The Ten-Day MBA 4th Ed. Page 25

  NEW TECHNOLOGY AND INTEGRATION

  New technology in and of itself is not necessarily a good thing unless it can be used effectively. General Motors spent billions of dollars in the 1980s for robotics to automate its assembly lines. With this lavish spending, GM hoped to achieve both higher quality and lower costs. However, GM lacked the technical expertise to integrate the new technology effectively into its operations.

  Using traditional low-tech tooling and American workers, Japanese auto companies have met high productivity and quality standards in their U.S. assembly plants, to the chagrin of Detroit. In Honda’s case, the use of flexible work rules, production work teams, and participative management has resulted in the productivity and quality gains that Detroit expected from its high-tech investments.

  Mass customization was a new concept first promoted in 1992 by the Strategic Horizons group. Mass customization is based on the idea of tying computer-based information systems together with new modes of operation such as flexible manufacturing and just-in-time production. Using those linked systems, companies can provide each customer with the attractive, tailor-made benefits of the preindustrial craft era at the low cost of modern mass production. Products such as customized shoes, magazines, books, and computers can be provided in this manner.

  INFORMATION TECHNOLOGY (IT)

  At many of the Top Ten schools, information technology has been added as a separate course. The topic has gained a life of its own in academic journals, the business press, and on the lecture circuit. As computers have become more powerful, and linked on the Internet via cloud computing, they have become a valuable tool in the gathering and integration of useful information for competitive advantages.

  Those companies that know the most about their customers’ preferences have an advantage over their competitors. Sales registers linked to large computers can yield daily information on consumer demand and preferences. Department stores, such as Macy’s and Wal-Mart, can track daily rack movement of their apparel to spot a hit dress or to cut back on orders for a fashion dud. The supermarket checkout scanners serve the same purpose. With limited shelf space, grocers can cull slow-moving items and replace them with more promising ones to maximize every foot of the aisle. Using the information in computer databases, direct mail pitches can be targeted to the most likely prospects.

  Customer relationship management (CRM) is the current hot topic in business automation. Complicated and expensive to implement, it is therefore fertile ground for MBA consultants. In theory it could automate every aspect of a company’s relationship with its customers from customer data acquisition to customer retention. The contact with the customer can be in person, via e-mail, on the Web, or on the phone. Technological applications range from frontline customer data collection to providing customers and potential customers more accurate real-time data to answer their questions. Automated operators, called interactive voice response (IVR), can provide information or better route calls to the most competent service provider. Within the corporation, a well-constructed database can identify opportunities for product development and additional markets for current products. The information that could potentially be part of a CRM system encompasses all parts of the organization, such as accounting, production, marketing, and finance. Technological barriers often keep these functions from interaction, making for an expensive and difficult implementation. Security of each function’s data is critical.

  As the scope of a CRM implementation can be so comprehensive, corporations must create a CRM strategy and then select the initial CRM application that delivers the greatest return on initial CRM investment.

  The CRM cycle encompasses five functions:

  Product Development—Research, concept development

  Sales—Ordering, cross-selling, leads, forecasting, bidding and quoting

  Superior Customer Experience—Personalization, service, queue management

  Retention and Win-Back Customers—Loyalty programs, outbound efforts

  Targeting and Marketing—Promotions, pricing, segmentation, behavior modeling, customer scoring, analytics

  According to a Gartner Group survey, 55 percent of CRM projects do not produce results. With annual expenditures for CRM approaching $100 billion, it is important to avoid the common missteps: focusing solely on the technology, losing sight of the customer, lack of management support, inflexible business processes, underestimating change management, and undervaluing CRM’s benefits.

  MBA students are taught a lot of computer jargon so that they can be conversant in technospeak. MBAs hate to be outjargoned. Here’s a small lexicon sampling.

  EDI—Electronic data interchange

  CAD/CAM—Computer-Aided Design / Computer-Aided Manufacturing

  Online / Real Time—Computer system with continuous updating (airline reservation systems)

  POS—Point of Sale systems, checkout registers

  Hardware—Computer equipment (IBM, Apple, EMC)

  Software—Computer programs

  Applications—Synonym for software.

  Mainframe—A big computer

  Microcomputer—A desktop or portable computer

  CPU—Central Processing Unit, a computer’s brain

  LAN—Local Area Network of many computers

  AI—Artificial Intelligence, computers that think like people

  Intranet—Private network system

  QR Code—Quick Response square matrix bar code

  RFID—Radio Frequency Identification Inventory control tags

  URL—Uniform Resource Locator, Web page address

  HTTP—Hypertext Transport Protocol, the way Internet browsers communicate with server computers

  HTML—Hypertext Markup Language, the computer language of Internet Web pages

  Hypertext—The system of interlinking Web pages

  Firewall—Network protection from unauthorized access from outside computer users

  Moore’s Law—Intel founder Gordon Moore’s idea that processing power doubles every eighteen months with proportionate decreases in cost

  Besides knowing the vocabulary, it is important that MBAs become knowledgeable computer buyers. The same equipment that can create a competitive advantage can also become a disadvantage if the equipment or the programming cannot be changed to suit the company’s needs. Therefore computers and other technology purchases should be made after considering the company’s long-range strategy.

