Mercosur countries which operates from Montevideo, Uruguay and includes in its area of influence the South Atlantic and insular territories."[footnote] For more information on MERCOPRESS visit: http://www.mercopress.com/about.do. MERCOPRESS, “About MERCOPRESS, http://www.mercopress.com/about.do (Accessed January 2, 2009). Media databases: Contain detailed information on how to reach media contacts. The more expansive and current the media database, the more likely you are to achieve optimum press coverage in targeted publications. Style guides: Provide guidelines on the proper formatting of information to include when quoting from another source and attributing in a citation the quoted source. Extensive Rolodex: Public relations practitioners are major networkers with vast contacts with the media as well as key stakeholders. Timelines: Successful public relations practitioners are known for keeping long timelines of checklists to make sure events and campaigns are carried out flawlessly in order to achieve the maximum amount of effective media coverage Archives: The public relations practitioner usually is the one to maintain the press clipping files documenting media coverage as well as the video and image files. Images are sometimes used by the media so keeping well- organized archive files is essential to any marketing campaign. Because public relations professionals are dedicated to the tasks surrounding disseminating, documenting and archiving news coverage, these practitioners are usually a great resource to any startup. Blog Back 8: PR Plan Blog Back: Write down a list of public relations plans you have for your new venture. Include what you will do to get publicity for your startup. What news sources will you target? Be specific by naming newspapers, magazines, newsletters. Leaflets, signage and other media sources that you plan to target. Mentor insights: the “Where the Rubber Meets the Road” spokes on the wheel Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) Mentor insights: the “Where the Rubber Meets the Road” spokes on the wheel Mentor insights are the lessons learned by the protégé/mentee. Mentor insights are depicted as spokes on the wheel because they are the glue that effectively holds together everything else. Understanding your mentor’s driving philosophies is essential if you want to gain the wisdom that your mentors possess. There is a tremendous amount you can learn from a mentor’s successes as well as their setbacks. Mentors come literally in all “styles, shapes and sizes”. When you are away from home be sure to keep a “look out” for people who might have some business wisdom to share with you. Places you can go to find mentors potentially ideal for coaching you with your startups include: e faculty at schools e libraries e seminars/conferences/workshops e town meetings e management from other businesses e classmates e family e friends ¢ co-workers e religious institutions e public markets e neighbors e near-by communities e re-acquainting yourself with people you haven’t kept in contact with e entrepreneurs e micro-loan recipients To keep track of the insights that you pick up from mentors try keeping a journal of the lessons you are learning that are applicable to your startup. Mentor insights can come from a business executive or role model who you want to emulate. Mentor insights can also come from observations of others. I was fortunate to meet a student named Jay Milbrandt while teaching a Social Entrepreneurship course at Pepperdine University’s Graziadio School of Business and Management. Jay had recently traveled to Bangladesh and kept journals of his first-hand observations of meeting people who were prospering through micro-finance loans. I found these journal entries extremely inspirational and we hope you will as well. We encourage you to be on the alert for micro-finance opportunities in your country as a proven method for helping those that are less fortunate than yourselves. By reading these journal excerpts you can experience how those less fortunate are finding success no matter what their economic situation. Micro-financed loans are imparting a great deal of opportunity to those that really need it and transforming the economies of developing countries in remarkable ways! The following are excerpts from the journal of Jay Milbrandt. Example: Jay Milbrandt’s Journal Entries from Bangladesh: Not Just Statistics The shear numbers are impressive. 1.2 billion people throughout the world live in extreme poverty. Accordingly, extreme poverty is defined by the World Bank as living below $1 per day purchasing power parity threshold. The United Nations set the Millennium Challenge goal of eliminating extreme poverty by the year 2025. In Bangladesh, at least, it appears to be well on the way. It’s easy to get lost in the numbers. But, when you travel through Bangladesh meeting the microcredit borrowers, you realize that behind every number is a life—real people and real families. Suddenly, the Statistics come alive. I don’t know what it’s like to live on less than $1 per day. I have, however, met enough people to garner some details about what such a life is like. Simply put, you consume in proportion to what you grow; when you cannot afford more, you beg. Meet Meera. She used to live on less than $1 per day. Now, she’s a twenty- six year old business owner with two daughters, eleven and seven years old. Her husband walked out on her a few years ago, leaving her to fend for herself. In the culture of Bangladesh, she was in a very tough spot. To give birth to only daughters and no sons is unlucky. Likewise, for a husband to walkout on his wife is looked down upon even more. In spite of this, she became one of the most successful women in her village. Through microcredit, she started and built a large poultry farm, raising thousands of chickens and selling them to market. After showing us her farm, she invited us into her home, which was considered a nice home by village standards—four walls, two rooms, a cement floor, and metal roof. Her home was also financed through a Grameen| footnote] microcredit home loan. And, best of all, she told us how happy she was and how microcredit changed her life. Grameen Bank: Banking for the Poor, “Home Page,” http://www.grameen- info.org/ (Accessed on December 10, 2007). Although Meera holds the distinction as the first microcredit customer I met, that’s the only number associated with her.[ footnote] Jay Milbrandt’s Journal Entries from Bangladesh, Pepperdine University JD/MBA alumni, Reprinted with Permission. Example: Jay Milbrandt’s Journal Entries from Bangladesh: Why I Have Hope “T’ve got this feeling of hopelessness,” I admit to a traveling companion. I’m here to see the hope that microcredit has brought, but our taxi has not even left Dhaka yet and I’m surrounded by the most abject poverty I have ever seen. I’m on sensory overload. There are so many people that the country seems ready to burst at the seams. More than 140 million people are packed into this country, approximately the size of Iowa. In Dhaka, garbage is everywhere—in the streets, in the ditches. Its obvious that the city does not possess the infrastructure to service its 15 million inhabitants. Judging by the integrity of the city streets, which appear to have been paved once left alone, I’m not the least bit surprised. If the heap of garbage is fresh, a few people would be rummaging through it—looking for a meal, I suspect. If the garbage was old, it served as a bed. Audibly, Dhaka pulses with the sound of non-stop horns—there need be no reason to use it. Dhaka is also a city of smells. Every street has a different smell, many of which I find both unfamiliar and unappealing. The streets are a labyrinth—if I were lost, I could never find my way back. We round a corner and roll past a lot of wood and metal. A salvage yard maybe? “Those are the slums of Dhaka,” our guide explains. Our taxi comes to a stop, waiting for a train to pass. After a few seconds, there’s a bang on the window. It’s a young boy, maybe seven years old, begging for money. He’s yelling in Bengali and motioning to his mouth with his hand. “In Dhaka, people work together in an organized system of begging,” my guide explains. He cracks the window and tells the child to leave. We start moving again and the child runs along until he can no longer keep pace. Little did I know at this point, that over the succeeding two months, I would meet some of the most disadvantaged people in the world: the poorest-of-the-poor, victims of trafficking, prostituted women, refugees, and the illiterate. Despite their perilous circumstances, I’m filled with more hope than ever before. Why? The positive, successful change I would come to witness—and the great potential for continued change. My hopelessness, however, would be relieved. What I saw in Dhaka was probably a piece of history for Bangladesh... Due to current laws, Grameen Bank is restricted from operating in urban areas. I have hope because of Bangladesh. I wish I could have traveled here 20 years ago to experience the change. From the descriptions of the people I met, the change has been Bangladesh—a model for global turn around; the man sitting next to me on the airplane was convinced that, given ten years and right national leadership, the country could shine like Malaysia. [footnote | Ibid Example: Jay Milbrandt’s Journal Entries from Bangladesh: Moving the Mountains of Poverty How come I have never heard a sermon preached on the elimination of poverty? Christians frequently talk about giving to those in need or feeding the hungry, but I have yet to hear a sermon calling for a solution. Here is one to start with, I would like to call it “Microcredit and the Mustard Beedig One evening just before dusk, we were riding a rickshaw down a narrow road in the village of Salanga. Suddenly, our guide stopped the driver, had him turn the rickshaw around, and pull up at a small metal building. Inside, the building was dimly lit with an organic smell and the hum of a large engine. We met with the owner, Shameen, who had financed his small business through a Grameen microloan. Before Grameen, he had nothing —barely enough to feed his family—if that year’s rice harvest was plentiful. After founding and growing his business through Grameen loans, he started generating income on his own, built a better house, and could afford to send his kids to school. And his business? Processing mustard seeds. Matthew 17:20 [from The New International Version, NIV, which is the English translation of the Christian Bible] tells us that with the faith the size of a mustard seed, we can tell the mountains to move. I took this verse literally with a good dose of skepticism until this day. Here was a mountain right in front of us: More than 1 billion people clenched in the fist of poverty. In Bangladesh and throughout the world, millions of people are putting a lot of faith in tiny loans—Shameen’s faith, ironically, happened to be a mustard seed. Soon, the entire building was flooded with local people wanting to gaze at the foreigners. Each of these people was a microcredit borrower. None of them in the chains of poverty. This held true for practically everyone in the entire village, followed by millions more throughout Bangladesh. Microcredit was moving the mountain of poverty before my very eyes. Deuteronomy 15:7-8 says “If there is a poor man among you... do not be ... tightfisted. ...Rather be openhanded and freely lend him whatever he needs.” Is it coincidence that the word “lend” is used? I believe microcredit is a sermon that every church should hear. I believe that if Christians were to join the Muslims and Hindus of Bangladesh in the mustard seed of microcredit, the mountain would move much faster.[ footnote | Ibid Example: Jay Milbrandt’s Journal Entries from Bangladesh: What Third World? The man staring at me has no shoes or shirt. This seems like the perfect opportunity to capture the face of the human condition in rural Bangladesh. As I pull out my camera he mirrors me with none other than a camera phone. I’m photographing him photographing me—something seems wrong here. Earlier in the day, I spontaneously walked out into a rice field to visit the field workers. They were excited to show a foreigner how fast they cut, then give a brief rice cutting lesson. I just about took a Bengali man’s leg off—the sickle blade is sharper than it looks. They cut a few sheaths of rice, then tie the bundle off with one of the stalks. The whole process takes but a few seconds. Rice harvesting has been done this way here for hundreds of year. Occasionally, I would see a billboard for a tractor or modern agricultural convenience, but I never saw any of them in action. Third world technology transfer is an interesting phenomenon. Is a cell phone really what they need? How about drip irrigation instead? Or maybe a rice harvester? Grameen created an interesting microenterprise program throughout Bangladesh with village “phone ladies.” A woman in each village is allowed to purchase a cell phone through a Grameen loan. The “phone ladies” then sell use of their cell phone to other villagers. The result is that the “phone ladies” have a very profitable business and villages that previously had no phone line at all now have a modern method of communication. As traveling is difficult for the poor of Bangladesh, the villagers no longer have to leave if they need to communicate with a relative in another village or ask a doctor a question. In other villages, the profitability of “phone ladies” has diminished because a majority of villagers now own a personal cell phone. It’s surprising how someone may not have running water, but own a nicer cell phone than I do.[footnote | Ibid Blog Back 9: Journal Blog back: Keep a journal of the lessons learned from your own startup time mentor insights. journal entries that is particularly applicable to someone on an entrepreneurial journey. With the Mentor Insights providing strong spokes; this completes the description and elaboration of the visual model of the Business Eco-system Wheel. BUSINESS ECO-SYSTEM WHEEL Exhibit Striking gold Image created by: Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009 Early-stage entrepreneurs can rejoice when they invest the time and energy to build well thought out Business Eco-systems. These hard-working, strategic-thinking entrepreneurs increase the chances of creating a startup that has a real opportunity of potentially striking gold at the end of the rainbow! About this author and acknowledgements Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Reviewer: Debbi D Brock (Berea College, USA) About this author and acknowledgements: Editor and Author: Molly Lavik, Founder, Mentorography, Inc. & StartupTime Coach, Molly.Lavik@StartupTime.com, Professor, Vatel International Business School. Very special thanks to the Academic Reviewer: Debbi D Brock, William and Kay Moore Professor of Entrepreneurship and Management, Berea College. Special Thanks to Michael Tanenbaum, Kaushik Shirhatti, and Sumeet Malik my graduate assistants and my former students, Ann Shafer and Luiz Montoya from Pepperdine University’s Graziadio School of Business and Management who assisted by providing initial research on preliminary versions of this chapter. Special thanks to my former student Jay Milbrandt for providing his journal. Special thanks as well to Taissia Belozerova, Graphic Designer, Artist, MBA Candidate at Pepperdine University Class of 2009. Also, special thanks to Bruce D Buskirk, PhD, Professor of Marketing, Pepperdine University’s Graziadio School of Business and Management who co-authored the gratefully acknowledged and appreciated excerpts provided by Mentorography, Inc. from Entrepreneurial Marketing: Real Stories and Survival Strategies. Additionally, special thanks to Estelle Holloway. Introduction Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) In this chapter we will explore what factors and characteristics are commonly found in an entrepreneurial mindset. These may be characteristics that you can strive to possess and emulate. Perhaps you may need to inherit from your parents a certain combination of entrepreneurial characteristics to become an entrepreneur or perhaps that has absolutely nothing to do with if you are destined to become an entrepreneur. Is an entrepreneur ultimately born or made? That question has no definite answer. We suggest you meet as many entrepreneurs as you can to see if this is how you want to spend your life; then decide if you want to train under these entrepreneurs as an apprentice. You control your own destiny and your life’s journey is your own so you decide! Review: In [link] we discussed the characteristics of an entrepreneur as possessing the following attributes: Vision: Able to create and communicate an easily understandable mission for what the new venture does in order to successfully launch a new business. This is accomplished while inspiring others to join you in your new enterprise. Creativity: Ability to inject imagination and uniqueness into a new business venture. It takes skill and ingenuity to create a new venture equipped with strategies to outsmart the competition. Focus: Able to maintain the vision of the company with unwavering diligence. It's very easy to get sidetracked especially if you find it necessary to evolve the original vision. Ironically, we have encountered many successful entrepreneurs who get bored easily... Passion: Desiring to succeed under your own steam [initiative] on a business venture... Drive: Possessing intrinsic energy to accomplish the business goal even in the face of adversity. Perseverance: Able to keep going even when faced with seemingly insurmountable obstacles. Opportunistic Nature: Sees the possibilities even before they exist. Can take advantage of an upcoming trend or unite unrelated processes to create a unique business venture... Problem Solving Ability: Thrives on coming up with solutions to complex challenges... Self-discipline: Able to be organized and regimented in pursuit of a successful business venture. Frugality: Knows how to stretch every cent so that expenditures are as low as possible. Empathy: Able to put yourself in another’s shoes and therefore able to show sensitivity and understanding of what others are communicating in the start up environment... Social Responsibility: Ethics, caring and humanitarianism are characteristics that are commonly found in today’s entrepreneurs... Spirituality: We have found that successful entrepreneurs have often devoted time to spirituality development. Meditation and positive affirmations are two common examples of spirituality. Good Timing: Able to identify a market opportunity and know when it is the optimum time to launch a new venture or expansion of an existing enterprise. Luck: Can a person be predisposed to be lucky: Is luck a human behavior or a karmic universal predisposition?[ footnote | “The Mindset of an Entrepreneur” is reprinted and adapted with permission from Mentorography, Inc. © 2008. All Rights Reserved. Entrepreneurial Marketing; Real Stories and Survival Strategies by Molly Lavik and Bruce Buskirk, introduction pages xxviii-xxx. In this chapter we begin by introducing you to Costa Roussos, a young entrepreneur from the country of Cypress who is creating a global music empire. We will share his story through an interview that Molly Lavik conducted with him and look at his entrepreneurial tendencies and attributes. Then it is your turn to take the Entrepreneur Assessment Survey which can be used as one indication of measuring your own entrepreneurial mindset. However, it should be noted that a true entrepreneur would never rely on a survey to determine how worthy or ready they are to become an entrepreneur. A true entrepreneur would simply begin implementing his or her start up idea. True story: Costa Roussos was one of my students several years ago and immediately I noticed something quite different from Costa and that was his focus on starting a music company. It seems to take a certain type of person to start a new venture because you do not have the security and structure of a more established company not to mention the challenges of inspiring others to join your unproven venture and to help you meet their deadlines associated with a new business. Do you have the type of mindset that Costa seems to possess to get him through the many setbacks and challenges that faced him or any entrepreneur in the making? If you are not sure do not worry. When the timing seems right you will know if an entrepreneurial journey is your destiny. And you might even become a hero to someone or maybe even an entire group of people such as how you will soon read Costa is becoming a hero to the independent music artist and music listening enthusiast. This is your future we are talking about and it’s your decision if you have a hero’s journey ahead! As you read Costa’s story pay particular attention to the characteristics described as his entrepreneurial mindset. Do you possess some of the same characteristics? Read Costa’s story to find out. http://www.startuptime.com/costamusicus.html Do you possess any of the entrepreneurial mindset characteristics that Costa has? Blog Back 10: Your Mindset entrepreneurial mindset characteristics. Still not sure if you are an entrepreneur or if you may some day have your own hero’s journey ahead? Try taking the Entrepreneur Assessment Survey but remember, this does not mean if you have the tendency or not, again only you get to decide if you want to go on your own entrepreneurial journey. No one or no survey can tell you that. Entrepreneur assessment survey Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Entrepreneur assessment survey Directions: Please circle your personal response to each question. Please be sure to go with the answer that is your first choice if and when you are in doubt of how to respond. 1. Do you have an issue that is a major driving force behind your professional goals in life? Yes Undecided No 2. Would you describe yourself as the type of person who gives up easily when faced with adversity? Yes Undecided No 3. Do people who have known you since childhood describe you as the type of person who gives up easily when faced with adversity? Yes Undecided No 4. Have you been successful in the past convincing others to help you to accomplish your goals? Yes Undecided No 5. Do you have a desire to make the world a better place that is a stronger goal for you then your desire to earn money? Yes Undecided No 6. Have you considered becoming an entrepreneur? Yes Undecided No 7. Have you spent a substantial amount of time in your life considering what type of legacy you would like to leave? Yes Undecided No 8. When trying to raise support for an idea, do you ever start by identifying people to form alliances with who may be sympathetic to your goal? Yes Undecided No 9. If you were busy with a deadline for work and or school would you miss completing this deadline on time because you gave your own new venture/start up/new product idea a higher priority? Yes Undecided No 10. Will you use your score on this test to ultimately help determine if you should become an entrepreneur? Yes Undecided No 11. How many of the entrepreneurial mindset characteristics do you possess? Give yourself 1 point for each of the characteristics you possess from the list below. Yes Undecided No Total Score for characteristics: Some key characteristics of an entrepreneurial mindset In [link] some characteristics of an entrepreneurial mindset were shared; here are additional characteristics and or similar characteristics to also consider. Mentor Method 2 Humanitarian Organizing movements that can take many forms Worth 1 including campaigns, drives, grassroots or net Point Add 1 Point Visionary Worth 1 Point Add 1 Point Values- centered Worth 1 Point Add 1 Point Change- oriented Worth 1 Point Add 1 Point Self-reliant Worth 1 Point Add 1 Point Persuasive Worth 1 Point Add 1 Point Hyper- focused Worth 1 Point Add 1 Point roots movements, lobbying, and/or crusades for the express purpose of providing altruistic or charitable support. Possessing the ability to potentially define the future by making bold unsubstantiated predictions for new enterprises while utilizing a great deal of imagination and foresight in the process. Demonstrating worthwhile qualities of leadership that are lawful, ethical, considerate, and honest in nature and intent. Adopting a leadership style that attempts to transform the status quo by creating a new method, process or invention for accomplishing tasks. Depending on yourself to develop solutions for the problem or challenge at hand. Able to convince others that the new organizations’ mission and goals are viable and should be adopted and supported. Maintaining uninterrupted attention and concentration directed at implementing the enterprise’s mission. Passion Worth 1 Point Add 1 Point Energetic Worth 1 Point Add 1 Point Having a tremendous amount of enthusiasm and excitement over the mission and goals of the new organization. Demonstrating an infinite amount of drive and an enterprising nature toward accomplishing an organization’s objectives. When starting a new organization especially when Starting a social enterprise, it requires a great deal of energy and drive to accomplish all the objectives especially given that social enterprises usually require volunteer staff and unpaid staff for resourcefulness that goes far beyond the standard needs of a traditional, long-established company. 12. Ask someone who has known you since you were a child how many of the entrepreneurial mindset characteristics they think you possess? Give yourself 1 point for each of the characteristics they feel you possess. Total Score for characteristics: Answer key Answer key for entrepreneur assessment survey Directions: Please circle your personal response to each question. Please be sure to go with the answer that is your first choice if and when you are in doubt of how to respond. 1. Do you have an issue that is a major driving force behind your professional goals in life? Yes Undecided No Score: Ten points for Yes, 0 points for Undecided and No. Reason: One of the first steps toward creating a new company is to have a major reason or issue for your new venture's mission or goal. . Would you describe yourself as the type of person who gives up easily when faced with adversity? Yes Undecided No Score: Ten points for No and 0 points for Yes and Undecided. Reason: You have to be able to continue through all the setbacks to be successful and ultimately enjoy being a social entrepreneur. . Do people who have known you since childhood describe you as the type of person who gives up easily when faced with adversity? Yes Undecided No Score: Ten points for No and 0 points for Undecided and Yes. Reason: It typically takes a track record in life of dealing successfully with adversity to build up the confidence and credibility that comes with a No answer for this question. . Have you been successful in the past convincing others to help you to accomplish your goals? Yes Undecided No Score: Ten points for Yes and 0 points for Undecided and No. Reason: New ventures do not have the funding to afford the staff to get work accomplished. Resourcefulness is the key to succeeding and one must possess the ability to attract and retain volunteers and non-paid experienced help at first to get the tasks completed. . Do you have a desire to make the world a better place that is a stronger goal for you then your desire to earn money? Yes Undecided No Score: Ten points for Yes and 0 points for Undecided and No. Reason: Entrepreneurs are driven by their need to create societal wealth vs self-wealth. This desire takes precedent and priority over other goals. This does not mean that someday you might not derive a financial bonanza for the work you have been doing associated with the start up. It just means that is not what drives you today. . Have you considered becoming an entrepreneur? Yes Undecided No Score: Ten points for Yes and 0 points for Undecided and No. Reason: Even if it was a subconscious or passing thought, usually you have to have some propensity or interest toward becoming an entrepreneur for it to be your destiny. . Have you spent a substantial amount of time in your life considering what type of legacy you would like to leave? Yes Undecided No Score: Ten points for Yes and 0 points for Undecided and No. Reason: Perhaps your legacy is something to be considered in later years. With that said it is never too soon to begin considering what type of footprint you may want to leave. If you have considered trying to leave a legacy of making the world a better place then you may a hero’s journey as your entrepreneurial path for future. . When trying to raise support for an idea, do you ever start by identifying people to form alliances with whom maybe sympathetic to your goal? Yes Undecided No Score: Ten points for Yes and 0 points for Undecided and No. Reason: One of the best ways to increase your chances of being a successful entrepreneur is to enhance your credibility by forging 1A); 11. 12. strategic alliances and partnerships with others. . If you were busy with a deadline for work and or school would you miss completing this deadline on time because you gave your own new venture/start/new product idea a higher priority? Yes Undecided No Score: Ten points for No and 0 points for Yes or undecided. Reason: This may appear to be a trick question. A values-centered leader would not sacrifice one important commitment for another even if it was to help a social enterprise. Part of starting a new company is demonstrating ethical and honest business leadership. Will you use your score on this test to ultimately help determine if you should become an entrepreneur Yes Undecided No Score: Ten points for No and 0 points for Yes and Undecided. Reason: The truth of the matter is that if you are really meant to be an entrepreneur you do not need a test and or survey to tell you this. In fact; a true entrepreneur does not depend on others to make their decisions. Only you know your destiny; do not let anyone tell you what you can and can’t accomplish in life because statistically speaking they would not really know. How many of the entrepreneurial mindset characteristics do you possess?Give yourself 1 point for each of the characteristics you possess. Total Score for characteristics: The goal is to score a ten for this question. Many entrepreneurs embody these entrepreneurial mindset characteristics. How many of the entrepreneurial mindset characteristics do you possess? Give yourself 1 point for each of the characteristics you possess. Total Score for characteristics: The goal is once again to score a ten for this question as explained above. If it turns out that you have a very different score for your self-assessment of this question in comparison to what someone who has known you all your life then you need to come to an understanding why others perceive you differently then you perceive your own interests. Perhaps you are repressing or camouflaging your true interests or maybe you have changed. The reason for the difference isn’t as important as making sure you are aware of your own interests. Score: e A score of 120-110 may mean that you know that you want to become an entrepreneur and you should begin working out a strategic plan to make your goals a reality and to begin your own hero’s journey. e A score of 109-90 may mean that you most likely want to become an entrepreneur and you should begin thinking of this possibility to give yourself a further self-assessment of your interests. e A score of 89 or lower may mean that you probably are not going to be an entrepreneur but as mentioned before; do not let this assessment be the final or even partial determination; the choice is clearly your own to make. Blog Back 11: Start-up Story Blog back: Post a story or interview with an entrepreneur who possesses some of the entrepreneurial mindset characteristics you hope to develop in confidence in your own entrepreneurial mindset or hope to enhance or inspire further development there are resources and things you can do today to build your entrepreneurial mindset! Entrepreneurial mindset enhancing activities Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) Entrepreneurial mindset enhancing activities e Set up a Google Alert for the key words: “entrepreneurial mindset” at http://www. google.com/alerts. A Google Alert is a query of key words and allows you to receive in your e-mail inbox a list of all the stories to be posted on the Internet that day associated with your key word. You can set the alert to come to you immediately, daily or weekly. e Discuss with entrepreneurs what attributes they possess that make these founders particularly adept at starting new ventures. When you talk with these visionary individuals be on the “look out” for unique characteristics that they people possess. e Take some time and consider today what you want your lasting legacy to be and who you will accomplish those goals. Keep a diary of this journey and try when possible to have journal entries about what type of entrepreneurial characteristics you are developing to help you achieve your legacy goals. ¢ Do not let others define your entrepreneurial journey! You know who you are and who you want to be. The “naysayers” will always be around to try to prevent you from starting a new venture. Learn to listen to your gut. e Seek out educational programs and literature that will help you better develop your own entrepreneurial characteristics. Make a list of the attributes you do not yet possess and then develop a plan of action to achieve adding these entrepreneurial characteristics to your own personality traits. e Schedule time every day for 30 minutes to keep refining your entrepreneurial characteristics and figuring out how to enhance your entrepreneurial personality. Many people think that what you spend time thinking about will become ultimately your own reality. e While each of you are from different countries and cultures there are some places that often will provide resources for first-time entrepreneurs. These places include: e Small business associations e Banks, financial institutions, and micro-credit agencies e Educational Facilities e Business related NGOs e Libraries e Community Redevelopment Agencies e Most family and friends for moral support e The Internet when using the right search terms associated with developing and or enhancing your entrepreneurial mindset. Now you are ready to go out and potentially create your own hero’s journey Chapter summary Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Molly Lavik (Vatel International Business School Los Angeles, USA) In [link] titled, “The mind of the entrepreneur”, we reviewed the characteristics of an entrepreneurial mindset that were covered in Chapter 1, shared the story and entrepreneurial mindset attributes of Costa Roussos during his start up journey with Music.us followed by sharing with you the Entrepreneur Assessment Survey and answer key ending [link] with a list of entrepreneurial mindset enhancing activities so that you can begin embarking on your own hero’s journey. Blog Back 12: Hero Post Blog back: Post entries from your journal regarding your thoughts about your own journey. Then read what others have posted. Do you see anyone who you think is on his or her way toward becoming a hero? Post your thoughts and comments on entrepreneurial mindset characteristics at Learning Objectives Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez e how to build and implement a successful business model e understand the importance of a company to be market vs product oriented in a developing country e how to identify consumers’ wants successfully e understand Porter’s 5 forces of Industry Attractiveness e how to perform a Market Research study What is a business model? Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez Business models can be approached from two perspectives. A general perspective defines a business model as any type of conceptual framework explaining how to organize and evolve a business venture. On the other hand, specific circumstances guide business modeling. For instance, industries such as tourism, banking in the services sector, or automobile or shoe manufacturing demand specific models that take into account critical variables found within the industry’s specific environment. One definition from the general perspective is provide by Alex Osterwalder: "A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.” (Osterwalder 2005, http://business-model- design.blogspot.com/2005/11/what-is-business-model.html. Accessed November 25, 2007). " Models are simplified representations of things in the real world. You are already familiar with many kinds of models. You have played with a model air plane or boat when you were a child. You may have seen models of buildings, dams, or other construction projects built by architects to show the sponsors of a project how a completed building will look after it is built. In the same way, a business model lets an entrepreneur try out different ways to put together the components of his or her business and evaluate various options before implementing the one that looks the best. This technique is especially important in today’s business environment, where technology gives business people so many more options than ever before. Osterwalder goes on to say: "“For managers and executives this means that they have a whole new range of ways to design their businesses, which results in innovative and competing business models in the same industries. Before it used to be sufficient to say in what industry you were for somebody to understand what your company was doing because all players had the same business model. Today it is not sufficient to choose a lucrative industry, but you must design a competitive business model. In addition increased competition and rapid copying of successful business models forces all the players to continuously innovate their business model to gain and sustain a +b an competitive edge”. Based on his search of the literature, Osterwalder lists nine building blocks for managers to use in developing an innovative and effective business model. We list them, along with some comments of our own: e “The value proposition of what is offered to the market”; We have covered this issue earlier in the chapter in general, and with specific reference to how Porter’s analytical tools can assist managers in generating a viable value proposition that consumers perceive as one that is superior to what is offered by the competition. e “The target customer segments addressed by the value proposition”; Managers soon learn that they cannot be all things to all people, that what appeals to one segment of the market will not appeal to another. We will discuss this in more detail later in this chapter. e “The communication and distribution channels to reach customers and offer the value proposition”; This issue relates to two of the “four P’s” (promotion and place) we discussed briefly when we discussed the marketing mix. For example, do we promote the business by word of mouth, signs on a storefront, ads in a newspaper, ads on TV, ads on the Internet, or some combination of all of these? Place refers to where the product or service is made available to the customer. The three usual choices are in a store, through a mail-order catalog, or from an Internet website. e “The relationships established with customers”; In general, however, the important point is not just to acquire customers, but to serve them in a way that your business retains them as customers. For example, it is usually much more expensive to attract a new customer to your business than it is for you to encourage a previous customer to return. e “The core capacities needed to make the business model possible”; This point refers to the necessity to define the basic capabilities your business must have. For example, if you are opening an art gallery to sell your own work, you had better have some talent as an artist! e “The configuration of activities to implement the business model”; Another way of stating this is to define the business processes that your business must have in order to function properly. e “The partners and their motivations of coming together to make a business model happen”; Partnerships and alliances are increasingly important in today’s world. e “The revenue streams generated by the business model constituting the revenue model”; In essence, this is the Price component of the “Four P’s”. Where does your revenue come from, what are the projections for the future, and what are the plans to sustain the necessary revenue stream as business conditions change? e “The cost structure resulting of the business model”. The difference between revenues and costs, of course, is your profit. Without a profit, it will not be possible for you to stay in business very long. Examples of successful business models It may be helpful to illustrate the concept of business models with two examples, McDonalds and CEMEX. In the case of McDonalds, it operates franchises all over the world. Franchises are proven and successful business models whose business model “prescription” is successful within the country of origin and even overseas. Dominating the hamburger fast food market, McDonalds’ franchise model has also proven to be successful since it quickly adapts and evolves according to the environment. For example, McDonalds USA does not have hot sauces, but in Mexico where Mexicans like a lot of spicy food, they offer hot sauce, as well as spicy meat put into the hamburgers. Another successful example is the Mexican cement maker CEMEX (the world’s third largest producer of cement) that has successfully implemented and tested a standard business model called the “CEMEX Way” in all the plants and business units it has within more than 50 countries around the world. Considering it operates in four different continents, except Oceania, with very different cultures and ways of thinking; countries such as the US vs Thailand, or Italy vs Bangladesh; it allows CEMEX to have a very quick response mechanism to adjust to the market demands since it has a standard operational platform. This gives CEMEX a clear competitive advantage against its main rival giants such as Holcim and Lafarge. Having established what a business model is, it is important to separate it from the design of a model actually implementing it, i.e. testing it and putting it into practice. The design is best defined as the strategy. If a business model design is not well outlined; the implementation and testing will also fail. Taking a very simple framework from Alexander Osterwalder (Business Model Design Blogpost, June, 2006) shown in [link], business model design is separated from business model execution, preceded, of course, by business execution implementation and testing. Companies in quadrant “B” with sound business model designs and effective execution are successful companies, and they must focus on staying in that quadrant. Companies in quadrant “C” need to re-examine their business vision and strategy, while companies in quadrant “D” do not have a good design but are effective on its implementation; this latter usually happens with the appearance of disruptive technologies that “shake up” established industries and business models much the way iTunes and the iPod did. It is very common for companies to have a sound business model design but fail to implement and test it properly (quadrant “A”). Exhibit 5 D 2 o s a) o S| ° E wo o © 2 3 = & 2 m0 Flawed Sound Business execution (implementation and testing) Success = Business model design and implementation If we seek to have a successful test result from a business model it is mandatory to have a clear vision as well as a sound business model design. The rest is a matter of testing and implementations, or “execution” as it is often called. Still, successful execution is sometimes the most difficult task of all. The focus of the balance of this section will be to review the main issues companies must consider in order to successfully implement and test a business model. Model implementation/testing pre-requisites A model must have the following pre-requisites in order to implement and test it: 1. A company owner/sponsor: Organizational models must manifest themselves as a cascading effect emanating from top to bottom. Therefore, the sponsor must either be the head of the company or other high level executive. Usually sponsors are identified as the head of a company department. 2. Sound budget: Testing a business model will always require funds. The amount provided must be the one demanded by the model to test it, no more and no less. 3. Leader: This is especially important since he/she will be the “authority” or responsible person who will get results. 4. Qualified human resources: The leader gets to choose his/her team. This an important point since the leader must look for the key individuals who are up to the test and have the necessary expertise to successfully implement and test a business model. 5. Effective training: With all the above accomplished, the final part of the pre-requisites is training. A business model automated or manually developed, must be operated by human beings, therefore these persons who will actually test and operate the model must have no doubts and be convinced about the model’s processes and the benefits of working accordingly to the business model. Real expectations outcome: benefits Usually companies have a tendency to be very optimistic about outcomes when a business model is tested. Companies must be balanced between being aggressive and demanding about the model benefits and be realistic when evaluating outcomes of the test. The main benefits to show when a business model is tested must be outlined around the next three aspects. Economical: They must reflect tangible economical benefits, such as: cost reductions or sales increases. Process: They must improve connections between the company’s value chain activities such as production, maintenance, procurement, finance, human resources, etc. so they are better coordinated and decision making processes are more effective and timely. Practice: They must improve the work flow of how things are done in the company. These improvements can be translated into creating better historical data for a company e.g. real time inventory transactions from a plant warehouse, or complete and accurate recording of a maintenance job performed on a specific item of plant equipment. This creates a more accurate data set, later used as important information to make decisions. Success factors Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez Once the benefits have been shown, the next step is to preserve them. In order to do so, the following success factors must be kept in mind. 1. 2. Have the appropriate leadership. Person(s) that can make well based and quick decisions to assure the continuity of the model once it has been implemented. Create an internal environment of quick and flexible response. All departments of the company must be flexible and adjust quickly to events . Have integrative indicators and measurements. This is a model “thermometer”, one that will indicate if everything is going smoothly according to expectations or not. The indicators will show warning signs in order to take corrective action. Have corrective actions or model adjustments. Learn from actual results by quickly adjusting and evolving the business model in an integrative way, being coherent, sound and aligned with the company vision. Conclusions After seeing what a business model is and the required issues involved in having a successful business model test and implementation; companies must keep in mind that there is no one time testing of a model and guarantees of success in the business world. In our era, businesses are dynamical propelled by technology that change constantly as we move more and more into a more global world. The keys for companies to succeed are to be always focused and to be flexible enough to adjust its business model quickly and effectively according to the changing demands of customers and markets. One of the most important functions that companies can have to anticipate competitive threats and to recognize evolving market opportunities is to have a continuing competitive intelligence function within the company. Management failures are frequently associated with the inability to anticipate rapid changes in the markets, respond to new and proliferating competition, or re-orient technologies and the strategic direction of their business toward changing customer needs and new industry standards. Competitive intelligence is an important function in today’s rapidly changing business environment. Consumer marketing models Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez The formal use of marketing concepts is a fairly recent activity in developing economies. In the past, most companies focused on producing products or offering services without much emphasis on customers and wants. Understanding consumer behavior was not considered to be important. The emphasis was on the product or service per se. Given the emergence of a global economy, however, which brought the opening of markets and increased competition, the traditional approach has changed dramatically. Companies are increasingly focusing on what customers need and/or want. Market-oriented companies are beginning to emerge in every developing economy in the world. The purpose of this section is to introduce you to the importance of marketing oriented companies in developing economies, as well as identifying business models which follow a marketing model rather than a product model. The product model vs the marketing model According to Philip Kotler, the product model is a management orientation that assumes that if a quality product is produced, and offered to consumers at a price they find to be acceptable, the company will be successful in the market place. Another author who successfully introduced a marketing orientation is Theodore Levitt. His orientation is sometimes referred as a “marketing myopia” approach since companies define their business in terms of products and not in terms of customer needs and wants. For example, a car manufacturer may think they are in the “car business” while they are, in fact, competing in the transportation industry. Under the product model, management focuses on developing high quality products which can be sold at the right price, but with insufficient attention to what it is that customers really need and want. For example, Apple determined that what customers wanted was the ability to purchase music one song at a time rather than purchase an entire CD with 16 tracks, only three of which were really wanted. They subsequently developed and introduced the iPod and iTunes online store which revolutionized the way consumers buy music. In the meantime, traditional producers of traditional CDs lost market share to Apple, which had a much better understanding of how to satisfy consumers. The premises implicit in the product model are: e Consumers buy products more than solutions. e Consumers are interested basically in product quality. e Consumers recognize product quality and differences in performance alternative products. ¢ Consumers choose between different products based on getting the best quality for the money. e The main task of organization is to keep improving quality and reducing cost as key factors to maintain and attract customers. The product model used to be applied in developing or closed economies where few, if any choices were available. Advantages of the product model are that the cost of determining consumer preferences and the development of new products and services are minimized or eliminated because consumers are in some way captive. By way of example, compare the automobile industry in developed countries to the automobile industry in the Soviet Bloc countries prior to 1989. Customers had a wide variety of automobile models to choose from while citizens in the Eastern Bloc had few. The latter was operating on a product model rather than a marketing model. Disadvantages of the product model are that as soon as a company could offer a product more oriented to satisfy customers’ needs and desires the companies oriented to products will lose the most if not all of its market share. The traditional CD companies referred to above are a good example of this. In summary, market orientation is essentially a customer orientation. Understanding customer needs lies at the core of the marketing concept. The marketing model Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Trevifio and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez The marketing model is a management orientation which maintains that the fundamental task of the organization is to determine needs and wants of customers in the target market and adapt the organization as a whole to satisfy their customers more effectively and efficiently. Satisfying customers more efficiently and effectively than competitive companies increases the chances of the organization’s success. The marketing model is an approach whereby companies create value for their customers. This concept can be understood by applying it in the so called Value Chain Model introduced by Michael Porter. An application on how this model is applied in marketing is shown [link] below. Exhibit Value chain of marketing e First, you need to know and understand your customers’ needs and wants. e Based on your understanding of their needs, through research and development you must develop an appropriate product or service that fulfills those needs. e Based on your engineering capabilities you must define your manufacturing process that delivers the right product in the most efficient and economical way. e Finally, the product or service must be delivered at the right time and place. A simple way to understand the creation of value to customers is by examining the following equation: Value = Benefits / Price Value is created by increasing benefits to the customers. For this reason, “benefits” is specified in the numerator of this equation (the higher the benefits, the higher the perceived value by the customer); on the other hand, “price” is placed in the denominator since the higher the price the lower the perceived value. Now you must understand how value is created for your customers. To do SO, Managers use a technique called the “Marketing Mix” (commonly called the four P’s) ¢ Product: What is the product/satisfactor that best fulfills my customer’s needs? e Price: What should be the appropriate price for this product that reflects not only its cost but also its benefits to compete with other products in the same segment or substitute products? e Place: In what markets should the company offer the product? e Promotion: How should the company promote the product or satisfactor? One of the main advantages of the marketing model approach is that the company tries to be near the customer’s needs by understanding them and therefore developing products that fulfill or exceed them in the best possible way. On the other hand, and especially in developing economies, the main disadvantage of this model is the cost in obtaining the information needed to understand the customer. Identifying market needs Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editors: Salvador Trevifio and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez As mentioned previously, the essence of applying the marketing model lies in the finding of needs and filling them wisely. We will assess this issue of “Identifying market needs” by introducing a conceptual framework known as Abraham Maslow’s Hierarchy of Needs. This model focuses in the psychological features that explain the basic dimensions of human needs. Maslow’s Hierarchy of Needs Maslow’s Hierarchy of Needs, a staple of sociology and psychology courses, provides a useful framework for understanding how and why local products and brands are being selected and additionally how they can be extended beyond home country borders. Maslow hypothesized that people’s desires can be arranged into a hierarchy of five needs. As an individual fulfils needs at each level, he or she progresses to higher levels (see Exhibit 3 Maslow’s Hierarchy of Needs). At the most basic level of human existence, physiological and safety needs must be met. People need food, clothing, and shelter, and a product that meets these basic needs has potential for introduction into a specific market. However, the basic human need to consume food and liquids is not the same thing as wanting or preferring a hamburger and a soft drink. An additional consideration is that preferences are deeply embedded in local cultures. Responding to such differences has required the creation of products and brands for specific regional or country markets. Mid-level needs in the hierarchy include self-respect, self-esteem, and the esteem of others. These social needs, which can create a powerful internal motivation, driving demand for status-oriented products, cut across the various stages of country development. Luxury goods marketers are especially skilled at catering to esteem needs on a global basis. Some consumers flaunt their wealth by buying expensive products and brands that others will notice. Such behaviour is referred to as “conspicuous consumption” or “luxury badging”. Any company with a premium product or brand that has proven itself in a local market by fulfilling esteem needs should consider devising a strategy for taking the product global. Exhibit rN ae ea eee @ Salling for self realisation and personal growth esteem belongingness &love the requirements for survival Zz food, water and shelter physiological needs Maslow’s Hierarchy of Needs Source: http://www.provenmodels.com/19/image Identifying customer’s wants successfully A process to determine the actual needs of consumers requires the identification of the market factors that produce them. In this process companies should find real consumption motivators that eventually evolve into product offerings. Furthermore, a correct business definition leads to a natural market orientation; for instance, Charles Revson famous quote “in the factory we make cosmetics; in the drug store we sell hope” (www.thinkexist.com) made possible for the company to develop cosmetic products based on women’s hopes rather than product features. Several potential pitfalls should be avoided. First, the natural tendency to impose a personal point of view when launching a new product or entering a new market. Second, simple imitation about competitors’ moves. Third, lack of sufficient research and market knowledge to produce market proved ideas. A framework has been proposed to align customer’s needs and wants with companies capabilities. This framework was introduced by Sherri Dorfman in her 2005 marketing article entitled “What do Customers Really, Really Want”. In the article aforementioned, Dorfman proposes a three-step process to develop a natural market orientation: Discovery: Finding out what To learn about customer needs and priorities, to customersidentify opportunities in the company to fulfill these really needs, and to create new or enhanced product need offerings. These ideas must be incorporated in a market research process involving customers and other clients and suppliers in the Value Chain. Definition: Shaping the In this step, Dorfman proposes prioritizing features and offerings benefits identified by clients, suppliers, and customers. to meet Different qualitative research techniques such as in- depth interviews, ethnographies, and focus group customer needs _ sessions permit the identification of the core market needs. Validation: Insuring your Further communication with consumers validate the offerings fit final definition of a market based product or service. into your This validation takes place as prototypes are customer's assessed by consumers to identify potential world. problems and to smooth out design issues. All these models take into account the so-called end consumer perspective, which implies that consumers buying, using, or recommending the products are the driving force behind successful marketing efforts. However, there are other marketing perspectives that assume that organizations of many sorts, given their importance in the overall size of the global economy are the real forces behind markets’ success. This implies that marketing efforts should be aimed at understanding their behaviour as consumption entities, and use this knowledge to develop marketing Strategies. Business to business marketing models Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez Models of industry attractiveness; the strategic perspective In order to be successful in business, we must understand what our customer’s needs and wants are and deliver them in an efficient and profitable manner. In order to do so, we must also understand the industries in which the companies are immersed and what makes them attractive from the general point of view. Industry attractiveness was initially described by Michael Porter in his book, Competitive Strategy (Porter 1980). Porter’s well-known Five Forces Model is often used as an analytical tool by companies when they are deciding whether or not to enter a particular industry. According to Porter, what makes an industry attractive or unattractive is determined by 5 forces: 1. Rivalry: This force is measured by how intense the rivalry/competition relationship in an industry is. The factors affecting rivalry are: number of competitors, slow market growth, low levels of product differentiation, how aggressive competing companies are, etc. For example, retailing has always had the reputation of being a highly competitive industry, while the rail road industry is thought to be less competitive. 2. Threat of substitutes: In Porter's model, substitute products refer to products that can be substituted for your own. Substitute products can be found within own or other industries. For example, if you decide to start an inter-city bus company, you have to consider all the other options your customers have to get from one city to another, for instance, city trains, small shuttle service, shared private cars, among others. 3. Buyer power: The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the buyer has the ability to set the price because usually there are very few buyers and many suppliers. Grain farmers are often used as an example. In most countries, there are many small farmers who grow grain, but few large buyers who have the power to set the price a farmer receives. 4. Barriers to entry: Barriers to entry are unique offerings of companies in an industry that any company wishing to enter that industry must be prepared to overcome. Examples from developed economies are online banking and ATM services for banks and frequent flyer programs for airlines. In many cases, development of these expected products or services is quite expensive for a new entrant, and, thus, it s a barrier to entry. 5. Supplier power: Suppliers are powerful when there are few suppliers for a company to purchase necessary items from. In a situation where there are few suppliers, it is typically difficult for a buyer to get a lower price from another supplier. An example is the oil industry, where they are many buyers, but relatively few suppliers, and most of the suppliers are members of the OPEC cartel which sets common production quotas, thereby controlling the market price for oil. Michael Porter developed two other tools that are widely used by organizations in their approach to markets: Three Generic Strategies and the Value Chain. Porter postulated that a firm should adopt only one of three generic strategies. They are illustrated in : Exhibit strategic advantage uniqueness perceived by low-cost the customer position VW V7 industry - - overall cost wide differentiation leadership multi-segment ~ oO o =) oc pe] 2 2) ao P=) co kL - 7) particular segment Source: http://www. provenmodels.com/27/image A firm can choose to be the low cost producer for a wide segment of the market; it can offer a differentiated product for a wide segment that customers are willing to pay more for because of its perceived greater value; or it can focus on a market niche as a low cost producer or with a differentiation strategy. For example, the original Volkswagen automobile focused in a broad low-cost market. As a matter of fact, the word in German means “Peoples Car”, indicating it was meant to be affordable by everyone. A good example of a differentiated automobile is the BMW. People pay more for a BMW because of the “conspicuous consumption” or “luxury badging aspects” they have managed to create in peoples’ minds, not necessarily because the BMW is actually worth 30 per cent more than a comparable automobile from Cadillac or Nissan. An example of a car positioned towards a low cost niche is the Mazda Miata, a two-seat sports car that costs much less than comparable cars. Finally, you can consider the Hummer as a car that appeals to a differentiated market niche. Porter’s other widely-used tool is the Value Chain, which is used to model the firm as a chain of value-creating activities or processes. Porter identified a set of interrelated generic processes common to a wide range of firms. He divided them into primary activities and support activities, as illustrated in [link]. Exhibit firm infrastructure ” c ° S © - ® Qa ° outbound logistics marketing inbound logistics & sales Value chain Source: http://www. provenmodels/26/image The primary activities in the value chain are: inbound logistics, operations, outbound logistics, marketing and sales, and service. The support activities are procurement, technology development and research and development, human resource management, and firm infrastructure (top management). The primary value chain activities are interrelated, to the extent that they can be formed with high quality and low cost, the firm will be able to have value-added that will be returned to the firm as profit. As an example of the way that primary value activities are interrelated, suppose that the inbound logistics process does not do well in identifying raw materials of poor quality. This will cause problems with the next process, operations, and it may cause problems as far down the value chain as service after the sale. The value chain is, thus, a useful tool for analysing a company’s business processes and searching for ways to lower costs, improve efficiency or search for process innovations. Other Strategic Models There are many other strategic models used by companies to help them formulate their overall business and marketing strategies. Three of best known models are the Boston Consulting Group (BCG) Matrix, the McKinsey Matrix, and Larry Downe three forces. Each of these models is described below. The BCG matrix The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a Strategic Business Unit (SBU). To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. This model can be explained in two dimensions: relative market share and market growth. The basic idea behind this model is that the larger the market share a product has relative to its competitors or the faster the product's market grows, the better it is for the company in an economic sense. The key components of the matrix are illustrated in [link] and discussed below: Exhibit Market Growth Rate (Cash Usage) Low BDG Matrix Source: http://www.quickmba.com/strategy/matrix/bcg l 1. Stars (high market growth, high relative market share). These are products that require large amounts of cash and are also leaders in the business and therefore they should also generate large amounts of cash. They are frequently roughly in balance on net cash flow. 2. Cash Cows (low market growth, high relative market share). These are products that generate high amounts of profit and cash, and because of the low growth, investments needed should be low. 3. Given its characteristics, companies should avoid and minimize the number of products in this category. If the product does not deliver cash, it may be discontinued. 4. Question Marks (high market growth, low relative market share). These products have the worst cash characteristics of all, because of high cash demands and low returns due to low market share. If nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, it may become a dog. So, managers should either invest heavily in order to improve market share, or sell off/invest nothing and generate whatever cash is possible. The McKinsey matrix The McKinsey matrix is a later and more advanced form of the BCG Matrix. It has several differences with BCG’s matrix, as discussed below. It is illustrated in Exhibit 6. Exhibit McKinsey Matrix Source: http://www.quickmba.com/strategy/matrix/bcg/ 1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market attractiveness includes a broader range of factors other than just the market growth rate that can determine the attractiveness of an industry/market. For example, market attractiveness could be determined using Porter’s five forces model. 2. Competitive strength replaces market share as the dimension by which the competitive position of each Strategic Business Unit is assessed. Competitive strength likewise includes a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit. 3. Finally the McKinsey matrix works with a 3x3 grid, while the BCG Matrix has only 2x2. This also allows for more insight in the analysis of the business. Downes’ three new forces Larry Downes (1999) identifies three new forces that require a totally different perspective towards a strategic framework and a set of very different analytic and business design tools: digitalization, globalization, and deregulation. Digitalization: As the power of information technology grows, all players in a market will have access to far more information. Thus, totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market. Downes gives the example of the rise of electronic shopping malls, operated for instance by telecom operators or credit card organizations. Those who use the Five Forces Model and who base their thinking on today’s industry structure would never see these changes coming in time. Globalization: Improvements in distribution logistics and communications have allowed nearly all businesses to buy, sell, and cooperate on a global level. Customers, meanwhile, have the chance to shop around and compare prices globally. As a result, even locally oriented mid-sized companies find themselves in a global market, even if they do not export or import themselves. In addition, global and networked markets impose new requirements on organizations' strategies. It is not enough any more to position oneself as a price-leader or quality-leader (as Porter suggests in his Generic Strategies model). Rather, competitive advantages emerge now from the ability to develop lasting relationships to more mobile custumers and to manage far-reaching networks of partners for mutual advantage. Deregulation: The past decade has seen a dramatic shrinking of government influence in many industries like airlines, communications, utilities, and banking in the US and in Europe. Fueled by the new opportunities provided by information technology, organizations in these industries were able and forced to completely restructure their businesses and to be on the lookout for new opportunities and competitive threats. For example, traditional land line telephone companies that did not enter the wireless telephony market found themselves with a shrinking customer base. This is because young people frequently use only cell phones now and do not bother to have a land line phone in their homes. Chapter summary Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez While each of these models (and others we have not covered) have their own strengths and weaknesses, what organizations must learn is how to best utilize each of them. Porter still is the best known authority in strategy models and complemented with Downes’ digital age model works well for many companies. BCG’s Matrix and Mckinsey’s Matrix help diagnose the dimensions in a product’s life cycle. They are all tools, and just as a workman has many tools in his tool kit, so managers must have many tools in theirs, and know when to use the right tool in a given situation. Example: Establishing that a market exists: Market research Understanding the market’s needs, competitors’ strategies, and to obtain information for decision making, it is imperative to do market research. Next, we will introduce a case that demonstrates the value of market research to any firm willing to spend time and resources using it. After this example is introduced, two sections are developed. One, introducing the market research process, and second, the general guidelines on how to conduct a market research study. A Candy Store Company with subsidiaries in New York and other large cities in US was interested in opening a store in Monterrey, Mexico. The New York subsidiary is located in one of the most visited areas of Manhattan. It is housed on three floors, a huge locale focused on selling all type of candies. Every floor has a thematic decoration, characters, and games, depending on the type of candies sold on that floor. Inside they even have a coffee shop. They employ a high price strategy, and most of their visitors are tourists (a differentiated niche in Porter’s Three Generic Strategies model). The plan for the store located in Monterrey was recently completed. It will be a big store, almost the same size as the one in New York, with high prices and focused on high-income consumers. Additional to the thematic areas defined in the New York store, this store will have a space for “old candy brands” to attract older consumers. The store will also have a section for local brands. A consultant was hired for advising the owners on how to achieve the plan. His first advice was to do some market research to understand the real opportunity. The market research results were astonishing: there was no market in Monterrey. Consumers loved the idea, but they were not willing to pay the high prices or even to visit the store more than once a month and being Monterrey city with a small amount of tourists there would not be enough revenue to maintain the business. The investment for opening the store in Monterrey was about USD 1 million dollars. The potential entrepreneurs spent around USD 10 thousand in marketing research, which kept them from making a bad investment. The market research process There is an inherent risk when trying to expand the market, launching a new product, or starting a new business. Defining that a market exists for your business idea will help in reducing that risk. You may think that with a bunch of collected data and facts you will be able to decide whether or not to go forward with your idea. But the challenge is not just collecting the data, but how to transform it and how to use it. Market research will support you in collecting, transforming, and getting meaning from the data. Some of the reasons why market research is so important are: 1. The cost of errors. Launching and selling a new product that is not successful in the marketplace could cause you to lose your entire investment. 