July 26, 2010

Operations Management Lesson 6 Exercise

Question:

Find extreme or good examples of the following practices and justify the reasons for their adoption:

1.     Level capacity management

2.     Chase capacity management

3.     Yield management

4.     Queue design

Different business and operations are adapting different capacity managements. Capacity can be defined as an output over a specified period of time. Final designs of capacity management depend on customer demand and nature of operations (Walley 2010).

1. Level capacity management

Slack et al. (2006) describes level capacity management as a process in which processing capacity is set at a uniform level through the planning period, regardless of the fluctuation in demand. In case of non-perishable materials production, if not immediately sold, these can be transferred to finished goods inventory in anticipation of later sales. As captured in Figure 1, setting capacity below the forecast peak demand level will reduce the degree of underutilization, but, in the periods where demand is expected to exceed capacity, customer service may deteriorate.

Figure 1. Level capacity management – absorb fluctuations

Example:

Silicon is a metalloid widely distributed in dust & sand. Amongst its main industrial uses are: usage as components in semiconductor devices, but it is mainly used in integrated circuits (microchips). Production of silicon involves several steps in which pure quartz, at a cost around $1.7 cent per kilogram, is transformed into monocrystalline silicon rod worth more than $500 per kilo. Production of silicon is therefore rather costly and involves complicated technological process which incurs high fixed costs. It is not flexible to fluctuate based on demand, manufacturers are aiming to achieve economies of scale. Usage of level capacity management is most suitable approach to production of silicon. Products that are not immediately sold are stored in warehouses. Silicon is a non-toxic material which is fairly easy to store.

Picture 1. Silicon wafle

2. Chase capacity management

As portrayed in Figure 2, chase capacity management is an attempt to match capacity closely to the varying levels of demand (Slack et al. 2006). To achieve this, company has to vary its resources according to demand, which is not suitable for capital-intensive operations. Adjustment of capacity in chase capacity management can be achieved by several methods (e.g. overtime, annualized hours, staff scheduling, etc.).

Figure 2. Chase capacity management

Example:

IBM Mainframe customers, which are typically large enterprises (e.g. banks), can already for quite some time use the offering called “On/Off Capacity on Demand”. The idea behind is very simple and provides fast response to customer demand. Customers are purchasing from IBM Mainframe products with originally built-in high capacity, however they can choose what capacity they want to use and respectively pay only for selected level of capacity – customer uses only specified number of processing units while others remain disabled. Should the customer require increase of capacity due to peak of operation, instead of lengthy upgrade process, he can purchase fast access to extra processing unit already available on the machine. There is no physical shipment involved only access code is provided. Once normal workload levels resume, customer can choose to turn off the extra capacity. In this way IBM is matching fluctuation in customer demand, rather than selling level capacity, which is increased in steps without possibility of decrease (Figure 3). In such instance customers were facing underutilization of extra capacity in low demand periods.

Figure 3. Staged level increase capacity in standard mainframe purchase

3. Yield management

In yield management, as described by Slack et al. (2006), service providers always try to use the capacity to its full potential. This is especially used when:

    • Capacity is relatively fixed
    • Service cannot be stored
    • Service is sold in advance
    • Making a sale is at relatively low cost

    Number of methods is used to ensure operation is maximized (e.g. airlines overbooking).

    Example:

    One of the closest examples for yield management that comes into my mind is a beauty studio. Demand of women for beauty services was, is and probably always will be high. Premises of the studio are typically rather small, capacity is fixed. Rent for the studio depends on the area, however attractive areas have rents rather high and labor is relatively cheap. Studio therefore wants to be utilized to maximum and on top employees are willing to work harder to make more money for extra hours, but also for tips. Beauty treatment is a service that cannot be stored and most of the beauty services can only be performed at that particular place mainly due to equipment used. Customers are required to make an appointment well in advance and since typically there are customers who did not make an appointment trying their luck, in some studios service stuff contacts every customer shortly before the appointment to ensure it is still valid. This depends on the demand levels of course, some studios simply take available customer in case the scheduled one did not show up on time. Yield management is the best method to be used by beauty salons in order to maximize their profit.

    4. Queue design

    Good capacity plan acknowledges existence of queues and therefore designs the queue. As categorized by Walley (2010) we can allow the queues to form in two different forms:

    a)     single queue with multi-server design

    b)     multi-queue with multi-server design

    Customer behaviour in queues is also a very relevant factor. How fast can they proceed? How they can get entertained while waiting? These are all the aspects that should be considered when designing a queue.

    Example:

    Since I had the chance to observe different types of queues in different airports in the world, for this exercise I would like to compare three airports and their queue management at the arrival passport control. This is a particularly painful check point, as there is no way for the passenger to turn around and come another time, nor they can choose a different way of exit, while mostly they are anxious and under time pressure to leave the airport as soon as possible.

    1. Dubai Airport

    As pictured in Figure 4, arrival passport control in Dubai airport is a combination of two queue option designs described by Walley (2010). There is more than one server available per each queue. This design is very effective. Not only customers can easily move fast in the queue and select the shortest one, but speed at check points is higher due to more servers available. On top, there is always airport stuff regulating not only the number of people in queues, but also ensuring that people do not block the process by moving too slow to one of the free servers due to not noticing a free server.

    Dubai airport has established also fast track which is called E-Gate. The idea behind is that Dubai residents can purchase a pass which is added on their ID card. Card contains all required data about the resident in electronic form. Passengers scan their ID card at the E-Gate check point and proceed to the exit. Procedure is very fast and helps to off-load the passport control. Frequent travelers appreciate time savings allowed by E-Gate procedure.