  OPERATIONS WRAP-UP

  In all operational situations a five-issue framework applies: capacity, scheduling, inventory, standards, and controls. With that framework, a little history, some vocabulary, six M’s, and a few formulas, the top MBA schools thrust their students into the business world. Imagine yourself as a consultant reviewing the operations of Onoff, Inc., a switch supplier to IBM. Onoff has been running short of cash. Product defects have plagued the factory, and costs have been rising. Based on the MBA knowledge culled from this chapter, you would start your investigation by asking a few questions:

  What is the management style used in the plant? Theory X, Y, or Z?

  Are the workers properly trained?

  Is the production equipment adequate? Efficient?

  Are there material supplier problems? Quality, Delivery problems?

  Is the production process efficiently configured? Consider a flow diagram.

  Can linear programming help develop a more profitable product mix?

  Could an MRP system be used to coordinate the entire production process, or a CRM system be used to manage the customer relationship?

  Are Economic Order Quantities used for inventory ordering to minimize inventories and to free up cash?

  Are there quality improvement programs in place? SPC, quality circles?

  Are adequate standards being set, monitored, and followed up timely?

  Those are the types of questions that run through an MBA’s head. With this chapter in mind, you too are able to ask the right questions.

  KEY
OPERATIONS TAKEAWAYS

  Frederick Taylor—Father of “scientific” production management (Theory X)

  Elton Mayo—Father of the “human relations movement” of production management (Theory Y)

  Operational Problem Solving—Capacity, scheduling, inventory, standards, controls

  Six M’s of Capacity—Manpower, machinery, materials, money, methods, messages

  Flow Diagramming—Mapping out work flows to spot efficiency opportunities

  Linear Programming—Computer method of determining the optimal solutions in situations with constrained capacity

  Gantt Chart—A simple project-scheduling tool

  Critical Path Method (CPM)—Sophisticated scheduling method for projects

  Queuing Theory—Mathematical tool to make waiting lines more efficient

  Inventory Types by Stage of Production—Raw materials, work in process, finished goods

  Inventory Types by Reason for Holding—Pipeline, cycle, safety, anticipatory, speculative

  Economic Order Quantity (EOQ)—Mathematical formula to minimize inventory costs

  Material Requirements Planning (MRP)—Sophisticated operational inventory and capacity management tool

  Quality Gurus—Joseph Juran, W. Edwards Deming, and Philip Crosby

  Statistical Process Control (SPC)—Statistical quality-control technique

  Customer Relationship Management (CRM)—A system of improving and managing the entire relationship with the customer

  Day 8

  ECONOMICS

  Economics Topics

  Supply and Demand

  Microeconomics

  Opportunity Costs

  Marginal Utility

  Elasticity

  Market Structures

  Macroeconomics

  Keynesian and Monetarist Theory

  Gross National Product Accounting

  International Economics

  Like kings of old dispensing with their astrologers, big business is sacking its economic soothsayers. Their stargazing proved entertaining and interesting—but not very useful.

  —“Dreary Days in the Dismal Science,” Forbes

  That may sound like a good excuse to play hooky on the day for economics, yet there is value in studying the subject. Economics cannot provide a clear picture, but it can supply some insights into the “invisible forces” that underlie the movement of business around the world. As in the case of all other MBA subjects, some familiarity with this subject provides the chance to impress people at the office with how smart we are!

  “I HAVE NO IDEA WHAT IT MEANS BUT I LOVE THE ACTION.”

  Schools like Chicago and MIT place a great deal of emphasis on learning classical textbook economics, but most others treat economics a bit more on an applied basis. Harvard and Darden have integrated economics into their international studies courses.

  Economics can boast about only a few basic concepts. So how does one explain the endless volumes of complex academic literature that try to explain the booms and busts of business cycles? Like the Holy Grail, the perfect economic model is an elusive target that seduces many zealous professors and thousands of Ph.D.’s in private industry. In their wake over the past hundred years they have left thousands of magic formulas, graphs, and charts. An MBA should aim at understanding the fundamentals and the vocabulary of economics, then move on and leave the windmill theories for theoretical Don Quixotes to chase after. With that in mind, this chapter sticks to the basics. It does not dwell on complicated formulas and difficult concepts that you would probably skip over, have no real use for, and forget in short order anyway.

  Economics studies how society allocates the limited resources of the earth to the insatiable appetites of humans. Supply and demand are the forces at work. At what is referred to as equilibrium (E), the market price allows the quantity supplied to equal the quantity demanded. Suppliers are willing to sell, and consumers are willing to buy. Supply equals demand for a price. That, in a nutshell, is the basis of all economic theory.