2. Conducting market research will help you identify new trends, market segments, and niches. 3. Market research will end up saving you time by developing focused strategies based on a better understanding of your customers. Market research involves all the activities that allow the company to obtain the required data for decision support. Market research is collecting, interpreting, and communicating the information used for strategic marketing. The most typical approaches are to conduct a tailored, one-time market research study as described below, or to use readily available information such as the periodical information provided by companies like AC Nielsen. This section will describe how to conduct a market research study. The main steps are: 1. Identify and define the problem: The first step is defining the target or problem to solve for your market research. Most of the time it is more than one problem to solve, but you should prioritize. The right definition of the problem should allow us to obtain the needed data. 2. Define the objectives: The objective should answer the question of what you want to obtain from the market research. In this step you should define the scope and action plan. Developing the objectives should consist of establishing a budget, understanding the environment, developing the approach to analysis, and formulating hypotheses. 3. Developing a research plan: Based upon a well-defined problem and objectives, the framework for the research plan should be apparent. This step requires the greatest amount of thought, time, and expertise. It includes incorporating knowledge from secondary information, analysis, qualitative research, methodology selection, question measurement and scale selection, questionnaire design, sample design and size, and determining the data analysis to be performed. 4. Collecting the data: This is the point at which the finalized questionnaire (survey instrument) is used in gathering information among the chosen sample segments. There are a variety of data collection methodologies to consider. For instance: Computer Assisted Telephone Interviewing, Mail Survey, Internet Survey, Mall intercepts, Traditional telephone interviewing, Internet panel, home panel, among others. 5. Performing data analysis: This is the process of analyzing the collected data, and transforming complex to simple information. Less complex analysis on smaller data sets can be handled with any of a number of personal computer office suite tools, like spreadsheets, while more complex analysis and larger data sets require dedicated market research analysis software. Types of analysis that might be performed are simple frequency distributions, crosstab analysis, multiple regression (driver analysis), cluster analysis, factor analysis, perceptual mapping (multidimensional scaling), structural equation modeling and data mining 6. Reporting and presentation: This is one of the most important steps. All business critical information and knowledge that comes from your market research investment are limited by how they are presented to decision makers. There are as many reporting styles as there are research reports, but some are definitely better than others, and there are definitely trends to be aware of. It is important to mention that market research by itself does not arrive at solutions or marketing decisions. It does not even guarantee your business success. However, when conducting a well-executed market research study you can reduce the uncertainty in the decision-making process, increasing at the same time the probability and magnitude of success. To illustrate these concepts in a live situation, we have included a discussion of how a market research study was performed to determine the potential market for a new concept for funeral services in Monterrey, Mexico. Market research to determine the potential market for funeral services in Monterrey, Mexico Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez Background: A group of investors thought about developing a new enterprise concept of funeral services in Monterrey, Mexico. The main idea was to offer improved funeral services, satisfying a need not yet covered in the city. Concept of the project: The company will offer funeral services to people of socioeconomic level A and B+. The new funeral services will include: Sale of coffins or crematory urns, luxury transportation, memorial vigils, chapel, flowers and cafeteria services, religious ceremonies, wide parking with valet parking service, legal requirements, condolences via Internet, publication of brief letters, private room for the family with foods at the request of the client and pre-arranged funeral plans. The architecture of the place will include many green areas, big spaces and a quiet and peaceful atmosphere. The added value will be to support the client in his pain, reason why a specific executive will be in charge of all the proceedings and procedures for the memorial vigil and burial of his beloved. Objectives: e To understand if a potential market exists for a funeral services enterprise in Monterrey City. e Identify current specific needs for the sector. e Evaluate project concept. e Evaluate project location. e Evaluate project name and logo. ¢ Methodology: Stage I Qualitative study: 2 sessions group with the following profile: Session 1: Men between 35 and 50 years of age, from socioeconomic level A and +B who experience in the process of hiring funeral services in the last year. Session 2: Women between 35 and 50 years of age from socioeconomic level A and +B who had experience with the process of hiring funeral services in the last year. Stage Il Quantitative study: The size of sample was of 472 personal interviews to men and women of socioeconomic level A and +B, ages between 35 and 60 years old, who live in Monterrey and its metropolitan area. Main findings and conclusions: In this research we found an important opportunity at the funeral logistics services since 76 per cent of the interviewed people consider that it is necessary to have a company of this type in the city, since at the moment the companies that offer these services have many opportunity areas. “Cedillas del Toro”, the most important funeral services enterprise up to date show us some opportunity areas as: lack of parking, mentioned by 15 per cent of the sample; the lack of a comfortable cafeteria, mentioned by 10 per cent of the sample; small chapel, mentioned by 7 per cent of the sample; and the temperature of the very cold climate, mentioned by 7 per cent of the sample, among others. In the qualitative study, people interviewed mentioned what they dislike about “Cedillas del Toro” is that the memorial vigils have a common area for visits in where you can not identify whom each person is accompanying, turning it very informal. The challenges that we found at the second more important funeral services company of the city, “Cedillas Carmelo” were: high price (20 per cent of mentions), lack of facilities for handicaps (crowded elevating) (15 per cent of mentions) and poor availability of chapels (only three) (10 per cent of mentions), among others. The concept of the new funeral services enterprise was very well accepted by most of the people interviewed (70 per cent), mainly the idea of having a person who facilitates all the funeral proceedings, seems to be very helpful and important in those moments of grief. The proposed location for the new funeral services enterprise had an acceptance of 80 per cent of the people interviewed, mainly because they are near the most important churches of the city with easy accesses. The options of names people interviewed preferred were “Cedillas Marian” or “Cedillas de Maria” by 45 per cent and 30 per cent respectively. The people interviewed in the qualitative study suggested some ideas to improve the concept mentioned like: To have a private area with all the comforts (telephone, computer, air condition, bath) for the family who does not wish to receive visits, that have a pleasant decoration (not funeral), and personal attention, among others. Thanks to this market study, the investors could corroborate the idea that a funeral service enterprise in Monterrey may be a good business opportunity. In addition they could delineate the concept according to the market. The funeral business has been an economic success so far, thanks to its clear definition of its mission and its market oriented philosophy: always searching for and delivering an excellent service to its customers. Discussion questions Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcewill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez e Think of an industry with which you are familiar. Discuss the major elements of a business model and apply it to the industry chosen. What features in the model appear to be a standard compared to other industries? e What are the steps in the process of customers’ needs and wants identified in the chapter as defined by Dorfman? e Or: Refer to the section of this chapter entitled “Identifying customers’ wants successfully”. In Dorfman’s framework three steps lead to the identification of customers’ need and wants. This process ends on the validation of needs. What would be a further step geared to identify future needs? e Read the case about the Market research to determine the potential market for funeral services in Monterrey, Mexico. o What objectives would you propose for this study? °o Methodology suggested? o What policies could be derived from the information obtained by the Marketing Research study? References Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editors: Salvador Trevino and Carlos Ruy Martinez (ITESM, Monterrey Campus, Mexico) Contributors: Carlos Alberto Alanis, Gaspar Rivera, Jorge Echeagaray, Jose de Jesus Montes, Juana Monica Garcia, Ramiro Robles, and Roberto Sanchez Direccion de Mercadotecnia. Analisis, planeacion y control. Philip Kotler, 4* edicion. What Do Your Customers Really, Really Want? Sherri Dorfman. ?June 7, 2005 Osterwalder, Alex. “Success = Business Model Design AND Implementation”. June 11, 2006. <http://business-model- design. blogspot.com/2006/06/sucess-business-model-design-and.html>. CEMEX Web site. CEMEX S.A. DE C.V. April 2007. <http://www.CEMEX.com>. McDonalds Web site. McDonalds Corporation. April 2007. <http://www.mcdonalds.com>. Wikipedia. Business model definition by Osterwalder, Pigneur and Tucci. Learning objectives Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) e differentiate between the growth stages of business organizations e understand how businesses can organize their tasks and responsibilities ¢ compare the advantages and disadvantages of tall versus flat organization structures e distinguish between the various types of business legal entities (see skill head, US legal issues) Introduction Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) This chapter discusses organizational issues owners face while operating and attempting to grow their businesses. We examine four stages of organizational growth and the choices business owners face when deciding how to manage tasks and responsibilities. Those management decisions shape an organization's structure, which in turn influences lines of communication and decision-making processes. The end of the chapter includes a short description of business legal entities. Also, you will find exercises to help you better grasp these concepts and to determine what type of organizational structure and legal entity might best suit your venture. Moving from a one-person band to an orchestra Most businesses start like a one-person band. The owner plays all the instruments, some better than others, but all out of necessity. Like any musical ensemble, a small business includes many roles. In the beginning, the owners are often the best at making or delivering the product or service. Since they have the most at stake, they often assume a wide variety of roles, including sales, accounting, and much more. Through a combination of skill, planning, talent, and perhaps luck, some businesses manage to grow. This growth leads to new and changing roles in the business for everyone, including the owner. Of all the roles an owner has in the business, perhaps the most important one is to be the designer for the business. In the role of chief designer, business owners have three critical duties: ¢ Provide the vision and direction for the company. Owners set the direction for the values of the company, develop its product and service strategies, and set the tone for its relationships with customers. ¢ Develop and refine processes and procedures. Owners design the “business model”, or the big picture formulas and processes of doing business. Then, they must fill in the details by analyzing processes and finding bottlenecks. e Create the organization’s human resource structure. Owners identify the positions and types of people the business needs, and then they find the people to fill those roles. In the words of Jim Collins, author of the bestseller Good to Great, "Get the right people on the bus, the wrong people off the bus, and get everyone in the right seats." The payoff for a well-designed business is immense. With clarity of vision, expectations and processes, and with the right people pulling together, there is a strong foundation for growth. Instead of a grim “never take a day off” grind, the business owner can now enjoy the ride—and maybe take a day off from time to time. It is also now possible for the owner to think about a profitable exit, because a business that can run without the owner is worth a lot more than one that falls apart when he or she is not at the controls. Owners of a growing business eventually have to decide how to organize employees and delegate authority. Doing so can be a frustrating task for many entrepreneurs. Most would rather concentrate on closing sales, producing product, or managing cash. However, they do so at the peril of putting off planning for the future needs of their enterprise. Organizational issues Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) Organizational issues Entrepreneurs typically know when their company needs a structural overhaul. The owner can no longer juggle all the critical day-to-day activities. Important decisions are delayed, customer contact suffers, employees feel overwhelmed and confused about their and others' roles in the organization. As the employee count rises, someone other than the owner has to manage and be empowered to make critical decisions. The stress generated by these various dysfunctional symptoms eventually reaches a point where the owner has to decide to either continue growing the business (but in a more managed way) or to restrict its growth to effectively manage the firm single-handedly. Acme Security Company’s (the name has been changed to maintain its anonymity) original organizational structure caused many problems for the company, especially as its customer base began to expand. "The company provides security and fire alarm systems for high rise buildings and large corporate and government customers. It had grown to more than 40 employees in a short time, but was finding it increasingly difficult to provide the service customers expected. The company’s organizational structure had evolved to meet the needs of the many family members that worked in the company, but not the needs of the customers." The company had a product-based structure. The departments included Inspection, Maintenance, and Alarm Installation. Each department had a manager, a sales manager, field crews and administrative support. Even though most customers needed and purchased all of the company’s services, no one was responsible for meeting the total needs of the customer. Each department focused on getting its work done. The lack of communication and coordination resulted in scheduling snafus and invoicing problems. A growing number of petty details quickly buried the CEO and prevented her from focusing on the important strategic and financial issues facing the company. She was also a bottleneck that contributed to customer service problems. No wonder she kept a candy dish filled with antacids on her desk! Exhibit Acme Security, Inc. Original Organization Chart CEO Administration Inspection Daywork/ Alarm Department Service Department Office Inspection Sales! Alarm Alarm Manager Manager Design Manager Coordinator Design! Receptionist Field Crews Ssles . Inspection " Field " Admin Admin Inspection —_—— A product-based organization From the customer’s point of view, working with Acme Security was akin to entering a restaurant and having to order the appetizer from the appetizer waiter, entrée from the entrée waiter, and dessert from the dessert waiter. In this scenario, each waiter is only concerned with getting his or her order complete and delivered. The dessert might arrive before the entrée or appetizer. And if the entrée is delivered cold, the other waiters cannot help. Finally, once the meal is over, all the waiters have to get together to figure out the bill. Like Acme Security, the restaurant’s structure made it difficult, if not impossible, to deliver quality service. With the ultimate goal of improving customer service, what should the new and improved Acme Security organizational structure look like? For this company, a function-based rather than a product-based structure was more appropriate. The most important change was to assign one person as the primary contact for each Acme Security customer. This Account Manager would report to the Sales Manager. The new company structure features two other key management positions, an Operations Manager and an Office Manager. These three key managers report to the CEO. The challenge for the CEO was to delegate responsibility and authority to these three managers. Below we will discuss the composition and responsibilities of these three functional departments: Exhibit Acme Security, Inc. New Organization Chart CEO Sales Operations Office Manager Manager Manager Account Account Scheduling Job Accounting Human Manager Manager Costing Resources Account Alarm Inspection = aaa A Function-based organization Sales: includes the Sales Manager, the account managers and estimators. Account Managers are assigned by building or a major corporate account. This way everyone in the company, and more importantly the customer, knows who is responsible for a question or problem. The Account Manager's primary task is to meet the customer’s total needs, and to make sure the invoices for work performed are issued in a timely manner. Operations: includes the operations manager and the field crews. This department includes a position responsible for scheduling all operations work and a position responsible for collecting and entering all job cost information. Operations’ primary task is to meet the needs of the Account Manager and the needs of the Office Manager with respect to information required to process invoices and payroll. The department maintains a centralized scheduling system that is accessible to everyone. They notify the Account Manager that a job is complete, provide the necessary job costing and billing information so that the Account Manager can notify accounting that an invoice should be issued. Administration is led by the Office Manager. This department includes the receptionist, Accounting Manager, and Human Resources. This department’s primary task is to issue invoices and manage payables, receivables, and to provide management with timely financial reports. With improved structure and communication, the CEO of Acme Security can focus on more strategic issues and replace the bowl of antacids with chocolate! Organizational stages of growth Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) As an organization grows, it generally progresses through four stages of increasingly formal management structures.| footnote | Longenecker, Justin Gooderl, Moore, Carlos W.; Petty, J. William; Palich, Leslie. (1991). Small Business Management: An Entrepreneurial Emphasis. South-Western College Publishing. Mason, OH. Stage 1: In a one-person operation, the owner does everything: sales, bookkeeping, marketing, production and so on. Many firms remain one- person operations indefinitely due to the owner's family obligations, financial constraints, or contentment with the status quo. Stage 2: As more people join an organization, the business owner becomes a player-coach. The entrepreneur continues to perform day-to-day tasks, but along with other employees. So the owner assumes additional employee management duties such as hiring, scheduling, supervising, and payroll. Stage 3: Firms reach a major milestone in organizational development when they add an additional level of supervision. The owner relinquishes some direct control and begins working through an intermediary layer of professional managers. Stage 4: As a company adds more layers of management and processes, it also adopts written policies, budgets, standardized personnel practices, organizational charts, job descriptions, and control protocols. Departmentation New business owners do not ask themselves how they should organize their business. Rather, they organize by objective: what does it take to get a job done, meet a goal or create wealth. How owners organize a company depends on a multitude of factors: for example, are certain tasks performed in-house or out-sourced? Are people (staff and management) with the necessary skills available? Business scholars have categorized various organizational structures as described below. However, do not assume that a growing business must at one point or another assume one of these structures. Rather, smart entrepreneurs constantly tweak their organizations to remain agile to take advantage of new opportunities or respond to new challenges. Sometimes the changes necessary to move from a small to larger business require gut wrenching decisions: for example, personnel that might have played key roles in establishing a new business might not be the right fit for a larger, more structured organization. As the business grows, its organizational structure is heavily influenced by function (people grouped with similar responsibilities), process (people involved in similar processes), product (people building a specific product) or projects (members of a project).[footnote] A firm's structure might be influenced by some or all of these types of departmentation. Large firms usually employ a variety of departmentation styles, selecting the most appropriate form for each subsystem. “Entrepreneurial Firms: An Examination of Organizational Structure and Management Roles Across Life Cycle Stages,” Watson, Kathleen M., Plascha, Gerhard R., paper presented at U.S. Association for Small Business and Entrepreneurship annual conference, Baltimore, Maryland, October 1993) Departmentation by function Grouping activities by function is the most widely used form of departmentation. Similar activities are housed in a department or under a single chain of command. For example, sales, advertising, public relations, and promotion might be grouped in a marketing department; employee benefits, employee training and employee regulatory compliance may be housed in the human relations department and so on. Functional departmentation takes advantage of employees’ specialization. Employees with similar training, education, skills, or equipment work together and under a supervisor responsible for that department's activities. Because one supervisor typically oversees a major area of activity, functional departmentation also facilitates coordination. For instance in a larger retail operation, one marketing department supervisor would control and coordinate the work of buyers, merchandisers and the sales force so that information and activities of each function would be more efficient and productive. Exhibit Department by function Departmentation by function Human Resources The process or equipment used in producing a product or service may be the basis for determining departmental units. Since a certain amount of expertise or training is required to handle complicated processes or complex machinery, activities that involve the use of specialized equipment may be grouped into a separate department. This form of departmentation is similar to functional departmentation. The grouping of all milling machines into one department or the placing of lathes in another department is illustrative of departmentation by equipment or process. As a further example, a large food products firm may be departmentalized by processes such as manufacturing, package design, distribution, and shipping.3 Exhibit Department by process Departmentation by process Shipping Departmentation by products Companies with diversified product lines frequently create departmental units based on the product. To departmentalize on a product basis means to establish each major product in a product line as an independent unit within the overall structure of the company. For instance, retail stores may organize their operations to meet the needs of specific customer groups by forming special departments to cater to house wares, menswear, children’s clothing and so forth. Product departmentation can be a useful guide for grouping activities in service businesses as well. Many banks have separate departments for mortgages, checking accounts and commercial loans. Exhibit Department by product Commercial loans Consumer loans Departmentation by product Checking accounts Departmentation by projects Project organizations are specifically designed to deal with changing environments. A project in this sense is a series of related activities required to accomplish a work outcome, such as the development of a new product. Projects and task forces or teams are generally unique—designed to work on a nonrecurring project. They are tightly organized units under the direction of a manager with broad powers of authority. A team is given a project with specific tasks or operational concerns. This team is composed of employees from the firm who have expertise or skills that can be applied directly to the project. The members of the team manage the project without direct supervision and assume responsibility for the results. When work teams function well, the need for a large number of supervisors decreases. Departmentation by matrix Some firms are organized by using a mix of departmentation types (matrix organization). It is not unusual to see firms that utilize the function and project organization combination. The same is true for process and project as well as other combinations. For instance, a large hospital could have an accounting department, surgery department, marketing department, and a satellite center project team that make up its organizational structure. e Once the bases for departmentation are determined, another problem of structure immediately arises concerning how many departments or how many individual workers should be placed under the direction of one manager. This is referred to as a span of management or span of control issue. A number of factors should be considered when deciding upon a span of control: o the complexity of the subordinates’ jobs and need for interaction with management o the complexity of the supervisors’ jobs o the competence of the supervisors and subordinates o the number and nature of the supervisors’ other interactions with non-subordinates o the extent to which staff assistants provide support. Flat versus tall organizations Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) By definition, a small business is typically a flat, centralized organization. The founder/owner is the boss and makes all the critical decisions. However, as the personnel count grows, the firm’s structure typically expands either horizontally (flat) or vertically (tall). Again, various factors including the owner’s management style, might affect what type of structure a business assumes. Flat organizations Flat organizations follow the decentralized approach, or organic system. There are fewer levels of management which creates an environment for faster growth and response between all levels. Organizations that follow this type of structure have wider spans of supervisory control and have more horizontal communication. This type of structure promotes task interdependence with less attention to formal procedures. More decisions are made at the middle levels of the organization. They are less bureaucratic and less structured. Externally, the organization as a whole becomes more adaptable to its market and can quickly react to changes. Internally, the organization as a whole encourages more participation between all levels of the organization. As a result, all levels have the potential of working more closely together which enhances a closer working environment with better communication and creativity. Exhibit Salespeople Tall organizations Flat organization A tall structure is a more formal, bureaucratic organization or mechanistic system. In this environment, multiple levels of management control decision making processes and employees within the organization. When numerous levels become involved in daily operations, decision-making tends to be more impersonal. Since this type of structure has more levels, the division of labor is much more specialized. Departments can become more compartmentalized, which increases the communication within them, but does not lend itself to communication with other departments. Exhibit CEO Sen. VP - Marketing Sen. VP - Sen. VP - Finance Sen. VP - Human Manufacturing Resources Accounting Manager Budget Manager Purchasing Manager Purchasing VP Tall organization Centralized versus decentralized organizations Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) Communication is essential to disseminate information throughout organizations and can take place at many levels. There are two communication models that are utilized—centralized and decentralized. Again, each style can be effective depending on the environment and each has its advantages and disadvantages, as are outlined below. Centralized Centralized organizations require communications flow through a central person or location. Single leaders are prominent and have a great deal of decision-making power. These persons have access to more information and can therefore exercise a great deal of influence over group members by controlling the flow of critical information. One disadvantage to centralized communication is that as the organization grows, the amount of information can overwhelm the central hub (person or department) that processes this information. One advantage to the centralized approach is that it encourages standardized processes that typically result in cost savings and better quality control. Decentralized Decentralized organizations tend to utilize many channels of information flow, allowing for more open communication between group members. This model is more conducive to solving complex problems. One of the major advantages to decentralized communication is that problems and processes can be solved and changed in a timely manner. Also, the needs of customers and employees are more easily and quickly met because fewer levels of management are involved. A major disadvantage to a decentralized organization is that departments can easily lose sight of the organization's common mission. To ensure organizations stay on task, upper management should maintain open lines of communication with local management. Chapter summary Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) So how does an owner begin to digest and pick between all the choices (function, product, process, project or matrix structure, flat versus tall, centralized versus decentralized) available when it comes to organizing a business? To design a better business, owners should take these steps: e Schedule time to work on the business. This applies to start-ups and established businesses. There is an old saying, “If you are chopping wood, you need to take some time to sharpen the axe”. e Write everything down. Document all job descriptions, processes, and procedures, and then refine the processes so the result is reliable and high quality output. In his book The E-Myth, Michael Gerber makes the case that entrepreneurs should build and document their business as if it were the first of 5,000 locations, even if they never plan to expand. e Try to become unimportant to the day-to-day operations. A business that would cease if something happened to the owner has very little value to a potential buyer. If the business is a turn-key operation with documented and reliable processes, it has much greater value to the current owner and future buyers. e Be prepared to change roles as the business grows. As time goes on, the amount of time an owner spends working in the business should decrease. He or she should embrace the role of a CEO who is working on the business. In the introduction of this chapter we likened the business owners’ role to a musician. In the early stages of the business, the owner had to play every instrument. But if the business is to grow and prosper, the owner must become the conductor of an evolving orchestra. If an orchestra has good musicians, excellent sheet music, and a talented conductor, the result is beautiful music. Example: US legal issues Because laws regulating business vary greatly by country and locale, entrepreneurs should pick a legal entity for their business in consultation with a local attorney that specializes in business law. The legal issues discussed below reflect general practices in the United States where laws governing business vary not only by state, but by local jurisdictions within states. Businesses activities are organized either by individuals, couples or groups of people. Businesses with one owner (the most common and referred to as sole proprietorships in the United States) can be launched without any legal assistance, and depending on the location, with or without certain permits. Businesses with multiple owners typically write out explicit guidelines regarding investment and management issues using one of several types of legal agreements designed specifically for business organizations. Thus, one of the first decisions facing new business owners is deciding what legal entity to use for their business. That decision-making process typically weighs the following issues: a. how much time or involvement in the business is required b. what skills are required c. degree of risk associated with the business d. amount of capital needed e. tax regulations on labor and income earned by the business In the United States, there are four basic types of business operations: 1. Sole proprietorships A sole proprietorship is an individual owner of a business (with or without employees). This type of operation is the simplest to form, and the single owner, or sole proprietor, may work as much or as little time as desired. The sole proprietor is generally held accountable for all products and/or services produced by the business, as well as debts and liabilities of the business. Since the owner’s personal liability extends well beyond amounts invested in the business or even beyond assets purchased by the business, this type of operation is considered high risk. The amount of capital required to start a sole proprietorship is generally minimal. In addition to sole ownership of all assets and liabilities, the proprietor benefits by receiving all profits, which in the United States are taxed as part of the owner’s total personal income. The sole proprietor may employ workers or engage independent contractors to increase skills available, but the business ceases to exist upon the owner’s death. A sole proprietor business can be organized at any time into a different legal entity. The owner often decides to reorganize when profits substantially increase the individual's tax liability. . Partnership When two or more family members or people join together in a business operation, they may choose to establish a partnership which can take the form of a general or limited liability partnership. General partnerships are similar to the combination of a group of sole proprietorships in that the partners share workloads, profits, and liabilities. Limited Liability Partnerships, however, usually include one or more partners who manage daily operations and are generally liable for the debts of the business while other limited partners risk their investment in anticipation of profits. Initial agreement is essential concerning how the partnership will operate, who will manage daily operations, how profits will be disbursed, and who assumes liabilities and debts. Such an agreement is normally formalized in writing and is known as a “Partnership Agreement”. Partnerships, like sole proprietorships, are generally dissolved upon the death of a partner. Profits are shared in accordance with terms of the Partnership Agreement and reported to taxing authorities on personal tax returns of the partners. . Corporations In the United States, corporations are considered separate legal entities that are chartered and regulated by an authority in each state, such as the Secretary of State. Additionally, a separate agent who acts on behalf of the corporate entity is identified in the initial application process to receive legal notifications. Corporations must also submit identification and governing documents such as Articles of Incorporation and By-Laws. Corporate entities are generally required to be kept in active status through annual updates to a regulatory authority. As a result, this type of entity is deemed slightly more complex to form and manage. Corporations require investment by one of more owners who are known as “shareholders” or “stockholders”, and the amount of investment varies depending on the needs of the business. Since this form of entity provides protection (widely known as the “corporate veil”) for the personal assets of owners against certain types of claims, it is generally of lower risk. Corporate entities may vary in numbers of owners from a single shareholder to an unlimited number. States and federal agencies regulate financial activities and reporting requirements that are categorized by the number of shareholders and whether their shares are available to purchase and sell on public stock exchanges. For example, US corporations with publicly traded shares are regulated by the US Securities and Exchange Commission. The corporation may employ workers and engage independent contractors as needed to increase skills available. Corporations are required, however, to acknowledge formally (in a written document) the individuals who are approved to engage in financial transactions on behalf of the entity. In the United States, the Internal Revenue Service regulates federal tax codes. There are two taxing options for earnings of corporations: a progressive structure on profits for the traditional corporation and another that allows owners to “flow-through” profits to their personal tax returns. . The Limited Liability Company (LLC) In the United States, the Limited Liability Company (LLC) is the entity of choice for the owner or owners who prefer the limited liability afforded by a corporation and a tax treatment that allows profits to flow from the business to the owner or owners. The LLC must also be registered with a State authority, but requires less documented structure. Ownership is acknowledged by percentage as opposed to number of shares and protection for the owners is similar to that of a corporation. Discussion questions Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) e Describe the characteristics of each of the four stages of growth a business organization might experience? e Describe the advantages and disadvantages of a flat versus tall organizational structure. e Given your personality and past experience, do you prefer working in a flat or tall organization and why? e What are the characteristics of the four types of business legal entities? References Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: John Maynard (The University of Georgia, USA) Contributors: Suzanne Barnett, Lydia Jones, Carol McDonell, Bernie Meineke, Tammy Segura (Georgia Small Business Development Center, USA) Reviewer: Dr Gideon Markman (The University of Georgia, USA) Collins, Jim. (2001). Good To Great. HarperCollins, New York, NY. Gerber, Michel E. (1995). E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It. HarperCollins Publishers, Inc. New York, NY. Learning objectives Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 e to understand the field of Human Resource Management and its potential for creating and sustaining competitive advantage ¢ to understand how an organization can effectively recruit, manage, and terminate its employees. e to know the basic approaches to creating effective reward systems through base pay, benefits, and pay for performance e to understand the relationship between work design and employee motivation e to show familiarity with mechanisms to create employee voice and influence Competitive advantage through human resource management Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 An introduction, by Cynthia V Fukami A great deal of recent research has underscored the strategic advantage to be gained from managing employees as if they are assets rather than commodities. Consider the commodities a business employs—pads of paper, ballpoint pens—things that you purchase, use up, and then discard. Investing in a commodity is never considered—refilling a ballpoint pen, for a simple example—because it simply is not worth the expenditure of time and resources. A return on that investment is not expected. On the other hand, consider the assets employed in business—the physical plant, the equipment, and the money—things that are maintained and developed. When the paint peels on the office walls, one does not throw away the building and build a new one; a new coat of paint is sufficient. Making investments in a business’s assets makes a great deal of sense, because these investments will bring a return. A growing number of companies, recognizing that their employees are among their most valuable assets, are backing up that recognition with solid investment. In an important recent book, Professor Jeffrey Pfeffer of Stanford University identified seven management practices that have been associated with producing sustained competitive advantage for the companies that have adopted them. These practices are: employment security, selective hiring, self-managed teams with decentralized authority, high pay contingent on organizational performance, training, reduced status differences, and sharing information. Put together, these practices form the foundation of what is called a “high-commitment” or a “high-performance” management system. The evidence on the results of implementing a high-commitment management system is striking and strong. Research has been conducted in many industries, from banking to automotive to semiconductors to service. Some research has focused on one industry while others have looked across industries. Some research has included companies from the United States and others have studied companies abroad. Overall, the conclusions of these studies are remarkably similar. High-commitment management systems produce higher organizational performance. Pfeffer summarizes the results into three categories. First, people work harder because they have more control over their work from the high-commitment management practices. Second, people work smarter because they have stronger skills and greater competence from the investments of high-commitment management practices. Third, companies save administrative overhead and the costs by reducing the alienation of their workforce and the adversarial relationship with management. In a study of firms representing all major industries, Mark Huselid found that a one standard-deviation increased the use of high-commitment practices was associated with a 7.05 per cent decrease in employee turnover, a USD 27,044 per-employee increase in sales, USD 18,641 more in market value per employee, and USD 3,814 more in profits per employee. When he repeated the study several years later, he found that a similar increase in the use of high-commitment management practices was associated with a USD 41,000 increase in shareholder value per employee. Another noteworthy study examined the management practices of initial public offerings or IPOs to see if there was a relationship between high- commitment management practices and the five-year survival rate of IPOs. This study concluded that the treatment of employees as assets and the use of stock options, profit sharing and gain sharing programs for all employees (versus limiting the programs to key executives) were significantly related to the survival of the IPO to the five-year milestone. These studies, and many others like them, have put conventional wisdom on its ear. Typically, we have assumed that success was related to factors such as size, or being global, or leading your market, or being in particular industries such as high tech, or pursuing a brilliant strategy. Yet, research shows there is virtually no connection between industry and success. As Wal-Mart and Southwest Airlines have shown us, an individual business can be very successful in a terrible industry. Similarly, there is little or no connection between success over time and company size or market dominance. Instead, competitive advantage comes from the way business is conducted, and employees are the keys to this. The most successful companies manage their workforce effectively as assets not commodities. So why are more companies not adopting high-commitment management practices? Why are their executives proclaiming employees to be their most valuable assets, while continuing to treat them as commodities? Perhaps it is a continual cultural emphasis on short run performance and stock prices —an emphasis that makes it seem more profitable to lay off employees or to cut training when times are tough. Perhaps it is a preoccupation with systems that control rather than delegate. Perhaps it is our overwhelming tendency to teach future managers technical tools at the expense of people- management tools. Whatever the reasons, the challenge remains. If a business is able to meet that challenge, the odds are that competitive advantages will follow. Providing employee voice and influence Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By Liz Evans Employees are the resources of an organization in the same way as material assets but they are also the firm’s stakeholders. The concept of employees as stakeholders refers to the interest employees have in the success of the company and the fact that actions taken by the organization directly affect the employees (Olson, 2003). Employees’ stakes in the company are economic in the fact that their livelihood comes from the firm, psychological in that they derive pride from their work, and political in terms of their rights as employees and citizens. Though employees are the stakeholders who are arguably most visible to management on a day-to-day basis, they do not often command the majority of attention in terms of decision-making influences. The short-term, economic duties to stockholders often command more managerial attention in the decision making process than employee opinion (Peterson, 2005). According to Jones, the best way to incorporate employees' stake to improve firm performance is through employee participation and influence (Employees as Stakeholders, 1997). Apart from unionization, employees can obtain influence in organizational decisions in several ways. Grievance and Due Process Systems allow employees to address grievances and to argue their point if they feel they are wronged by management or another employee. Participation Systems provide employees with influence in the organizational or managerial decision making processes. This subchapter will discuss the ways employees are given voice and influence in non-unionized workplaces, with particular attention paid to influence in decision-making and organizational success. This will include the benefits of employee input to the firm, the difference between voice and influence, and the many participation mechanisms management can use to harness employee influence into decision-making. There are benefits to a firm for providing employee influence. For one, strong employee voice and influence mechanisms are an important part of a High-Performance Human Resource System in which the human resources of the firm are coordinated and “designed to maximize the quality of human capital in the organization” (Becker & Huselid, 2001). Voice and influence mechanisms allow employees to give input and to contribute their expertise to business success; these mechanisms allow firms to get the most benefit from the skills of their human capital. Thus, firms with employee influence mechanisms get higher financial return from their employee assets; high-performance HR systems improve the financial bottom line of the firm (Becker & Huselid, 2001). Despite the many benefits, there are various reasons not to implement voice and influence mechanisms perceived by employees and management. Voice and influence can benefit employees by helping them to protect their rights and most “employees want a voice in their workplace” (Peterson, 2005). However, employees may be hesitant to organize into employee associations or push for voice mechanisms for fear of retribution due to perceived opposition to influence by management (Peterson, 2005). Employers benefit from the increased trust that comes from sharing information and giving employees influence (Pfeffer & Viega, Putting People First for Organizational Success, 1998). However, managers who are used to having control often find it “disconcerting, difficult and even impossible” to share power in the form of influence in exchange for the many organizational benefits (Marken, 2004). Voice and influence are different, but both are necessary to garner the benefits to the firm. Many managers recognize the importance of giving their employees a voice, but often this open communication does not result in authentic employee involvement or influence on the actual decision making process (Golan, 2003). Hearing employee voice is not the same as giving consideration to the received information; consideration is what gives employees influence in the organization (Garvin & Roberto, 2001). Visible action is as important to influence as consideration (Solnik, 2006). Action provides the follow up that allows management to make it apparent to employees that they have influence; it also allows management to see real change and benefit from the insight provided by employees. Voice without consideration and action creates little benefit for employees or the firm. Many different participation systems can be implemented to authentically get employee input and to capitalize on the benefits associated with employee influence. Open book management empowers employees with the information they need to see the reality of the organizational situation and to give relevant and helpful input (Case, 1997). Similar to open book management are open-door policies, where management makes it clear that employees can informally raise issues or give input at any time. The open- door policy page on the Central Parking Corporation website provides an example of such a policy and the procedures employed by the company for submitting and receiving employee input (Central Parking Corporation, 2004). Feedback programs, sometimes implemented in the form of employee surveys or through direct employee-management interaction, can be a less expensive way to get feedback from employees concerning specific programs or policies (Solnik, 2006). Surveys are particularly economical, especially when done online using free survey programs such as SurveyMonkey.com (Survey Monkey, 2007). Team mechanisms such as quality circles, work teams, and total quality management teams provide employees with the ability to synthesize their individual input into a better solution to organizational problems. In conclusion, there are many possible benefits to a firm associated with providing employees with voice and influence within the organization. However, in order for these benefits to be realized, management must not only provide employees with an outlet to speak, but must also take the information into consideration and follow up with visible action. In this way, an organization can attend to its most important stakeholders, the employees, and gamer return on its investment in its human capital. Managing differences in organizations By Hanoi N Soto Garcia and Nora Martin In today’s business environment, an increasing trend towards teamwork, a larger presence of women and ethnic minorities in the workplace, and a greater exposure to international businesses and cultures are constantly challenging employees from a variety of industries in all parts of the world. This posts a greater opportunity for people to learn from cultural and personal differences and create a more productive work environment. Thomas L Friedman, in The World is Flat, makes the following comment after one of his trips to Bangalore, India: "It is now possible for more people than ever to collaborate and compete in real time with more people on more different kinds of work from more different corners of the planet and on a more equal footing than at any previous time in the history of the world" (2006). Due to the importance of managing differences effectively in organizations, there is a need to identify the types of differences encompassed in organizations, the effects of differences in work teams, and the importance of understanding and diagnosing differences to maximize organizational performance. Organizations usually take one of two paths in managing diversity: (1) they encourage people of diverse backgrounds to blend in for the benefit of fairness and equality; or (2) they set them apart in jobs that relate specifically to their backgrounds, assigning them, for example, to areas that require them to interface with clients or customers of the same identity group. African American MBAs often find themselves marketing products to inner-city communities; Latino Americans are frequently positioned to market to Latinos or work for Latin American subsidiaries. In those kinds of cases, companies are operating on the assumption that the main virtue identity groups have to offer is knowledge of their own people. This assumption is limited and detrimental to diversity efforts. Diversity goes beyond increasing the number of different identity-group affiliations on the payroll. Such an effort is merely the first step in managing a diverse workforce for the organization’s utmost benefit. Diversity should be understood as the “varied perspectives approaches to work that members of different identity groups bring” (Thomas & Ely, 1996). Leaders realize that increasing demographic variation does not in itself increase organizational effectiveness. They realize that it is how a company defines diversity and what it does with the experiences of being a diverse organization that delivers on the promise. Group diversity refers to the amount of heterogeneity within a group determined by several characteristics derived from informational, visible, and value differences (Hobman, Bordia, & Gallois, 2003). Informational differences refer to different professional backgrounds and experiences; visible differences refer to things that become more physically apparent, such as age, gender, ethnicity, etc.; and value differences are shaped by each individual’s set of beliefs, goals, and values. These three categories of differences have a major impact on team performance because they can become the cause for multiple types of conflicts within a team. When approaching tasks, different members of the team will have different behaviors based on their own set of informational, visible, and values characteristics. Employees with different views of the same situation may have totally different ways of responding to it. After the appearance of conflict, team members can create a true learning environment where they can perform far beyond expectations by leveraging their differences. Hobman, Bordia, and Galois highlight the ways in which group diversity can foster a higher organizational performance, “It has been noted that diversity can lead to higher performance when members understand each other, combine and build on each others’ ideas. This suggests that interaction processes within a diverse team are crucial to the integration of diverse viewpoints. For example, Abramson found that organizations that had teams with high diversity and integration had the best performance” (Consequences of Feeling Dissimlar from Others in a Work Team, 2003). Along these lines, diverse groups have a higher ability to overcome initial difficulties by identifying the multiple angles of a problem and generating creative solutions. The more openly they are recognized and discussed, the better chance there is for differences to become part of organizational success. Tomas and Ely believe in the notion that "a more diverse workplace will increase organizational effectiveness. It will lift morale, bring greater access to new segments of the market place, and enhance productivity" (Making Differences Matter; A New Paradigm for Managing Diversity, 1996). By truly embracing diversity, leveraging the talent within multicultural teams, and approaching diversity as means to higher knowledge and productivity, organizations will effectively manage differences, to achieve competitive advantage successfully. Paradigm Discrimination- and-fairness Access-and Focus Equal opportunity, fair treatment, recruitment, and compliance with US federal Equal Employment Opportunity requirements Leaders work towards restructuring the makeup of the organization to reflect more closely that of society Need of a more diverse Key success factors Effectiveness in its recruitment and retention goals rather than by the degree to which companies allow employees to draw on their personal assets and perspectives to do their work more efficiently Degree to which legitimacy workforce to help leaders in companies gain access organizations to the differentiated understand niche segmentsMatches the capabilities and demographics of the incorporate them organization to those of into differentiated critical consumer or categories aligned constituent groups to their business strategy Incorporates The promotion of equal opportunity and acknowledgment of cultural differences employee’s perspectives into the main work of the organization Enhances Learning-and- work by rethinking ae ; ; Organizational effectiveness primary tasks and é ee learning and redefining markets, growth fostered by products, strategies, ; -_ ae internalizing missions, business ; differences among practices, and even employees cultures End goal: Leaders should thrive to shift to the Learning-and- effectiveness paradigm to approach diversity as a means to higher knowledge and productivity. Paradigms of diversity Recruiting workers Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 Lukhvinder Rai Recruitment of talented employees is an essential part of any company’s ability to maintain success and ensure the achievement of standards within an organization. Recruiting workers consists of actively compiling a diverse pool of potential candidates which can be considered for employment. A good recruitment policy will do this in a timely, cost-efficient manner. The ultimate goal of any human resources recruitment policy is to develop relationships with potential employees before they may actually be needed while remaining cognizant of the costs of doing so. In different industries, the constant need for talent creates a highly competitive marketplace for individuals, and it is important for any manager to be aware of these factors as they develop recruitment programs and policies. As retirement among baby boomers becomes increasing prevalent, victory in the “war for talent” will depend greatly on recruitment policies. Methods of recruitment There are two principal ways to recruit workers: internally and externally. Most companies will actively use both methods, ensuring opportunities for existing employees to move up in the organization while at the same time fielding new talent. Depending on the time frame and the specialization of the position to fill, some methods will be more effective than others. In either case, the establishment of a comprehensive job description for every position for which the company recruits will help to narrow the scope of the search, and offer more qualified candidates, aiding in search efficiency. Internal recruitment is often the most cost effective method of recruiting potential employees, as it uses existing company resources and talent pool to fill needs and therefore may not incur any extra costs. This is done in two principal ways: e Advertising job openings internally: This is the act of using existing employees as a talent pool for open positions. It carries the advantage of reallocating individuals that are qualified and familiar with the company’s practices and culture while at the same time empowering employees within the organization. It also shows the company’s commitment to, and trust in, its current employees taking on new tasks. e Using networking: This method can be used in a variety of different ways. First, this recruitment technique simply posts the question to existing employees on whether anybody is aware of qualified candidates that they know personally which could fill a position. Known as employee referrals, this method often gives bonuses to the existing employee if the recommended applicant is hired. Another method uses industry contacts and membership in professional organizations to help create a talent pool, through simple word-of- mouth information regarding the needs of the organization. External recruitment focuses resources on looking outside the organization for potential candidates and expanding the available talent pool. The primary goal of external recruitment is to create diversity among potential candidates by attempting to reach a wider range of individuals unavailable through internal recruitment. Although external recruitment methods can be costly to managers in terms of dollars, the addition of a new perspective within the organization can carry many benefits which outweigh the costs. External recruitment can be done in a variety of ways: ¢ Traditional advertising: This often incorporates one or many forms of advertising, ranging from newspaper classifieds to radio announcements. It is estimated that companies spend USD 2.18 billion annually on these types of ads (Kulik, 2004). Before the emergence of the Internet, this was the most popular form of recruitment for organizations, but the decline of readership of newspapers has made it considerably less effective (Heathfield, Use the Web for Recruiting: Recruiting Online). e Job fairs and campus visits: Job fairs are designed to bring together a comprehensive set of employers in one location so that they may gather and meet with potential employees. The costs of conducting a job fair are distributed across the various participants, and can offer an extremely diverse set of applicants. Depending on the proximity to a college or university, campus visits help to find candidates that are looking for the opportunity to prove themselves and have minimum qualifications, such as a college education, that a firm seeks. e Headhunters and recruitment services: These outside services are designed to essentially compile a talent pool for a company; however they can be extremely expensive. Although this service can be extremely efficient in providing qualified applicants for specialized or highly demanded job positions the rate for the services provided by headhunters can range from 20 to 35 per cent of the new recruit’s annual salary if the individual is hired (Heathfield, Recruiting Stars: Top Ten Ideas for Recruiting Great Candidates). e Online recruitment. The use of the Internet to recruit a talent pool is quickly becoming the preferred way of doing so, due to its ability to reach such a wide array of applicants extremely quickly and cheaply. There are many ways to turn the Internet into a recruitment tool for your company. First, the use of the company website can allow a business to compile a list of potential applicants which are supremely interested in the company while at the same time allowing them exposure to your company’s values and mission. In order to be successful using this recruitment method, a company must ensure that postings and the process for submitting resumes are as transparent and simple as possible. Another popular use of online recruiting is through career websites (e.g. Monster.com or Careerbuilder.com). These sites charge employers a set fee for a job posting which can remain on the website for an agreed amount of time. These sites also carry a large database of applicants and allow clients to search their database to find potential employees. Although extremely effective, many companies prefer to use their own websites to eliminate the flood of resumes which may result from these services. Finally, many professional associations may have websites on which a company may post job openings. For instance, the NCAA allows all of its member schools and conferences to post jobs on their website at a minimal cost, allowing for a more specialized selection of candidates. It may also be in a company’s interest to contact area schools to see if they offer a career services site for their students for posting openings, further expanding the reach of recruitment efforts. To learn more about the growth of internet job postings: http://www.clickz.com/showPage.html?page=3443851 To learn how to create an effective online job posting: http://www. yourhrexperts.com/posting html Evaluating recruiting policies Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 To evaluate recruitment policies, the concept of a yield ratio is often used. This calculates the efficiency of recruitment practices by taking the number of hirable individuals resulting from a recruitment policy divided by the total number of individuals recruited by the same policy (Kulik, 2004). This equation is outlined below: Yield ratio = Total number of recruits For many companies, this number can vary enormously, depending on the image, size and business of the company. However, it is still an extremely useful measure as it offers insight into the ability of a recruitment policy and whether it needs to be modified. A company like Microsoft may receive thousands of applicants simply based on the image that the firm carries, distorting its yield ratio without telling anything about the effectiveness of their recruitment strategies. No matter how a company decides to recruit, the ultimate test will remain the ability of a recruitment strategy to produce viable applicants. Each manager will face different obstacles in doing this; however, it is important to remain concise and objective when searching for potential applicants. It is important to remember that recruiting is not simply done at a time of need for an organization but rather is a yearlong process that constantly maintains a talent pool and frequent contact with candidates. Selective hiring By Kristen Giacchino and Emily Gray In recruiting, it is beneficial to attract not only a large quantity of applicants but a group of individuals with the necessary skills and requirements for the position. After obtaining a large, qualified applicant base managers need to identify those applicants with the highest potential for success at the organization. According to Pfeffer and Veiga, selecting the best person for the job is an extremely critical piece of the human resources inflow process (Pfeffer & Viega, Putting People First for Organizational Success, 1998). Selective hiring helps prevent the costly turnover of staff and increases the likeliness of high employee morale and productivity. In order to evaluate the fit, it is important for managers to create a list of relevant criteria for each position before beginning the recruitment and selection process. Each job description should be associated with a list of critical skills, behaviors or attitudes that will make or break the job performance. When screening potential employees, managers need to select based on cultural fit and attitude as well as technical skills and competencies. There are some companies, such as Southwest Airlines, based out of the United States, who hire primarily based on attitude because they espouse the philosophy that you hire for attitude, train for skill. According to former CEO Herb Kelleher, “We can change skill levels through training. We can’t change attitude” (O'Reilly & Pfeffer). After determining the most important qualifications, managers can design the rest of the selection process so that it is in alignment with the other human resource processes. Managers must strive to identify the best applicants at the lowest cost. Companies have a variety of processes available to screen potential employees, so managers must determine which system will generate the most accurate results. The methods of selection vary both in levels of effectiveness and in cost of application. In addition to biographical information, companies can conduct personal interviews, perform background checks, or request testing. Because of the costs associated with these measures, companies try to narrow down the number of applicants in each round of hiring. In some countries, such as the United States, the selection procedures are subject to Equal Employment Opportunity guidelines (Recruitment). Therefore, the companies also need to ensure that the process is accurate, with a high level of validity, reliable and related to critical aspects of the job. Proactively taking these measures will help companies avoid litigation related to discrimination in the selection process. Interviews As mentioned, it is important to first define the skills and attributes necessary to succeed in the specified position, then develop a list of questions that directly relate to the job requirements. The best interviews follow a structured framework in which each applicant is asked the same questions and is scored with a consistent rating process. Having a common set of information about the applicants upon which to compare after all the interviews have been conducted allows hiring managers to avoid prejudices and all interviewees are ensured a fair chance (Smith G.). Many companies choose to use several rounds of screening with different interviewers to discover additional facets of the applicant’s attitude or skill as well as develop a more well rounded opinion of the applicant from diverse perspectives. Involving senior management in the interview process also acts as a signal to applicants about the company culture and value of each new hire. There are two common types of interviews: behavioral and situational. Behavioral interview In a behavioral interview, the interviewer asks the applicant to reflect on his or her past experiences (Janz, 1982). After deciding what skills are needed for the position, the interviewer will ask questions to find out if the candidate possesses these skills. The purpose of behavioral interviewing is to find links between the job’s requirement and how the applicant’s experience and past behaviors match those requirements. Examples of behavioral interview questions: e Describe a time when you were faced with a stressful situation. How did you handle the situation? e Give me an example of when you showed initiative and assumed a leadership role? (Free Sample Behavioral Interview Questions). Situational interview A situational interview requires the applicant to explain how he or she would handle a series of hypothetical situations. Situational-based questions evaluate the applicant’s judgment, ability, and knowledge (Latham & Saari, 1984). Before administering this type of interview, it is a good idea for the hiring manager to consider possible responses and develop a scoring key for evaluation purposes. Examples of situational interview questions: e You and a colleague are working on a project together; however, your colleague fails to do his agreed portion of the work. What would you do? e A client approaches you and claims that she has not received a payment that supposedly had been sent five days ago from your office. She is very angry. What would you do? (Creating Situational Interviews and Rating Scales) Selection tests When making a hiring decision, it is critical to understand the applicant’s personality style, values, and motivations (Smith G.). Technical aptitude is important, but attitude is often more important. The reality is that technical skills can be learned, but interpersonal work attitudes are usually more difficult to change (Schaefer). Behavioral assessments and personality profiles are a good way for hiring managers to learn how the individual will interact with their coworkers, customers, and supervisors (Smith G.). Tests such as the Myers Briggs and D.I.S.C Profile assessments are popular tools that provide an accurate analysis of an applicant’s attitudes and interpersonal skills; however, it is critical that the tests are administered, scored and interpreted by a licensed professional. Other selection tests used in hiring, may include cognitive, which measure general intelligence, work sample tests that demonstrate the applicant’s ability to perform specific job duties, and integrity tests, which measure honesty (Kulik, 2004). Background checks Background checks are a way for employers to verify the accuracy of information provided by applicants in resumes and applications. Information gathered in background checks may include employment history, education, credit reports, driving records, and criminal records. Employers must obtain written consent from the applicant before conducting a background check, and the information gathered in a background check should be relevant to the job. Evaluation Employers may choose to use just one or a combination of the screening methods to predict future job performance. It is important for companies to assess the effectiveness of their selective hiring process using metrics. This provides a benchmark for future performance as well as a means of evaluating the success of a particular method. Companies can continuously improve their selection practices to ensure a good fit for future employees that will successfully accomplish all that the job entails as well as fit into the organizational culture. If companies are not successful in their hiring practices, high turnover or low employee morale, decreased productivity will result. Research shows that the “degree of cultural fit and value congruence between job applicants and their organizations significantly predicts both subsequent turnover and job performance” (Pfeffer & Viega, Putting People First for Organizational Success, 1998). Thus, companies need to assess their hiring in terms of technical success as well as cultural fit. Evaluating the hiring process will help ensure continuing success because human capital is often a company’s most important asset. Employee training Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By Peter Wright For years, employee training was viewed as a necessary evil something unpleasant but needed. However, with time it was realized that training could be used to the advantage of the company. When used effectively, training provides the employee with skill and knowledge with relation to the job tasks, which then creates a competitive advantage for the company (Pfeffer & Viega, Putting People First for Organizational Success, 1998). Training is generally defined as the act of teaching a skill or behavior. However, what does this mean in business terms? Simply put, training in business is the investment of resources in the employees of a company so that they are better equipped to perform the tasks of their job. The type of resources invested may include time to learn, money to create programs and develop training materials, training effectiveness evaluation systems, etc. (Fukami, Strategic Human Resources: Training, 2007). There are many training methods from which a company may choose; these will be covered in the Training Methods section of this article. Benefits of training Training can be a source of a competitive advantage for a company. The primary benefit to the company is the result of an accumulation of smaller benefits. Training provides greater skill and knowledge to the employees, which translate into any number of improved job performances. The belief is that providing employees with training will result in increased profits— the improved performance or error reduction of the employees results in cost reduction for the company (Pfeffer & Viega, Putting People First for Organizational Success, 1998). The company is not the only beneficiary of employee training; the employee benefits quite a bit as well. The well-trained employee creates an advantage for him or herself. By attending training sessions, employees can deepen their existing skill set, increase their overall skill set and increase their understanding of the organization. Additionally, the trained employee becomes more marketable in the event that he or she searches for another job—more and better skills will often lead to better or higher paying jobs (Kulik, 2004). These are not the only benefits that the company and employee enjoy as a result of utilizing a company’s training systems. Below is a list of other benefits that both may enjoy: e increased job satisfaction and morale among employees e increased employee motivation e increased efficiencies in processes, resulting in financial gain e increased capacity to adopt new technologies and methods e increased innovation in strategies and products e reduced employee turnover e enhanced company image, e.g. conducting ethics training (note that this is not a good reason for ethics training!) e risk management, e.g. training about sexual harassment, diversity training (Duening & Ivancevich, 2003) Need for training The need for training varies depending on the type of organization that is being discussed; a manufacturing company has different training needs than an insurance firm. But regardless of the type of company being discussed, appropriate training systems can greatly benefit the company. However, how does one decide on a training system? The answer to this question stems from the example above—it depends on the type of organization that is being discussed as well as what the company wishes to address in the training. The process begins with a training needs assessment. This assessment ought to be a systematic and objective analysis of the training needs in three main areas—organizational, job, and person. Organizational needs deal mostly with the skills the company is looking for, the labor force, etc. whereas the job needs focus on the skills that the company views as necessary for a specific position. Then there are the person needs, and these are the most variable needs. Often these needs arise after a gap is seen in the expected performance compared to the actual performance of the employee. A large gap needs to be addressed and is often dealt with through training or termination (see the Termination and Downsizing section) (Fukami, Strategic Human Resources: Training, 2007). Other reasons for the person issues in regards to training may include training to develop a skill set that is lacking but not affecting performance or that the employee feels a need to develop. Training can also be a part of a young employee’s “exploration” stage, where training can be used to focus the employee’s interest and development towards a specific area (Kulik, 2004). Specific circumstances may also create the need for training. These circumstances usually occur rather suddenly and infrequently, creating a need for a specific and highly directed training mechanism. Examples of such circumstance are shifts in an organizations ethics (keeping the employees and organization in alignment), new legal requirements (such as Sarbanes-Oxley compliance in the United States), or during states of change within the organization (Duening & Ivancevich, 2003). If a company, regardless of the circumstances surrounding that need, deems training necessary a method for conducting this training needs to be developed and implemented. Training methods Designing and implementing the training systems requires the company to consider a number of things; the method of training, the material the training will deal with, who will provide the training, how to evaluate the effectiveness of the training, etc. (Fukami, Strategic Human Resources: Training, 2007). There are also a number of other items that can impact the training system, things like what the training program is called. Because of the negative view that training has had for so long, some organizations are shying away from the term training and replacing it with things such as (“Learning & Development”) in order to emphasize the importance of learning for the individual and the organization. In other organizations, the term “Human Resource Development” is used (Training and Development, 2007). Two of the largest issues that a company faces with developing these training systems are: (1) what type of training to use, and (2) how to evaluate the effectiveness of the training. It is important that these training systems and evaluation procedures remain in-line with the culture and policies of the rest of the company. Below is a partial list of common training systems: e Lectures: Similar to a school classroom, the session is lead by a “trainer/teacher” who covers a specific topic such as how to use a new computer program. e Audio-visual media & computer-based training: With the advancement of technology, companies can invest in video, audio and computer based learning such as instructional tapes, recorded lectures or “podcasts”, or computer materials such as Flash presentations. The benefit of these methods is that they are relatively inexpensive and can be utilized by the employee at their discretion (Training and Development, 2007). e On-the-job: a training method that relies on the employee to recognize the skills and knowledge he or she will need as they perform their work, and then develop those skills on his or her own. e Technical training: specialized training that focuses on a specific need of specific employees. This typically applies to manufacturing based companies in relation to training their employees on the machinery and methods used. e Mentoring & coaching: Mentoring systems pair a younger or less experienced employee with an individual that has experience and success within the company who can offer guidance, aid and insight to the younger/less experienced employees (Craumer, 2001). Coaching systems are slightly different. They involve the manager offering developmental assistance to the employee through observation, assessment, providing feedback, questioning, etc. (Kram, 1985) ¢ Outdoor programs: the use of physical and mental activities such as ropes courses or problem-solving tasks that encourage the use of team work. After the training system has been developed and implemented, the effectiveness of the system needs to be evaluated, and there are multiple ways to do this. Common methods includes surveys given to the employees who have used the system, an ROI analysis and test at the end of the session (Fukami, Strategic Human Resources: Training, 2007). Training in the context of global business When examining the need for and type of training in the context of global/international business, training becomes even more necessary. The training of an employee who will be working in a country other than his or her own can be broken into three segments—pre-departure, on-site, and repatriation. The pre-departure training consists of formal language training, training with respect to the local culture (culture sensitivity), education about the country (history, geography, government, etc.), and education about the companies operation in the foreign country. Such training allows for easier assimilation of the employee into the country and the company’s office there. Once on site, training takes the shape of training at any other branch of the company (see “Training methods” section). When the employee abroad returns to his or her home country it is equally important that the company offer some form of repatriation program. Such programs are designed to reduce culture shock upon return and to integrate the experience abroad into the employees overall career plans and development. These programs are often most effectively carried out through mentor programs (Asheghian & Ebrahimi, 2005). Aligning employee career development with organizational growth Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By Rahul Choudaha "Work is such a cozy place that it’s sometimes difficult for Google employees to leave the office... '" (Lashinsky, 2007). We all can predict at least one thing about the future of businesses— competition will increase. However, the direction of competition will not only be for customers, but also for talent. Satisfied talent will attract more customers and in turn will keep them satisfied. Losing talent in an era of talent scarcity is the last thing an organization wants. Especially for small and medium enterprises, criticality and dependability on the talent is much higher. Schweyer makes a case for improving the retention strategies within the organization because winning the internal war for talent is as critical as losing a top performer and leads to general employee dissatisfaction. “Successful talent management inside an organization sets in motion a virtuous cycle. Through word of mouth it becomes known as a great place to work. This reduces the external war for talent to mere skirmishes in which talent will almost always choose the top employer” (An Internal War for Talent, 2006). Recruiting and selecting the right talent is the first stage, and identifying talent which fits into company’s needs and values is critical. Subsequently, the challenge for the organization is to keep the talent and consistently motivate them to over deliver. Baruch examines transforming models of career Management, arguing that there is a general shift in career trajectories from linear to multidirectional trajectories (Transforming Careers from Linear to Multidirectional Career Paths, 2004). In this new model, workers’ experience of career development and progression does not follow a traditional linear model of moving up organizational hierarchies. The multidirectional career model suggests that as the individual career trajectories gain multiple direction and possibilities, workers are exposed to greater diversity of relationships, involving cross- functional, inter- and intra-organizational and multi-level encounters which transform the landscape of relationships involved in career experiences. Example: Best of East and West Google was ranked number 1 in the Fortune 100 Best Companies to Work For. Google receives almost 1,300 resumes every day. The biggest challenge for Google is not how to attract the best talent but how to retain them and keep them excited. Google provides innumerable perks at the office like free meals, free professional advice on health and finance, childcare, shuttle services, gym etc. Google provides two key opportunities for career development. First, engineers are required to devote 20 per cent of their time to pursuing projects of their interests which are in alignment with organizational goals. Second, Google is exploring a sabbatical program and mobility within the company for the developing and retaining talent. TCS was ranked the number 1 technology company in the DQ-IDC India Survey: Best Employers. This is not an easy achievement considering size of TCS and its philosophy of being one of the moderate pay masters. TCS has over 70,000 employees, and earned global revenue of USD 4.3 billion (2006-07). The key to success is the learning culture that the organization promotes. The organization has adopted a two-prong strategy for developing talent. First, continuous learning through technology: TCS has launched iCALMS, an integrated competency and learning management system. Second, providing global assignments to employees and hence enabling a route for professional and financial growth (Dataquest, 2006). The career development programs should provide excitement and satisfaction at various stages of employee development. Marshall highlighted that leadership development programs for small organizations should identify the talent early on and provide multiple opportunities of learning by job rotation (Leadership Development for Small Organizations, 2002). These development programs should also leverage the internal talent, who are already experts in their fields for creating inspiration and developing the next chain of leaders. Komisar shared his experiences and mentioned that a passion-driven career has major virtues and ample learning opportunities. This is good for the organization as they know that employee is enjoying the work, and finally it provides fluidity and flexibility in the ever-changing landscape of the new economy (Goodbye Career, Hello Success, 2000). The changing nature of careers and organizations has increased the significance of mentoring. It benefits and strengthens employer-employee relationship. Mentoring can be accomplished by immediate superiors, peers within one’s own organization, individuals outside of one’s organization, subordinates, and any number of other individuals (Baugh & Sullivan, 2005). Michaels, Handfield-Jones, and Axelrod in their book The War for Talent mentions that talent development is critical for organizations and many think development means training, but training is only a small part of the solution (2001). They suggest that development primarily happens through a sequence of stretch jobs, coaching, and mentoring. However, organizations are not leveraging the development opportunities. Companies need to adopt and accelerate development by improving the frequency and candor of feedback and institutionalizing mentoring. Every leader at all levels can and should be responsible for people development. Hymowitz says that managers are not spending adequate time in understanding their team members and providing them with opportunities to learn and grow on the job (When Managers Neglect to Coach Their Talent, 2007). This is leading to employees feeling alienated, underutilized and ignored, and may be searching for new jobs elsewhere. Managers who focus on talent assign their employees to jobs that play to their strengths, make sure they have the resources they need to perform well, respect their opinions and push them to advance (Hymowitz, 2007). The people manager should develop relationships and an environment that is conducive to development. Five skill areas that successful developers of people have mastered are: * encouraging an open climate for dialogue with employees ¢ providing employees with on-going feedback regarding performance e helping employees understand the strategies of the organization e helping employees identify multiple and realistic options for their career growth and development within the enterprise e helping employees compile meaningful, business-driven personal development plans (Kaye & Vultaggio, 2004) ".,.[[]n the new career model, employees make major shifts within the same company, or exit and reenter the company at different career stages" (Kulik, 2004). Organizations need to realize that talent is precious and dynamic. Organizations need to create action strategies and provide a favorable environment to help talent grow in line with the organizational goals. Performance appraisal Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By Adam Ruberg Purpose of appraisals Historically, performance appraisals have been used by companies for a variety of different purposes, including salary recommendations, promotion and layoff decisions, and training recommendations (Kulik, 2004). In general, “performance elements tell employees what they have to do and standards tell them how well they have to do it” (United States Department of the Interior, 2004). This broad definition, however, can allow for appraisals to be ineffective, even detrimental, to employee performance. Second only to firing an employee, managers cite performance appraisal as the task they dislike the most, and employees generally have a similar disposition (Heathfield, Performance Appraisals Don't Work). One key item that is often forgotten during the appraisal process (by managers and employees alike) is that the appraisal is for improvement, not blame or harsh criticism (Bacal, 1999). Creating an appropriate appraisal process One significant problem in creating an appraisal process is that no single performance appraisal method will be perfect for every organization (Kulik, 2004). Establishing an appropriate process involves significant planning and analysis in order to provide quality feedback to the employee. The most crucial task in the process is determining proper job dimensions that can be used to gauge the employee against accepted standards that affect the performance of the team, business unit, or company (Fukami, Performance Appraisal, 2007). Peter Drucker developed a method termed ‘Management by Objectives' or MBO, in order to address the creation of such job dimensions. Drucker suggests that the objectives of any employee can be validated if they pass the following six tests (Management by Objectives— SMART, 2007): e Specific e Measurable e Achievable e Realistic e Time-related If an objective meets these criteria, it is considered a valid dimension on which to gauge performance. The standards on which the objective is compared with should also be validated using the SMART method. Appraisal methods Numerous methods exist for gauging an employee’s performance, and each provides strengths and weaknesses for given environments. The following outlines some of the more commonly used methods, as well as some recently developed ones that can be useful for various feedback situations: Graphic rating scales: This method involves assigning some form of rating system to pertinent traits. Ratings can be numerical ranges (1-5), descriptive categories (below average, average, above average), or scales between desirable and undesirable traits (poor excellent). This method can be simple to setup and easy to follow, but is often criticized for being too subjective, leaving the evaluator to define broad traits such “Leadership ability” or “Conformance with standards” (Kulik, 2004). Behavioral methods: A broad category encompassing several methods with similar attributes. These methods identify to what extent an employee displays certain behaviors, such as asking a customer to identify the usefulness of a sales representative’s recommendation. While extremely useful for jobs where behavior is critical to success, identifying behaviors and standards for employees can often be very time consuming for an organization (Kulik, 2004). 2+2: A relative newcomer in performance appraisal methodology, the 2+2 feedback system demonstrates how appraisals can be used primarily for improvement purposes. By offering employees two compliments and two suggestions for improvement focused around high-priority areas, creators Douglas and Dwight Allen suggest that organizations can become “more pleasant, more dynamic, and more productive” (Formula 2+2, 2004). If the goal of the performance appraisal is employee improvement, this system can provide significant benefits; however, if the goals are more akin to compensation changes and rankings, the system provides little benefit. Appraisal methodologies depend greatly on the type of work being done; an assembly worker will require a considerably different appraisal system than a business consultant. Significant planning will be required to develop appropriate methods for each business unit in an organization in order to obtain maximum performance towards the appraisal goals. Performing the appraisal Performing an appraisal on employees can be nerve racking for both parties if the situation is not handled correctly, and is thus seen as one of the most difficult tasks managers face. There are many acts a manager can perform to make the process easier on both parties, and hopefully, mutually beneficial. Many assume that performance appraisals are meant to identify weaknesses to be worked on, and exposing these weaknesses can be painful for employees. Martha Craumer suggests that organizations should be leveraging the strengths of each employee rather than focusing on their weaknesses. By “encouraging and developing what people do well naturally...the organization could become more efficient by allowing their people to do what they do best” (Craumer, 2001). The frequency of appraisal can be a notable factor in ongoing development. Yearly performance reviews are becoming increasingly rare as companies begin to see the benefits of frequent appraisal. Susan Heathfield suggests that quarterly performance development meetings can allow for clear direction towards performance goals (Heathfield, Performance Management is NOT an Annual Appraisal). Constant tuning of performance can be much more effective than annual overhauls. Any individual administering performance appraisals must realize the two- way conversation that is occurring. Inviting feedback and listening to reactions and concerns from the employee during the appraisal process becomes very important to establishing trust with the employee (United States Department of the Interior, 2004). If the appraiser provides any negative feedback or improvement points, suggestions should be made to help resolve the problem to develop the person’s performance. With the suggestions made, follow-up should occur to assist with any problems with the development and to track progress, rather than waiting until the next performance review (Fukami, Performance Appraisal, 2007). Often being seen as a strictly hierarchical feedback tool, performance appraisals can be less “scary” if employees have the opportunity to appraise their managers as well as their peers. With this 360-degree feedback process, employees and managers will see multiple vantages of their performance and can participate on an even playing field, ultimately providing a greater ability to work together to achieve corporate goals (Kulik, 2004). Performance appraisals should not be looked upon as a necessary evil, but rather a process that has the ability to develop and improve the people within the company. By taking the time to create appropriate performance measures, and administering them accordingly, the resulting system can provide long-term gain for the company. For further investigation: For a discussion of why many people think of feedback as criticism visit: http://www.selfhelpmagazine.com/articles/growth/feedback.html For a discussion of differing views on feedback and specific examples on how to give feedback visit: http://home.att.net/~nickols/feedback.htm Giving and receiving feedback By Kristin Hamilton and Tiffani Willis In a broad sense, feedback is simply verbal or nonverbal communication between two or more parties. So, why are so many of us afraid of the word feedback? People often think of feedback as being synonymous with criticism because feedback is given, in most circumstances, when expectations have not been met (Rich). As humans, we all have the desire to fit in with our society’s social norms and please those within our community by meeting expectations. As shown in [Link], we are constantly surrounded by feedback as we see the consequences of our actions and how our actions affect the impressions of those around us (Jossey and Bass, 1995). Feedback is an essential part of our personal life and our work environment, making, giving and receiving feedback successfully critical. Exhibit Expectations a Goals = os Perceptions -@@} — — — - = --—--—---+4--------- feediack Feedback Giving feedback Many are not aware that giving successful feedback is affected by more than just the words used to communicate. Words used to tell ideas are only “7 per cent of your communication, your tone of voice comes out to 38 per cent and your gestures are equivalent to 55 per cent of your total communication” (Hathaway). As a result, the effectiveness of communication is related to how well one mirrors the culture and behaviors of the person to which one is talking. Matching a person’s voice tone, tempo, body posture, movements, and gestures creates a feedback environment where the ideas being communicated are easily understood. In addition to mirroring the person you are communicating with, there are nine easy steps that can be followed when giving feedback. First, be clear about what you have to say. Second, emphasize the person’s ability to change in a positive way. Third, avoid general comments and clarify pronouns such as “it” and “that” so the person understands exactly what you are attempting to communicate. Fourth, make sure to pick the right time. Fifth, focus on the behavior that can be changed rather than the person or your opinions (Meister). Sixth, be descriptive rather than evaluative. Seventh, own the feedback by using “I statements” that clarify your feelings related to the person you are giving feedback to. Eighth, avoid generalization words such as “all”, “never”, “always” etc.; rather, use more specific examples of the behavior you are trying to change or encourage in the future. Ninth, to ensure mutual understanding after giving feedback, ask the person you are communicating with to restate their understanding of the issue being discussed (McGill & Beatty, 1994). When thinking about feedback in an organization, it is likely a person will think of performance reviews. One common problem that managers overlook when reviewing performance is remembering that feedback is not all about forms. Traditional performance reviews have checklists, ratings or reports that are used as tools to analyze feedback in the organization. While these forms are useful in documenting and appraising a person’s performance, feedback should not be dictated by the type of form an organization uses. Performance appraisals are often given at benchmarked times throughout the year. As a result, feedback is often delayed. Increased amounts of time that pass between the time the behavior took place and the time the recipient receives the feedback greatly affects the recipients ability to accept the feedback as useful information. In one’s personal life and in the work environment, it is important to understand that feedback is something that can be asked for. As such, the giver and receiver of feedback are equally accountable for communicating the need and desire to give and receive feedback. Finally, it is important to ask for comment on the way one gives feedback because most humans are great at self-delusion. It is much easier to think that our suggestions are useful to another person than to actually understand how our feedback is being interpreted by another. In the end, feedback is a continuous process which ensures goals and expectations are being met through communication between two parties. Receiving feedback While giving feedback is extremely important, receiving feedback and changing one’s characteristics to reflect that feedback is just as important. Often, employees become defensive when they are receiving feedback on their performance. Ken Blanchard, co-author of The One Minute Manager states, “[t]he reason a lot of people get defensive with feedback is they don’t distinguish feedback from reaction. While they are listening to the feedback, they have a reaction to the demand for action that your feedback implies” (Blanchard, 1996). For example, when a boss is telling an employee the aspects of the job the employee needs to work on, he may only focus on the negative points and not the positive. Receiving feedback should not only be looked at from a downward point of view, such as a boss giving his employees critiques; but it should also be studied in an upward way. According to Richard Reilly, James Smither, and Nicholas Vasilopoulos, authors of A Longitudinal Study of Upward Feedback, “upward feedback (that is, subordinates rating the performance of their immediate supervisor) is growing in importance as a tool for the individual and organizational development” (1996). Upward feedback allows management to see the effects they have on their employees. It is then up to the managers to act on that feedback. Atwater, Roush and Fischthal found that “follower ratings of student leaders improved after feedback was given to leaders and that leaders receiving ’negative’ feedback (defined as self-ratings that were considerably higher than follower ratings) improved the most” (The Influence of Upward Feedback on Self and Follower Ratings of Leadership, 1995). This shows that there is a bigger reaction when the upward feedback is negative instead of positive. In order to effectively receive feedback, a person has to be ready to understand that they may hear critiques that they do not want to hear. Jan B. King, the former President and CEO of Merritt Publishing states that an individual is ready to receive feedback when he: e wants to know him as others see him and he is clear that this is their perception, net necessarily what is true about you inside. e trusts his co-workers to care enough about his development to risk hearing their opinion. e has a place outside work where you can talk it through. e Has opportunities for additional feedback so he gets validation of the changes he has made (Receiving Feedback Gracefully is a Critical Career Skill). If an individual is not ready to constructively receive feedback, then the feedback he does receive will not be effective. King continues to state that individuals must remember this about feedback, “it is one opinion coming from another individual’s unique perspective” (Receiving Feedback Gracefully is a Critical Career Skill). Just because one person views another individual in a particular way does not mean that the rest of world views that person in the same way, but it is a good way for an individual to find out what others think of him/her that is not known. There are several tips that an individual can use when receiving feedback. These tips include: e Try to show your appreciation to the person providing the feedback. They will feel encouraged and believe it or not, you do want to encourage feedback. e Even your manager or supervisor finds providing feedback scary. They never know how the person receiving feedback is going to react. e If you find yourself becoming defensive or hostile, practice stress management techniques such as taking a deep breath and letting it out slowly. e Focusing on understanding the feedback by questioning and restating usually defuses any feelings you have of hostility or anger. e If you really disagree, are angry or upset, and want to dissuade the other person of their opinion, wait until your emotions are under control to reopen the discussion (Heathfield, How to Receive Feedback with Grace and Dignity). These tips are helpful in becoming a better receiver for feedback, but they will only work as long as they are practiced on a regular basis. With the above facts and figures workers can see that giving and receiving feedback does not have to be scary. As long as people give and receive feedback in a constructive way and practice their feedback skills it will eventually become second nature to the employees. It will also show that feedback provides benefits for both the individuals that work for the company, and the company itself. For further investigation: For information on Ken Blanchard, his Book One Minute Manager, and various facts on feedback visit: http://www.answers.com/topic/ken-blanchard For more information on the findings of “A longitudinal study of upward feedback” visit: 6570.1996.tb01586.x Link your knowledge: Click on this link to find an exercise to practice effective ways to receive feedback: http://humanresources.about.com/cs/communication/ht/receivefeedback.ht m Determining base pay Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By Cynthia V Fukami Have you ever wondered how a company decides how much to pay for a particular job? Imagine that you have seen a job posted on the Internet. It reads, “Office Assistant Wanted. Will answer the phone and greet visitors. Some word processing duties. Other duties as assigned. Start at USD 8.00 an hour”. How did the manager decide to pay USD 8.00 per hour? Why did she decide that was fair? In this subchapter, we will cover the two types of “faimess” important in designing a base pay system. Internal equity The first consideration is that the base pay system needs to be internally equitable. This means that the pay differentials between jobs need to be appropriate. The amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives. In determining this, the manager should ask his or herself, “How does the work of the office assistant described above compare with the work of the office manager?” Another question to be asked is, “Does one contribute to solutions for customers more than another?” Internal equity implies that pay rates should be the same for jobs where the work is similar and different for jobs where the work is dissimilar. In addition, determining the appropriate differential in pay for people performing different work is a key challenge. Compensation specialists use two tools to help make these decisions: job analysis and job evaluation. Job analysis is a systematic method to discover and describe the differences and similarities among jobs. A good job analysis collects sufficient information to adequately identify, define, and describe the content of a job. Since job titles may in and of themselves be misleading, for example, “systems analyst” does not reveal much about the job; the content of the job is more important to the analysis than the title. In general, a typical job analysis attempts to describe the skill, effort, responsibility, and working conditions of each job. Skill refers to the experience, training, education, and ability required by the job. Effort refers to the mental or physical degree of effort actually expended in the performance of the job. Responsibility refers to the degree of accountability required in the performance of a job. Working conditions refer to the physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation. A job description summarizes the information collected in the job analysis. See analysis. Job evaluation is a process that takes the information gathered by the job analysis and places a value on the job. Job evaluation is the process of systematically determining the relative worth of jobs based on a judgment of each job’s value to the organization. The most commonly used method of job evaluation in the United States and Europe is the “point method”. The point method consists of three steps: (1) defining a set of compensable factors, (2) creating a numerical scale for each compensable factor, and (3) weighting each compensable factor. Each job’s relative value is determined by the total points assigned to it. See http://www.hr- guide.com/jobevaluation.htm for more information about job evaluation and the point system. The result of the job analysis and job evaluation processes will be a pay structure or queue, in which jobs are ordered by their value to the organization. External equity The second consideration in creating a base pay system is external equity. External equity refers to the relationship between one company’s pay levels in comparison to what other employers pay. Some employers set their pay levels higher than their competition, hoping to attract the best applicants. This is called “leading the market”. The risk in leading the market is that a company’s costs will generally be higher than its competitors’ costs. Other employers set their pay levels lower than their competition, hoping to save labor costs. This is called “lagging the market”. The risk in lagging the market is that the company will be unable to attract the best applicants. Most employers set their pay levels the same as their competition. This is called “matching the market”. Matching the market maximizes the quality of talent while minimizing labor costs. An important question in external equity is how you define your market. Traditionally, markets can be defined in one of three ways. One way to define your market is by identifying companies who hire employees with the same occupations or skills. For example, if a company hires electrical engineers, it may define its market as all companies that hire electrical engineers. Another way to define a market is by identifying companies who operate in the same geographic area. For example, if the company is in Denver, Colorado, the market would be defined as all companies in Denver, Colorado. A third way to define a company’s market is by identifying direct competitors, that is, those companies who produce the same products and services. For example, Shady Acres Veterinary Clinic may define its market as all other veterinary clinics. Notice that these three characterizations can interact, that is, Shady Acres might define its market as all veterinary clinics in Denver, Colorado that employ veterinary technicians. Once you have defined your market, the next step is to survey the compensation paid by employers in your market. Surveys can be done ina variety of ways. First, there are publicly available data through the Bureau of Labor Statistics in the United States. Second, there are publicly available data through the Internet, from sites such as www.salary.com or www.haypaynet.com. Third, salary information can be obtained from a third party source, such as an industry group or employer organization, which has collected general information for a geographic region or industry. Fourth, the company can hire a consulting organization to custom design a survey. Finally, one can conduct a survey one’s self. See http://www.hr- guide.com/data/G474.htm for more information about salary surveys. Combining internal and external equity A company that has performed appropriate research has two sets of data. The first is pay structure, the output from the job evaluation. The second is market data, the output from the market survey. The next step will be to combine these two sets of data, to create a pay policy line. The pay policy line can be drawn freehand, by graphing actual salaries and connecting the dots. Alternatively, statistical techniques such as regression analysis are used to create a pay policy line. Regression generates a straight line that best fits the data by minimizing the variance around the line. In other words, the straight line generated by the regression analysis will be the line that best combines the internal value of a job (from job evaluation points) and the external value of a job (from the market survey). You can also enact a policy of “leading” the market by raising the line, and the policy of “lagging” the market by lowering the line. How do companies decide the pay associated with each job? First, they analyze the content of each job. Second, they assess the value each job contributes to the company. Third, they price each job in the market. Finally, they look at the relationship between what they value internally and what the market values externally. By following each of these steps, a company will have a fair base pay system, which will lead to attracting and retaining the best employees. Benefits and non-monetary compensation By Julie Wells In order for most businesses to function, employees must be provided with a payment in exchange for their services. Cash is one way to compensate employees, but cash alone is rarely enough payment. “Compensation is becoming more variable as companies base a greater proportion of it on stock options and bonuses and a smaller proportion on base salary, not only for executives but also for people further and further down the hierarchy” (Pfeffer, Six Dangerous Myths About Pay, 2000). Benefits and other forms of non-monetary compensation are becoming more appropriate forms of compensation for employees in today’s workplace. A benefit is a “general, indirect and non-cash compensation paid to an employee” that is offered to at least 80 per cent of staff (Employee Benefits Definition). On average, 40 per cent of payroll is dedicated to non-cash benefits (Kulik, 2004). In order to attract, retain, and motivate the best employees, benefits and other sources of non-monetary compensation should be considered. There are three things a company must fully consider before determining if and how they will issue employee benefits: the industry structure, the strengths of the company and its competitors, and the wage structure. A company should not issue benefits to employees if they have not considered the implications of these factors, specifically the wage structure. If a company offers employees extremely high wages compared to other businesses in the industry in addition to non-monetary compensation, costs may increase at a faster rate than profit. Benefits are also related to the type of industry in which the company does business. If the company has an understanding of what they can offer to employees and how those offerings will be received in the industry, benefits can increase a company’s workforce quality and general happiness of employees. : Fringe ae Employee Benefits Benefits Perks (perquisites) relocation sick leave company cars assistance medical and/or income dental insurance protection plans flexible s penains vacation accounts ; profit retirement plans ; sharing life and long-term education insurance funding legal assistance plans adoption assistance and child care plans miscellaneous employee discounts Types of non-monetary compensation The benefit of benefits hotel stays profit-sharing leisure activities on work time, in-office exercise facilities stationary, business cards, personalized office supplies first choice at job assignments Benefits can be required by government, offered willingly by employers, or arise from pressures within the company. In the US, the government requires that businesses deduct Federal Income Contribution Act (FICA) taxes from employee paychecks, which pay for Social Security and Medicare (Internal Revenue Service). Workers’ Compensation is paid to employees if they are injured while performing work necessary for their job function; this can include breaking a bone, getting into a car accident, or payments made to the family of someone killed on the job. Unemployment insurance provides wages to unemployed persons, generally only if they are registered as unemployed and actively seeking a job. In Australia, these benefits are paid through the income taxes, but payments are issued by Centrelink, a governmental office that seeks to support unemployed individuals and help them become self-supporting (Centrelink). The Family Medical Leave Act (FMLA) allows individuals to leave work for a semi- extended period of time in order to care for an ailing family member, new child, or personal illness. This leave is unpaid, but it guarantees that employees will not lose their jobs if they leave under these circumstances. Employee benefits that are not required by law are often provided. These are attractive to businesses as well as employees because they provide both with some tax advantages. For example, if a company offers employees a flexible spending account, money that employees receive in this account may be deducted from total earnings on employees’ tax returns. Employees can “use pre-tax dollars to pay for eligible health care and dependent care expenses”, however any money that remains in the account at the end of the year will be forfeited (SHPS). This is a benefit to employees because individuals will receive a portion of their income tax-free. Employers also benefit from offering these types of programs because they also receive tax benefits and they retain happy employees by providing programs that meet their needs. Benefits are also offered to employees as incentives. These are designed to attract, keep, and improve life for employees. They are not usually required by the government but companies may receive tax benefits for some types of these non-monetary payments. There are a plethora of services that can be offered, including complementary gym memberships, on-site daycare, company cars, and paid vacations. Companies offer such these benefits in order to create a culture for their employees, which have the ability to promote social interaction, make life easier for working parents, or improve employees’ quality of life. Depending on the industry, benefits may be more attractive than salary figures; this could allow companies to pay lower wages to employees, thus reducing the total amount spent in payroll. In situations like these, a company may want to be extremely creative in devising their benefit packages. Detriments of benefits Benefits can provide companies with ways to attract high quality employees and help retain them especially if the benefits offered are significantly different or better than the benefits offered by competitors. However, there are negative situations that can arise from offering too many or the wrong kind of benefits to employees. These can be better understood in the context of the following case study. By attracting employees who desire a strong work/life balance, the SAS Institute has the potential to create an overly homogenous culture. This can lead to a lack of dissent in the company; if someone disagrees with a policy or practice, they may be less likely to voice their opinions for fear of demonstrating different opinions than their friends and co-workers. This can also foster an environment that lacks cultural, ethnic, or social diversity, which can lead to an inability to adopt change within the company. Case, The SAS Institute The SAS Institute, based in the southern United States, is a software development company that competes against global software giants, such as Microsoft. In order to attract employees that fit their unique company culture, SAS has developed an extensive employee benefit program that is offered to all employees at the company. Salaries paid to SAS employees are not significantly higher than competitors in the industry, but they do maintain a competitive pay rate. For the ideal employee, however, the benefits more than compensate for an unimpressive salary. Benefits at SAS include: private offices for all employees; contributions of 15 per cent into employee profit sharing plans; 200 acre natural campus setting with on-site hiking trails and picnic areas, sculptures, and artwork; the latest technology and equipment; 35 hour work week; on-site medical facility (including nurses, doctors, a physical therapist, massage therapist, and mental health practitioner), five minute waiting time for appointments, and free healthcare for employees and their families; health plans that cover most basic needs and offer “cost accountable” services for services that are more extensive; on-site Montessori daycare at 33 per cent of the cost of normal daycare; on-site private junior and senior high schools, open to students from outside of SAS, with high tech laboratories and equipment; free on-site gym for employees and families with a pool, exercise classes, yoga, weight room, etc.; cafeteria with high quality food at low prices, live piano music, and the option of dining with your children if they attend the on-site schools; subsidized memberships offered for health clubs and daycare off property; company owned country club memberships at significantly low costs for employees and their families; and more. SAS is a unique example of a company that hires employees who desire a strong work/life balance. Not all software engineers would desire this lifestyle, but SAS recognizes that they hire from a unique niche of employees and seek to attract these individuals. This has been very successful; “SAS is certainly among the lowest [turnover] in the industry— less than 4 per cent annually. For a company of more than 5,000 employees, this is quite an achievement, and much of their success can be linked to their unique HRM practices” (SAS). Pay for performance By Bonggi Yim and Chanakiat “Art Samarnbutra” Compensation techniques According to Kulik, it is important for companies to attract “quality job applicants, motivate employees to be high performers, and encourage long- term employee retention” (Human Resources for the Non-HR Manager, 2004). Doing these things can increase companies’ competitive power today. Compensation systems usually consist of three categories: “base salary, short-term incentive systems, and long-term incentive systems” (Kulik, 2004). Reward systems really affect work performance. Reward systems can be applied to employees with different formula. Poorly designed and administered reward systems can do more harm than good. It is important to design reward systems carefully, taking into considerations base salary and incentives according to the different tasks of specific employees. Companies should have well-designed base salaries. Nowadays, many websites (e.g. salary.com, jobstar.org, wageweb.com) provide detailed information to employees according to company mission (Kulik, 2004). When a company designs a base salary, they have to consider the company’s unique aspects: locations and acquisition period of skills and so on. Depending on ranking system of the company, employees need to be evaluated differently. A CEO’s evaluation is different from that of management and evaluation of management is different from that of employees. Companies also provide short term incentives to employees. Most companies’ compensation systems include “variable pay” (Kulik, 2004). Depending on work performance, many companies reward their employees without affecting base salary. To achieve a set goal, many companies use bonuses. For example, “Nucor set its base pay at about half of the competition’s. By emphasizing a bonus system, Nucor has shifted the risk onto the employee’s shoulders” (Kulik, 2004). Companies should have exact evaluation systems that support bonus pay. Many companies such as GE, HP, and Sun Microsystems are using software that directly evaluates employees’ behavior with respect to customer service. Long-term incentives are also a part of reward systems. Stock options and profit-sharing plans are representative long-term reward systems (Kulik, 2004). Even though employees are motivated by these incentives, they do not receive benefits until after few years. For example, employees cannot sell stock options until after a few years after they receive stock options. “In a profit-sharing plan, employees are promised a payment beyond base pay that is based on company profits” (Kulik, 2004). Components of pay for performance According to Dr Cynthia Fukami, a professor from the University of Denver, these are the main components of pay for performance (Fukami, Reward Systems, 2007): 1. The company pays the employee beyond his or her job value. 2. Many forms for improving the pay system are available. 3. The company can divide up the pay into 3 levels that are individual, team, and company-wide. Pay secrecy Besides the compensation techniques, the companies should consider whether the compensation system should be secret. Historically, employees and businesses both expressed concerns about the public discussion of salary; however, such discussions should not be prohibited (Kulik, 2004). Companies need to conclude what information they should reveal in their pay systems. Some US companies select to announce salary ranges. For example, for each position American Express posts the market pay ranges so that its employees can compare them with their salaries. Some companies disclose the formula and the factors they may use to calculate salaries, such as education and experience. Good outcomes of paying for performance Dr Cynthia Fukami notes that reward system is a powerful tool if pay links with performance (Fukami, Reward Systems, 2007): 1. Strategic objectives of the organization will be achieved. 2. The reward system will support the organizational culture. 3. Employees’ working performance will be improved from the right pay practice. 4. Competitive advantages have increased continuously. Folly of reward systems in different organizations In politics: Politicians are separated from the general population when they speak only of official goals that are purposely vague and generalized. In contrast, the electorate will punish the candidate who frankly informs about the source of fund. In universities: According to Steven Kerr, “Society hopes that professors will not neglect their teaching responsibilities but rewards them almost entirely for research and publications” (p. 9). While it is easy to recognize those professors who receive awards, quantifying a dedication to teaching is more difficult. To resolve this problem, it is essential that university leadership should emphasize teaching and doing research equally. In sport: Coaches talk about teamwork, not individuals. Clearly, in a reward system, the best player will receive the biggest reward. Therefore, players normally think of themselves first and their team second. To correct this problem, the team manager needs to reduce the gaps of pay among team players. Cautions for introducing a pay system e Much advice about pay is wrong (Kerr, 1995). Many executives learn that the employees will certainly work more effectively in case that the company gives them higher compensation. Pfeffer said that the executives may not be “spending as much time and effort as it should on the work environment-on defining its jobs, on creating its culture, and making work fun and meaningful” (Six Dangerous Myths About Pay, 2000). Sometimes, companies pay well to create proactive work environment and get new innovative ideas in return. This policy does not surely work, especially when the top executives and employees are lacking of trust with each other. e Pay systems need to align with the company culture. The top management should adjust the pay system when it is not fit with the current business strategy. However, changing the internal culture is a wrong idea because it is embedded in the employees’ minds. The confusion can make the growth of the company stagnant. e Implementing the reward system is hard and takes management time Most companies believe that employees will work effectively when they get rewards for their efforts. Because of this concern, the HR managers cannot maintain the policy in compensation. From Mercer survey, “nearly three-quarters of all the companies surveyed had made major changes to their pay plans in just the past two years” (Pfeffer, Six Dangerous Myths About Pay, 2000). In addition, an example of changing reward system occurred in Sears. Sears had to eliminate its commission system because Sears’s employees wanted high commission, so they offered unneeded services to customers. Meaningful job design By Ryan Brown and Mike McClain Job design is critical to the success of any organization. For our purposes job design is defined as the allocation of specific work tasks to individuals and groups (Schermerhorn, Job Design Alternatives, 2006). Allocating jobs and tasks means specifying the contents, method and relationships of jobs to satisfy technological and organizational requirements as well as the personal needs of jobholders. If successful job design is not implemented, than the companies general strategy and direction will be strongly diverted. Meaningful jobs must also exemplify the company’s goals and culture. Elements to job design In order to better understand job design it is helpful to define some key elements and their relationship with job design processes. A task can be best defined as a piece of assigned work expected to be done within a certain time. It is important to strictly and thoroughly identify tasks that need completion. In addition individuals need to be compelled, excited, and passionate to do their work. Hence, it is essential to design jobs that motivate employees. Motivation describes forces within the individual that account for the level, direction, and persistence of effort expended at work (Schermerhorn, Job Design Alternatives, 2006). In job design it is necessary to identify and structure jobs in a way so that the company’s resources are being efficiently used. Resource Allocation occurs when organizations decide to appropriate or allocate certain resources to specific jobs, tasks or dilemmas facing the organization. Jobs need to be constructed so that efficiency of the worker or department is maximized. Organizations need to use the resources and creativity of their employees effectively and efficiently. Appropriate resource allocation allows large organizations to foster and develop innovation in their workforce (Dorenbosch, van Engen, & Verhagen, 2005). Reward systems also play a role in job design. Reward systems include compensation, bonuses, raises, job security, benefits, and various other methods of reward for employees. An outline or description of reward packages needs to be established while constructing jobs. Brief history of traditional approaches to job design Taylorism, also known as scientific management, is a foundation for management and managerial decisions. Frederick Taylor developed this theory in an effort to develop a “science” for every job within an organization (Taylorism). Taylorism principles Create a standard method for each job. Successfully select and hire proper workers. Effectively train these workers Support these workers. Taylorism Hertzberg's Motivation-Hygiene theory attempts to uncover psychological needs of employees and enhance employee satisfaction. In regards to this theory employers are encouraged to design jobs that enhance and motivate employees beyond simply meeting a daily or weekly quota. This theory highlights the importance of rewards systems and monitoring when and how employees are rewarded. Simple recognition is often enough to motivate employees and increase job satisfaction (Herzberg's Motivation- Hygiene Theory). More effective jobs can be created when specific goals are established. Goal setting theory as described by Edwin Locke mainly focuses on the motivational properties of task goals (Schermerhorn, Job Design Alternatives, 2006). Task goals can be highly motivating when set and managed properly. One of the problems with goal setting theory in job design is that individuals are more strongly motivated by establishing or setting their own personal goals. If organizations set these goals for their employees the effectiveness of this technique is diminished. Moreover, individuals are often times ineffective at setting personal goals (Godwin, Neck, & Houghton, 1999). If a company wants to implement goal setting theory with regards to job design than a reasonable job criteria and description must be established. Current approaches to job design Technology and the flattening of the global economy have contributed greatly to the changes we now see in jobs and job content across the world. This shift is a signal for employers to meet changing job demands and expectations (McDonald & Obenchain, 2003). We now recognize that a person presented with quality meaningful work is more likely to do that work well. Because of this insight, job design now presently takes a couple of prominent forms. The first of which is designed around the evolution from individual work to work-groups. This job design practice is called socio-technical systems (STS) approach. This approach has the following guiding principles: e The design of the organization must fit its goals. e Employees must be actively involved in designing the structure of the organization. e Control of variances in production or service must be undertaken as close to their source as possible. e Subsystems must be designed around relatively self-contained and recognizable units of work. e Support systems must fit in with the design of the organization. e The design should allow for a high quality of working life. e Changes should continue to be made as necessary to meet the changing environmental pressures (Accel Team) Click here to read more about soci-technial systems approach to job design. Another modern job design theory is the Job Characteristics Model (JCM), which maintains five important elements that motivate workers and performance: skill variety, task identity, task significance, autonomy, and job feedback. The individual elements are then proposed to lead to positive outcomes through three psychological states: experienced meaningfulness, experienced responsibility, and the knowledge of results (Parker & Turner, 2002). A further evolution of this theory is Psychological Empowerment Theory (Spreitzer, 1995). This theory posits that there is a distinction between empowering practices and cognitive motivational states. When a person is aware of the impact that they are having, they benefit more than if they cannot relate a positive impact to any of their behaviors or practices. There are many more iterations of job design theory that have evolved from the practices of previous generations, but one general trend can be identified among them; the move towards autonomous work teams and the importance placed upon the meaning derived from the individual. Steps to effective job design Key to effectively crafting a meaningful job for an employee is starting the thought process by looking at the values and strategy of the organization. By framing the job in these contexts the job design process is more likely to align potential employees with the purpose of the company. Once you have this context the following steps will ensure both meaningful and effective job design: 1. Assess skills, needs, abilities, and motivations of employees and the organization. 2. Design the job to meet those needs, abilities and motivations. 3. Implement the new job design. 4. Audit the success of the job design and begin with step one periodically as well as when problems have been identified. How meaningful job design can impact an organization The goal of job design is to positively affect the performance of an organization. “It (job design) affects how well employees coordinate their work, the degree to which they are committed to the goals of the organization, the extent to which their abilities are tapped, and the extent to which their psychological and ergonomic needs are met” (Beer, Spector, Lawrence, Mills, & Walton, 1984). As this quote shows, job design is the base element for producing effective work organizations, and without meaningful job design, an organization will never operate to its potential. Termination Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 By James Frasche The termination of an employee is an uncomfortable event for all parties involved. Obviously, the employee losing his or her job will be distraught for many reasons, and in many cases the manager responsible for making the termination decision and the employee have formed a personal relationship during the employee’s tenure, thereby making the manager’s responsibility of “letting someone go” an undesirable one. However, there are ways that a manager can lessen the unpleasantness of the termination process. There are many factors to take into consideration when terminating an employee. First and foremost, an employer must take into account the nature of the relationship that exists between the organization and the employee in order to assess the legality of the termination. In the United States, approximately 70 per cent of employers and employees maintain an “at will” relationship with one another, that is, an employee may quit their job for any reason, at any time, or an employer may fire an employee for any reason, at any time. The other 30 per cent of the workforce is employed under individual employment contracts or union contracts that specify the “length of an employment relationship, how the relationship can be severed, and how the relationship can be extended” (Kulik, 2004). An “at will” relationship may give the impression that a termination decision may never be challenged. Indeed, firing an employee “for cause” is made even easier when an “at will” relationship is present. Broadly speaking, an employer can typically fire an employee “for cause” when their behavior falls under the following categories (Falcone, 2002): 1. Policy and procedure violations 2. Substandard job performance 3. Inappropriate workplace conduct 4. Attendance/tardiness problems However, there are some instances in which employees can be wrongfully discharged or fired for reasons that are not legitimate, typically either because they are unlawful or because they violate the terms of an employment contract (Lectric Law Library). Some of the illegitimate reasons for terminating employees include, among many others, discrimination and violations of public policy. For a more complete list of illegitimate reasons for terminating employees in the US, visit: http://smallbusiness.findlaw.com/employment-employer/employment- employer-ending/employment-employer-ending-wrongful-reasons(1).html. There are several laws that have been enacted in the United States in order to protect employees from unfair termination in the workplace based on discrimination, the most prevalent of which are Title VII of the Civil Rights Act of 1964, the Age Discrimination and Employment Act of 1967 (ADEA) and the Americans with Disabilities Act of 1990 (ADA). Title VII, the broadest of these statutes, protects employees, applicants, and union members from termination and discrimination in the workplace based on race, color, religion, gender, and national origin, regardless of the nature of the employment relationship (at will, union, etc.) (Clarkson, 2004). For instance, if an African American or Muslim individual can prove in a court of law that he or she was fired because of race or religious preferences, that employee is entitled to both compensatory and punitive damages under Title VII. Organizations that employ 100 people or less are liable for USD 50,000 and organizations that employ 100 or more employees are liable for USD 300,000 in punitive and compensatory damages under Title VII (Clarkson, 2004). For more information on Title VII, including the claims process, bona fide occupational qualification defense, and who is protected, visit the Equal Employment Opportunity Commission’s (EEOC) website According to West’s Business Law, it is quite possible that discrimination based on age is the most widespread form of discrimination, being that anyone, regardless of gender, national origin, etc. may find themselves a victim at some point in their life (Clarkson, 2004). The practice of “laying- off” older employees and hiring younger, less expensive ones in order to cut costs is a common occurrence amongst organizations that operate in the United States. Sec. 621 (Section 2) of the ADEA states, “in the face of rising productivity and affluence, older workers find themselves disadvantaged in their efforts to retain employment, and especially to regain employment when displaced from jobs”. In an effort to promote employment of older persons based on their ability rather than age, Congress enacted the ADEA, which “prohibits employment discrimination on the basis of age against individuals forty years of age or older” (The US Equal Employment Opportunity Commission). In order for the ADEA to apply to a specific employer (under federal law), that employer must employ twenty or more people, and the employer must engage in interstate commerce. Should a plaintiff successfully prove that age discrimination has occurred, the remedies under the ADA stipulate that the employee may be awarded back pay, attorney’s fees, liquidated damages (when a willful violation has been proven), front pay (which is designed to compensate the victim for future losses), and injunctive relief (which may include reinstatement). Unlike Title VII, punitive and compensatory damages are not awarded under the ADEA (Clarkson, 2004). To view the ADEA in its entirety, visit According to the US Congress, 43,000,000 Americans have one or more mental or physical disabilities. In 1990, Congress enacted the Americans with Disabilities Act, which made it illegal for private employers, state and local governments, employment agencies, labor organizations, and labor- management committees to discriminate against individuals based on a disability (The US Equal Employment Opportunity Commission). Furthermore, the ADA was specifically enacted in order to “(1) provide a clear and comprehensive mandate for the elimination of discrimination against individuals with disabilities, (2) provide clear, strong, consistent, enforceable standards addressing discrimination against individuals with disabilities, (3) to ensure that the Federal Government plays a central role in enforcing the standards established in this Act on behalf of individuals with disabilities, and (4) to invoke the sweep of congressional authority, including the power to enforce the fourteenth amendment and to regulate commerce, in order to address the major areas of discrimination faced day- to-day by people with disabilities” (US Department of Labor). As of 1994, the ADA is applicable to companies that employ 15 or more employees and prohibits such companies from discriminating based on a disability in all employment practices such as recruitment, pay, hiring, firing, promotion, benefits, etc. For more information on the ADA including remedies under the act and the plaintiff’s burden of proof, visit the US Department of Labor’s website at: http://www.dol.gov/esa/regs/statutes/ofccp/ada.htm. Most states in the US prohibit employers from “firing an employee in violation of public policy, that is, for reasons that most people would find morally or ethically wrong such as terminating an employee for (1) refusing to commit an illegal act such as refusing to falsify insurance claims or lie to government auditors (2) complaining about an employer’s illegal conduct such as the employer’s failure to pay minimum wage, or (3) exercising a legal right such as voting or taking family leave” (FindLaw.com). The manner in which an organization terminates an employee can send a powerful message to the organization’s remaining staff (Heathfield, How to Fire an Employee). Managers must be aware that seemingly unfair or harsh terminations may cause some of the organizations best workers to become less effective or seek new employment for fear of the same treatment. In some cases, it is appropriate for managers to engage in progressive discipline before terminating an under performing employee. Progressive discipline is “a process for dealing with job-related behavior that does not meet expected and communicated performance standards. The primary purpose for progressive discipline is to assist the employee to understand that a performance problem or opportunity for improvement exists” (Heathfield, Discipline (Progressive Discipline)). By attempting to assist an employee in fixing any problems that they are experiencing in the workplace before terminating them, the organization communicates a strong commitment to its employees, which can go a long way in regards to retention, turnover, and other areas of concern. Should the decision be made to move forward with the termination process after all other options have been exhausted, it is important for managers to know how, when, and where to break the news to the employee. Supervising managers should generally be responsible for terminating an employee, and it is generally improper to pass this responsibility off to upper management or to the human resources department. Most managers postpone telling an employee about their termination until the end of the week. However, this may be a grave mistake, as the employee will have the entire weekend to complain about their treatment to their coworkers and friends, thereby tarnishing the reputation of the organization. An alternative is for managers to break the news of termination to employees at the beginning of the week. This will give the employee time to “cool off” and think about their next move before they have the opportunity to socially interact with former coworkers during the weekend (Kulik, 2004). The termination interview is an important aspect of the exit process. The following are guidelines for the termination interview provided by the experts at Hay Associates as seen in Framework for Human Resource Management. e Plan the interview carefully. Make sure the employee keeps the appointment time. Never inform an employee over the phone. Allow 10 minutes as sufficient time for the interview. Use a neutral site, never your own office. Have employee agreements, the human resources file, and a release announcement (internal and external) prepared in advance. o Be available at a time after the interview in case questions or problems arise. o Oo 0 0 0 o Have phone numbers ready for medical or security emergencies. e Get to the point. As soon as the employee enters the meeting, give the person a moment to get comfortable and then inform him or her of your decision. e Describe the situation. Briefly explain why the person is being fired. Remember to describe the situation rather than attack the employee personally. e Listen. Continue the interview until the person appears to be talking freely and reasonably calmly about the reasons for termination. e Review all elements of the severance package. Describe severance payments, benefits, access to office support people, and the way references will be handled. However, under no conditions should any promises or benefits beyond those already in the support package be implied. ¢ Identify the next step. The terminated employee may be disoriented and unsure of what to do next. Explain where the employee should go next, upon leaving the interview. Note:The above is a brief summary of some of the issues surrounding the termination process in the United States and, due to space constraints, in no way takes into account all of the factors that managers should consider while terminating an employee. Readers are encouraged to explore the outside reference material noted above as well as other literature that will provide more insight into the termination process, as well as consulting with appropriate legal counsel. Downsizing By Logan Price The goal of any company is to supply a product or service that customers are willing to pay for. If a company provides a good that consumers are willing to pay a lot of money for, the company will similarly earn a lot of money. As long as the amount of money the company brings in is more than the amount they spend to make the good the company will profit and grow. To fuel this growth companies must invest in additional resources and must increase its number of workers. During times of growth few employees are laid off and the company is making money. However, a company’s product or service may no longer be desired by consumers over time. Some reasons this might occur are because the good has gone out of date or a competitor may have created a better product or may offer a better service. Loss of demand happens all the time in a competitive business environment. With so many companies trying to sell their products or services it becomes essential for companies to continually improve upon existing offerings so they do not fall behind competitors. But companies do fall behind, and as a result growth and profits quickly turn to layoffs and losses. Sometimes losses are so bad that the company cannot survive and simply closes down. Other times the lost revenue is not enough to shut down the company. In this instance the company cuts some resources and workers in order to survive the downturn in business. When companies decide to do this it is called downsizing. To downsize, as defined by the Merriam-Webster Dictionary, is "to fire (employees) for the purpose of downsizing a business." The reasons for downsizing businesses vary, but the main reason for doing this is because the product(s) or service(s) that the company offers is not as successful as it once was. As a result revenues decrease, and expenses (costs like materials and employees) must be cut to counter the lost revenue. Obviously, employees do not like it when they get laid off. However, downsizing is something that neither the company nor the employees want to see happen. Since both sides suffer (the company loses money and the worker loses a job) downsizing is often not met with strong resistance from employees. One reason for this lack of resistance is that employees understand that they are not being fired for doing a bad job. Employees tend to be more understanding if a company is forced to reduce its labor force. Also, the employees that are laid off during a downturn are normally the first ones to be rehired if business picks back up. Business will always have companies that are growing and companies that are dying, and downsizing and layoffs are a natural part of that cycle. Since downsizing is a normal part of business it can often be seen as necessary and reasonable. There is one other main reason why companies would downsize. If a company observes that they could be getting the same amount of output from fewer workers it makes economic sense to let the excess workers go. As an example, imagine a job that it would take three workers an hour to do. Now, if a fourth worker was added the job area would get crowded so everyone worked slowly and it took the four of them over an hour to complete. Clearly, the fourth worker is not adding value to the job and the company should downsize by firing the fourth worker. This practice is somewhat common, as most businesses continually review their processes to look for areas of the business that could run more efficiently with fewer expenses. For example, by evaluating and changing a manufacturing process could be streamlined resulting in reduced labor, material, and/or time costs while producing the same output. In order to continue growth and avoid the need for downsizing, products and services must constantly be made better, cheaper, and/or faster than what is being offered by the competition. A company that does this successfully will enjoy increased revenues and most likely growth. Companies that fail to offer products and services that are better, cheaper, and/or faster than their competition will not succeed. Companies are constantly battling with each other for market share, and downsizing and growth are two results of how effectively companies create demand for their good. HR Metrics By Ronald Tam For any company that is implementing new human resource programs or adjusting existing ones, these changes can quickly become a substantial company project. The roles of human resource programs are to manage the employees of companies to increase the human capital in a company. However, the specific goals or strategies that HR seeks to achieve may be different for each company or situation. Therefore, there is no set standard for measuring the success of HR. "The business world is dominated by people who look at metrics, and the HR world needs to play in that space...if you can measure manufacturing efficiency with Six Sigma, why not use similar analytics to measure human capital performance" (Grossman, 2006). It is suggested that the business world is focused on metrics in determining success. Similar approaches must be taken to value HR in order for it to be widely accepted, "but were the HR policies and practices really worth the time and effort? HR thought so, based on overall company performance. But Poses, who also had served as a financial analyst at AlliedSignal, wanted more. He wanted substantive proof, validation that his HR investments were paying off" (Grossman, 2006). This is the most common view of companies when it comes to HR, so the metrics sought out here is a financial measure. The first approach to HR metrics would be the approach in measuring the financial success of the company as a result of the HR implementations. Evaluations can be viewed as company projects or investments in this case. The first measurement is just a simple ratio of change in profits due to new HR divided by cost of the new HR. This measure will give an idea of how well the new changes paid off relative to how much was spent on it. Another measure is payback period, “The payback period of an investment is the period of time required for the cumulative cash inflows (net cash flows) from a project to equal the initial cash outlay (net investment)” (Moyer, McGuigan, & Kretlow, 2006). The payback period is measured by the net investment divided by the annual cash inflows as a result of that investment; this measure will give a company an idea of how long it takes the project to earn by its cost. The final measure for financial metrics of HR is a net present value, “The net present value of a capital expenditure project is defined as the present value of the stream of net (operating) cash flows from the projects minus the project’s net investment” (Moyer, McGuigan, & Kretlow, 2006). This is done by taking the present value of all future expected cash flows from the HR change and subtracting it from the cost of the project. This will put the value of the HR project in monetary terms like any other investment for the company. These are all measures that can be used to express the HR program or changes in terms of a relationship between its financial returns and costs. There are no specific standards for determining whether an HR project was a good investment or not, but the company should relate their results with industry results or historic results. The other approach to HR metrics is more towards operations aspect of the company. “The old HR measures, such as head count, the cost of compensation and benefits, time to fill, and turnover, no longer cut it in this new world of accountability. They don't go far enough to create shareholder value and align people decisions with corporate objectives” (Schneider, 2006). Since the purpose of HR is to improve an operational aspect of the company, it should also be measured in that context. “Many companies are forging ahead on efforts to create a new set of metrics that the traditional HR functions like recruiting, training, and performance review [relate] to overall corporate goals” (Schneider, 2006). Measurements here can include a variety of traditional measurements such as employee turnover, average stay of employees, efficiency of employees, etc. These measures all affect the operation aspects of a company and are standardized information currently. A new measure that can be introduced is the measurement of human capital; “human-capital metrics can provide meaningful correlations that help predict behavior and human-capital investment demands well ahead of the annual budget”. Another new HR metric can be directly related to the operational aspects of the company. “HR metrics might measure efficiency, or the time and cost of activities; human-capital metrics measure the effectiveness of such activities. Time to fill becomes time to productivity; turnover rate becomes turnover quality; training costs become training return on investment” (Schneider, 2006). The take from non- financial HR metrics is that there is no limit to any measurements or techniques. They can range from something simple and standard such as employee turnover to something creative that measures the effects of human capital increases, customer satisfaction increases, etc. Human resources should be treated like any other projects that a company can undertake. It can be measured both with financial results or operational results. The financial results are measures to compare the cost against the return from HR. The operational measure can look at standards or more complex and creative measures. Ultimately HR metrics are valued and judged against the goals or strategies of the company and how well they are aligned with the results. Therefore, a company should not limit themselves on how they are evaluating their HR success and build techniques around how they feel they feel they should value it. Discussion questions Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 e Provide three reasons for a company to implement a high-commitment work system. e Name and describe three examples of mechanisms a company could use to increase employee participation. e Discuss the four different categories of diversity. Give one reason why each would be important to a company. e Discuss the pros and cons of internal and external recruiting. Which one do you prefer, and why? e Should tests be used to select employees? Why? Why not? e What are the primary benefits of training employees? e¢ What is the relationship between career development systems and employee retention? e Identify the critical parts of an effective performance appraisal. e Provide two lessons for giving, and for receiving, feedback effectively. e Define internal and external equity in establishing a base pay system. e Provide three reasons to provide employees compensation in the form of benefits. e Name and describe two examples of each: short-term incentives and long-term incentives. e Name the five characteristics of the JCM approach to job design, and provide an example of each. e What are the four main reasons why an employee is terminated? e How can a company avoid downsizing? e Identify two ways to measure the effectiveness of your Human Resource Management policies. Exercise Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Cynthia V Fukami (Daniels College of Business, University of Denver, USA) Contributors: The students of MGMT 4340, Strategic Human Resource Management, Spring 2007 1. Read the description of SAS Institute in the section on Employee Benefits. Do some research on SAS Institute. 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Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) As you read this chapter, you should develop an understanding of the following key marketing concepts: e the important role marketing can play in the success of an organization e the various kinds of marketing e the strategic workings of marketing components ¢ understand the various bases for market segmentation ¢ understand the role of marketing research e understand the behavior of the individual consumer in the marketplace e understand the primary tools available to marketers and how they are used Defining marketing Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) Noted Harvard Professor of Business Theodore Levitt, states that the purpose of all business is to "find and keep customers". Furthermore, the only way you can achieve this objective is to create a competitive advantage. That is, you must convince buyers (potential customers) that what you have to offer them comes closest to meeting their particular need or want at that point in time. Hopefully, you will be able to provide this advantage consistently, so that eventually the customer will no longer consider other alternatives and will purchase your product out of habit. This loyal behavior is exhibited by people in the US who drive only Fords, brush their teeth only with Crest, buy only Dell computers, and have their plumbing fixed only by "Samson Plumbing—On Call 24 hours, 7 days a week". Creating this blind commitment—without consideration of alternatives—to a particular brand, store, person, or idea is the dream of all businesses. It is unlikely to occur, however, without the support of an effective marketing program. In fact, the specific role of marketing is to provide assistance in identifying, satisfying, and retaining customers. While the general tasks of marketing are somewhat straightforward, attaching an acceptable definition to the concept has been difficult. A textbook writer once noted, "Marketing is not easy to define. No one has yet been able to formulate a clear, concise definition that finds universal acceptance". Yet a definition of some sort is necessary if we are to layout the boundaries of what is properly to be considered "marketing". How do marketing activities differ from non-marketing activities? What activities should one refer to as marketing activities? What institutions should one refer to as marketing institutions? Marketing is advertising to advertising agencies, events to event marketers, knocking on doors to salespeople, direct mail to direct mailers. In other words, to a person with a hammer, everything looks like a nail. In reality, marketing is a way of thinking about business, rather than a bundle of techniques. It is much more than just selling stuff and collecting money. It is the connection between people and products, customers and companies. Like organic tissue, this kind of connection—or relationship—is always growing or dying. It can never be in a steady state. And like tissue paper, this kind of connection is fragile. Customer relationships, even long— standing ones, are contingent on the last thing that happened. Tracing the evolution of the various definitions of marketing proposed during the last thirty years reveals two trends: (1) expansion of the application of marketing to non-profit and non-business institutions; e.g. charities, education, or health care; and (2) expansion of the responsibilities of marketing beyond the personal survival of the individual firm, to include the betterment of society as a whole. These two factors are reflected in the official American Marketing Association definition published in 1988. “Marketing is the process of planning and executing the conception. pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual (customer) and organizational objectives.” [link]" While this definition can help us better comprehend the parameters of marketing, it does not provide a full picture. Definitions of marketing cannot flesh out specific transactions and other relationships among these elements. The following propositions are offered to supplement this definition and better position marketing within the firm. 1. The overall directive for any organization is the mission statement or some equivalent statement of organizational goals. It reflects the inherent business philosophy of the organization. . Every organization has a set of functional areas (e.g. accounting, production, finance, data processing, marketing) in which tasks that are necessary for the success of the organization are performed. These functional areas must be managed if they are to achieve maximum performance. . Every functional area is guided by a philosophy (derived from the mission statement or company goals) that governs its approach toward its ultimate set of tasks. . Marketing differs from the other functional areas in that its primary concern is with exchanges that take place in markets, outside the organization (called a transaction). . Marketing is most successful when the philosophy, tasks, and manner of implementing available technology are coordinated and complementary. The role of marketing in the firm: a basis for classification Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) Marketing is an individualized and highly creative process. Despite the availability of high-powered computers and sophisticated software capable of analyzing massive amounts of data, marketing is still more of an art rather than a science. Each business must customize its marketing efforts in response to its environment and the exchange process. Consequently, no two marketing strategies are exactly the same. This requirement of marketing to play slightly different roles, depending upon some set of situational criteria, has in turn provided us with a division of marketing into a number of different categories. This is not to imply, however, that there are not general marketing principles that work in most businesses—there are. There is a right and wrong way to design a package. There are certain advertising strategies that tend to work more often than others. Rather, we are saying that because of certain factors, a business's approach toward marketing and the ensuing strategy will require some modification from the basic plan. Shown in Table 1 are the most common types of marketing categories. Since these various types of marketing will be discussed throughout this text, a brief introduction is provided at this point. Macromarketing versus micromarketing The division of marketing into macromarketing and micromarketing is a fairly recent one. Initially, the division was a result of the controversy concerning the responsibility of marketing. Should marketing be limited to the success of the individual firm, or should marketing consider the economic welfare of a whole society? Accepting the later, or "macro", point of view dramatically changes the way marketing is carried out. In this light, every marketing decision must be evaluated with regard to how it might positively or negatively affect each person and institution operating in that society. In 1982, Hunt and Burnett surveyed the academic community in order to define more precisely the distinction between macro- and mircomarketing.[link] Their findings suggest that the separation depends upon "what is being studied", "whether it is being viewed from the perspective of society or the firm", and "who receives the consequences of the activity". Examples of macromarketing activities are studying the marketing systems of different nations, the consequences on society of certain marketing actions, and the impact of certain technologies on the marketing transaction. The use of scanners in supermarkets and automatic teller machines in banking illustrates the last example. Micromarketing examples include determining how Nikon Steel should segment its market, recommending how Denver Colorado’s National Jewish Hospital in the US should price their products, and evaluating the success of the US "Just Say No" anti-drug campaign. Service marketing versus goods marketing The distinction between services and goods products is not always clear- cut. In general, service products tend to be intangible, are often consumed as they are produced, are difficult to standardize because they require human labor, and may require the customer to participate in the creation of the service product. Goods products tend to be just the opposite in terms of these criteria. Consequently, marketers of service products usually employ a marketing strategy quite different from that of goods marketers. For example, a local family physician creates tangibility by providing an environment: waiting room examination rooms, diplomas on the walls, that convinces patients that they are receiving good health care. Conversely, coffee producers create intangibility in order to appear different from competitors. This is done through colorful packaging and advertisements showing people who are successful because they start each day with a cup or two or ten of Starbuck's coffee. Classification Example Factors The Macromarketing devaluation Emphasis of study of the yen A pricin ; ; ; : pacwe Perspective, receiver of Micromarketing strategy for Benccaucnede Wal-Mart d : Tangibility, standardization, 008 Napisce ee e a ilichioe Marketing International eee : involvement ' Chase Service marketing Manhattan Bank For-profit ; ae Otis Elevator Concerns for profits marketing Nonprofit Now Tor ; Museum of Tax status marketing Art Mass marketing Sony Nature of contact Direct Time : . Information marketing Magazine Internet Process for purchasing and trip.com é marketing delivery Imperial Local marketing Garden Proximity of customers Restaurant Regional Olympia ; ae aes Geographic area marketing Brewery Nauone eapiaae Extent of distribution marketing Red Cross International Ford Motor Network, marketing marketing Company Global variation commitment to . Qwest marketing country oe Kraft Foods Nature of consumer goods marketing Business-to- business IBM Product function marketing Kinds of marketing For-profit marketing versus nonprofit marketing As the terms connote, the difference between for-profit and nonprofit marketing is in their primary objective. For-profit marketers measure success in terms of profitability and their ability to pay dividends or pay back loans. Continued existence is contingent upon level of profits. Nonprofit institutions exist to benefit a society, regardless of whether profits are achieved. Because of the implicit objectives assigned to non-profits, they are subject to an entirely different additional set of laws, notably tax laws. While they are allowed to generate profits, they must use these monies in specific way in order to maintain their non-profit status. There are several other factors that require adjustments to be made in the marketing strategies for nonprofits. Mass marketing, direct marketing, and Internet marketing Mass marketing is distinguished from direct marketing in terms of the distance between the manufacturer and the ultimate user of the product. Mass marketing is characterized as having wide separation and indirect communication. A mass marketer, such as Nike, has very little direct contact with its customers and must distribute its product through various retail outlets alongside its competitors. Communication is impersonal, as evidenced by its national television and print advertising campaigns, couponing, and point-of-purchase displays. The success of mass marketing is contingent on the probability that within the huge audience exposed to the marketing strategy there exist sufficient potential customers interested in the product to make the strategy worthwhile. Direct marketing establishes a somewhat personal relationship with the customer by first allowing the customer to purchase the product directly from the manufacturer and then communicating with the customer on a first-name basis. This type of marketing is experiencing tremendous growth. Apparently, marketers have tired of the waste associated with mass marketing and customers want more personal attention. Also, modern mechanisms for collecting and processing accurate mailing lists have greatly increased the effectiveness of direct marketing. Catalogue companies (Spiegel, J.C. Penney), telecommunications companies (Sprint), and direct mail companies (Publishers Clearing House) are example of direct marketers. A modified type of direct marketing is represented by companies that allow ordering of product by calling a toll-free number or mailing in an order card as part of an advertisement. Although (officially), Internet marketing is a type of direct marketing, it has evolved so quickly and demanded the attention of so many companies that a separate section here is warranted. Essentially, Internet technology (which changes by the moment) has created a new way of doing business. In the Internet age, the way consumers evaluate and follow through on their purchase decisions has changed significantly. "Call now!" is no longer an effective pitch. Consumers have control over how, when, and where they shop on the Internet. The Internet has all but eliminated the urgency of satisfying the need when the opportunity is presented. Local, regional, national, international, and global marketers As one would expect, the size and location of a company's market varies greatly. Local marketers are concerned with customers that tend to be clustered tightly around the marketer. The marketer is able to learn a great deal about the customer and make necessary changes quickly. Naturally, the total potential market is limited. There is also the possibility that a new competitor or environmental factor will put a local marketer out of business. Regional marketers cover a larger geographic area that may necessitate multiple production plants and a more complex distribution network. While regional marketers tend to serve adjoining cities, parts of states, or entire states, dramatic differences in demand may still exist, requiring extensive adjustments in marketing strategy. National marketers distribute their product throughout a country. This may involve multiple manufacturing plants, a distribution system including warehouses and privately owned delivery vehicles, and different versions of the marketing "mix" or overall strategy. This type of marketing offers tremendous profit potential, but also exposes the marketer to new, aggressive competitors. International marketers operate in more than one country. As will become clear later in this book, massive adjustments are normally made in the marketing mix in various countries. Legal and cultural differences alone can greatly affect a strategy's outcome. As the US market becomes more and more saturated with US-made products, the continued expansion into foreign markets appears inevitable. Global marketing differs from international marketing in some very definite ways. Whereas international marketing means a company sells its goods or services in another country, it does not necessarily mean that the company has made any further commitments. Usually the product is still manufactured in the home country, sold by their people, and the profits are taken back to that country. In the case of Honda Motors, for example, it means building manufacturing plants in the US, hiring local employees, using local distribution systems and advertising agencies, and reinvesting a large percentage of the profits back into the US. Consumer goods marketing and business-to-business (industrial) marketing Consumer goods marketers sell to individuals who consume the finished product. Business-to-business marketers sell to other businesses or institutions that consume the product in turn as part of operating the business, or use the product in the assembly of the final product they sell to consumers. Business-to-marketers engage in more personal selling rather than mass advertising and are willing to make extensive adjustments in factors such as the selling price, product features, terms of delivery, and so forth. For the consumer goods marketer, the various marketing components are relatively fixed. In addition, consumer goods marketers might employ emotional appeals and are faced with the constant battle of getting their product into retail outlets. Defining international marketing Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) Now that the world has entered the next millennium, we are seeing the emergence of an interdependent global economy that is characterized by faster communication, transportation, and financial flows, all of which are creating new marketing opportunities and challenges. Given these circumstances, it could be argued that companies face a deceptively straightforward and stark choice: they must either respond to the challenges posed by this new environment, or recognize and accept the long-term consequences of failing to do so. This need to respond is not confined to firms of a certain size or particular industries. It is a change that to a greater or lesser extent will ultimately affect companies of all sizes in virtually all markets. The pressures of the international environment are now so great, and the bases of competition within many markets are changing so fundamentally, that the opportunities to survive with a purely domestic strategy are increasingly limited to small-and medium-sized companies in local niche markets. Perhaps partly because of the rapid evolution of international marketing, a vast array of terms have emerged that suggest various facets of international marketing. Clarification of these terms is a necessary first step before we can discuss this topic more thoroughly. Let us begin with the assumption that the marketing process outlined and discussed in [link]Chapters 1-4 is just as applicable to domestic marketing as to international marketing. In both markets, we are goal-driven, do necessary marketing research, select target markets, employ the various tools of marketing (i.e. product, pricing, distribution, communication), develop a budget, and check our results. However, the uncontrollable factors such as culture, social, legal, and economic factors, along with the political and competitive environment, all create the need for a myriad of adjustments in the marketing management process. At its simplest level, international marketing involves the firm in making one or more marketing decisions across national boundaries. At its most complex, it involves the firm in establishing manufacturing and marketing facilities overseas and coordinating marketing strategies across markets. Thus, how international marketing is defined and interpreted depends on the level of involvement of the company in the international marketplace. Therefore, the following possibilities exist: e¢ Domestic marketing. This involves the company manipulating a series of controllable variables, such as price, advertising, distribution, and the product, in a largely uncontrollable external environment that is made up of different economic structures, competitors, cultural values, and legal infrastructure within specific political or geographic country boundaries. e International marketing. This involves the company operating across several markets in which not only do the uncontrollable variables differ significantly between one market and another, but the controllable factor in the form of cost and price structures, opportunities for advertising, and distributive infrastructure are also likely to differ significantly. Degree of commitment is expressed as follows: a. Export marketing. In this case the firm markets its goods and/or services across national/political boundaries. b. Multinational marketing. Here the marketing activities of an organization include activities, interests, or operations in more than one country, and where there is some kind of influence or control of marketing activities from outside the country in which the goods or services will actually be sold. Each of these markets is typically perceived to be independent and a profit center in its own right. c. Global marketing. The entire organization focuses on the selection and exploration of global marketing opportunities and marshals resources around the globe with the objective of achieving a global competitive advantage. The primary objective of the company is to achieve a synergy in the overall operation, so that by taking advantage of different exchange rates, tax rates, labor rates, skill levels, and market opportunities, the organization as a whole will be greater than the sum of its parts.[link] Thus Toyota Motors started out as a domestic marketer, eventually exported its cars to a few regional markets, grew to become a multinational marketer, and today is a true global marketer, building manufacturing plants in the foreign country as well as hiring local labor, using local ad agencies, and complying to that country's cultural mores. As it moved from one level to the next, it also revised attitudes toward marketing and the underlying philosophy of business. Ultimately, the successful marketer is the one who is best able to manipulate the controllable tools of the marketing mix within the uncontrollable environment. The principal reason for failure in international marketing results from a company not conducting the necessary research, and as a consequence, misunderstanding the differences and nuances of the marketing environment within the country that has been targeted. Standardization and customization In 1983, Harvard marketing professor Theodore Levitt wrote an article entitled, "The Globalization of Markets", and nothing about marketing has been the same since.[link] According to Levitt, a new economic reality-the emergence of global consumer markets for single standard products-has been triggered in part by technological developments. Worldwide communications ensure the instant diffusion of new lifestyles and pave the way for a wholesale transfer of goods and services. Adopting this global strategy provides a competitive advantage in cost and effectiveness. In contrast to multinational companies, standardized (global) corporations view the world or its major regions as one entity instead of a collection of national markets. These world marketers compete on a basis of appropriate value: i.e. an optimal combination of price, quality, reliability, and delivery of products that are identical in design and function. Ultimately, consumers tend to prefer a good price/quality ratio to a highly customized but less cost-effective item. Levitt distinguished between products and brands. While the global product itself is standardized or sold with only minor modifications, the branding, positioning, and promotion may have to reflect local conditions. Critics of Levitt's perspective suggest that his argument for global standardization is incorrect and that each market strategy should be customized for each country. Kotler notes that one study found that 80 per cent of US exports required one or more adaptations. Futhermore, the average product requires at least four to five adaptations out of a set of eleven marketing elements: labeling, packaging, materials, colors, name, product features, advertising themes, media, execution, price, and sales promotion.[link] Kotler suggests that all eleven factors should be evaluated before standardization is considered. To date, no one has empirically validated either perspective. While critics of Levitt can offer thousands of anecdotes contradicting the validity of standardization, a more careful read of Levitt's ideas indicate that he offers standardization as a strategic option, not a fact. Although global marketing has its pitfalls, it can also yield impressive advantages. Standardized products can lower operating costs. Even more important, effective coordination can exploit a company's best product and marketing ideas. Too often, executives view global marketing as an either/or proposition- either full standardization or local control. But when a global approach can fall anywhere on a spectrum-from tight worldwide coordination on programming details to loose agreements on a product ideas-there is no reason for this extreme view. In applying the global marketing concept and making it work, flexibility is essential. The big issue today is not whether to go global, but how to tailor the global marketing concept to fit each business and how to make it work. Reasons for entering international markets Many marketers have found the international marketplace to be extremely hostile. A study by Baker and Kynak,4 for example, found that less than 20 per cent of firms in Texas with export potential actually carried out business in international markets. But although many firms view in markets with trepidation, others still make the decision to go international. Why? In one study, the following motivating factors were given for initiating overseas marketing involvement (in order of importance):[link] . large market size . stability through diversification . profit potential . unsolicited orders . proximity of market . excess Capacity . offer by foreign distributor . increasing growth rate . smoothing out business cycles WOMONAUBWN FP Other empirical studies over a number of years have pointed to a wide variety of reasons why companies initiate international involvement. These include the saturation of the domestic market, which leads firms either to seek other less competitive markets or to take on the competitor in its home markets; the emergence of new markets, particularly in the developing world; government incentives to export; tax incentives offered by foreign governments to establish manufacturing plants in their countries in order to create jobs; the availability of cheaper or more skilled labor; and an attempt to minimize the risks of a recession in the home country and spread risk. [link] Reasons to avoid international markets Despite attractive opportunities, most businesses do not enter foreign markets. The reasons given for not going international are numerous. The biggest barrier to entering foreign markets is seen to be a fear by these companies that their products are not marketable overseas, and a consequent preoccupation with the domestic market. The following points were highlighted by the findings in the previously mentioned study by Barker and Kaynak, who listed the most important barriers:[link] . too much red tape . trade barriers . transportation difficulties . lack of trained personnel . lack of incentives . lack of coordinated assistance . unfavorable conditions overseas . Slow payments by buyers . lack of competitive products . payment defaults . language barriers COUOON DU BRWNFE RR jo It is the combination of these factors that determines not only whether companies become involved in international markets, but also the degree of any involvement. The stages of going international Earlier in our discussion on definitions, we identified several terms that relate to how committed a firm is to being international. Here we expand on these concepts and explain the rationale behind this process. Two points should be noted. First, the process tends to be ranked in order of "least risk and investment" to "greatest involvement”. Second, these are not necessarily sequential steps, even though exporting is apparently most common as an initial entry. Firms typically approach involvement in international marketing rather cautiously, and there appears to exist an underlying lifecycle that has a series of critical success factors that change as a firm moves through each stage. For small-and medium-sized firms in particular, exporting remains the most promising alternative to a full-blooded international marketing effort, since it appears to offer a degree of control over risk, cost, and resource commitment. Indeed, exporting, especially by the smaller firms, is often initiated as a response to an unsolicited overseas order-these are often perceived to be less risky. Exporting In general, exporting is a simple and low risk-approach to entering foreign markets. Firms may choose to export products for several reasons. First, products in the maturity stage of their domestic life cycle may find new growth opportunities overseas, as Perrier chose to do in the US. Second, some firms find it less risky and more profitable to expand by exporting current products instead of developing new products. Third, firms who face seasonal domestic demand may choose to sell their products to foreign markets when those products are "in season" there. Finally, some firms may elect to export products because there is less competition overseas. A firm can export its products in one of three ways: indirect exporting, semi-direct exporting, and direct exporting. Indirect exporting is a common practice among firms that are just beginning their exporting. Sales, whether foreign or domestic, are treated as domestic sales. All sales are made through the firm's domestic sales department, as there is no export department. Indirect exporting involves very little investment, as no overseas Sales force or other types of contacts need be developed. Indirect exporting also involves little risk, as international marketing intermediaries have knowledge of markets and will make fewer mistakes than sellers. In semi-direct exporting, an American exporter usually initiates the contact through agents, merchant middlemen, or other manufacturers in the US. Such semi-direct exporting can be handled in a variety of ways: (a) a combination export manager, a domestic agent intermediary that acts as an exporting department for several noncompeting firms; (b) the manufacturer's export agent (MEA) operates very much like a manufacturer's agent in domestic marketing settings; (c) a Webb-Pomerene Export Association may choose to limit cooperation to advertising, or it may handle the exporting of the products of the association's members and; (d) piggyback exporting, in which one manufacturer (carrier) that has export facilities and overseas channels of distribution handles the exporting of another firm (rider) noncompeting but complementary products. When direct exporting is the means of entry into a foreign market, the manufacturer establishes an export department to sell directly to a foreign film. The exporting manufacturer conducts market research, establishes physical distribution, and obtains all necessary export documentation. Direct exporting requires a greater investment and also carries a greater risk. However, it also provides greater potential return and greater control of its marketing program. Licensing Under a licensing agreement, a firm (licensor) provides some technology to a foreign firm (licensee) by granting that firm the right to use the licensor's manufacturing process, brand name, patents, or sales knowledge in return for some payment. The licensee obtains a competitive advantage in this arrangement, while the licensor obtains inexpensive access to a foreign market. A licensing arrangement contains risk, in that if the business is very successful, profit potentials are limited by the licensing agreement. Alternatively, a licensor makes a long-term commitment to a firm and that firm may be less capable than expected. Or, the licensee may be unwilling to invest the necessary resources as needed to be successful. Licensing may be the least profitable alternative for market entry. Scarce capital, import restrictions, or government restrictions may make this the only feasible means for selling in another country. Franchising represents a very popular type of licensing arrangement for many consumer products firms. Holiday Inn, Hertz Car Rental, and McDonald's have all expanded into foreign markets through franchising. Joint ventures A joint venture is a partnership between a domestic firm and a foreign firm. Both partners invest money and share ownership and control of partnership. Joint ventures require a greater commitment from firms than licensing or the various other exporting methods. They have more risk and less flexibility. A domestic firm may wish to engage in a joint venture for a variety of reasons; for example, General Motors and Toyota have agreed to make a subcompact car to be sold through GM dealers using the idle GM plant in California. Toyota's motivation was to avoid US import quotas and taxes on cars without any US-made parts. Direct investment Multinational organizations may choose to engage in full-scale production and marketing abroad. Thus, they will invest in wholly owned subsidiaries. An organization using this approach makes a direct investment in one or more foreign nations. Organizations engaging in licensing or joint ventures do not own manufacturing and marketing facilities abroad. By establishing overseas subsidiaries, a multinational organization can compete more aggressively because it is "in" the marketplace. However, subsidiaries require more investment as the subsidiary is responsible for all marketing activities in a foreign country. While such operations provide control over marketing activities, considerable risk is involved. The subsidiary strategy requires complete understanding of business conditions, customs, markets, labor, and other foreign market factors. US commercial centers Another method of doing business overseas has come in the form of US Commercial Centers[link]. A Commercial Center serves the purpose of providing additional resources for the promotion of exports of US goods and services to host countries. The Commercial Center does so by familiarizing US exporters with industries, markets, and customs of host countries. They are facilitating agencies that assist with the three arrangements just discussed. US Commercial Centers provide business facilities such as exhibition space, conference rooms, and office space. They provide translation and clerical services. They have a commercial library. They have commercial law information and trade promotion facilities, including the facilitation of contacts between buyers, sellers, bankers, distributors, agents, and government officials. They also coordinate trade missions and assist with contracts and export and import arrangements. Trade intermediaries Small manufacturers who are interested in building their foreign sales are turning to trade intermediaries to assist them in the sale and distribution of their products. These entrepreneurial middlemen typically buy US- produced goods at 15 per cent below a manufacturer's best discount and then resell the products in overseas markets. These trade intermediaries account for about 10 per cent of all US exports9. The trade intermediary provides a valuable service to small companies, which often do not have the resources or expertise to market their products overseas. The trade intermediaries have developed relationships with foreign countries; these relationships are time-consuming and expensive to develop. Alliances Heineken, the premium Dutch beer, is consumed by more people in more countries than any other beer10. It is also the number-one imported beer in America. Miller and Budweiser, the two largest American beer producers, have entered into global competition with Heineken, partly because the American beer market has been flat. They are doing so by forming alliances with global breweries such as Molson, Corona, and Dos Equis. Heineken has responded to the challenge, heavily promoting products such as Amstel Light and Murphy's Irish Stout. Heineken has also begun developing an alliance with Asia Pacific Breweries, the maker of Tiger Beer. The international marketing plan Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dcwill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) It should be apparent by now that companies and organizations planning to compete effectively in world markets need a clear and well-focused international marketing plan that is based on a thorough understanding of the markets in which the company is introducing its products. The challenge, then, of international marketing is to ensure that any international strategy has the discipline of thorough research, and an understanding and accurate evaluation of what is required to achieve the competitive advantage. As such, the decision sequence in international marketing (see [link]) is much larger than that of domestic markets. As noted in the next Integrated Marketing box, it is also more complicated. See below. Exhibit markets Corporate level External environment Business level Selection of entry Situation methods analysis Selection of target markets Marketing strategies Tactics/ Functional level implementation Resources/ capabilities Organization/ allocation of resources Controls/ corrections The decision sequence in international marketing The corporate level We begin at the corporate level, where firms decide whether to become involved in international markets and determine the resources they are willing to commit. Thus, this stage is primarily concerned with the analysis of international markets. Decisions here will be dependent on matching the results of that analysis with the company's objectives. These objectives, in turn, will be determined by the many motivating factors we have discussed in the earlier sections. The level of resources that the company is willing to commit should be determined by the strategy that is needed to achieve the objectives that have been set. The business level Business-level considerations begin with the assessment of the stakeholders involved in the business. It is important to clearly identify the different stakeholder groups, understand their expectations, and evaluate their power, because the stakeholders provide the broad guidelines within which the firm operates. In the case of international marketing, it is particularly important to address the concerns of the stakeholders in the host company. The situation analysis concerns a thorough examination of the factors that influence the businesses’ ability to successfully market a product or service. The results lead to a realistic set of objectives. Conducting a situation analysis in an international setting is a bit more extensive. It not only includes the normal assessment of external environmental factors and resources/capabilities, it also includes a determination of the level of commitment exhibited by the business, as well as possible methods of entry. These last two factors are interrelated in that a company's level of commitment to international markets will directly influence whether they employ exporting, a joint venture, or some other method of entry. In turn, level of commitment and method of entry are influenced by the evaluation of environmental factors as well as resources and capabilities. The latter audits not only the weaknesses of the company, but also the strengths of the company, which are often taken for granted. This is particularly important in international markets; for example, customer brand loyalty may be much stronger in certain markets than others, and products may be at the end of their life in the domestic market but may be ideal for less sophisticated markets. It is important, too, to evaluate the capacity of the firm to be flexible, adaptable, and proactive, as these are the attributes necessary, for success in a highly competitive and rapidly changing world. Undoubtedly, environmental factors have received the most attention from marketers considering international markets. Marketing objectives Having identified stakeholder expectations, carried out a detailed situation analysis, and made an evaluation of the capabilities of the company, the overall marketing goals can be set. It is important to stress that there is a need for realism in this, as only too frequently corporate plans are determined more by the desire for short-term credibility with shareholders than with the likelihood that they will be achieved. The process adopted for determining long-term and short-term objectives is important and varies significantly, depending on the size of the business, the nature of the market and the abilities and motivation of managers in different markets. At an operational level, the national managers need to have an achievable and detailed plan for each country, which will take account of the local situation, explain what is expected of them, and how their performance will be measured. Examples of objectives might be: e financial performance, including return on investment and profitability e market penetration, including sales (by volume and value), market share by product category ¢ customer growth, by volume and profitability e distribution, including strength in supply chain, number of outlets e brand awareness and value e new product introductions and diffusion ¢ company image, including quality and added value (or service) The functional level Having set the objectives for the company, both at the corporate level and the business level, the company can now develop a detailed program of functional activities to achieve the objectives. Following the integrated approach employed throughout this text, each of the functional elements (e.g. finance, human resources, research) must be considered jointly. The international marketing strategy is doomed to failure if human resources can not find and train the appropriate employees, or research can not modify the product so that it is acceptable to consumers in another country. Ultimately, this coordination between business functions is contingent on the market entry strategy employed as well as the degree of standardization or customization deemed. Having integrated at the function level, we next consider integration of the marketing mix elements. Product/promotion Keegan|link] has highlighted the key aspect of marketing strategy as a combination of standardization or adaptation of product and promotion elements of the mix and offers five alternative and more specific approaches to product policy: 1. One product, one message, worldwide: While a number of writers have argued that this will be the strategy adopted for many products in the future, in practice only a handful of products might claim to have achieved this already. 2. Product extension, promotion adaptation: While the product stays the same this strategy allows for the adaptation of the promotional effort either to target new customer segments or to appeal to the particular tastes of individual countries. 3. Product adaptation, promotion extension: This strategy is used if a promotional campaign has achieved international appeal, but the product needs to be adapted because of local needs. 4. Dual adaptation: By adapting both products and promotion for each market, the firm is adopting a totally differentiated approach. 5. Product invention: Firms, usually from advanced nations, that are supplying products to less well-developed countries adopt product invention. Another critical element that is closely aligned with the product and promotion is the brand. Anthony O'Reilly, Chairman of H.J. Heinz, believes that the communications revolution and the convergence of cultures have now set the stage for truly global marketing. The age of the global brand is at hand. For example, Heinz was looking to expand its 9 Lives cat food brand and Morris the Cat logo into Moscow. Although it is a stable and successful brand in the US, testing and research done by Dimitri Epimov, a local marketing manager in Moscow, led Heinz executives to make a marketing change to ensure the product's success in Russia. Namely, a fatter-looking Morris was created for packaging. Another discovery: While Americans tend to treat their kitties with tuna, Russian cat-lovers prefer to serve beef-flavored food. As discussed earlier, product positioning is a key success factor and reflects the customer's perceptions of the product or service. However, in countries at different stages of economic development, the customer segments that are likely to be able to purchase the product and the occasions on which it is bought may be significantly different. For example, while KFC and McDonald's restaurants aim at everyday eating for the mass market in the developed countries, in less-developed countries they are perceived as places for special-occasion eating, and are beyond the reach of the poorest segments of the population. The product positioning, therefore, must vary in some dimensions. In confirming the positioning of a product or service in a specific market or region, it is therefore necessary to establish in the consumer perception exactly what the product stands for and how it differs from existing and potential competition by designing an identity that confirms the value of the product. Pricing Pricing products in foreign nations is complicated by exchange rate fluctuations, tariffs, governmental intervention, and shipping requirements. A common strategy involves a marketer setting a lower price for their products in foreign markets. This strategy is consistent with the low income levels of many foreign countries, and the lower price helps to build market share. Pricing strategies are also strongly influenced by the nature and intensity of the competition in the various markets. For these reasons, it is important to recognize at the outset that the development and implementation of pricing strategies in international markets should follow the following stages: 1. analyzing the factors that influence international pricing, such as the cost structures, the value of the product, the market structure, competitor pricing levels, and a variety of environmental constraints 2. confirming the impact the corporate strategies should have on pricing policy 3. evaluating the various strategic pricing options and selecting the most appropriate approach 4. implementing the strategy through the use of a variety of tactics and procedures to set prices 5. managing prices and financing international transactions Perhaps the most critical factor to be considered when developing a pricing strategy in international markets, however, is how the customers and competitors will respond. Nagle[link] has suggested nine factors that influence the sensitivity of customers to prices, and all have implications for the international marketer. Price sensitivity reduces: The more distinctive the product is: e the greater the perceived quality e the less aware consumers are of substitutes in the market e if it is difficult to make comparisons e if the price of a product represents a small proportion of total expenditure of the customer e as the perceived benefit increases e if the product is used in association with a product bought previously e if costs are shared with other parties e if the product cannot be stored Finally, there are several inherent problems associated with pricing in international markets. Often companies find it difficult to coordinate and control prices across their activities in order to enable them to achieve effective financial performance and their desired price positioning. Simply, how can prices be coordinated by the company across the various markets and still make the necessary profit? Difficulty answering this question has led to two serious problems. Dumping (when a firm sells a product in a foreign country below its domestic price or below its actual costs) is often done to build a company's share of the market by pricing at a competitive level. Another reason is that the products being sold may be surplus or cannot be sold domestically and are therefore already a burden to the company. When companies price their products very high in some countries but competitively in others, they engage in a gray market strategy. A gray market, also called parallel importing, is a situation where products are sold through unauthorized channels of distribution. A gray market comes about when individuals buy products in a lower-priced country from a manufacturer's authorized retailer, ship them to higher-priced countries, and then sell them below the manufacturer's suggested price through unauthorized retailers. Considerable problems arise in foreign transactions because of the need to buy and sell products in different currencies. Questions to consider are: What currency should a company price its products? How should a company deal with fluctuating exchange rates? Finally, obtaining payment promptly and in a suitable currency from less developed countries can cause expense and additional difficulties. How should a company deal with selling to countries where there is a risk of nonpayment? How should a company approach selling to countries that have a shortage of hard currency? Distribution and logistics Distribution channels are the means by which goods are distributed from the manufacturer to the end user. Logistics, or physical distribution management, is concerned with the planning, implementing, and control of physical flows of materials and final goods from points of origin to points of use to meet customer needs at a profit. Essentially there are three channel links between the seller and buyer. The first link is the seller's headquarters organization, which is responsible for supervising the channel, and acts as part of the channel itself. Channels between countries represent the second link. They are responsible for getting products to overseas markets and payment in return. Finally, the third link is the channel structure (logistics) within countries, which distributes the products from their point of entry to the final consumer. Distribution strategies within overseas markets are affected by various uncontrollable factors. First, wholesaling and retailing structure differs widely from one nation to the next. So, too, does the quality of service provided. Differences in the size and nature of retailers are even more pronounced. Retailers more closely reflect the economic conditions and culture of that country; many small retailers dominate most of these countries. Physical distribution to overseas markets often requires special marketing planning. Many countries have inadequate docking facilities, limited highways, various railroad track gauges, too few vehicles, and too few warehouses. Managing product inventories requires consideration of the availability of suitable warehousing, as well as the costs of shipping in small quantities. The budget Marketing mix components must be evaluated as part of an overall marketing strategy. Therefore, the organization must establish a marketing budget based on the required marketing effort to influence consumers. The marketing budget represents a plan to allocate expenditures to each of the components of the marketing mix. For example, the firm must establish an advertising budget as part of the marketing budget and allocate expenditures to various types of advertising media—television, newspapers, magazines. A sales promotion budget should also be determined, allocating money for coupons, product samples, and trade promotions. Similarly, budgets are required for personal selling, distribution, and product development. How much should be spent? Consider the following example. A common question that marketers frequently ask is, "Are we spending enough (or too much) to promote the sale of our products?" A reasonable answer would revolve around another consideration: "What do we want to accomplish? What are our goals?" The discussion should next turn to the methods for achievement of goals and the removal of obstacles to these goals. This step is often skipped or avoided. Usually, when the question is asked, "Are we spending enough?" an automatic answer is given, in terms of what others spend. Knowing what others in the same industry spend can be important to an organization whose performance lags behind the competition or to an organization that suspects that its expenditures are higher than they need to be. But generally, knowing what others spend leads to an unproductive "keeping-up-with-the- Joneses" attitude. It also assumes that the others know what they are doing. Evaluating results No marketing program is planned and implemented perfectly. Marketing managers will tell you that they experience many surprises during the course of their activities. In an effort to ensure that performance goes according to plans, marketing managers establish controls that allow marketers to evaluate results and identify needs for modifications in marketing strategies and programs. Surprises occur, but marketing managers who have established sound control procedures can react to surprises quickly and effectively. Marketing control involves a number of decisions. One decision is what function to monitor. Some organizations monitor their entire marketing program, while others choose to monitor only a part of it, such as their sales force or their advertising program. A second set of decisions concerns the establishment of standards for performance; e.g. market share, profitability, or sales. A third set of decisions concerns how to collect information for making comparisons between actual performance and standards. Finally, to the extent that discrepancies exist between actual and planned performance, adjustments in the marketing program or the strategic plan must be made. Once a plan is put into action, a marketing manager must still gather information related to the effectiveness with which the plan was implemented. Information on sales, profits, reactions of consumers, and reactions of competitors must be collected and analyzed so that a marketing manager can identify new problems and opportunities. The international marketing environment Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at drexel@uga.edu and dewill@cnx.org. Editor: Dr John Bumett (Daniels College of Business, University of Denver, USA) Reviewer: Dr Asit Sarkar (University of Saskatchewan, Canada) A number of factors constitute the international environment: social, cultural, political, legal, competitive, economic, plus technology. Each should be evaluated before a company makes a decision to go international. The social/cultural environment The cultural environment consists of the influence of religious, family, educational, and social systems in the marketing system. Marketers who intend to market their products overseas may be very sensitive to foreign cultures. While the differences between our cultural background in the United States and those of foreign nations may seem small, marketers who ignore these differences risk failure in implementing marketing programs. Failure to consider cultural differences is one of the primary reasons for marketing failures overseas. This task is not as easy as it sounds as various features of a culture can create an illusion of similarity. Even a common language does not guarantee similarity of interpretation. For example, in the US we purchase "cans" of various grocery products, but the British purchase "tins". A number of cultural differences can cause marketers problems in attempting to market their products overseas. These include: (a) language, (b) color, (c) customs and taboos, (d) values, (e) aesthetics, (f) time, (g) business norms, (h) religion, and (i) social structures. Each is discussed in the following sections. Language The importance of language differences cannot be overemphasized, as there are almost 3,000 languages in the world. Language differences cause many problems for marketers in designing advertising campaigns and product labels. Language problems become even more serious once the people of a country speak several languages. For example, in Canada, labels must be in both English and French. In India, there are over 200 different dialects, and a similar situation exists in China. Colors Colors also have different meanings in different cultures. For example, in Egypt, the country's national color of green is considered unacceptable for packaging, because religious leaders once wore it. In Japan, black and white are colors of mourning and should not be used on a product's package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death. Consider how the following examples could be used in development of international marketing programs: e In Russia, it is acceptable for men to greet each other with a kiss, but this custom is not acceptable in the US. e Germans prefer their salad dressing in a tube, while Americans prefer it in a bottle. e In France, wine is served with most meals, but in America, milk, tea, water, and soft drinks are popular. McDonalds's Corporation has opened 20 restaurants in India. Since 80 percent of Indians are Hindu, McDonald's will use a nonbeef meat substitute for its traditional hamburger. The likely beef substitute will be lamb, a very popular meat in India. In anticipation of its restaurant openings, McDonald's conducted extensive market research, site selection studies, and developed a relationship with India's largest chicken supplier. McDonald's has opted to market its product in India, largely because India's population of more than 900 million represents one sixth of the world's population. Values An individual's values arise from his/her moral or religious beliefs and are learned through experiences. For example, in America we place a very high value on material well-being, and are much more likely to purchase status symbols than people in India. Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald's and Burger King would encounter tremendous difficulties without product modification. Americans spend large amounts of money on soap, deodorant, and mouthwash because of the value placed on personal cleanliness. In Italy, salespeople call on women only if their husbands are at home. Aesthetics The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase, "Beauty is in the eye of the beholder" is a very appropriate description for the differences in aesthetics that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy. However, the Japanese do not. Time Americans seem to be fanatical about time when compared to other cultures. Punctuality and deadlines are routine business practices in the US. However, salespeople who set definite appointments for sales calls in the Middle East and Latin America will have a lot of time on their hands, as business people from both of these cultures are far less bound by time constraints. To many of these cultures, setting a deadline such as "I have to know next week" is considered pushy and rude. Business norms The norms of conducting business also vary from one country to the next. Here are several examples of foreign business behavior that differ from US business behavior: e In France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need. e In Russia, plans of any kind must be approved by a seemingly endless string of committees. As a result, business negotiations may take years. e South Americans like to talk business "nose to nose". This desire for close physical proximity causes American business people to back away from the constantly forward-moving South Americans. e In Japan, businesspeople have mastered the tactic of silence in negotiations. Americans are not prepared for this, and they panic because they think something has gone wrong. The result is that Americans become impatient, push for a closure, and often make business concessions they later regret. These norms are reflected in the difficulty of introducing the Web into Europe (see the next Integrated Marketing box). Religious beliefs A person's religious beliefs can affect shopping patterns and products purchased in addition to his/her values, as discussed earlier. In the United States and other Christian nations, Christmastime is a major sales period. But for other religions, religious holidays do not serve as popular times for purchasing products. Women do not participate in household buying decisions in countries in which religion serves as opposition to women's rights movements. Every culture has a social structure, but some seem less widely defined than others. That is, it is more difficult to