    Figure 4. Arrival passport control Dubai airport

    2. Vienna Airport

    Vienna airport passport control upon arrival (Figure 5) is a typical example of multi-queue with multi-server design (Walley 2010). This queue design allows steady pace of the queue. There are queues for EU citizens and non-EU citizens as well, which helps to speed up the process. There is, however no fast track for passengers. Fast track is only available for crew members, airport stuff and disabled passengers. Considering the volumes of passengers arriving to Vienna airport, this design often becomes insufficient. Airport and authorities should consider increasing number of servers as well as fast track for EU-citizens.

    Figure 5. Arrival passport control Vienna airport

    3. Birmingham airport

    Queue design on Birmingham airport (Figure 6) is a typical example of single-queue with multi-server design (Walley 2010). The pace of the queue is rather slow, the arrival hall is small, so the atmosphere is tense. Similar to Vienna airport, fast track is only available for specified personnel. Birmingham airport is a small airport compared to Vienna and Dubai, therefore need for different design or more servers might not be justified.

    Figure 6. Arrival passport control Birmingham airport

    References:

    Hardware – IBM mainframe On/Off Capacity on Demand [Online] (http://www.mainframe-upgrade.com/mainframe-ibm-capacity-on-demand.php) (Accessed 25 July 2010)

    Silicon and Steel [Online] (http://www.softmachines.org/wordpress/?p=261) (Accessed 25 July 2010)

    Slack, N., Chambers, S., Johnston, R., and Betts, A. (2006). Operations Process Management. London: FT Prentice Hall

    Walley, P. (2010). Operations Management. Coventry: Warwick Business School

    Wikipedia [Online] (http://en.wikipedia.org/wiki/Silicon) (Accessed 25 July 2010)


    July 22, 2010

    Operations Management Lesson 4 Exercise

    Question:

    For a product or service of your own choice, complete a QFD matrix that relates customer requirements to design characteristics. Justify your entry.

    The Quality Function Deployment (QFD) is one of the best known techniques that can be employed in order to evaluate and improve the preliminary design and is typically used in design evaluation and improvement stage of design activity (Slack et al. 2006). In this exercise I will be using QFD to evaluate the design of Nikon camera D5000 released in April 2009.

    Nikon D5000 Digital SLR Camera with Nikon AF-S DX 18-55mm lens

    1. WHATS – definition & score of key customer requirements

    Slack et al. (2006) defines the key customer needs as WHATS. These represent the product essentials customer is looking for and values the most.

    When we scan camera customer groups it becomes obvious that different customers buy cameras for different purposes. While some are looking for small, inexpensive, easy to use and simple cameras producing quality pictures from holiday, others have requirements of professional photographers with number of special features always looking for best quality pictures and they are willing to spend more money.

    D5000 is aimed for customers of the second group. General customer ratings of cameras are mostly emphasizing strengths in photo quality, number of innovative features included, clarity and ease of use, performance of in-camera features, value for money, battery capacity, size and weight of the camera and also the overall look and design.

    Customer requirements

    Score (scale of 10)

    Photo quality

    10

    Ease of use

    8

    Innovative features

    9

    Design

    3

    Portability

    4

    Battery life

    5

    Price

    6

    Performance

    7

    2. Score vs competition

    Nikon D5000 can be compared to Canon cameras of similar range – Canon EOS Rebel T1i and Canon EOS Rebel XSi. Other camera producers do not compete in this range of camera products.

    On the scale of 1 to 5, 1 being the minimum and 5 being the maximum score, facts and customer ratings are resulting in the following picture:

    Customer requirements

    1

    2

    3

    4

    5

    Photo quality

    X

    Ease of use

    X

    Innovative features

    X

    Design

    X

    Portability

    X

    Battery life

    X

    Price

    X

    Performance

    X

    3. HOWS – definition and relationship to WHATS

    In listing the “HOWS” I am referring to concrete product dimensions with correlation to WHATS. This list boils down to parameters or items which are in weak to strong relationship to WHATS (Slack et al. 2006).

    HOWS

    Correlation

    Resolution

    Level of details an image on digital camera holds is directly affecting quality of pictures. D5000 features 12.3 effective megapixel sensor offering high photo quality.

    ISO

    Sensitivity of digital imaging system also directly impacts the photo quality. The higher the ISO the lower the picture quality. ISO of D5000 offers 200 – 3200 range, which is comfortable range for high quality photos. ISO also influences performance as it determines the length of exposure.

    Lens

    Lens directly affects quality of the picture, but it also has a relationship to ease of use and portability. D5000 features standard 18-55mm lens, which is sufficient for portraits, regular full figure pictures, however more demanding photographers have a desire for different lens range which requires changing lenses or investing. This further affects the portability as it is not convenient to carry around several lenses which are typically rather heavy.

    DSLR

    Digital single-lens reflex system allows the user to see how the picture will look like (much closer to final picture unlike with regular cameras). This feature, included in D5000, helps the quality of the picture and eases the use. It can surely be considered as an innovative feature and it influences design as it dictates the need for display (in case of D5000 it is a flip-down rotating 2.7” LCD). Apparently it also influences performance perception, as the live view in D5000 is rather slow.

    HD video

    An innovative feature on a camera which absorbs more battery energy.

    Operating system/software

    Links directly to ease of use, influences quality of photo and helps to improve the performance. D5000 contains fun-in camera retouching features allowing some minor image manipulation which is normally done with SW on PC. Therefore I can see weak correlation to innovative features.

    Case

    Camera case is relevant for product design and portability. D5000 is viewed positively for its compact body.

    Battery

    Battery quality affects battery life and performance of the camera.

    In all HOWS I have identified correlation to price. In optical and technological features I see strong correlation to price, while operating system/software, case and battery represent medium correlation.

    4. Technical evaluation

    Technical evaluation is carried out by scoring technical qualities of HOWS on the scale of 1 to 5 (5 being the best). The scores are representing user’s perception of the quality based on available technical parameters and their comparison to general standards.

    5. HOWS to HOWS correlation

    Comparison of HOWS to HOWS (Slack et al. 2006) is used for comparisons of interrelationships of product features. In case of D5000 this comparison shows that all the optical & digital features correlates to each other strongly positively or positively, while most of them would have strongly negative relationship to battery. In some instances there would be strongly negative correlation between features and case (e.g. lens and case – the quality and mechanism of the lens requires certain size and has been manufactured in standardized way, while there would always be a tendency to decrease the size of the case).

    5. Conclusion

    Applying the QFD matrix, as summarized in Figure 1 below, on Nikon camera D5000 SLR shows that product’s HOWS have mostly strong relationship to WHATS, which indicates that product features are addressing the customer requirements. Interrelation of HOWS represents a typical struggle of all the technological gadgets – delivering highly advanced technology product in a smallest possible format with energy that sustains for the longest duration at improved prices.

    D5000 is comparing to competition rather successfully with positive technical evaluation. Result of the QFD matrix analysis is in line with customer ratings and overall success of the product.

    Figure 1. QFD matrix of Nikon D5000

    References:

    Canon [Online] (http://www.canon.com/) (Accessed 22 July 2010)

    Nikon [Online] (http://www.nikon.com/) (Accessed 22 July 2010)

    Nikon D5000 [Online]

    (http://www.google.com/products/catalog?hl=en&q=d5000+nikon&um=1&ie=UTF-8&cid=8808454403248695864&ei=XtZHTOjwAYz80wTFrsW-BA&sa=X&oi=product_catalog_result&ct=result&resnum=1&ved=0CAYQ8wIwAA#) (Accessed 22 July 2010)

    Slack, N., Chambers, S., Johnston, R., and Betts, A. (2006). Operations Process Management. London: FT Prentice Hall

    Walley, P. (2010). Operations Management. Coventry: Warwick Business School


    July 19, 2010

    Operations Management Lesson 2 Exercise

    Question:

    Take two processes with different volume and variety characteristics. Profile these processes and establish the process choice and layout decisions they have taken. Critically appraise the design decisions taken.

    For the purpose of this exercise I have selected two air transportation services providers: Ryanair and Qatar Airways.

    Irish Ryanair is well known as low cost & no-frill airliner operating within Europe and Morocco more than 1,100 routes. It operates fleet of almost 250 aircraft. Qatar Airways is carrier based in Doha linking over 90 international destinations with fleet of 84 aircraft. It is a 5-star airline (rating given by UK consultancy company Skytrax, performing in-flight research services), one of only 6 airlines in the world indicating high quality of customer service. It also operates Qatar Airways Executive division offering private flights.

    1. Performance objectives

    Table below captures the analysis of performance objectives as defined by Slack et al. (2006).

    Performance objectives

    Ryanair

    Qatar Airways

    Quality

    Ryanair objective is not quality of customer service and it has been heavily criticized for many aspects of customer service quality.

    As already mentioned high rating of 5-star airline makes Qatar Airways one of the top airlines in the world with high focus on quality of customer service.

    Speed

    Communication with customers is brought down to minimum; therefore in the created communication channel airline reacts fast. Any non-standard requirements are answered late or not at all.

    Speed being part of customer service satisfaction is on priority list of Qatar Airways. Its Executive division offers bookings of flight only 4 hours in advance, which requires very fast response time.

    Flexibility

    There is little or no flexibility due high focus on minimal costs.

    Qatar Airways strives to provide unique customer experience. Flexible service is therefore also a priority.

    Dependability

    Transportation service is very punctual as any delays might drive extra cost for airline.

    Flight delays are minimal and only occur due to unexpected circumstances outside of airline influence.

    Cost

    High focus on efficiency in order to minimize cost and offer highly competitive prices to customers.

    Cost control is important, but not to the extent to compromise the quality of customer service. Margin expansion is achieved mainly by economies of scale and pricing model (especially for premium products).

    2. 4Vs

    There are four characteristics of demand which have a significant effect on how processes need to be managed (Slack et al. 2006). Let’s have a look at 4Vs of Ryanair and Qatar Airways transportation processes, visually captured in Figure 1:

    Ryanair has higher volumes than Qatar Airways, which is mainly determined by number of flights, fleet size and competitive prices. Thanks to the volumes and minimal costs Irish carrier can still benefit from economies of scale despite the low prices.

    Variety, on the other hand, is higher at Qatar Airways, since in 2009 company has launched its new charter division Qatar Executive. It is providing customers with exclusively premium travel experience. Qatar Executive’s customers can book an aircraft four hours before departure, 24/7 and check in 15 mins before departure. Regular Qatar Airways flights offer options of Business, First class or Economy. Entertainment system in Economy class is rated very highly. Ryanair provides only the service of continental transportation, Economy class only without any add-on services.

    Variation in demand is on higher side for both due to oil prices and seasonality.

    Visibility in both processes is fairly high, however due to the fact that business model of Ryanair does not establish clear communication channels, part of travel service is not visible to customers.

    3. Process type

    In terms of selected process types, as introduced by Slack et al. (2006), both airlines operate largely mass services process analyzed in Figure 2 below. The aim is to achieve economies of scale in order to maximize the margins. High number of passengers (specifically Ryanair) requires highly standardized service. On the other hand I consider Qatar Airways Executive division more of a Service shop process due to higher flexibility (although still limited due to nature of air travel and air travel procedures) and higher costs which are covered by premium prices.

    4. Process Layout

    Using Slack et al. (2006) definition of process layout I have come to conclusion that both airlines have selected Product layout to operate their processes. This enables them to handle large volumes of customer movements (Ryanair) and ensure all the security procedures are complied with. Even if smaller volumes of passengers are serviced (Qatar Airways Executive), the Product layout is still used, which is mainly due to the fact that airlines operate their processes jointly with airports operating massive amount of passengers on daily basis, therefore airlines have to adjust their processes accordingly. It can be handled on different quality levels increasing variety of service (e.g. Premium Terminal for First & Business Class passengers of Qatar Airways including nursery play area, spa treatment rooms, conference rooms, etc), however essentially the process layout is the same.

    References:

    Arabian Aerospace Online News Service [Online]

    (http://www.arabianaerospace.aero/article.php?section=business-aviation&article=qatar-s-executive-offering-goes-from-strength-to-strength) (Accessed 17 July 2010)

    Qatar Airways [Online] (www.qatarairways.com) (Accessed 17 July 2010)

    Ryanair [Online] (www.ryanair.com) (Accessed 17 July 2010)

    Slack, N., Chambers, S., Johnston, R., and Betts, A. (2006). Operations Process Management. London: FT Prentice Hall

    Waley, P. (2010). Operations Management. Coventry: Warwick Business School


    May 01, 2010

    ENVC Exercise 6

    Question:

    Your Great Uncle died and left you a company that you have neither the time nor inclination to run – hence you want to sell. Set out the options for which type of buyer might be interested and the differences in likely value that they might place on the business. Conclude by deciding which buyer you hope will buy it and describe why.

    My uncle has been running a small company with gardening services. Business was running generally well, that part of the country is mainly inhibited by middle and upper class families with big family houses and gardens. Several TV programs popularized gardening and created demand which has kept my uncle’s company busy over the last 5 years. There is one more company of a similar size providing gardening services in the area, however mainly large garden centers has started to offer the same services as part of their portfolio. My grand uncle’s company has 30 employees and in the management of the company there are several family members.

    First of all, given the fact that I am not interested to keep ownership of the company and my main goal is to sell it, I would need to run an assessment to understand the value and determine the price of the company. There are several ways how this can be achieved:

    • Price to earnings & Price to revenue ratio – this method is difficult to use in the given business environment and market as information for comparable companies are challenging to obtain. It might be possible to search outside of the area in different part of the country if there are such companies and such information available
    • Net value of assets – calculation in this method ignores the firm’s future profitability, which is a drawback, however it is worst case scenario and with the given situation of the company it can be realistic and useful. Growth potentials for the business are minimal and there is a threat and pressure from larger players which appeared in the market (garden centers).
    • Present discounted value of free cash flow – does not account for a risk of future revenue & cost performance. The current company’s performance is very stable, however pressure is expected for the future as mentioned above. Therefore outcome of this method might be on optimistic side.

    Probably a combination of methods above is best to determine the price of the company. Net value of assets in combination with present discounted value of free cash flow method are more suitable and realistic.

    There are several strategies and methods of exit. I am leaving out options of siphoning cash, partial harvest and exit, employee stock ownership plan and an IPO as these are more suitable for harvest rather than exit. My main focus is to sell the company as soon as possible on the best terms.

    • Transfer of ownership in family firms – as already mentioned there are also several family members employed in the company and some of them are in the management team. Transferring the business to family has its positives and negatives. Family owners would probably be more passionate and dedicated. Tradition would remain in the family. However, on the other hand: do the family member posses necessary skills to run the business? Wouldn’t the family members get into power and control games instead of looking after the future and health of the company? Some due diligence is required firstly. In any case I am in a tricky position now as if I don’t consider family members for the future of the company I am risking that they leave and form a new competition. From selling price perspective I am certainly going to face troubles in getting the best possible price. Family ties will not enable me to push for higher price.
    • Merger, acquisition or trade sale – in this option I am looking for generating value added, which would be either synergies or economies of scale, or both. This will secure that I am getting the best possible price, which would range from a low of the value of the seller’s independent business to a maximum of the merged value (seller and buyer) minus the independent value of the buyer’s business:
        • Selling the business to other small company operating in the region will not create many synergies as the operations and business strategies are very similar. It would help to create economies of scale to a certain extent as it would practically involve mainly selling the customer base. In this option I can push for a maximum price as for the competitor gaining my customer base and buying my business can be a matter of survival. If we don’t agree and I sell my newly inherited company to one of the large garden centers, my competitor is going to get under the price pressure as garden center do benefit from economies of scale. On the other hand, the company might be already aware I am desperate to sell, therefore can still afford to negotiate. The question also is: is my competitor financially viable to pay what I am asking for?
        • If large garden centers are interested in buying off, it would mean synergies as I am offering difference in business strategy based on personalized approach and tradition. This option offers both types of value added as at the same time economies of scale can be achieved. In terms of best selling price this situation is also not ideal, as they might be already aware of me being under pressure to sell, also they can chose to make an offer to my competitor and push the selling price down. In any case my business is interesting for them and I can expect the best selling price from this option.
        • I can also look into option of selling the business to companies outside of the region. Potential buyers would be gardening services who are planning to expand and grow to national level. They can also achieve both: synergies by gaining access to customers in the new region and economies of scale by enlarging their customer base. This option also can provide good selling price.
        • Management buy out­ – is an option with similarities to transfer of ownership to family, also because there are some family members in the management. Again some due diligence is required to determine the capabilities and plans of the management team. In this instance the selling price can get under pressure as the management team is fully aware of the situation and that I need to sell as soon as possible under the best term. Also, if I decide not to, management can take an option to leave and form a competition. In this situation I am not able to achieve the best selling price as management is well aware of the situation I am in and also they know the situation of the company very well.
        • Management buy in – is improbable option, however if it does occur I would need to understand the intentions of the buyer in the first place. I am risking the company falls into ownership of a completely new team, which is new to business with practically no experience and experts in management team. I assume the management team of the company would leave, or at least part of it. Selling price would be conditional to the intention of the new management, however it can be very favorable, although the word of me being under pressure to sell fast might have already spread.

        Conclusion

        It is not straight forward to determine the best option from above exit methods.

        As a first step I would have a word with the family members in the management to understand if they are interested in buying out the business and on what terms. I would certainly try to avoid situation that I lower the selling price for the sake of maintaining the business in the family, while the new owner would sell it off in a short period of time for a much better price. In cases of management buy out and buy in I would have similar concern. However, I would look into these options as a first instance.

        As a second best option I would negotiate with the garden centers or buyers from outside of the region, as here the best value added might be achieved.

        As a last instance I would seek agreement on a sale with competition. Least value added is achieved in this exit option.

        References:

        Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

        Bygrave W.D and Zacharakis A (2004). The Portable MBA in Entrepreneurship. 3rd ed. Hoboken, New Jersey: John Wiley & Sons, Inc.


        April 27, 2010

        ENVC Exercise 5 – updated

        Question:

        Your business is bringing out a new product which adds on to an existing product, that you already produce. You are keen to ensure that the take up of the add-on product is high but your manager needs to be assured that you are aware and mindful of anticompetitive practices. Set out the arguments you would give to your manager concerning what the business can and cannot do in this context.

        Example & Analysis

        For the purpose of this exercise I am going to use a real case of Monsanto vs DuPont about genetically modified soybeans. In May 2009 Monsanto sued DuPont claiming it was illegally selling new line of biotech seeds, which was add on to older soybeans developed under a license with Monsanto.

        Clearly in this case we have a situation where license and terms of license are the core of the problem. It touches more general issue of how much freedom do the licensees have to use the licensor’s product and develop their own products based on it.

        Licensor must make clear the limit of the license, so that licensee can be sure what they are getting. In this particular situation if we apply the logic of the antitrust law we end up questioning whether Monsanto had a right to restrict the license in such manner (provided those were the Terms & Conditions). If developing new products, as add on to the license property, is in favor and benefit of the market and customers, Monsanto might not have the right to restrict the license in this direction. Also considering the fact that in the area of herbicide tolerance technology in soybeans Monsanto has 97% of market share. In fact, the judge in this case kept this point opened and DuPont is challenging its licensing agreement with Monsanto on antitrust grounds.

        Another aspect, which is perhaps triggering the whole discussion, can be hidden in the license agreement. Licensor generally seeks some way to ensure that the licensee will use its best effort to exploit the property and maximize the licensor’s income. Should there be other than flat royalty agreement by which licensor would have an option to benefit from the sale of products based on its property Monsanto would probably not be so concerned with restricting the license. However, having a weak chance to benefit from sales of new add on products or having just a flat royalty payment, Monsanto is apparently losing money to recover their R&D costs. Even further, should Optimum GAT – the new product of DuPont replace Roundup Ready corn, this would have devastating effect on Monsanto.

        Genetically modified organism is a subject of controversy. Modification of biological states or processes that have developed over long period of time are seen by many as intolerable. Any GMO situation potentially outside of regulatory boundaries that surface to the public (whether intentionally or unintentionally) is attracting a lot of attention and will call for legal dealing. Such situations are and will in the near future cause public discussion with politic involvement. This has certainly also contributed in the case of Montsanto vs DuPont. Final rulings in such cases are creating very influential precedence and there will be therefore a lot of attention and political/public pressure in this case.

        From the above example it is clear that IPR protection with the license agreement and its terms and conditions protecting intellectual property are the key elements of the business relationship involving intellectual property rights. Protecting company’s IPR without harming the market and being accused of intention to monopolize it is sometimes challenging, probably not always possible. Monsanto existence is at stake.

        Coming back to our hypothetical situation described in the question, I would firstly ensure whether the add on product bares the same IPR as the original one. If not, it is vital that right level of IPR is secured, whether in the form of patent, copyright, trademarks, etc. It will secure that we are not going to lose on the market against the fast competitors and that we recover the invested R&D.

        There are also areas which need to be taken into consideration in terms of anticompetitive practices to avoid violation of articles 81 and 82 of the EC Treaty, should the situation occur in EU:

        • Price/Profits
        • Potential price reduction effect on consumption
        • Market impact of price or supply differentiation
        • Tie-ins negatively impacting competition
        • Overtake entry strategy – Trade purchase
        • Selling exit strategy – Trade sale

        The principles of US Intellectual property law is practically the same as in EU and many countries around the world are aligning to the same in order to enable the right conditions for companies to come and invest.

        IPR in the home country

        Observing situation with IPR protection in my home country (Slovakia), it is very much aligned to European Union standards as Slovakia is part of EU. Focus is currently on allowing faster electronic based processes around registration form, which is proceeding well. In general level of IPR protection is good and companies coming to invest to Slovakia are provided fair ground for their business.

        Summary:

        Selecting the right type of IPR (patent, copyright, trademarks) is a number one step to protect company’s future. In case of license agreement it needs to be ensured that it is supporting the IPR protection. Last but not the least, new products or add on’s strategy needs to be assed to ensure if it is legal, not in breach of antitrust law.

        References:

        Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

        Bygrave W.D and Zacharakis A (2004). The Portable MBA in Entrepreneurship. 3rd ed. Hoboken, New Jersey: John Wiley & Sons, Inc.

        Bioscience Technology [Online]
        http://www.biosciencetechnology.com/News/FeedsAP/2010/01/court-rules-for-monsanto-antitrust-case-remains (Accessed 27 April 2010)

        UPVSR Annual Report 2009 [Online] http://www.indprop.gov.sk/swift_data/source/downloads/annual_reports/r_2009.pdf (Accessed 27 April 2010)

        United States Patent and Trademark Office [Online] http://www.uspto.gov/ (Accessed 27 April 2010)


        April 24, 2010

        ENVC Exercise 4 – updated

        Question:

        There is the opportunity to lead a new team that will introduce a new (or substantially amended) service. Conduct a self-assessment exercise as suggested in the notes and outline how your sectoral, managerial and personal skills match the service.

        For the purpose of this exercise let us assume that the new services are being introduced by IBM Services organization and below self-assessment is therefore based on the current situation.

        Past

        Purpose & Ability:

        I felt satisfaction when I could convince people to do what I needed them to do in order to achieve a goal or task despite their original push back. The high moments of my life include achieving challenging goals on my own, e.g. self-sponsored work & travel. Low moments are on the contrary failures in moments when other people put trust in me or situation when people failed me while I have put trust in them. Criteria to measure my high and low are performance related: expectation –> achievement with element of trust.

        Personal resources

        Strengths

        Weaknesses

        Sector skills

        I have been working in IT sector in last 12 years and have a solid knowledge on it. I have gain most experience through support functions working with internal customers (brands, sales, etc).

        I have never worked with nor faced external customers. Most of my sector knowledge and experience comes from dealing with hardware and software, little with services.

        Management ability

        I have worked in purchasing area, customer support operation area and financial operation. I led and managed teams and was able to work through complex matrix organization collaborating with sales and brand teams, marketing, HR and others.

        I have a tendency to push and focus on execution mainly while underestimating importance of linking to a big picture. I find it difficult being able to translate strategic missions to small operational teams.

        Personal atributes

        I am reliable in execution, leading team towards goal achievement, determined and am good at using network of my peers and upward management. I feel particularly strong in being able to push execution through organization and functions bringing them together and making them work as a team. I enjoy communication with people.

        I have less sense for strategy, am weaker at pushing through my own innovative ideas and am sometimes unnecessary hesitant.

        In the results of my Belbin’s self-perception test three dominant types are

        ·        Coordinator

        ·        Monitor

        ·        Shaper

        As per Belbin’s team role profiles in Figure 1 picking from the strengths including focused, extrovert, analytical and makes things happen are linking to what I have shared in first part of the answer above. From the weaknesses I can link to not creative and intolerant, which are in a way also similar to above analysis.

        In the team I prefer to work with two other profiles based on Belbin, which I believe are complementing my profile and therefore working with these types of profiles can form a good team:

        • Implementer – I benefit from the drive of implementers and treasure their practicality which I sometimes lack. Their controlled behavior and approach to topics is fitting my preference for structured and organized workflow. Weaknesses are not generally contradicting my profile or I can handle them well.
        • Completer, Finisher – my weak spots is ability to plan well and efficiently carry out the tasks. These profiles are always motivating me and pulling me back to basics to stay focused on the main goal. Sometimes I find it difficult to manage the weaknesses of completer/finisher as they tend to worry too much and are not able to approach challenges with ease.

        Figure 1.

        Personal objectives

        Year 1

        Year 3

        Year 10

        What do I want to have ?

        I want to have reasonable financial securities.

        I want to have achieved level of experience sufficient for senior position.

        I would like to have my own business and have sufficient resources to enjoy working for myself.

        What do I want to do ?

        Gain position in the area of Services. Get back to people & team management.

        I want to be able to influence organization structure and cooperation in order to deliver better results.

        I want to run a small private company in the area of services or retailing.

        What do I want to be ?

        Services finance leader or leader of operations. Preferably I would like to have a role closer to customers

        I would like to be in an executive role.

        I want to be a leader of my own company.

        Summary:

        As the new services require determination and execution focus in terms of Purpose and Ability my personal profile matches the position. My experience in the sector is long term, but not “first hand” which is a disadvantage. The key drawback is no previous experience in sales area facing the customer and no services experience. When introducing a new service this might be a risky choice. On the other hand I have already experience from hardware and software operations, which can provide a background and network. Previously I successfully lead various teams therefore am fitting the requirement of leader capabilities. My strengths in personal attributes area are needed for the position, however strategic leadership is a weak spot.

        Belbin’s type analysis result (Coordinator, Monitor and Shaper) are valuable and relevant for the position. Should there be Implementer & Completer/Finisher in the team this will help to create a good working team.

        My personal objectives are matching the new role.

        Overall, the new position is challenging for my type of profile, however there are several matches with the requirements. Weaknesses can represent a problem therefore education and experience in stable services environment would be required.

        References:

        Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

        BelbinM. (1984), Management Teams: Why They Succeed and Fail, Oxford


        April 23, 2010

        ENVC Exercise 3

        Question:

        Discuss an idea for a new product that will create a new industry niche. To convince others of your idea you need to set out the likely scenario for how the new niche will develop in terms of competition, numbers of firms, and how firms compete over time.

        New Product

        I would like to introduce an idea and concept of relax drink RD. This type of drink should serve to calm down stress, sooth nerves and remove irritations. Beverage market is going through the boom of energy drinks. RD can use this “wave” to promote itself creating new industry segment on principle of opposite concept. Relax drink is made of natural products and contains no sugar or artificial sweeteners. Packaging comes in cans. RDs will be placed next to energy drinks on the store shelves in order for a customer to make a choice. It is a new choice which was not there before: Relax fast and easy. Customers with a need to increase energy level will not consider purchase between energy and relax drink. However, there are many customers who are buying energy drinks for image or taste while energy boost is a secondary element. These are the target customers of RD. Relax drink will parasite on customer base of energy drinks.

        Competitors

        The current competitors are seen in herbal tea producers, in different type of medication and supplements. There is no direct competitor selling this or similar type of products in the same format.

        Timing of the market entry

        RD drink will be first mover of its kind in a beverage market with a focus on Europe. However, considering the fact that it is not first in the area of beverages with “value added dimension” like energy drinks, it can benefit from advantages of late entrant (e.g. approach to marketing and distribution chain) and those of a first mover at the same time (benefiting from rapid growth of a new industry segment).

        Company & market development

        It is expected that after entering the market with new RD product its success and potential will attract new competitors appearing in the segment as it grows. Competitors can be large beverage producers launching new product line in the space of relax drinks, energy drinks producers might decide to extend their product portfolio and diversify it or there can be new small producers entering the segment as late entrants after the RD has proven to be successful. I expect the development of revenue and firms to follow the typical pattern for the number of firms and industry revenue as captured in Figure 1.

        It is difficult to assess how many competitor firms will be attracted, however in the long run the segment might consolidate up to 5 top firms which will dominate the market.

        Figure 1.

        Production of RD drink will trigger higher initial costs for developing formula, testing it and gaining required certifications in order to comply with high health standards in Europe, developing a can design, setting up production plants and establishing distribution channels. Costs will amount to high numbers therefore minimum efficient scale is high. Pricing strategy will be to set up prices on a higher than average levels as intention is to create image of a premium product with trustworthy content and effect. With higher than average prices and minimized cost based on economies of scale profit results can be maximized. RD drink is a homegenous product which allows for standardization, large production runs and mass production techniques.

        Barriers to entry

        Barriers to entry depend on a type of a competitor. For those who already are present in beverage industry introducing new product is not so costly – they can use economies of scopes. Most of the initial costs which are faced by RD drink can be avoided by these companies (e.g. production plants, distribution channels). In order to increase barriers to entry RD drink needs to emphasize uniqueness of formula, advertising and goodwill. For new start up companies entering calm drink segment barriers to entry are higher as they have to face the same sunk costs as RD, although they can also benefit from being late entrants.

        Market maturing

        In the initial phase of entering a new segment high growths are expected. Before competition enters RD can enjoy high revenues and high profits. In this phase RD will maximize benefits and gains of a first mover. It is important that in this stage company avoids burning cash and invest in facilities, working capital, recruiting and training in order to secure the right resources availability – company has to become an Adaptive Survivor (Day 1997). Also, from initial phase with management focusing on growth there might be a need for replacement in case the management is not suitable for phase with slower growth, as it is probable that original high growth slows down after the first company life cycle of 2-3 years.

        Relax drink segment is expected to undergo overshooting shakeout due to number of firms trying to exploit the same market opportunity, which is characteristic for new industries. It is vital that RD is prepared for shakeout and is able to benefit from it. Management needs to carefully consider amount of long term investments, expansion plans and mainly cash management as already mentioned. Effective cost & expense management and operational effectiveness will be crucial as the company enters the shakeout and revenue drop will trigger margin reduction.

        Provided RD is successful in a more maturing market it might consider expanding to new markets outside of Europe as once the market is fairly stabilized with few key players it will be difficult to gain further market shares. Such step can help to increase economies of scale even more, reduce the cost and increase the margins giving RD stronger position against other competitors. It might also consider extending or diversifying its product portfolio or aggressively acquire smaller companies – following the approach of an Aggressive Amalgamators, which will eventually cause a seismic shakeout (Day 1997).

        Overtime I would consider selling the business to larger beverage or food company. Niche segment can expand better in the larger corporation with strong brand name, which is difficult to gain for a smaller player.

        References:

        Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

        Day, G.S. (1997). ‘Strategies for Surviving a Shakeout’. CHarvard Business Review, 75, 2, pp 8-9


        April 20, 2010

        ENVC Exercise 2 – updated

        Question:

        There is a committee that considers strategic developments on the basis of business plans. It is concerned that it may be too risk averse and requires some new guidance on evaluating business plans. Having worked through the PORES how would you advise the committee?

        The first thing that comes into my mind when reading through the question is: who are the members of the committee? Are there actually members that have real business experience and have lived through success or failure? Or is there more members with little real life experience? Having a mixed and well balanced group can help to bring in new views in evaluation process. Especially at the point when numbers and facts from the papers just cannot tell more.

        Furthermore, who is preparing business plans? Is it necessary to re-assess the business plans structure and content in order to enable the committee getting more dimensional view?

        PORES analysis is an evaluation approach helping to assess the business opportunity on basic principles reviewing elementals. It can help the committee to understand whether the level of its risk aversion is appropriate. PORES views the opportunity as a dynamic one. Therefore should the committee be evaluating dynamic business plans, performing further evaluation will not bring in much more light and might be unnecessary and expensive. On the contrary, should the committee be working with static business plans or Dehydrated business plans (William D. Bygrave and Andrew Zacharakis 2004) PORES can provide the needed dimensions for further decision making. PORES tends to be a costly analysis, therefore it is to be used when the business idea shows signs of being viable. Dehydrated business plans can serve to provide initial conception of the business only.

        Before moving to PORES analysis however, it is also important to understand what is the committee investing in: the idea itself or the entrepreneur? While many great companies built a successful start up company on the breakthrough idea, often it is the entrepreneur who can build a success story on a simple idea. (Richard Branson).

        In order to determine where is the committee too risk averse I have selected an example of The Body Shop company and will apply the PORES analysis.

        The Body shop’s history is a classical example of how a company evolves and needs to search new directions and ideas in order to survive and be successful. Current perception of the company as socially and environmentally conscious (e.g. famous for its “products not tested on animals”) has not been there at the start up of the company, but it was used throughout the life of the company to enhance the differentiator.

        The Body shop started in 1976 as a small stand-alone shop for £4,000 Anita Roddick, the founder, raised. Idea was to sell natural-ingredient cosmetics and personal care products. The whole concept was based on simple-out-of-necessity principle.

        Is there a market for the product?

        • Is there a competition?
          The idea of selling natural-ingredient cosmetics in a specialized shop was fairly new to the market and is a main differentiator. Generally The Body Shop had to face very strong and well established competitors like Nivea and L’Oreal, famous and popular cosmetic brands.
        • Who are the potential buyers and how much are they willing to pay?
          By the format of economized packaging, handwritten labels with product information and simple shop design Anita targeted health conscious women who would build trust to the products and who don’t necessarily want to spend fortune for luxurious products without any proper content information. However, they are willing to spend more than average provided they get a value for it.
        • How many are there?
          Above specification of potential buyers implies that Anita’s customer were to be middle class women which are strongly represented in UK.

        Anita has identified a profit opportunity and there was a market gap she explored. The key uncertainty every potential start-up company faces is demand. Answers to the questions above are helping to determine the demand potential and therefore reducing the level of uncertainty.

        Can you acquire the necessary resources?

        • Anita has chosen testing her business idea on a very small scale, therefore production, distribution and financial & general management was not a challenge at that point. There are not many information available on this part of company operation at the time, but let us assume Anita managed most of the resources on the DIY principles for the sake of cost.
        • Marketing/Promotion?
          Company has from a very early start chosen not to use advertising as a form of marketing/promotion, but rather use press coverage and personal references.

        Low cost approach in all elements of the start-up business revealed good potential. Resources are vital element for every business opportunity. In my view it is necessary to break down the management of resources to rather detailed level. This can help to reveal any hidden risks. Having concrete answers on who, how and when is a must.



        Who else can acquire these resources?

        • At what cost?
          Acquiring the resources was relatively easy , there was no major obstacle for competition to enter in the same business
        • Variety, quality and quantity capability?
          The variety, product portfolio and quantity were planned at low levels at the starting point, therefore this was not of an interest for competition, however it could have been tested by large cosmetic brands as a new product line
        • Commercial incentive to exploit the same profit opportunity?
          As the starting business was small at that point larger brands had no incentives to exploit this field. As it has shown later, growing the business on the larger scale would bring in competitors
        • Intensity of competition with the new venture?
          It was safe to assume that at early stages competition was not to be intensive. With the growth of the business, this would become a serious threat.
        • Likelihood of cooperation with the new venture?
          Given the uniqueness of the idea and size of its realization it was not preferable. Anita’s preference was to run a small personalized business.

        Given the fact that the early Body Shop was looking for a small business with candid approach to customer relations which had the privilege not being threatened by fierce competition yet, it was preferable to run an independent start-up.

        It is recommended to run a deeper analysis on competition situation. Follow up questions like “What if...” are helpful to prepare a strategy. Not only we need to understand how the competitors react, but we need to ensure what steps can be taken if they do react. This can also help to reduce the overall uncertainty by discussing concrete situations and actions.

        The Body Shop company has proven to be viable and experienced interest in its products. Soon it arrived to a milestone of growth decision. Similarly PORES analysis can be again carried out with a focus on areas which need to be further stretched (resources) or analyzed & addressed (competition).

        Summary:

        There are several approaches how uncertainty about potential start up business can be reduced. Starting from the variety of people assessing the opportunity in terms experience level, the format of the business plan or focus of the evaluation (idea or entrepreneur). Getting the answers to principle questions of the PORES analysis can help to narrow the risk and provide further basis for decision making process.

        As PORES analysis is expensive once the committee understands the areas to look into in order to help them to be less risk averse they can switch to use of business plans whether traditional or dynamic ones. A use of specific check list on PORES principles can be helpful.

        References:

        Burke, A. (2006). Modern Perspectives on Entrepreneurship. Dublin : Senate Hall Academic Publishing

        Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School

        Bygrave W.D and Zacharakis A (2004). The Portable MBA in Entrepreneurship. 3rd ed. Hoboken, New Jersey: John Wiley & Sons, Inc.

        Funding Universe [Online] (http://www.fundinguniverse.com/company-histories/The-Body-Shop-International-plc-Company-History.html) (Accessed 21 April 2010)


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