  For example, let’s take a look at the local pub, Porth Tavern, which brews its own beer, Duff beer. Imagine you are a Heineken drinker and the bar is running a $1 special on mugs of Duff. The owner has ten kegs on hand, but feels if he were to charge the usual $4 per mug, he might only be able to sell one or two kegs. You like Heineken, but at a dollar, you decide to try the much cheaper brew. Here, in this bar, the “invisible hand” of economics is at work. At the “right” price, there is a demand for the ten kegs. The graph shows that as the price per mug increases, the brewery would be willing to produce more, but people would be less willing to buy.

  SUPPLY AND DEMAND FOR BEER

  Generalizing from this simple relationship to an entire economy, aggregate supply (AS) equals aggregate demand (AD) at an equilibrium price and level of economic output. The graph is similar to the beer graph, the same relationship holds, but the elements measured constitute a much more serious MBA subject.

  SUPPLY AND DEMAND FOR AN ECONOMY

  LEVEL OF ECONOMICS: MICRO OR MACRO?

  Students can study either microeconomics or macroeconomics. Microeconomics deals with the supply and demand equation of individuals, families, companies, or industries. The Heineken versus Duff competition was an example of a microeconomic battle. Macroeconomics, on the other hand, concerns itself with the economies of cities, countries, or the world as shown in the second graph. Simply put, “micro” economics deals with “small,” specific situations; “macro” economics looks at the “big” picture of entire economics.

  MICROECONOMICS

  Microeconomics is less glamorous than macroeconomics but is a little more practical. Since most of us are not likely to have a macro-effect on a whole economy, it is better if we concentrate on the few basic concepts that make up microeconomic knowledge.

  OPPORTUNITY COSTS

  Because our appetites for goods and services are insatiable, decisions have to be made to determine how to allocate limited resources. Most often, the increase in production of a good or service requires that a cost or sacrifice be incurred. Economists call these costs opportunity costs.

  For example, in the 1990s the demand for Harley-Davidson motorcycles had the company’s factories operating at 100 percent of capacity. Harley controlled 60 percent of the big-ticket, big-bike market, and management was forced to decide how best to allocate limited production capacity to satisfy demand. They chose to produce several models for sale in the United States and abroad. As a result, Harley-Davidson incurred a significant opportunity cost because the company decided not to devote its entire capacity to its most expensive and profitable models for export to Japan. Had Harley tried to maximize short-term profits, it would have risked alienating the domestic market of devoted bikers—the very group that helped create the Harley mystique that the Japanese are buying. Opportunity cost, therefore, is the cost of choice, when output, time, and money are limited.

  MARGINAL REVENUE AND COST

  A concept closely associated with opportunity cost is marginal revenue and marginal cost. Companies are motivated to maximize total profits by maximizing revenues and minimizing costs. If a business has the opportunity to sell even a single additional unit at a profit, it should produce it. The marginal revenue (MR) from the sale should exceed the marginal cost (MC) to produce.

  Enterprises should continue to produce until their MR equals their MC. At that point of equilibrium the marginal profit on the next unit sold will equal zero. No profits are left on the table. Past that level, the marginal revenue of each additional unit sold decreases and the marginal cost increases. Experience tells us that the more units businesses try to push on the market, the less the market is willing to pay for these goods. The cost of producing one additional unit is minimal. But if there is no excess capacity and a company wants to produce more units, new workers will need to be hired, new equipment purchased, and a larger factory leased or built. Therefore, once a factory reaches capacity, the marginal cost of produ
cing one additional unit increases beyond the cost of the last unit produced.

  In the case of a cattle rancher, Bud Montana, the marginal cost of adding a steer to the herd is minimal. Fences still have to be mended and the pasture maintained. Since he is a rational decision maker, Bud will add cattle to the point that the marginal revenue from the sale of an additional steer will cover these marginal costs of raising this steer (MR = MC). If the cost of raising one additional unit becomes higher than the current market price, then Bud Montana will stop adding steers to his herd.

  MARGINAL REVENUE AND COST EQUILIBRIUM

  You might wonder why the demand curve is flat rather than downward sloping, as in the case of other demand curves. It is because the price of beef is determined in a competitive auction. The few additional head of cattle that Bud might bring to the market will not affect the price that is determined by the output of thousands of ranchers and meat processors. If Bud had a corner on the beef market, or a monopoly, then presumably he would always produce and sell at the point where MR = MC. In that case, his marginal revenue curve would slope downward to the right as in the instance of the standard demand curve shown in the beer and macroeconomic illustrations.

  The marginal cost and revenue concepts would also hold true for a cookie factory manager faced with a large special order. Imagine yourself in his or her apron. The customer wants to pay $1.00 per dozen for 100 dozens to be sold at a church fair. You have some excess capacity and so you go to your accountant and ask what your cost is to satisfy this order. She asserts that it would cost $1.45 per dozen. She gives you this breakdown as proof: