Business Counselor Manual 2006

FOREWORD PKII Engineers, a consulting group, conducted a study of the SME Center in the country. One of the recommendations made by PKII consultants in their final report was to equip Business Counselors with the right skills to enable them to meet “the general business advisory needs of SMEs in the areas of marketing, technology, organizational development, and finance.” To partly address this concern, the Bureau of Small and Medium Enterprise Development (BSMED) decided to come up with a guidebook that will satisfy the basic information needs of Business Counselors. The Business Counselor’s Manual was prepared to effectively carryout the task of counseling. Apart from providing counselors with a working knowledge of the business counseling cycle, it represents an overview of the current status of the SME sector and over 30 diagnostic tools that can aid a counselor in his work. The Manual will be useful not only to DTI counselors but also to the growing number of full-time professional business counselors, whose counseling services have been valued and appreciated by the client entrepreneurs of micro, small, and medium enterprises (MSMEs). We acknowledge the University of the Philippines Institute for Small-Scale Industries for their assistance in the development of the Business Counselor’s Manual and the Bangko Sentral ng Pilipinas for their generous support.

iv

CONTENTS

The Business Counselor 1Chapter 1

The Counseling Profession 1 The Role and Scope of Work of a Business Counselor 1 The Demand for Business Counselors 3 Desirable Skills and Traits of a Business Counselor 3 Understanding the Client 6 The Engagement Period 7 The Business Counseling Process 7 Phase One: Making the First Contact 8 Phase Two: Studying the Client 10 Phase Three: Diagnosing 14 Phase Four: Working the Plan 18 Writing a Report 21 Professionalism and Code of Ethics 21

The Philippine SME Sector Today 25Chapter 2

Philippine SMEs: An Overview 25 The Philippine SME Sector Defined 25 Distribution of SMEs per Industry and Category 26 Geographical Concentration of SMEs 29 Employment in SMEs 30 Key Issues Facing SMEs 31 Low Competitiveness 31 Productivity and Structural Limitations 31 Limited Access to Fund Sources 32 Issues on Access to Markets 32 Other Concerns 33 Law, Policies, and Regulations in Support of SMEs 34 The BMBE Act of 2002: For the Promotion of Microenterprises 34 The Magna Carta for Small Enterprises 35 General Banking Law 36 Rural Bank Act of 1992 36 Sulong Program 37 Labor Training: The Dual Training System & TESDA Acts of 1994 37 Others 37

Initiating Changes Chapter 3

Problem Solving and Decision Making 39 Define the Problem 40 Gather Information 40 Develop Alternatives 41 Weigh Alternatives 41 Develop a Plan for Implementation and Monitor the Solution 42

i

Introducing Change 42 Any Change Should Add Value 42 Managing Change Depends on Its Complexity 43 System Must Be Ready 44 Remove Barriers to Change 45 The “AIDA” Prescription 47 Overcoming Resistance to Change 48

The Basics of Starting A Business 51Chapter 4

Identifying Business Ideas 51 The Entrepreneur’s Persona 51 The World Around Him 52 Screening Business Ideas 54 Appraising Business Projects 56 Why Appraise a Project? 56 Registering a Business 65 Where to Register 66 The BMBE Law 70

Business Counselor’s Tools 71Chapter 5

Classic Diagnostic Tools 77 Cause and Effect Diagram 77

Chapter 6

Charts and Graphs 80 Cost Benefit Analysis 84 Decision Tree 86 Flowchart 89 Force Field Analysis 92 Gantt Chart 95 Linear Responsibility Chart 97 Pareto Analysis 99 PERT/CPM 102 Procedure Chart 105 Relations Diagram 108 Scatter Diagram 110 Stakeholder Analysis 112 SWOT Analysis 115

ii

Marketing Tools and Strategies 119Chapter 7

Channels of Distribution Chart 119 Five Forces Analysis 122 Positioning Map 124 Pricing Strategies 126 Product Life Cycle Strategies 134 Product Strategies 136 Promotion Strategies 138 Sales Forecasting Techniques 140 Value Chain Analysis 148

Production Enhancement Tools 151Chapter 8

Control Charts 151 Economic Order Quantity 155 Flow Process Chart 157 Just in Time 161 Routing Diagram 163 Run Charts 165 Simplified Layout Planning 167 Value Analysis and Value Engineering 170

Financial Tools 173Chapter 9

Break-even Analysis 173 Common Size Financial Statements 178 Financial Ratio Analysis 180 Internal Rate of Return 184 Make or Buy Decision 188 Net Present Value 190 Payback Period 193 References 195

iii

THE BUSINESS COUNSELOR

Chapter

1

THE COUNSELING PROFESSION

Counseling as a profession traces its foundations to guidance counseling in schools and social work with juvenile delinquents. The history of counseling, therefore, is a history of helping other people. It helps others through advice, assistance or support on the way towards achieving a goal, and providing some form of intervention to alleviate the status or condition of a person or persons, provide some remedy, or correct certain practices. Two parties are essentially involved in counseling. One party is the counselor. He is the one who gives the advice using his expert or specialized knowledge. The other party is the client. In business counseling, the counselor has expert knowledge and skills in business management. He may be a business administration/management professor in a university, lecturer and trainor on the same topics, or manager, supervisor, president or chief operating officer (COO) of a company. The client is the entrepreneur, firm, association, or group. The counselor attends to the client’s needs giving some advice and recommending possible courses of action. The counselor may deliver his services in various modes: through individual personal counseling, or through group counseling, and/or via some crisis intervention. He may conduct his advisory services with the client through interpersonal face-to-face communication, the telephone, cellphone, the internet, or some combination of interpersonal, mass, and electronic media. THE ROLE AND SCOPE OF WORK OF A COUNSELOR Counselors may work either as a development worker or as professional counselors. A counselor functioning as a development worker usually works for an agency engaged in the promotion of entrepreneurship and business creation. Many of the development worker type of counselors are employed in government institutions and non-government development agencies or organizations supported by Overseas Development Assistance (ODA). If you are a government employee, you are considered a development worker who seeks clients in line with a national program or else you are a front liner assigned in a government-run business development service (BDS) office. Professional counselors, on the other hand, are organized to do business by rendering consultancy service for a fee. Professional counselors usually come from the ranks of development worker counselors. They can be development workers full-time or most of the

2 BUSINESS COUNSELOR’S MANUAL

time in the day as they work with the government agency they are connected with, but for certain hours they become professional counselors as they move on to a part-time job where their work is precisely business counseling. On the other hand, there are now people who are full-time professional business counselors – and their ranks are increasing as the profession of business counseling gets to be valued and appreciated by the client entrepreneurs of micro, small, and medium enterprises (MSMEs) and as more stakeholders in government and in the private sector realize the need for business counseling services. As a business counselor, you take on diverse roles: whether as change agent, coach, or educator. You are a change agent because you bring about a positive change in the business, measured in concrete outcomes of productivity and profitability for the client. The more important thing is to be able to bring about behavioral change in your client. Inevitably, you are also a coach who influences the way the client should carry out the business operations. The coach is tasked to bring a higher quality of life for the client. Probing questions that you ask encourage the client to think of new ways or new insights and perspectives. As coach, you give feedback to every discussion point so as to gauge how well (or poorly) the client is doing. When positive feedback is earned, the role of a coach is to support the client in taking on new challenges for sustainability and growth for his business.

You are also an educator because you are an advocate for development by passing on to a client data and information on development out of which new perspectives are shaped. Recognizing the enthusiasm and behavioral change in the client, you facilitate the acquisition of more information for the business to be competitive by providing sources of information. If the client does not know how to get the data, you assist him for the first time while teaching him how to do it by himself the next time.

Counseling should be distinguished from activities which are akin to it such as information dissemination. The following are not considered counseling activities:

When information or data is simply handed/provided, more accurately called selective information service;

When a client is referred to another person/expert/agency without the benefit of interacting with the expert who may supply the solution to the need; and

When a client is given formats or model documents as reference.

CHAPTER 1: THE BUSINESS COUNSELOR 3

THE DEMAND FOR COUNSELORS

Business counselors are in demand or are engaged by MSME clients for many reasons. The more progressive businesses would like to have an impartial opinion to assess the existing situation, determine critical areas of operations, and obtain recommendations for improvement. Clients know that they have limitations and constraints that can be better analyzed by counselors who have the knowledge, expertise, and skills. Instead of employing specialists on a full-

time basis, counselors are engaged on a short-term or temporary basis. Many times an entrepreneur would like to know the soundness of a major decision, hence he wants someone who can agree/disagree or even challenge a course of action. Or he needs somebody to render professional advice for the adaptation of new technologies and approaches. On the other hand, engaging a counselor at the entrepreneur’s volition is not a general practice. The services of a counselor are usually sought only when the business is in trouble or when a government program is launched. What business counselors find baffling is the fact that those who need assistance most are the ones that shy away. In fact, experts observe that the more successful businesses are the ones who employ counselors. A good number of counselors working in government institutions possess the expertise and are motivated to assist small and medium entrepreneurs, and yet MSMEs particularly the smaller ones, do not seek their assistance when the latter can render services for a minimum fee or even for free. DESIRABLE SKILLS AND TRAITS OF A COUNSELOR

Not everyone can be a business counselor. To be a business counselor you must have special skills and traits that make you a cut above the rest.

Skills • Intellectual and technical competence in at least one business function. You may be a

generalist but you must have an in-depth know-how in either marketing, production, trading, finance, or law. You must continuously seek knowledge and hone your skills. Intellectual competence enables you to know why the problem arose, applying the right diagnostic tools so that the advice on what to do, when, by whom and how can it be done are accurate. You must continuously seek knowledge and hone your skills.

• Good oral and written communication skills. These skills will enable you to articulate your wide knowledge in entrepreneurship and business improvement. The knowledge stems from the acquisition and processing of data/information and readings. The belief in life-long education makes you a perennial student not only of the academic type but as practitioner. You participate in conferences, fora, and the like. Your skills are honed through the continuous study of concepts and practices.


• Objective and impartial. Practice good judgment, be objective or impartial and unemotional to be able to give unbiased advice to clients. Detach yourself from personal matters to be objective in dealing with business problems.

• Professional in delivering your commitments. Be timely in submission of reports, studies, and in attendance in meetings.

• Interpersonal skills. Be skillful in interpersonal relations as dealings will not only be with the client but also with his employees and at times with investors/funders.

• Creativity. Your wide knowledge and purposeful thinking lead you to creative solutions.

• Analytical and problem-solving ability. Necessarily, you must have an analytical mind and possess problem-solving abilities, for how else can you help a client if the diagnosis is erroneous.

• Ability to synthesize. This refers to the ability to look ahead, relaying to your client, and developing your client’s skill to plan.

• Confidentiality. Confidentiality forms the core of professional traits. “What the company owns must be the company’s.” Learn from experiences but never identify the client when using a particular experience to teach a client. Business counseling is a type of service where professional ethics demands discretion about client’s affairs. Once a cordial relationship is forged between the counselor and client there is no room for apprehension because motives are made clear. It is a win-win relationship. With this relationship it is fairly easy to gather data and information to better analyze the business situation.

• Skill of limiting engagements. An effective counselor does not count the number of clients nor the fees earned but rather the number of clients with whom relationships are forged that result in the improvement of the business.

• Special skills are needed at different stages of the engagement.

At the beginning of the engagement: o Listen and understand your client’s needs. o Understand the situation and isolate the causes and effects. o Self-disclosure is important so that the client will understand where you

are coming from.

During counseling work: o Engage in active listening. That is, listening with a questioning mind,

asking yourself questions like: Why did it happen? Why did he act the way he did? Can the situation be reversed?

o Think analytically, to determine/isolate factors that led to the problems and be able to formulate alternatives.

o Make the most of your interpersonal skills. You must know how to deal with the client and his employees so that you can extract information from which a good alternative can be developed.

o Communicate well. Communication skills require oral proficiency so that questions are understood by the client and his employees and right answers are given. Written communication skills are equally important because the SME client may not have the time to read long reports. Concise reports, with bottom line figures, are better appreciated.

o Manage time well. Time management is manifested in approximating timelines prepared in the beginning of the contract.


Towards the end of the engagement:

o Use professional skills in conveying the message to the client and employees in such manner that they see clearly the cause(s) of the problem(s) and the concomitant factors that will affect operations.

o Leave a client with an increased capacity to handle pressing issues of a similar nature. When he is doing well, a “pat in the shoulder” will work wonders. When he is doing poorly, a “slap in the back” done in jest will convey the message. Be sure the slap is accompanied with a smile then correct him by giving him alternatives.

o Provide feedback without making the client feel inferior. It is also making sure that what is acceptable (to both counselor and client) and what is not are properly accepted.

Traits • You are motivated towards service and want to share knowledge and skills with

others. You may have little or no experience in managing a business and have no desire to enter into business because counseling is your business.

• Be honest or truthful. Where you have doubts or do not know the response to a situation be honest to say so. But search/look for the information/data that will allow you to address the issues at hand.

• Positive criticism is a trait that distinguishes a good counselor from one who is not. When the client is obviously wrong and his actions are leading to a disaster, you are obliged to call his attention, explain the consequences, and let the client make the decision.

• Good physical and mental health. A client will not want to interact with one who is sick or cannot focus on discussion items. The rigors of work require physical and mental exertions. A sound mind and a healthy body augur well for stability of behavior and action. This is manifested in consistency of behavior with the desire to help the client do better.

• Etiquette and courtesy. You should know how to act and respect a client. Actions like slouching, arms akimbo, finger-pointing, and holding head high are no no’s. The intonation and voice decibels also manifest the character of the counselor.

• Self-confidence. Believing that one has the knowledge and skill to help a client in solving his problems is a must for all counselors.

• Integrity. You are expected to deliver on your commitments. Excuses, pretensions, and negligence have no place in counseling.

• Independence of mind is necessary but do not be obstinate if you know that you are not accurate or incorrect.

• Psychological maturity. You should know when you have the competency to help a client. As a counselor you must be honest to acknowledge your limitations by taking in another person/expert in the team or not entering into a counseling engagement.


UNDERSTANDING THE CLIENT Before you accept an engagement, you must have an accurate reading of your potential client. Understanding your client is a skill that is developed through experience. The more clients or interactions you encounter, the better you will gain insights in assessing clients, his personality, and aspirations. Your major concern is that at the end of the contract, your client is in a better position and can do better. You have to leave him exhibiting attributes of a successful entrepreneur. How can you tell if a client can be successful? He must have exhibited good business sense, which requires one to have the drive for growth. A good client is one who is highly motivated and possesses some knowledge and/or skills needed in the business, be it in manufacturing, trade or service. With micro enterprises comprising 90.6% of the registered businesses in the Philippines (Source: SME Development Plan), clients will most likely be micro entrepreneurs. Studies of the University of the Philippines Institute for Small-Scale Industries in the 80s reveal that majority of the entrepreneurs completed their secondary course. A similar study conducted in the 90s shows that many entrepreneurs are college graduates. This proves that more and more entrepreneurs see formal education as an important factor in entrepreneurship. Knowledge acquisition provides the necessary analytical and strategic skills in marketing, production, and finance. The small entrepreneur is a doer and action-oriented. He may be averse to lengthy academic discourses and thick reading materials but if given reading materials coupled with instructions, s/he will not stop reading and do as instructed until the work is completed. Below is a parallel analysis of client’s personal and entrepreneurial traits which are indicative of his business sense.

PERSONAL • Achievement

drive

BUSINESS SENSE ENTREPRENEURIAL • Growth motivation • Intuition • Opportunity - seeking • Perseverance • Risk tolerance • Entrepreneurial

management

• Adaptability • Independence • Decisiveness • Energy • Social skills

Fig. 1.1 Personal and Entrepreneurial Traits of Clients Indicative of a Business Sense

1. The client’s motivation for growth is usually accompanied with the drive to make things happen.

2. The client’s alertness of potential product/service innovations and markets and ability to seize opportunities, convert them to sales, and ensure repeat orders. His “gut feel” could be traced to his knowledge of the industry.

3. The entrepreneur knows that his products/services have distinctive features/characteristics that make them different from those in the market. His goal is the satisfaction of the customer and so he perseveres to improve his products and services by exploiting every opportunity to do so.

4. The client makes hard decisions to the point of self-sacrifice because he is determined to correct a situation and do better.


5. Running a business is a round-the-clock operation so that there is no room for infirmities. He delegates some authority to his employees firstly because he is not everywhere. Secondly, decision-making should be at all levels. Thirdly, he is not forever in the pink of health. A successful entrepreneur recognizes that there are risks for every decision. He must be able to tolerate minor mistakes (committed once) and be able to point these things to the decision-maker(s).

6. The client must possess interpersonal skills to make things happen without sacrificing innovation and adaptation. He must be able to correct and/or introduce change in spite of resistance.

THE ENGAGEMENT PERIOD Counseling contracts have no hard and fast rules about how long the engagement period lasts. But there is such a thing as an effective counseling contract. You must work out your exit from the beginning. The idea is for you to help clients help themselves. As a counselor, you should never manage the business of a client. You job is to merely guide. Leave the decision-making to the client. For purposes of determining fees, one must keep track of the time spent or invested in a client. Preparatory time (time spent to gather information to prepare the proposal) must be considered separately from time spent for counseling but attributed toward counseling time in reporting. Travel time should not be included in counseling time but should be tracked separately. Hence, TIME (spent per client) = Preparatory time + Counseling session + Travel time

THE BUSINESS COUNSELING PROCESS Understanding the process enables you to render counseling services by using a step-by-step approach. Others may argue that there is no need for such an approach. Experience shows that a planned work, regardless of the size of firm, will be very helpful in carrying out the job. This part of the manual will deal only with the process not the substance of the counseling service.


PHASE ONE: MAKING THE FIRST CONTACT This is the period when you meet the client for the first time for a possible engagement.

When a prospective client approaches you, the first meeting is usually a “getting to know you” session. You normally would like to know more about your client-to-be. When a client wants to confirm the soundness of his major decision or needs somebody to render professional advice for the adaptation of new technologies or approaches, you must be prepared for a longer counseling session. In this case, the client recognizes that he has limitations in time and skills which can be better provided by one who has the relevant knowledge and expertise/skills. The scenario is different in the case of government-employed counselors. When it is the counselor and not the client that makes the first move, things can be misconstrued differently. The assistance of the counselor may be perceived as motivated by other considerations instead. Suspicion or fear pervades in the first meeting. Development workers are trapped by the desire to help MSMEs. The motivation to change on the part of the client is often unintentionally overlooked in the desire of the development worker-counselor to improve the operations of the business. A development worker who visits an entrepreneur who does not value his counseling services as worthwhile should end the visit and look for other clients. Experience shows that some MSMEs who shun government-employed counselors only realize their value when the firm is in trouble. The entrepreneur will then seek counseling service. He will only approach you when he is able to confirm that you were able to bail out another entrepreneur in trouble. In the first meeting you forge a relationship built on trust and credibility. Especially in counselor-initiated engagements, never hint to a prospective client that a problem exists in the business. This can be misinterpreted as forcing through and a ploy to try to make money. The prospective client is likely to think: How can he identify a problem without even going through the firm’s operations? The first visit will not end with a contract. It is just establishing rapport with the client. What is important is that you are able to determine if the potential client is motivated to change. Prior to the counseling contract, there could be at most two more visits. Counseling a group is more challenging because it is not often clear who has what kind of problem. When faced with this challenge, at the first encounter, explore the reason for the engagement, determine willingness of members to be assisted, and identify who among them can be potential clients. Preparing the counseling proposal. If there is no previous working relationship but some chance of a counseling relationship is possible, the next step is the proposal preparation. Then you need to have a deeper knowledge of the business situation. In this regard, a preliminary fact-finding is imperative. Both parties must agree on the scope of work. The estimated time should not exceed three work days for small enterprises. On his part, the client must make available some base documents and authorize the interview with key persons in the company. Familiarize yourself with the operations to get an overall assessment of how the company is faring in terms of efficiency of operation and net revenues. How fast diagnostics are carried out will depend upon your experience and size of the firm. When you are able to isolate the cause of the problem, list the possible areas for investigation.


Enumerate the approach you will most likely take indicating possible deviations as more data come in. The proposal consists of four parts. The technical proposal details the intended work and general approach. For big complex development projects, this is called the Inception Report. The second part is identifying the counseling team and their respective areas of responsibility. The hierarchy of command should be made clear, delineating the role of the senior from the junior counselors. The third part is the resume of the team wherein the team’s counseling experiences in similar businesses are enumerated. This section should highlight the relevant experiences of the team members. It is a practice to include the terms of reference (TOR). The financial proposal may be a separate document where details on the cost of doing the work and the timetable are presented. Formalizing the Relationship. No matter how small and simple the operations of a potential client, an engagement agreement should be prepared. It can be in the form of a letter of agreement where the client will affix his signature in a space labeled as “conforme” or an “I accept” line to signify acceptance of terms. A formal contract or memorandum of agreement (MOA) is another form. The third kind is a verbal agreement which is a result of a previous relationship where mutual respect and trust for each other has been established.

CONTRACTCONTRACTCONTRACT

Contract writing is sometimes considered an awkward step for the client and government-employed counselors but it should be done. The contract binds the counselor and the client by the mutually agreed TOR which spells out the work that will be carried out. Before signatures are affixed to the document, each item in the contract must be discussed and stipulations mutually understood by both parties.

- Unpublished training material “Effective Business Counseling” - Manitoba Institute of Management

“Formulating the agreement or the contract can be looked upon as a negotiation between buyer and seller in which there is an exchange of service for fees. The counselor’s fees are often a function of hours worked and reputation, experience, skill and knowledge. The counselor’s product is often advice, guidance, and direction, sometimes in written form, sometimes not. This makes for a very nebulous exchange in which it is easy for one or both parties to feel like they win or lose. As in any negotiation that results in a continuing relationship, both parties must win. It is essential that the client feel that s/he is getting good value for the time, effort and money in the relationship. It is also essential that the counselor feels adequately rewarded for the contribution. An imbalance in the exchange can lead to feelings of guilt or victimization, and either is conducive to an effective counseling.”

The contract usually contains details on the following:

• Areas for investigation. These are the specific matters that require attention and/or improvement.

• Process. This refers to the chronological steps to be undertaken in data gathering and analysis leading to causes of problems or critical areas for decision-making. It is the


step-by-step procedure of agreeing who will do what part of the plan. Can the process be terminated any time? What are the possible signals or factors for termination? There must be mutual agreement as to who will decide the termination.

• Expected outcome details the expectations and deliverables. It is the result of the investigation, the implementation of recommendations and/or the change of policies supporting the recommendations. Others may consider these as the impact of the counseling services. Some of these outcomes are manifested in terms of increase in profitability, productivity improvement, raised employees’ moral, etc. The question that should be answered is “What will make the client happy and what will make the counselor satisfied?”

• Delineation of responsibilities identifies who will do what part of the counseling contract. In the case of manufacturing firms, the operation may have to be simulated so that data can be gathered without disturbing the operations.

• Present an activity chart, which is a graphical presentation of the planned activities. It indicates how much time will be spent for each activity and milestones. For accurate timing and logical sequence of activities, the Gantt or the precedence charts are very convenient.

• Financial aspect. This includes cost of the counseling service (i.e., billing schedules, payment procedures, and expenses to be incurred).

PHASE TWO: STUDYING THE CLIENT In this phase, you have to know your client far better than in Phase One. In this case, it is useful to think of the four development levels of a client, classified according to ability and willingness to change. A client at Level One, for example, has low skills and low in getting the task done.

LEVEL ABILITY (CAN) WILLINGNESS (WILL) One Low skill Low interest in the task Two Building skills Has interest in the task Three Adequate skills Lacks confidence to perform the task Four High skill Motivated to do the task independently

The style of counseling matters particularly in this phase. Counseling style is nothing else but the behavioral pattern when interacting with a client. There are two major types of counseling behavior: facilitative counseling and directive counseling. A counselor exhibits facilitative behaviour when there is two-way communication and the client’s inputs and participation are encouraged in the process. Directive behavior is observed when one-way communication prevails with the counselor controlling the actuations and influences the actions of the client. A seasoned counselor uses a combination of facilitative and directive behaviors. The idea is to reduce tension between him and the client as counseling progresses. As time lapses, tension is lowered as both parties become comfortable with each other and the work is completed with no disagreements/friction. You and your client will have a win-win feeling towards each other.


The improvement on the client’s development level client is the result of your counseling style. If you adopt a directive behavior, you may never lower the tension between the two of you. The results will either be: Client will simply rely on you, thus remaining at Level One, or he will not be able to help himself without you by his side But given the proper motivation and posturing, in a facilitative behavior, you will be able to raise his willingness to perform (WILL) because he has the ability (CAN) to acquire adequate skill. Thus, counselors must develop the skill to combine both facilitative and directive behaviours suited to their clients’ development levels.

Relationship

TaskTENSION

TIME

Relationship

TaskTENSION

TIME Fig. 1.2: Facilitative and Directive Behavior.

Planning the work. Details of activities have to be laid out systematically. For a realistic work plan, the SMART formula is commonly used as a standard, that is, the plan must be:

Specific Measurable Achievable Realistic and Time-bound

Major factors to be considered in preparing for the work plan are as follows: Organization 1. The owner/investors of the business must spend time for meetings and interviews. 2. Top/key persons should participate because they will be the sources of information and

the work requires interaction at all levels of the organization. Also, the key officers should act as channels of communication among employees and/or investors.

3. Employees are informed of the presence of the counselor/counseling team. 4. The culture and biases of the firm must be looked into. Resource materials 1. Determine what facts are required for the investigation. The reason for the need for data

must be discussed with the client. 2. Express the details of the required data as to criteria, content, depth, and time period. 3. Request access to basic documents. Data-Gathering 1. The interview is asking the right persons the right questions or records. A well-planned

work recognizes the value of the time of the interviewee. Time and place of interviews must be arranged before the actual interview. The counselor prepares his questions to ensure accurate responses and optimize time. After the interview, the notes are read to the interviewee to confirm responses.

2. Observe meetings, operations, and any interaction considering interpersonal and intra group relationships.

Meetings must be observed according to the following:

• Is there or is there no agenda? • How was the discussion conducted? Two-way? Moderated?


• Any dominant personality respected? Abrasive? Etc. If a visit to the firm is part of the counselor’s observation, you need to request

management to see to it that employees at the workplace are informed beforehand that an observer will be around. The presence of an observer should not distract them and that they should carry on with their activities at normal pace. You observe employees’ attitude and behaviour towards their work, how instructions were given and accepted, and how work is done.

In all interactions, especially in a face-to-face situation, make mental notes because

clients are distracted as you write notes and consider this as a sign of disrespect. However, if there is too much to be absorbed inform the person to allow writing of important notes. It is important that at the beginning, the person is informed that important data will be written. You must develop the skill to synthesize and write out your mental notes just as the interview is completed.

3. A survey may be needed to get primary data or to confirm findings, the purpose of which

must be made clear to the client. The survey instrument must be approved by the client. The survey must be short and conducted at a time that will not interfere with the production or operations of the firm.

4. Records analysis is resorted to when gathering data from files, reports, and documents.

You must develop the skill to determine what basic documents and records will give accurate data.

Other factors 1. Accountability: When preparing the work plan, responsible persons and level of authority

are written. 2. Limitations and potential constraints are factors that might affect the quality of

counseling. There are distractions that are inevitable as there are interferences that must be tucked into the schedule of the counseling engagement. Some of these are:

• Quality time of the client due to family affairs, participation in organizations, etc. • Potential constraints like holidays, personal trips of key persons, absence of data,

access to confidential files/information, client’s personal views which may run counter to the counseling team, personal problems

3. The work plan must answer the following questions: WHAT is to be done? HOW will it

be done? WHERE will it be done? WHEN will it be done? and WHO will do WHAT, WHEN, WHERE and HOW?

The work plan should contain the goals that the counseling engagement is to achieve. Such goals must be as “SMART” as the work plan is and should be consistent with the vision and mission of the company. “WHAT is to be done” is an enumeration of areas for study and activities to be undertaken, in both chronological and simultaneous order, to complete a task. The work must be divided into tasks for easy monitoring and measure.


• Sales performance• Customer feedback• Marketing mix

• Financial records maintained• Financial Statements• Flow of documents• Investment flows• Financial analysis

• Manpower Utilization• Machinery Utilization• Technology• Space Utilization• Plant Layout• Production cost

• Vision-mission, goals • Organizational aspects• Decision makers• Records

MAJOR AREAS OF

STUDY

• Sales performance• Customer feedback• Marketing mix

• Financial records maintained• Financial Statements• Flow of documents• Investment flows• Financial analysis

• Manpower Utilization• Machinery Utilization• Technology• Space Utilization• Plant Layout• Production cost

• Vision-mission, goals • Organizational aspects• Decision makers• Records

MAJOR AREAS OF

STUDY

Fig. 1.3: Major Areas of Study

“HOW will it be done” is selecting and using the appropriate tool to examine/study a situation to accomplish the tasks. For example, solving the problem of productivity can be studied by observing the work force using work sampling to record their direct and indirect work. “WHERE will it be done” specifies the place/location of the study. It could be within the organization, building or business function (marketing, production, finance, or general management). It could also be outside of the firm. “WHEN will it be done” can be best presented in graphical form using either a Gantt chart or precedence chart. The presentation should show the series of activities and their relationship. Establish milestones and celebrate when the tasks are completed satisfactorily. “WHO will do WHAT, WHEN, WHERE and HOW” identifies the person who will be responsible in carrying the task to completion. Decision-makers are also identified at all levels so that there is participation in problem-solving and improvement formulation. The secret of successful engagement depends on the attitude of the implementers. If there is participation in the process, there is ownership of the improvement which will yield better outcomes. Among the activities that must be observed and considered when preparing the timetable is the conduct of meetings and/or feedback sessions. Since the business has to move on, you must have meetings and feedback sessions, the schedules (and place) of which are either pre-determined or mutually agreed upon between you and the top person. It is at these meetings that you prepare reports and discuss causes and possible course(s) of action.

4. After using confidential files/information, you must return the same to the owner and/or

top management only to avoid leakage.


PHASE THREE: DIAGNOSING This is the first step in operationalizing the counseling contract. A good diagnosis will lead to effective solutions. The counselor identifies the forces causing the problem by using tools and techniques that s/he is adept at to get good data. These are analyzed in the context of the vision, mission and goals of the business. At this stage, the counselor is guided by the big question - Is there still a chance to do better? - broken down into the following task questions:

Where is the firm now? What seem to be the problem(s)? What are causing the problems? Where does the firm want to go? What is the nature of the gap between the current situation and the desired state? What are the forces that block the progress towards the desired situation? What is the client’s ability to solve the problem?

According to the International Labour Organization (ILO), there are five principal characteristics of a problem:

1. Substance or identity is a statement of a situation like increasing manufacturing cost, low morale, decreasing sales. The fact is these are the manifestations of a problem. There is a root cause.

2. Organizational and physical location refers to the unit in the organization where the

problem exists, which areas are affected and how widespread the problem within the organization.

3. Problem “ownership” refers to the people who are affected by the problem and are

willing to solve it. They may be the supervisors, administrative staff or managers or even the rank and file.

4. Absolute and relative magnitude ranks the importance of the problem in terms of

working hours, money lost, and people who own the problem. If problems are traced at the higher echelon of management then damages or adverse effects can pervade throughout the firm.

5. Time perspective is the frequency of the occurrence of the problem and whether it is

increasing or decreasing. If occurrence is intermittent and at long intervals these could be operational dislocations not necessarily problems. But if the effect is decreasing productivity and sales performance, even if recurrence is infrequent, then the problem must be dealt with it.

At the beginning of the diagnosis, hypothetical cause(s) may be assumed. As data and information are gathered, these hypotheses will either be negated or confirmed. Set it aside for the meantime but be on the look out for symptoms. At the beginning of this stage, avoid giving solutions because usually there are other considerations which are interwoven that may require further study and/or more facts. The importance of fact finding and selection of diagnostic tools is imperative at this stage. During diagnosis, assess your client’s problem-solving and decision-making abilities. Early in the counseling work, the time that will be spent by the client in the work is a major factor. On the other hand, you must be able to present not only problems but also identify strengths of the firm. Counseling process includes changing client’s behaviors/apprehensions towards


problems. Explain the push and the blocking factors which are actually the support and challenges a business has to face in its pursuit for improvement

GAP

PUSH FACTORS

PRESENT SITUATION

BLOCKING FACTORS

DESIRED SITUATION

Fig. 1.4: Push and Blocking Factors

You need to discuss with your client the present situation of the company based on your preliminary findings. Direct your client to express the desirable situation by helping her/him express it. To aid your client in understanding his present situation, a practical approach is to start with financial matters assuming that you have access to official financial statements. Lead the analysis of the financial situation by computing the ratios. The basic ratios are clustered into working capital ratios, productivity and debt ratio, and profitability ratio. Explain the implication of the figures to the operation then draw him to enumerate the push and the blocking factors. Using the above diagram, draw the client to identify the push and the blocking factors (force-field analysis). When identifying the negative or blocking factors, guard against the client putting the blame on events, government, external factors which s/he has no control of. An experienced counselor knows what questions to ask and how to ask the questions without embarrassing the client. Ultimately your task is to affirm your client’s self-confidence and SMART actions. Fact-finding involves data gathering, interviewing, observing, analyzing of records, interpreting data, etc. You must know how to use analytical tools and techniques to examine relations, procedures, and relate causes and effects. Your reservoir of diagnostic tools must be polished for ready application. You should know what kind of facts to look for. Too many facts may dilute the analyses. Do not be a problem-oriented counselor. Fact-finding requires a step-by-step and logical action leading towards the development of a better functioning organization. It requires that the output of an action is an input to the next one. For example, findings that retail outlets are refusing a product is a manifestation of a problem. Upon investigation, records showed high frequency of “returns of products.” Findings reveal that returns are above the industry rate. This is symptomatic of a production problem. Analyses of production operation then ensues. Study of the situation may end in quality assurance procedures or organizational issues on skills of workers, machine maintenance, utility requirement and so on. The time required to study the client’s operation depends on the type of data needed and its availability. You must determine what data/information is needed to address root problems. Often the magnitude of data required becomes a function of experience. Having worked in similar industry sector and knowledge of global information, you can readily identify critical facts that should be retrieved in the fact-finding step. In a firm where the client stated that the


problem is increasing production cost, you can initially use the flow process analysis by tracking the operation for a given work segment. Having observed that there seems to be a smooth flow and that the time lapsed for each work segment cannot significantly contribute to the increase in cost, you review the production tickets noting material usage. It may turn out that the preliminary work on materials prior to transport to the shop floor was not properly done or handling was inappropriate, thus, the high occurrence of defects during operation. Fact-finding also requires observing indirect work before and after main activities. In manufacturing operations there are many sections which can affect productivity and cost. Remember that in an enterprise all these are interrelated. You must be able to analyze workers/employees, place (working condition) of operation, and relationship of process and workers. Ask yourself the question: How were finished products affected? Correlate your findings with marketing, general management, other production subsystems, and financial implications. When gathering information and data, critical elements like depth and contents are important. Learn to pick the vital few from the many. The final step in fact-finding is data classification. There are various ways of classifying data. It can be done by business functions, whether it is a marketing, production, general management/human resource management, and financial. Classification can also be done according to work place, top management, supervisors, the stores and material preparation, shop floor, warehouse/stores/traffic, welfare facilities, and premises. Other classifications include chronology of events, introduction of new/alternative raw materials, product development, R&D work, etc. The idea in classifying information and facts is to build a “story line” on it. The organized data and information are next presented to the client. This is a learning process for both the counselor and client. Confirm your suppositions and eliminate some hypotheses which you established at the beginning of the counseling process. Classify results whether these are push or blocking factors. At this point, allow/encourage your client to make decisions for improvement by explaining to you how to eliminate/avoid the problems. When the client is jumping to conclusions slow him down. Ask him to look at the financial implications of the action to be taken. Advice him against drastic moves unless the recommendations have been tested and results were positive. An effective counselor is able to share his diagnostic tools with the client. When you see that the client can solve problems by himself, celebrate. Goal-setting and decision-making are the next steps after analyses. Goal-setting is describing the desired situation the firm should be aiming for after the counseling engagement. This is a clear picture of what the firm should be. Business situations do not lend themselves to simple solutions. Several courses of action are needed to alleviate smaller problems attached to the root cause. Goal-setting requires experience and creative thinking to get good results. Experience is accumulated through years of counseling work. Every counseling contract is a lesson in progress. On the other hand, creative thinking is the discovery of new things through idea generation and idea analysis. According to a group of Canadian counselors, the goal should be:

• Results-oriented; • Specific as to accountability; • Specific to time;


• Measurable in terms of quality and quantity factors; • Realistic and achievable; • Challenging and stretching; • Inclusive of constraints or conditions imposed by manpower, money, material, time &

other forces; and • Within the control of the person who is accountable for its achievement.

An experienced counselor will always go for creative thinking as clients are drawn to discuss possibilities of solving the problems. The ILO describes several creative thinking techniques. These are: 1. Brainstorming. This involves getting a large number of ideas from a group of

people in a short time. Typically a group of 8-12 people take a problem and produce ideas in a free-wheeling atmosphere. Judgment is suspended in all ideas. The wild ideas are particularly encouraged. The wildest ideas can often be stepping-stones to new and practical ones. Its main disadvantage is that it takes time to evaluate all the ideas.

2. Synectics is similar to brainstorming but with less people (maximum of 9) involved. The

client explains the problem and the participants put forward suggestions for solving it. The client analyzes the solutions, gives the drawbacks and what he likes in the solution. New ideas are put forward until a solution is found.

Creative thinking guidelines: • Suspend judgment: rule out

premature criticism of ideas • Free-wheel: the wilder the

ideas the better the results • Quantity: the more ideas the

better • Cross-fertilize: combine and

improve on the ideas of others

3. Attribute listing is normally used on tangible rather than

intangible things. Main attributes of the idea or object are listed and examined to see how it can be changed. Each attribute is questioned and changes are suggested.

4. Forced relationships take objects or ideas and asks the

question “In how many ways can these be combined to give a new objector idea?”

5. Morphological analysis sets down all variables in a matrix and tries to combine them in

new ways. Although the matrix does not give all possible alternatives, the various combinations of the variables listed give an impression of the possibilities that may exist. Some will be discarded, but some are worth considering, thus paving the way for new, practical, useful and feasible solutions.

6. Checklists are used as pointers to ideas. List may be particular to an area (e.g., marketing,

design) or general. Decision-making is formulating an action plan to solve a problem. Problem-solving research shows that the quality and acceptance of a decision improves with the number of legitimate alternatives considered. Thus, it is best that at least three alternative ways of achieving a goal are presented. At this stage, present to your client decision-making techniques, reiterate the desired situation or goal, and then allow her/him to make choices. Usual techniques used are the means-end chain, arrow diagram, and the decision tree. Building the means-end chain is to trace the connection to the objective. The objective becomes the end. Alternatives are means to


produce the end. The arrow diagram links alternatives to the goal graphically. The depiction is very visual, less reading on the part of the client. Decision trees are composed of sets of arrow diagrams and are used where problems are intertwined. For clients with good computer skills, encourage the use of software to facilitate decision-making. Evaluation of alternatives can be pursued through matrices analysis using as factors for comparison the following:

• Costs, • Benefits, • Process changes, • Persons affected, • Time needed to install change, and • Degree of disturbance for the installation of the improvement.

PHASE FOUR: WORKING THE PLAN This involves implementing the plan. A simple way of implementing the improvement or solution to a problem is to break the activities into smaller tasks that answer the following questions:

WHAT is to be done, HOW will it be done

WHERE will it be done WHEN will it be done

WHO will do WHAT, WHEN, WHERE and HOW

At this stage, you slowly withdraw from the action but see to it that prerequisites to implementation are in place. Depending on the complexity of the problem you may still have to participate to ensure that set goals are attained. Your participation in the implementation is not encouraged but you may mentor your client and/or his employees During the implementation of recommendations, the client must be consulted on any change, addition or deletion of an area for study and the decision left to him. By so doing, the client will feel more comfortable and not regard change(s) as a form of intrusion or escape from a hard job or complex situation. It is possible that deviations may arise during implementation because of external and internal factors impinging on the firm’s operations. You must be able to anticipate such deviations. When a deviation occurs, you should:

• Inform the client right away or warn him/her, but never blame him/her; • Describe the situation: what was suppose to happen, what happened, where and when

the deviation was noticed, who was involved; • Be ready to answer such questions as: what did not occur, why a task was not

undertaken, who should have carried out the task; • Determine who has the information or where to get the information needed to get

back on track • Get the information and fit it into the plan; and • Correct the deviation.


When a deviation occurs, the client must be engaged to do more because he will have to learn how to solve problems. Observe how the client reacts and corrects the deviation. If the client is able to proceed without much help from you, then it means that the client’s development level is a notch higher. When milestones or targets are met, there is reason to celebrate. A pat on the shoulder of key players implies recognition of leadership and/or successful participation in solving the company’s problem. As problems are solved, make the client feel like a winner. It will make him feel good and will have more confidence in solving his problems. Where there were difficulties, point out learnings and how controls were applied. Evaluation. Evaluation involves taking stock of the progress made and the phasing out or termination of contract. There are two kinds of evaluation. The first is formative evaluation which is designed to improve implementation as work is in progress. For example, it is critical to know the implication of taxes on production cost and price determination. Hence, the evaluation process will indicate what factor will reduce material usage to avoid price differentials. Summative evaluation, on the other hand, occurs at the end of the engagement. Essentially, it will lead the client to asking:

• Where are we now? • How does this compare to the desired situation? • Is there a gap? • If so, is it worth working on?

Evaluation includes a review and an assessment of relationships. Be open and honest about the way the counseling contract was implemented. Explain why you exhibited direct behavior at times and on some occasions, facilitative behavior. Discuss what led to the successes and what contributed to the slowing down of the process. Never put the blame on any one. The client on the other hand must be encouraged to give feedback on the relationship. What were the things he disliked, resented, and felt bad about? Raise the client’s development level when interest and motivation is evident in the conversation. When there is negative feedback, know how to accept and discover the real score without being defensive. It is possible that you came in too strong or was not assertive as the client expected. The more important thing to do is learn from the experience. What did you do or not do? How did you behave in client’s presence? Termination. The termination phase is the proclamation of winners: the client is satisfied with the outcome and relationship while you are able to raise the development level of the client to an independent rational thinker who knows how to solve problems. This stage starts with the counselor suggesting the end of the engagement because the agreement has been fulfilled and goals have been met. During the counseling process be on the lookout for indications of withdrawal, meaning instances that will indicate that your client can solve problem by himself and be successful. It should end in a win-win relationship, you are happy the client feels good about the engagement contact. A satisfied client ends the engagement only to engage you again for another matter. Or else, the client ends the contract only to request you to make himself available in case another problem arises.


A meeting with the client must be scheduled long before the actual termination. Prepare for the meeting and have the following on hand:

• Contract of engagement , • Schedules of meetings held, and • Accomplishments and deviations resources utilized.

During the termination meeting, review with the client the activities and outcomes. Discuss the evaluation results and reiterate key factors that led to the success (or failure) of the engagement. Both must confirm the benefits that stemmed from the relationship: new benefits, new systems, and new behaviors. Indicate critical areas and identify outstanding assets including employees and officers and why. End the terminal meeting with acknowledgment and statement of gratitude.


WRITING A REPORT

During the engagement period, major tasks are concluded with short reports containing the areas for investigation and the corresponding recommendations. This is different from the counseling report. The counseling report is the summation of completed and uncompleted activities during the engagement. Uncompleted tasks should be explained, avoid excuses. It must be written briefly and factually. The purpose of a counseling report is to document the engagement. No

professional counselor should miss preparing the completion report. It records the impact of the work and benefits to the client. The final report should not repeat the information and data which were already presented or used for implementation and/or decision-making. Facts in the terminal report should be new, things that can impact on the client’s operation and can be useful to the client in the future.

PARTS OF THE REPORT The final report contains, first, the executive summary, and then the body of the report. Executive summary consists of major outcomes of the counseling engagement based on the objectives. It should include the visible effects, the intermediate outcomes, and the long-term impact of the changes. Necessarily, the financial implications particularly the minimization of cost and the increase of profits are good inputs. The body of the report must be carefully planned both in substance and style. Write to express not to impress. Writing style must be simple and in short sentences. The use of jargon should be avoided. The reports structure must induce easy reading. The main reports content should have a logical sequence usually based on how the counselor approached the problem. The executive summary’s content are amplified in the main body of the report. Where there are major milestones include charts that will show agreed scheduled vis-à-vis actual activities or as implemented. A client, specially an MSME entrepreneur, will not read a voluminous report. Tabulations, matrices, and graphical presentations are encouraged. Writing style can also mean the use of bullets and numbers. PROFESSIONALISM AND CODE OF ETHICS Professional conduct and the observance of the Code of Ethics build your image while effective performance builds your reputation. You must be able to delineate commercial interest from personal interest when dealing with clients. The Asia Pacific Economic Cooperation – Training and Certification Program (APEC TRACE) Principles of Professional Conduct provides the fundamental principles that should guide the professional small business counselors. Professional conduct includes the following components.


Public interest

The interest of clients must be paramount except where there is conflict with the law and the duties and responsibilities owed to the community/public.

Integrity Acting at all times with honesty and integrity in dealing with clients.

Objectivity Fairness and impartiality should govern the counselors’ activities. They should not be influenced by prejudice, bias or conflict of interest in the performance of their duty.

Independence Counselors must be independent and free of any interest that is incompatible with their duty. Counselors performing professional services in commercial, industry or public service must recognize the potential problems created by personal relationships or financial involvements. Depending on the nature or degree of such relationships or involvements, the objectivity of the small business counselor may be threatened.

Confidentiality

Counselors must respect the confidential nature of information obtained from their clients in the provision of professional services. This information should not be disclosed to a third party without specific authority or criteria required by law.

Technical and professional standards Counselors are expected to meet the technical and professional standards of a professional small business counselor.

Competence and due care Counselors must perform professional services with due care, competence, and diligence. The small business counselor has a continuing duty to maintain professional knowledge and skills.

Ethical behavior Counselors must conduct themselves at all times in an ethical manner to maintain the good reputation of the small business counseling profession.

Ethics refers to how the morals of an individual impact on the way you act and make decisions. According to Anne Langden and Patricia Marshall in their book, Organizational Behavior, ethics is “a branch of philosophy providing some rules or principles to help us decide right and wrong conduct.” This definition describes the basis on which individuals and businesses must decide to conduct their business affairs. Most professionals operate based on their moral principles. Therefore, there is a need for you as counselor to have a sound ethical practice based on good moral practice.


The APEC Certified Business Counselors are bound by a Code of Conduct as follows: Credibility The small business counselor must be acknowledged as a credible professional. The small business client must be able to rely on the credibility of the small business counselor. Professionalism The small business counselor must be qualified to provide the counseling services required by the small business client and to be in position to recommend the appropriate professional advice. The counselor must be recognized by the client, other counselors and the business community as a professional in the small business counseling sector. Quality of Services The Code of Ethics and Professional Conduct charter governing small business counselors gives an assurance to the small business sector that the services provided by the small business counselor will be of the highest professional standards. Confidence Users of the services of professional small business counselors must feel confident that the counselors relate with them within the framework of professional ethics which govern the provision of these services. The Professional Conduct of the Asia Pacific Economic Cooperation (APEC) Certified Business Counselors is a good ethical guide in counselor-client encounters.

Professional Conduct of

APEC Certified Business Counselors

Certified counselors must strive to provide professional services to their clients and are expected to deliver the highest professional standards in their counseling. All certified counselors shall:

• not act recklessly or maliciously, injure or attempt to injure, whether directly or indirectly, the professional reputation of another person.

• take all reasonable steps to ensure that the person overruling or neglecting the advice is

aware of any danger which the certified counselor believes may result from such overruling or neglect, where advice based on his skill and judgment is not accepted.

• recognize his limitations, maintain a network of professional resources and refer clients

where and when appropriate.


Code of Ethics of APEC Certified Business Counselors

Small business counselors are dedicated to providing competent and ethical service in the field of small business counseling. They strive to provide professional counseling to their clients and are dedicated to the delivery of the highest professional standard in their activities as counselors. They have the responsibility to:

• Hold the affairs of the clients in the strictest confidence; • Strive continuously to improve their professional skills; • Advance the professional standards of APEC International Network of Institutes of Small

Business Counselors (IBIZ); • Abide by the principles laid out in the Code of Ethics with all by-laws, regulations,

resolutions and rules as promulgated by the International Advisory Group of Experts (INAGE), Professional Standards Committee, and the Coordinating Council; and

• Maintain the highest standards of professional conduct. Certified counselors shall uphold the Code of Ethics and the profession’s common body of knowledge. Violations of the Code and Professional Conduct shall be reported to the Professional Standards Committee of the Coordinating Council. Objectivity A certified counselor will act in the best interests of the client, providing professional services with integrity. Confidentiality A certified counselor is duty bound to keep in confidence the affairs of any colleague, client or organization and shall not disclose confidential information obtained in the course of professional activities. Nor shall a certified counselor in any way exploit information obtained in the course of their duties to their personal advantage. Integrity in Conflicts of Interest A certified counselor shall inform a client of any interest, relationships or circumstances, which may impair or be seen to impair his/her professional judgment of objectivity. In cases where impartiality is seen not to exist, the certified counselor will refer the client to another small business counselor. A certified counselor will not provide any appropriate information learned from previous clients without first obtaining their consent nor knowingly, without permission, use the copyright material and proprietary data, procedures, materials, or techniques that others have developed but not released for public use.

Chapter

2 THE PHILIPPINE SME SECTOR TODAY

PHILIPPINE SMES: AN OVERVIEW

The small and medium enterprises (SMEs) comprise an exceedingly large portion of business establishments in the Philippines. In 2002, the SME sector employed 70.4% of the total local workforce.

THE PHILIPPINE SME SECTOR DEFINED

Two basic criteria are used in defining and classifying enterprises: number of employees and asset size. The former is usually used in economic literature while the latter is far more common among financial institutions. In January 2003, the Small and Medium Enterprise Development (SMED) Council defined the SME sector as follows: Table 2.1: SME Categories by Asset Size and Number of Employees1

Category Total Assets2 No. of Employees

Micro enterprises P 3,000,000 or less 1 - 9 Small enterprises P 3,000,001 – P 15,000,000 10 - 99 Medium enterprises P 15,000,001 – P 100,000,000 100 - 199 Enterprises with assets of more than one hundred million pesos or employees numbering more than 199 are classified as large enterprises, which comprise around 0.3% of business establishments in the Philippines.

1 The Bangko Sentral ng Pilipinas (BSP), through Monetary Board Resolution 328 dated March 2003,

approved the use of the SMED Council definition to apply to SME programs of financial institutions. 2 Excluding the value of land.


DISTRIBUTION OF SMEs PER INDUSTRY AND CATEGORY SMEs operate in various industries nationwide. Table 2.2 reveals that majority (53.82%) of SMEs are engaged in commerce, with the manufacturing industry (15.11%) coming in second. SMEs are involved least in mining (0.04%), utilities (0.14%), and construction (0.32%). According to size, 92.14% of the SMEs are categorized as micro-enterprises, 7.51% are small enterprises, and 0.36% are medium enterprises. Table 2.2: Number of Establishments, by Industry and by Size (2002)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % % Agri, Hunting & Forestry 1,467 47.0 1,431 45.9 101 3.2 121 3.9 3,120 Fishing 517 45.2 570 49.8 30 2.6 28 2.4 1,145 Mining & Quarrying 198 60.6 105 32.1 12 3.7 12 3.7 327 Manufacturing 108,847 88.5 12,128 9.9 1,020 0.8 982 0.8 122,977 Electricity, Gas & Water Supply 483 39.7 530 43.6 107 8.8 96 7.9 1,216 Construction 1,484 56.0 958 36.2 101 3.8 106 4.0 2,649 Wholesales & Retail Trade, Repair Motor Vehicles, Motorcycles & Personal & Household Goods 415,670 95.7 18,164 4.2 394 0.1 247 0.1 434,475 Hotels & Restaurants 81,561 92.0 6,846 7.7 142 0.2 59 0.1 88,608 Transport Storage and Communications 10,748 75.4 3,184 22.3 181 1.3 150 1.1 14,263 Financial Intermediation 18,438 76.6 5,456 22.7 74 0.3 92 0.4 24,060 Real Estate, Renting and Business Activities 34,412 88.5 3,857 9.9 273 0.7 320 0.8 38,862 Education 4,922 53.0 3,862 41.6 273 2.9 225 2.4 9,282 Health and Social Work 26,689 94.7 1,282 4.5 109 0.4 103 0.4 28,183 Other Community, Social & Personal Service Activities 37,990 94.3 2,193 5.4 57 0.1 53 0.1 40,293

All Industries 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460 Source: National Statistics Office

CHAPTER 2: THE PHILIPPINE SME SECTOR TODAY 27

Of the 122,977 establishments engaged in manufacturing, 99.20% are SMEs. The manufacturing sector is dominated by microenterprises at 88.5% and small enterprises at 9.9%. Most (42.3%) of the SME manufacturers are engaged in the manufacture of food products and beverages, followed by wearing apparel (15.5%), fabricated metal products except machinery and equipment (11.9%), furniture (6.2%), and non-metallic mineral products (4.7%).

Table 2.3: Number of Establishments, by Manufacturing Sub-industries (2002)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % % Food Products & Beverages 48,347 92.9 3,333 6.4 179 0.3 187 0.4 52,046 Tobacco Products 4 16.7 10 41.7 0 0.0 10 41.7 24 Textiles 1,109 68.8 383 23.8 63 3.9 57 3.5 1,612 Wearing Apparel 17,328 91.0 1,448 7.6 119 0.6 142 0.7 19,037 Tanning & Leather Goods, Luggage, Handbags & Footwear 2,141 82.9 390 15.1 33 1.3 18 0.7 2,582 Wood, Wood Products & Cork, except Furniture; Articles of Bamboo Cane, Rattan Plaiting Material 3,218 86.5 455 12.2 27 0.7 22 0.6 3,722 Integrated Paper and Paper Products 291 48.7 245 41.0 33 5.5 29 4.8 598 Publishing, Printing & Reproduction of Media 3,318 77.5 916 21.4 31 0.7 18 0.4 4,283 Refined Petroleum & Other Fuel Products 10 35.7 14 50.0 0 0.0 4 14.3 28 Chemicals & Chemical Products 400 37.5 540 50.6 76 7.1 51 4.8 1,067 Rubber & Plastic Products 826 52.3 623 39.5 74 4.7 55 4.8 1,578 Other Non-Metallic Mineral Products 5,168 88.3 594 10.1 42 0.7 51 0.9 5,855 Basic Metals 792 62.6 394 31.1 49 3.9 31 2.4 1,266 Fabricated Metal Products Except Machinery & Equipment 13,734 94.0 798 5.5 49 0.3 28 0.2 14,609


Table 2.3: (continuation)

MICRO SMALL MEDIUM LARGE TOTAL INDUSTRY % % % Machinery & Equipment Not Elsewhere Classified 2,704 79.2 661 19.4 33 1.0 18 0.5 3,416 Office, Accounting & Computing Machinery 12 23.1 14 26.9 5 9.6 21 40.4 52 Electrical Machinery & Apparatus, Not Elsewhere Classified 54 22.8 119 50.2 35 14.8 29 12.2 237 Radio, Television & Communication Equipment and Apparatus 30 11.7 83 32.4 28 10.9 115 44.9 256 Medical Precision & Optical Instruments, Watches & Clocks 39 34.2 35 30.7 18 15.8 22 19.3 114 Motor Vehicles, Trailers and Semi-Trailers 640 74.9 174 20.4 22 2.6 18 2.1 854 Other Transport Equipment 321 72.5 99 22.3 11 2.5 12 2.7 443 Manufacture & Repair of Furniture 6,940 91.5 566 7.5 53 0.7 28 0.4 7,587 Recycling 32 59.3 22 40.7 0 0.0 0 0.0 54 Manufacture Not Elsewhere Classified 1,389 83.8 216 13.0 36 2.2 16 1.0 1,657

TOTAL 108,847 88.5 12,132 9.9 1,016 0.8 982 0.8 122,977 Source: National Statistics Office


GEOGRAPHICAL CONCENTRATION OF SMEs

Outside the National Capital Region (NCR), large concentrations of SMEs are located in five regions: Southern Tagalog (Region 4), Central Luzon (Region 3), Central Visayas (Region 7), Ilocos Region (Region 1), and Western Visayas (Region 6). The geographical concentration of SMEs can be seen from Table 2.4.

Table 2.4: Number of Establishments, by Region and by Size of Firm (2002)

MICRO SMALL MEDIUM LARGE TOTAL REGION % % % % National Capital Region 166,757 85.5 25,708 13.2 1,350 0.7 1,214 0.6 195,029 I (Ilocos Region) 45,945 95.5 2,064 4.3 58 0.1 36 0.1 48,103 II (Cagayan Valley) 23,977 96.2 900 3.6 23 0.1 20 0.1 24,920 III (Central Luzon) 83,356 93.8 5,110 5.7 193 0.2 163 0.2 88,822 IV (Southern Tagalog) 134,116 93.9 7,868 5.5 423 0.3 456 0.3 142,863 V (Bicol Region) 29,307 94.9 1,482 4.8 54 0.2 36 0.1 30,879 VI (Western Visayas) 42,456 92.8 3,036 6.6 151 0.3 102 0.2 45,745 VII (Central Visayas) 44,492 90.5 4,204 8.5 223 0.5 229 0.5 49,148 VIII (Eastern Visayas) 19,951 94.5 1,085 5.1 40 0.2 26 0.1 21,102 IX (Western Mindanao)/ Zamboanga Peninsula 26,067 95.0 1,286 4.7 47 0.2 30 0.1 27,430 X (Northern Mindanao) 30,791 93.2 2,108 6.4 86 0.3 60 0.2 33,045 XI (Southern Mindanao)/ SOCCSKSARGEN 26,935 95.1 1,287 4.5 46 0.2 45 0.2 28,313 XII (Central Mindanao)/ Davao Region 32,813 91.7 2,742 7.7 121 0.3 121 0.3 35,797 CAR 13,470 94.8 687 4.8 26 0.2 18 0.1 14,201 ARMM 7,892 96.7 244 3.0 12 0.2 14 0.2 8,162 CARAGA 15,101 95.0 755 4.7 21 0.1 24 .02 15,901

TOTAL IN PHILIPPINES 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460

Source: National Statistics Office


EMPLOYMENT IN SMEs

The SME sector absorbed 70.4% of the workers in the formal sector. Microenterprises employed the largest number of workers at 39.2%, followed by small enterprises (23.9%), and medium enterprises (7.2%).

Table 2.5: Total Employment, by Region and by Size of firm (2002)

MICRO SMALL MEDIUM LARGE TOTAL REGION % % % % National Capital Region 544,621 25.8 586,790 27.8 185,144 8.8 795,983 37.7 2,112,538 I (Ilocos Region) 119,517 66.2 39,567 21.9 7,856 4.4 13,481 7.5 180,421 II (Cagayan Valley) 66,954 71.0 17,539 18.6 3,192 3.4 6,654 7.1 94,339 III (Central Luzon) 236,099 51.2 103,215 22.4 26,400 5.7 95,120 20.6 460,834 IV (Southern Tagalog) 365,135 39.9 167,465 18.3 59,795 6.5 322,179 35.2 914,574 V (Bicol Region) 82,703 63.1 29,929 22.8 7,118 5.4 11,381 8.7 131,131 VI (Western Visayas) 123,309 48.0 65,435 25.5 21,064 8.2 46,939 18.3 256,747 VII (Central Visayas) 128,684 32.4 94,119 23.7 31,081 7.8 142,972 36.0 396,856 VIII (Eastern Visayas) 58,467 61.3 21,352 22.4 5,434 5.7 10,063 10.6 95,316 IX (Western Mindanao)/ Zamboanga Peninsula 68,092 60.0 26,756 23.6 6,616 5.8 11,932 10.5 113,396 X (Northern Mindanao) 86,795 49.0 42,663 24.1 12,129 6.8 35,538 20.1 177,125 XI (Southern Mindanao)/ SOCCSKSARGEN 76,392 55.1 27,457 19.8 6,460 4.7 28,302 20.4 138,611 XII (Central Mindanao)/ Davao Region 94,829 39.6 58,687 24.5 16,712 7.0 69,416 29.0 239,644 CAR 35,225 53.9 13,727 21.0 3,595 5.5 12,836 19.6 65,383 ARMM 23,143 59.2 4,999 12.8 1,457 3.7 9,473 24.2 39,072 CARAGA 41,297 60.0 14,809 21.5 3,060 4.4 9,637 14.0 68,803

TOTAL IN PHILIPPINES 2,151,262 39.2 1,314,509 24.0 397,113 7.2 1,621,906 29.6 5,484,790

Source: National Statistics Office


KEY ISSUES FACING SMEs Since the 1970s, Philippine SMEs have lagged behind its East Asian neighbors in terms of generating employment and value added as shown in Table 2.6 below. Table 2.6: SME Contributions of Selected Asian Economies (%) Philippines South

Korea Japan China Malaysia Thailand Indonesia

No. of Establishments 99.7 99 99 99 94 98 99.99 Employment 69.1 78.7 88.6 75 40 55.8 99.4 Value Added 32 47 56.7 68 26 N.A 63.11 Source: SME Development Plan 2004-2010, page 13. The lackluster performance of Philippine SMEs has been attributed to factors such as competition, productivity, and financing, among others. LOW COMPETITIVENESS Philippine SMEs have been observed to fare below average in terms of competitiveness. Local SMEs have failed to meet head-on the vicious competition in export markets as well as the influx of cheaper priced products that find their way into the local market. Other factors that contribute to the inferior competitiveness of Philippine SMEs include the:

• Relatively small domestic market; • Need for imported parts and materials; • Barriers to business such as lack of funding and research and development

support; and • Limited economic activities at the local level.

PRODUCTIVITY AND STRUCTURAL LIMITATIONS Most of the challenges facing SMEs relate to productivity and structural limitations of services and the business environment. These include:

• Outdated or less productive operational assets and systems; • Limited production capacity; • Low investment in product development; • Inadequate use of technology; • Limited management and professional skills as well as unappreciated and

inadequate professional service; • Lack of incentives and inability to meet international product standards; and • Insufficient access to information.


LIMITED ACCESS TO FUND SOURCES It is important to stress that one of the most severe constraints facing local SMEs is the limited access to financing, and not necessarily the supply of funds available for SME lending. When it comes to financing, many start-up enterprises have limited access to fund sources. Most entrepreneurs rely on their savings or borrow from relatives and friends for initial capital. They are unable to access loans from formal credit sources because of three main constraints: 1) they do not know where and how to access such services; 2) they fear they may not be able to meet loan obligations; and 3) they do not have the collateral. The situation is aggravated by the lack of access to suppliers willing to provide materials on credit. The extended repayment terms extended by supermarkets, malls, and other establishments add to the funding pressure. If and when start-up costs have been met, many entrepreneurs face another set of problems – low-grade fixed assets, low level of technology, production inefficiencies, lack of sufficient working capital, and limited production capacity – all because of their inability to access external funding. Other challenges and problems SMEs face in the area of financing include: lack of information on the different loans/financing programs available; high interest rates; stringent collateral, equity and documentary requirements; low collateral valuation; and the tedious loan application process. ISSUES ON ACCESS TO MARKETS Inadequate knowledge of market opportunities and how to penetrate bigger markets have constrained entrepreneurs to limit their activities to selling locally, more specifically direct to final consumers. Only a few entrepreneurs are able to set foot in national or foreign markets. Selling to supermarkets, groceries, and department stores is not easy for many entrepreneurs because of the volume requirements and the unfavorable terms (e.g., 90 – 120 days credit) imposed by these volume buyers. Not many entrepreneurs realize the benefits of subcontracting. Instead of entering into a subcontracting arrangement with a qualified firm, some entrepreneurs would rather produce the same product on their own. Consequently, competition is heightened, resources wasted, and production inefficiencies encouraged. Many entrepreneurs face other challenges and problems SMEs in the area of marketing. These include among others:

• Lack of appropriate channel to obtain market information, other than through participation in trade fairs;

• Lack of up-to-date market information; • Lack of good business networks; • Inadequate market linkage; and • The need to understand and meet internationally recognized technical regulations.


OTHER CONCERNS The Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, in its review of policies on SMEs3, identified issues facing SMEs according to the SME type, whether one is a low-growth domestic SME, an entrepreneurial fast-growth SME, an internationalized subcontracting or supply industry SME, or a trading SME.

Low-growth domestic SMEs. These enterprises are characterized by their static contribution to the economy, the lack of international orientation, a relatively short life expectancy, and presence in a generally “at risk” or “insulated” category. Their main challenge lies in adapting to increased competition as a result of regionalism, through better access to information and markets; avoidance of systemic biases of financial markets; better business environment unhampered by unnecessary regulations; and capability-building and human resource development for increased competitiveness.

Entrepreneurial fast growth SMEs. The main challenge for these SMEs is how to overcome blocks to international entrepreneurship, such as outdated regulations, inaccessible markets, incompetent or unsuitable managers, and lack of financing. Entrepreneurs are especially interested in securing start-up assistance, having viable exit and bankruptcy arrangements, as well as accessing reliable telecommunications facilities at reasonable rates.

Internationalized subcontracting or supply industry SMEs. These SMEs have links with larger foreign firms or an exporting domestic firm, tend to be larger on average, employ more workers, and use more up-to-date technology than other SMEs. They are very important as they contribute to technology and skill transfer and industrial development. The challenge to them is to remain up-to-date and competitive, through Electronic Data Interchange (EDI) standardization, quality improvement and accreditation, more efficient and effective technology transfer, access to foreign contractor firms, skilled local staff, and databases for matching with contractors.

Trading SMEs. Such SMEs engage in international trade, exporting their products directly or through trading companies or other intermediaries, making significant contributions to the Gross Domestic Product (GDP). The main issue they face relate to identifying and taking advantage of opportunities with least costs and quick results. As with the other SMEs, access to markets is a major concern, and such is affected by cultural differences, variations in business practices, and international trade policies. These SMEs seek simplified and standardized customs procedures, better management skills, quick dispute settlement, finance and credit guarantees, experienced and helpful trade facilitators, and assistance for exports.

3 Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, Review of Existing Policies

Affecting Micro, Small, and Medium Enterprises (MSMEs) in the Philippines, December 2004.


LAWS, POLICIES, AND REGULATIONS IN SUPPORT OF SMEs No less than the 1987 Constitution declares support for the establishment and development of business, including SMEs: “The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investment”.4 Subsequent laws were enacted giving effect to this state policy. THE BMBE ACT OF 2002: FOR THE PROMOTION OF MICROENTERPRISES Republic Act 9178, the BMBE Act of 2002 (An Act to Promote the Establishment of Barangay Micro Business Enterprises (BMBEs), Providing Incentives and Benefits therefore, and for other Purposes) was enacted in accordance with the State’s policy “to hasten the country’s economic development by encouraging the formation and growth of barangay micro business enterprises” and the integration of “those in the informal sector with the mainstream economy.” This piece of legislation provides many benefits/incentives for BMBEs, to wit: income tax exemptions from enterprise operations; reductions/exemptions from local taxes and charges; one-stop business registration centers for faster registration and processing of licenses; exemption from Minimum Wage Law coverage; opening of special credit windows, including guarantee windows, for BMBEs in government banks and financial institutions; technology transfer, production and management training, and marketing assistance to be done by government agencies; as well as trade and investment promotion in cooperation with development organizations and those from private sector. In September 2004, the SMED Council requested the Department of Finance (DOF) to ease these requirements for registrants with asset size of P500,000 and below to encourage more microenterprises to register as BMBEs. Under the old DOF guidelines, BMBE registrants are required to submit nine documents. These are: 1) registration of business entity; 2) Taxpayer Identification Number (TIN); 3) BIR Certificate; 4) municipal business permit; 5) sworn affidavit that the enterprise is barangay-based and micro-business in nature; 6) sworn statement of assets and liabilities; 7) pictures of the place of business; 8) copy of duly notarized loan contracts; and 9) Income Tax Return (ITR). On December 16, 2005, the DOF issued Department Order No. 31-05, “Simplifying the Documentation Requirement for the Registration of BMBEs with Assets of P300,000 or Less, Amending for the Purpose Section 3, Rule 2 of Department Order No. 17-04 Governing the Guidelines to Implement the Registration of BMBEs and the Availment of Tax Incentives Under R.A. 9178.” Details of Section 3 under the new DOF guidelines are shown in Table 2.7.

4 Section 20, Article II.

CHAPTER 2: THE PHILIPPINE SME SECTOR TODAY 35 Table 2.7. Documents required under DOF DO No. 31-05

Documents Required Asset Size For a new applicant For renewal of registration P300,000 and below

1) Registration as a business entity from

appropriate government agency (e.g., Securities and Exchange Commission (SEC) for corporation, partnership or association; Cooperatives Development Authority (CDA) for cooperatives; and Department of Trade and Industry (DTI) for sole proprietorship); and

2) Municipal business permit.

Same as Nos. 1and 2 requirements for new applicant, and: 3) Annual Information Return

(for the year immediately preceding the renewal of registration) duly filed with BIR, together with its attachments.

More than P300,000 up to P3 M

Same as Nos. 1 and 2 requirements for enterprises with asset size of P300,000 and below, plus: 3) Taxpayer Identification Number (TIN); 4) Certificate of Registration from the Bureau of

Internal Revenue (BIR); 5) Sworn affidavit executed by the sole proprietor

or the President of the enterprise, as the case may be, that the enterprise is barangay-based and micro-business in nature and scope;

6) Sworn Statement of Assets and Liabilities showing the values of assets owned and to be used in the conduct of business, which shall be supported by pertinent information such as the date of acquisition, acquisition cost, and depreciation cost. In case of asset acquired during the year of registration, it shall be supported by either invoice, official receipt or contract document or deed;

7) Pictures of the place of business and its assets, other than cash, receivables, and intangibles;

8) Copy of Loan Contracts, if any, and Duly-Notarized Certification of Amortization Payments on the Loan; and

9) Income Tax Return (ITR) with proof that it has been duly filed with the BIR, including attachments, if any (for existing business only)

Same as Nos. 1 to 9 requirements for new applicant, and: 10) Annual Information Return

(for the year immediately preceding the renewal of registration) duly filed with BIR, together with its attachments.

THE MAGNA CARTA FOR SMALL ENTERPRISES Republic Act 6977,5 the Magna Carta for Small Enterprises (An Act to Promote, Develop and Assist Small and Medium Scale Enterprises Through the Creation of a Small and Medium Enterprise Development (SMED) Council, and the Rationalization of Government Assistance Programs and Agencies Concerned with the Development of Small and Medium Enterprises, and for Other Purposes), is a unified framework for government’s promotion and development of SMEs. The law was enacted in response to the general view that there was an

5 As amended by RA 8289: An Act to Strengthen the Promotion/Development of, and Assistance to

Small and Medium Scale Enterprises, Amending for that Purpose Republic Act 6977, Otherwise Known as the “Magna Carta for Small Enterprises” and for Other Purposes (May 1997).


unfavorable climate for SMEs in the Philippines due to the absence of a special law tailored to their needs and the generally uncoordinated programs for their development. The Magna Carta addresses two important concerns of SMEs: the lack of a body and/or office to integrate and look out for the implementation of incentives for SMEs; and the inadequacy of credit available to SMEs. The first issue was addressed through the creation of the SMED Council, tasked to promote SMEs by “facilitating and closely coordinating national efforts to promote the viability and growth of SMEs, including assisting relevant agencies in the tapping of local and foreign funds… as well as promoting the use of existing guarantee programs.” The SMED Council was attached to the DTI, with the Bureau of Small and Medium Enterprise Development (BSMED) designated as the Secretariat. To address the second issue of inadequate financing, the Small Business Guarantee and Finance Corporation (SBGFC) was created to “provide, promote, develop and widen in both scope and service reach various alternative modes of financing for small enterprises…” The law allows SBGFC to guarantee loans of qualified small enterprises, up to one hundred percent (100%). It also requires all lending institutions to allocate a portion of their total loan portfolio for small enterprises. The amendatory law, RA 8289, allocated to small enterprises ten percent (10%) of the total procurement value of government goods and services. SBGFC is now known as Small Business Corporation (SB Corporation). GENERAL BANKING LAW Republic Act 8791, the General Banking Law (An Act Providing for the Regulation of the Organization and Operations of Banks, Quasi-Banks, Trust Entities and for Other Purposes) has specific provisions recognizing the peculiar characteristics and addressing specific needs of microenterprises. For instance, while the law sets down documentary evidence and information required for proper evaluation of credit applications, it also mandates the Monetary Board to “recognize the particular characteristics of micro-financing, such as cash-flow-based lending to the basic sectors that are not covered by traditional collateral.” The law also mandates the regulation of interest imposed by investors and lenders to micro-finance borrowers and the adaptation of amortization schedules of bank loans to the projected cash flows of enterprises—a procedure beneficial to micro enterprises. RURAL BANK ACT OF 1992 Republic Act 7353, Rural Bank Act of 1992 (An Act Providing for the Creation, Organization, and Operation of Rural Banks, and for Other Purposes), was enacted “to promote comprehensive rural development” through the setting up of a rural banking system which will make credit available and easily accessible under reasonable terms for those in the rural areas. These rural banks, ideally suited to provide loans to micro enterprises, are tasked to give preference to farmers and businesspeople with small cash requirements.


SULONG PROGRAM The SB Corporation initiated the SME Unified Lending Opportunities for National Growth (SULONG) Program to increase credit access of SMEs by:

• Simplifying and standardizing the lending procedures of government financing institutions (GFIs);

• Decreasing the documentary requirements needed; and • Creating a wider, borderless financing system, and lowering the effective cost of

borrowing of SMEs.

Participating GFIs include the Development Bank of the Philippines, the Land Bank of the Philippines, the SB Corporation, the Social Security System, the National Livelihood Support Fund, the Philippines Export-Import Credit Agency, the Quedan and Rural Credit Guarantee Corporation, and the People’s Credit and Finance Corporation. LABOR TRAINING: THE DUAL TRAINING SYSTEM AND TESDA ACTS OF 1994 Republic Act No. 766, the Dual Training System Act of 1994, provides for technical and vocational training of special skills usually needed by workers in SMEs. To centralize these vocational and technical training programs, and policymaking in these areas, Republic Act No. 7796, the TESDA Act of 1994, was enacted. These two laws in effect support the skill and manpower requirements of SMEs for increased productivity and better services. OTHERS Other laws, policies, and regulations in support of SMEs include:

• Exemption from corporate income taxes (4-8 years), national and local taxes, duties and taxes on machineries, spare parts, materials and supplies, tax credit for imports and import substitution of capital equipment and for breeding stock and genetic materials (RA 7916 and RA 7227, Special Economic Zones Act, and Clark and Subic Special Economic and Freeport Zone);

• Exemption from value-added tax for certain exporting industries, excise taxes on locally produced products, and lowered taxes on spirits made from indigenous materials (RA 8424, Tax Reform Act);

• Incentives under the preferred areas of investment in the Investment Priorities Plan (Executive Order 226, Omnibus Investment Code); and

• Incentives for specified locations such as the Registered Economic Zones (RA 7916), Less Developed Areas (RA 7844), and those granted by local government units (LGUs) under the Local Government Code.

Chapter

INITIATING CHANGES

3

As a business counselor, clients will seek you out for advice when confronted with business problems. In general, an entrepreneur faces a problem when there is a gap between the present situation and a desired goal. The process of eliminating the gap or obstacles that block the attainment of the desired goal is called problem-solving. In contrast, decision-making involves selecting from one of two or more possible solutions the path to take to reach a desired goal. The steps in both problem-solving and decision-making are quite similar. In fact, the terms are sometimes used interchangeably. All people have problem-solving and decision-making skills, but at varying degrees. As a small business counselor you need to develop your problem-solving and decision-making skills to enable you to spot problems correctly and arrive at the right decision. Once a decision is made, changes inevitably have to be introduced to close in on the gap (problem). In many instances, changes that drastically alter the status quo attract serious resistance. Hence, care must be taken when initiating changes.

PROBLEM-SOLVING AND DECISION-MAKING Some problems are easy to resolve: what to wear for a dinner date, where to spend a long-weekend vacation, etc. There are a host of everyday problems that require little thinking. Other problems, especially those related to business, are however more difficult and challenging. They require a lot of serious thought, research, and consultation. Small business owners usually run under pressure to make decisions quickly and leave inadequate time to the decision-making process. Hastily-made decisions are often poor decisions and at times, worse than no decision at all. A simple guide designed to help you make sound business decisions is presented. The steps laid down overlap and you may have to return to the previous step or work with all of them simultaneously as you try to find the best solution.

40 BUSINESS COUNSELOR’S MANUAL DEFINE THE PROBLEM Defining the problem may sound elementary but this first step is often overlooked. Problems may concern personnel, equipment, products or services, suppliers, customers, etc. Whatever the nature of the problem, it must be defined accurately. It is also important that you detect the problem singly and not in combination or in part of other related problems. The question to ask is: What prevents your client from reaching the desired goal? The main reason why defining the problem at the outset is important is to avoid confusing its possible causes with its symptoms. A symptom is the effect of a problem and not the cause of it. But often the former is mistaken for the latter and this only creates new problems, leaving the real problem unresolved. At first, you may need to state the problem in broad terms, as the exact problem may not be obvious. To do this you may have to consider the following questions:

• What is the problem? • Is it the problem of my client? • Can I solve it? Is it worth solving? • Is this the real problem, or merely a symptom of a larger one? • If this is an old problem, what’s wrong with the previous solution? • Does it need an immediate solution, or can it wait? • Is it likely to go away by itself? • Can I risk ignoring it? • Does the problem have ethical dimensions? • What conditions must the solution satisfy? • Will the solution affect something that must remain unchanged?

A number of techniques like the Pareto chart, run chart, process flow chart, and routing diagram can help you identify problems. These and many more analytical tools and techniques are discussed in detail in the subsequent chapters. GATHER INFORMATION You will need to gather information before you can arrive at an educated decision. Vital sources of information include:

Stakeholders These are the people, groups or organizations that are affected by the problem or those that will inevitably be affected once your proposed solution is implemented. Their ideas about the problem matter, and you must elicit their opinions through personal interviews or casual conversations. The number of people you may have to sit down with depends on the type of business your client is operating. It could be as few as the number of owners and workers in case of a sole proprietorship or partnership. Or it could be as many as the number of board members, stockholders and employees in case of a cooperative or corporation. You do not have to interview all of them, just be sure you gather information from all sides to avoid biases and prejudices.

CHAPTER 3: INITIATING CHANGES 41

Facts and data

After your first meeting with the client, you may already have an idea on how to solve his problem. You may have encountered a similar problem in the past or you have read about it before. In any case, verify what you know about the problem through research and results from experimentation and studies; interview experts and trusted sources about the problem; or review related events, whether past or present, either personally observed or reported.

Opinions and assumptions Opinions of key decision makers, committees or groups or other influential factions in the organization will be important to the success of your decision. However, it is equally important to distinguish the truth from mere bias or prejudice. In some cases, assumptions can save time and work since it is not always possible to get all the facts. Admit that some things are accepted on mere common belief. Assumptions, however, also entail a risk: they must be accepted in the absence of proof to the contrary but must be discarded once proven wrong.

DEVELOP ALTERNATIVES Look at the problem in different ways; find a new perspective that you have not thought of before. Brainstorming is a good discovery process. Once you have listed or mapped out the alternatives, be open to their possibilities. Take note of those that—

Need more information; Are new solutions; Can be combined or eliminated; Will meet opposition; and Seem promising or exciting.

WEIGH ALTERNATIVES After listing all the possible alternatives, evaluate them without prejudice no matter how appealing or distasteful one is to the other. Here you may need to consider all the criteria. While a suitable solution may indeed solve the problem, you may find out later that in the long run it will not work since the resources needed are not available, the people will not accept it or it will only cause new problems. There are a number of techniques in weighing alternatives. Some of these techniques are discussed in the latter part of this manual. If you have weighed all the alternatives and arrived at one solution, you must still present to your client the other alternatives you disregarded. Your client might go back to these for verification in the future.

42 BUSINESS COUNSELOR’S MANUAL DEVELOP A PLAN FOR IMPLEMENTATION AND MONITOR THE SOLUTION The resolution of a problem will necessarily elicit a decision to do or not do a certain action. Without implementation, a proposed solution is not worth much. Although the task of implementation is the job of your client, it is ideal that your client gets the value of your advice by knowing how to implement the proposed solution. Thus, you need to develop a step-by-step process or action plan on how to solve the problem. Finally, advise your client to monitor outcomes by checking on effects on the resources and stakeholders, the timeline of its implementation, and its progress. If the results deviated significantly from what are expected, advise your client to review the other options and alternatives.

INTRODUCING CHANGE

A business counselor is a change agent. You are expected to introduce positive change to the small business in such areas as technology, markets, methods, values, etc., to enhance the business’ viability and gear it up for expansion and growth. You must also institute planned change, as your intentions can easily be misunderstood no matter how good they are if you initiate change tactlessly. The first thing that should come to your mind before initiating change is, “What kind of change should be instituted?” ANY CHANGE SHOULD ADD VALUE This seems obvious. Yet, there are many instances when changes are introduced because they are thought to be the latest fad, because an influential person is using them, or because they simply appear to be technically brilliant or attractive. Change should never be initiated for these types of reasons. A business counselor should ask several questions to test the real value of a change:

Will the change make the company more successful in its environment? If the environment does not require and will not support new directions, then making any core changes (in strategy, core competencies and such) are likely to fail. Time and again, there has been news of businesses that shut down because their markets were not ready to adapt to the changes the environment was introducing. This does not mean, however, that these bankrupt businesses will be successful in the future. Perhaps, their ideas were way ahead of their time. But their failure does mean that a severe mismatch with the environment is a recipe for disaster; a match is a formula for success.

Will the change make work more successful while reducing the effort required? Will it provide truly better customer service or product quality? Will it have a positive impact on people at work—their status, the meaning of their work, the ease of work, the elimination of barriers to success?


It is not enough that on the surface the change is a good technical, financial or political idea. If the change complicates things for customers or for people at work, reject it unless the management is willing to spend extra resources supporting and getting compliance with the change.

Will this change really improve performance for the overall organization? A change that is positive for a part of the organization may not be positive for the entire organization. There may be an improvement in the redesigned process in terms of cost savings, for example, but the improvement does not translate into improved employee morale. For a change to be efficient, it must satisfy not only certain factions in the organization but the entire organization as well.

MANAGING CHANGE DEPENDS ON ITS COMPLEXITY Some changes are complex and unpredictable, such as computerizing operations or shifting markets from regional to nationwide. Other changes are relatively simple, such as shifting from one brand to another. More complex changes generally call for new roles and power relationships, as well as changes in a variety of systems and processes. Simpler changes leave roles and relationships intact and just call for a few changes in behavior, knowledge, and skill. Another dimension of change is whether there are role models, precedents, and tested guidelines to follow, and whether there is expertise the management can turn to for support and coaching. Complex and unpredictable changes require more resources for trial and error and for learning. They call for multiple changes in systems and processes, and for lasting and visible commitment from leaders who must provide vision and optimism until results occur and the change is sustainable. These more difficult changes also require increased attention to communication and the human side of change. Simple and predictable changes seldom need extra attention. The nature of a change dictates the best method. Some changes can be done in incremental pieces, but those involving changes to tightly intertwined structures associated with strong power bases and deep systems of beliefs often require a forceful intervention and discontinuous replacement. In other words, if the change is complex and does not match the current culture, your client must be ready for a tough road ahead. Some industry changes, for example, are revolutionary and require a large amount of experimentation and resources, a loose structure, and broad involvement in planning. Other changes, on the other hand, are evolutionary and can be efficiently managed traditionally, using standard project management methods. Transactional changes (such as switching software) require only a few minor interventions—for example, training or changing the incentive system. Transitional changes are complex and shake up roles, power bases, relationships, and systems but have expertise and guidelines; an example would be opening an additional retail outlet in another city. Transitional changes require a much higher investment in change management than transactional changes. You therefore have to convince your client to set up detailed project plans, phase in innovation, address the emotional side of change, and take all of the other actions described in this chapter.

44 BUSINESS COUNSELOR’S MANUAL Transformational changes require a redesign of virtually everything in the organization—especially the fundamental beliefs and norms that guide decisions and actions. Organizations everywhere face transformational change as they adapt to information technology and globalization. In transformational change, usually there are no guidelines so there are a lot of trials and errors and costs. Your client can set up projects to help guide progress but the major effort must go into making the organization more adaptable and flexible so that it can learn as it goes along. All of these require asking—

How complex is the change in terms of the number, breadth, and depth of pieces and actions it contains?

For the change, are there obvious and clear solutions and precedents? (Is it relatively predictable?)

Is the change transactional (simple and predictable); transitional (simple but

unpredictable, or complex but predictable); or transformational (complex and unpredictable)?

What level of investment will your client have to make to ensure success (low for

transactional, moderate to high for transitional, or very high for transformational)? SYSTEM MUST BE READY Once the kind of change is determined, it is now time to set the system in place. Management has the tough job of guiding change. Some changes (the more predictable ones) thrive on more structure, traditional controls, and management nurturing. Others (the less predictable ones) require more decentralization and involvement in planning and implementing. Designing and guiding an organization for ongoing change is another matter that requires transformation—not only of the organization but of the leaders. Transformational leadership demands a blend of focus, determination, and empowerment that few leaders exhibit these days. It is important to adjust the various aspects of the organization so that the change can take root and thrive. A change may require minor or radical shifts in processes, technology, tools, information flows, skills, structures, facilities, and so on. Your client can prepare the organization for change by advising him/her to follow these guidelines:


Be sure work processes are supportive One common change failure is the lack of coordination of process changes between departments. For local changes to succeed, the larger processes they are part of have to be changed. Often, successful reengineering changes do not focus on functions and departments but look at all activities and events involved in the delivering a product or service, regardless of whose responsibility they are. The questions that need to be looked into are what, if any, work processes will be directly or indirectly affected by this change and how to align them.

Create change-enabling managers Be sure the supervisors actively support the change. This is obvious but seldom adhered to. When supervisors personally use the change practices communicated to them, employees are likely to follow. The supervisor is a key factor in the success of any change effort. It makes sense, therefore, to focus on the supervisors. They help make up the glue that keeps an organization together. They can also keep people’s feet stuck in the past. The lesson? Ask what supervisors need to do to support the change and how your client (the owner) can support them in their roles and actions.

Align the human resource (HR) system HR practices such as selection, promotion, performance evaluation, and pay and reward are critical success factors in change. HR practices must support the change, otherwise long-term success is unlikely. HR practices have more impact on a firm’s performance than improvements in the quality of its business strategy. When changes in HR practices accompany technical changes, a significantly greater performance improvement occurs over technical changes alone. Success requires asking how HR practices support or impede the change and what management can do to get the HR system alignment needed for success.

REMOVE BARRIERS TO CHANGE Finally, before change can be implemented, barriers to it must be removed. Ask your client to determine what organizational barriers can defeat the change and assess how confident is the organization in making enough supportive changes to give birth to and grow the change successfully. Further, ask your client to—

Help people align Focusing on the technical aspects of change may be enough for transactional (simple and predictable) changes. But for any other kind of change, the human side may make or break success.


Be scrupulously fair and trustworthy People can accept changes that affect them adversely if they believe the change is right and necessary. Decision makers must work hard to be objective and fair to all affected parties, and they must communicate the change and the details of the decision process. Regardless of how people feel about a change, they expect to know the rationale for such a change, how it is to be implemented and why some people will be more affected than others.

Find the positives The first lesson in introducing change (any change should add value) tells how important it is to pick changes that will make a difference. Here the emphasis is on communicating the value of the change. People will support changes that make sense—that make work easier and more effective, that make customers happier, that improve product quality. People also have to believe that the change is achievable. Often, people commit to change in order to comply, to be similar to others they admire, and to support a change they intrinsically believe in. The last motivation produces a more lasting commitment. The key question is: What are the critical short- and long-term positives of this change for the organization and its people?

Involve opinion leaders Some people have more influence on what employees do than others. Successful change efforts draw on the expertise and energy of opinion leaders, who often are not the formal leaders in the organization. Success with change may hinge on the answer to asking: “Who are the opinion leaders that people listen to? How can the owner or manager involve them?”

Communicate effectively and over the long term Sadly, by the time executives approve a change project they have often lost interest in it. They may have spent months looking at the pros and cons and making the decision. Now, they are ready to move on to something new at the very time when they should be showing their support for the change visibly and continuously. The decision to make a change is only the beginning of an intense and ongoing communication process that may last for years. It is therefore important for you to advise your client to find the mental and emotional stamina to keep talking about the same message over and over. This is especially true in organizations where people’s trust is low.

Involve people appropriately When people are involved they are more committed. It is also clear that decisions in the current complex business world require broad involvement and input. But involvement will not save a change that does not add value or is implemented unfairly. Involvement must have a purpose. If it is just a way to manipulate people and has no potential impact on decisions, the owner or manager should not go through the motions as it will only breed unrest. People do not have to participate to be committed. But they do need to trust the people setting the goals, believe that goals will lead to greater performance, have access to feedback, and have control and ownership of the steps and actions for


achieving the goals. In other words, there needs to be participation at the level of getting things done. Successful changes always involve the people affected because they have important contributions to its definition and implementation. It is important that people have the skills they need for implementing and sustaining the change. It is also crucial to align incentive and pay systems, especially if the change is not naturally rewarding and motivation is low. Your client knows the skills people need to implement and sustain the change, how to help develop those skills and what desired or undesirable behavior will or will not happen with or without offering incentives.

It might not be possible to manage change, but it can be influenced. Implementing and sustaining change require more than a dream and a goal. Although these are important, when your client approaches you and consults you on a major organizational change, be sure it will matter and be worth the effort. Ask your client to put the resources and time into making it happen. Your client must also pay attention to the systems and people issues. If your client is not ready to put the energy into making a change successful, it might be better not to initiate the change at all. Certainly, most organizations can dramatically reduce the number of change initiatives and thus find the resources to do a few things well. Of course, your client must always weigh the number of initiatives against demands of the environment and market. If the environment requires lots of change, that is your client’s challenge. Just be sure that what your client will decide to do lies in the organization’s best interests and that your client is ready to answer the questions and take the actions that are key to success.

THE “AIDA” PRESCRIPTION Once the barriers have been removed, change may now be implemented. One model in implementing change in the organization that is helpful to a small business counselor is called the “AIDA” prescription. This means getting your client’s Attention, Interest, Desire and Action to change for the better. Specifically it means—

Calling the attention of the entrepreneur and his or her workers to the need for change either by—

• Introducing anxiety to the entrepreneur and his or her workers. A particularly

successful approach is to use anxiety to turn attention to the specific needs of the business and to follow up by providing a solution.

• Achieving acceptance and effective introduction of change as a multiplier effect

in the flow of information by convincing first the technically oriented people and then the opinion leaders.

Creating interest in change by making available adequate information on the benefits

to be gained by the entrepreneur and the workers if the change is adopted. (Remember, there is a direct relationship between how much those involved in change understand about it, with all its implications, and their resistance to it.)


Develop the entrepreneur’s desire for change by presenting the advantages and disadvantages of several alternatives with the best one showing economic and technical superiority.

Get the commitment of the entrepreneur and the workers concerned to action by

involving them in the change process, such as brainstorming, so that the identification with and the internalization of the change can take place. (Remember, the greater the extent of personal involvement of the entrepreneur and the workers concerned in making some of the decisions about a change, the lesser their resistance and the more committed they will become to change.)

OVERCOMING RESISTANCE TO CHANGE People and the organizations they create and work in seldom welcome change. For the most part, they are resistant and reluctant, believing there is great comfort in the familiar and greater security in the status quo. As a result they tend to resist new ideas and new ways to think about old ideas. Unfortunately, the present and certainly the future are all about change. In fact, there is an old adage that describes the issue succinctly: The only thing constant is change. At its most basic, business counseling is about managing change. It is about anticipating it, framing it in ways the small business organization will understand and finding a path through it. In many ways, the hallmark of a good business counselor is how well he or she manages change. You as the small business counselor will likely encounter resistance to change from either the entrepreneur or the workers and sometimes even both. Resistance is particularly severe if you are trying to introduce a very radical change in the organization. You must therefore be skillful in minimizing resistance to change and in handling objections. The following strategies will help you overcome your client’s resistance to change:

Clarify the change event Always clarify the change event. Unless you clarify the specific threat or opportunity in real, concrete terms, you can’t advance. What’s more, the change event must be identifiable not only to the opinion leaders but also to the rank and file.

Create a sense of urgency Next, you must create a sense of urgency to get people to act. Your client’s business may have been suffering from increasing uncollected accounts for a long time now but the owner does not seem to be bothered. Showing this trend will affect the business cash flow and will generate a sense of awareness that something must be done. To stir people to action, those to be affected by the change event must understand how exactly it will affect them. Either show them how their lives will be affected if the problem is not resolved or how their lives will be improved if the proposed change is adopted.


Develop a course of action

Once you have identified a threat or opportunity, you must develop a course of action that is clear and simple. If it is not clear, people won’t understand how they will deal with the issue. If it is not simple, people will get bogged down. As you think about your course of action, however, keep in mind two important fundamentals: First, a good response created and acted upon quickly is much better than a perfect response that takes forever to formulate. Second, don’t get too focused on a need for consensus. Get enough people on board, especially the right people. Don’t worry about the vocal 10 percent who seem to oppose. Let their peers work on them. In the meantime, work with the others who are willing to be led.

Establish a guiding coalition

While the vision for a change may originate with one person, the actual change process must be accomplished through a coalition of believers, who in response to a threat or opportunity developed a unified response. This guiding coalition must be large enough to have an impact on the organization, but small enough to act in a truly coordinated fashion. Further, this coalition must include major and minor players and be as cross functional as possible, drawing from all segments of the organization. A coalition that includes people from manufacturing, marketing, finance and administration will likely be more credible than a team comprising people only from administration.

Communicate your course of action widely

With the key elements in place, you must communicate your course of action widely and continually. Not only must people understand in general the organizational response, but they must understand specifically their role in the change process. What is the role that the people in maintenance or security have in the change process? If they don’t understand their role, they will not be committed to the change event. Further, they might unintentionally undermine what you are trying to accomplish.

Generate and celebrate near-term wins

While significant change is typically a long-term undertaking, people need to know immediately that their efforts are having some impact. This is much like the overweight person who decides to lose 50 pounds over the next year. After a week of struggling with diet and exercise, she wants to know she’s dropped a few pounds. Without that near-term win, she’ll become discouraged and give up altogether. So, celebrate your near-term wins. If you decide to advise your client to reduce overtime work to save on operating costs, the workers need to be aware that the scheme is successful and that the company is indeed saving money from it. And if you are smart, you can advise your client on how to tell the workers that the new scheme is going to help them in their day-to-day activities.


Anchor change in the organization

Change begins with people but it is institutionalized through artfully developed policies and procedures, realistic budgets, measures of success and ongoing training. You simply cannot ask people to change without giving them the tools to change. This support must be real, obvious and given freely. At the same time, people who opt not to change must be dealt with or their recalcitrance will spread. One of the quickest ways to undermine change is to ignore people who will not embrace—and even sabotage—the change initiative.

Chapter

4 THE BASICS OF STARTING A BUSINESS

Where do business ideas come from? Studies on entrepreneurship suggest two ways of triggering the mind of an entrepreneur into creating business ideas. One, by letting him/her study his own persona and two, by letting him examine his environment. It will greatly help if one is to use the scale of human needs, which are broken down into Maslow’s five categories: psychological needs, safety needs, social needs, esteem needs, and the need for self-actualization. The entrepreneur can get business ideas by associating each kind of need with a product or service that he thinks he can provide. The bottom line is that a business idea should offer a product or service that provides a solution to a problem. THE ENTREPRENEUR’S OWN PERSONA From one’s understanding of his own self, the client may be able to draw out business ideas.

Who am I? Such self-analysis may begin by making him list down what he enjoys doing, how he spends his free time, where he goes; what and where he imagines himself to be in a couple of years; what his tastes are and the things he goes strongly for or looks forward to.

For example, he is a regular 8-hour employee, working five days a week. What occupies him after-office hours and on weekends? Does he have any culinary inclinations? Does he know how to prepare food and cook? If so, an opportunity may open for him to start a food service business such as providing lunch for his officemates. If he is a passionate teacher, he can entertain the idea of accommodating tutoring sessions at home or at the residence of the students during his free time. When the number of students who need his services increase, he may consider putting up a formal tutorial center either at home or probably in another location. Or as a book lover, a housewife could have a sizeable collection of (and collecting) books of different genre, be they documentaries, devotional, fiction, inspirational, adventure, classics, and biographies. There could be an opportunity for her to set up a book rental service and earn from her investment (yes, books are an investment).


What does she know? This consists of the academic knowledge, technical skills, and professional, as well as trade experience of your client. How can she be productive by using her skills or hobbies? Help her draw up her occupational history, specifying the nature and activities incumbent in the jobs and positions she has held. Refreshing her memory will remind her of the responsibilities that she excelled in the past and identify one or two ideas from which she can start a business with.

For example, as a public relations staff, your client has been exposed to contract signings, endless product launches, and company-client get-togethers until motherhood beckoned. Now that her children are grown up and can manage with a little help from her, she might be encouraged to take off from where she left and find an opportunity to be an event planner not only for corporate affairs but also for special occasions like weddings, reunions, etc. This is a business opportunity that will not take much of her time away from home.

What does he have? This refers to the resources that he can use to start a business. It

includes his family, property, money, and personal belongings. He can carry on the family business or build a new one that speaks of a family tradition. Do the other family members have some expertise that will complement what he is good at? How can he make more productive use of his assets?

What business idea would come to his mind when he realizes that some family members are very adept with matters pertaining to computers and their peripherals? Perhaps your client can think of starting a computer service shop business or even an internet café. What use can he find for that extra freezer space at home? He can be a dealer of meat and poultry products. What about his parents? After decades of making quality fine jewelry, they have decided to go on semi-retirement and accepted orders only as they pleased. Your client could consider coming into the picture and continue the business.

THE WORLD AROUND HIM The environment is another rich source of business ideas. As a counselor, encourage him to be updated with the development of environmental trends in his community or area. This will enable him to identify latent needs that are unsatisfied and new trends that are taking shape to which he can respond with appropriate products or services. Your client needs only to be attentive, observant, analytical, and curious. Guide him how to use the following techniques:

Be attentive to what is happening to the immediate environment. He can get ideas by listening to the needs and desires expressed by those around him. In most cases, such needs and desires are also shared by a great number of other people.

For example, his car has been stalled several times while driving daily through a rough road from his residence to the town proper. The other residents in the community have been similarly inconvenienced. The idea of putting up a service shop along the way may be an opportunity to look into.

CHAPTER 4: THE BASICS OF STARTING A BUSINESS 53

Monitor the development of demographic, economic, technological, ecological, and

socio-cultural trends. This will help him identify new trends in consumer needs.

Most of the residents in the subdivision where he lives are young families. Business ideas could include a day care center, a pre-school, party needs rental service, and a school bus service.

Find new applications or uses of existing products and services. He can make something new from something old.

Make him list 10 potential applications of his business idea.

Analyze the reasons for abandoning certain products or services. It is possible that

these products and services no longer meet the needs of the present market but may be right for other areas or regions. Or he can “import” a new business concept that boomed in the city and bring it to the province.

As the cities in the regions are getting highly attuned to their counterparts in the metropolis, your client could think of introducing a business that is fast gaining popularity in the metro.

Examine the structure of imports. He may find opportunities for substituting the imported items with ones that can be produced locally.

Look for businesses for sale. Buying an established business can be quite expensive

but it provides him with an established clientele, stock, and equipment. It may also include established premises. It is easier to continue a business (and get a loan) with a good history and with systems already in place rather than start a new one.

If he has the money, he could also look at getting a franchise. He may need a lawyer

to help him with the documents. Franchising allows him to sell an established product or service and use existing operating methods from the franchiser. In many cases, these products or services are well known in the market.

Look for companies that need a distributor for their products in his area.

Manufacturing companies who are downsizing often advice affected employees to become distributors of their products.

Be on the lookout for ideas when visiting friends and kin from other towns and cities.

Talk to customers and suppliers. Visit tiangges, bazaars, and trade fairs. Observe what people are selling and buying.

Get the most out of available resources. These resources can take the form of raw

materials, skills, information or technology. Ask him to think about the following: • Raw materials. Help him make a list of materials that abound an area in great

quantities. These can be in a natural form (twigs, grass, flowers, bark of trees, clay, bamboo, and other agricultural and marine products) or semi-processed (discards of certain companies, say, wooden, cloth, or metal trimmings). He could turn someone’s junk into a treasure.

• Skills. Let him look around for specialized skills predominant in the area that can be used to set up an industry. The pottery industry in Pagbornayan in Vigan Ilocos Sur, woodcarving and papier mache industry in Paete, Laguna, and the embroidery industry in San Juan, Batangas are places that gained prominence due to the abundance of local skills.


• Information and technology. Advise him to read newspapers and specialized magazines. This will help him identify market switches or growth trends. Check out trade and industry associations for subcontracting opportunities.

He could start his research by talking with his family and friends to generate the maximum number of ideas. In your discussions, take care not to shoot down ideas, even those that you may find really far-fetched. SCREENING BUSINESS IDEAS

After your client has created the maximum number of ideas for possible small business projects, help him sift through the list, focusing only on those that can be turned into business opportunities. Bear in mind that a good business opportunity must meet his own expectations and satisfy the needs of his consumers. One way of screening business ideas is to come up with some criteria that are based, once more, on the personal circumstances of the

entrepreneur and the nature and characteristics of the business environment where he will operate. Discuss this over with him. Try doing the following exercise together. It will guide him into narrowing down his ideas into a more manageable list.

You can agree on a rating scale that is acceptable to both of you, for example, 0 to 5 with 5 as the highest. The following items should be part of the criteria:

His knowledge of the business. This will measure how much he knows about the business idea. Some guide questions to ask include: • Will the idea require some time and money for him to know more about the

business? • Would he rather take on a partner to fill in his lack of knowledge of the business? Let us say he thinks of putting up that service center but he does not have a good grasp of auto mechanics. The rating will be based on his willingness and readiness to acquire the necessary skills or to ask a skilled person to join him. The rating can range from having no knowledge at all about the business, some indirect knowledge, limited knowledge, practical knowledge, and working knowledge.


His experience in the field. He may know a lot about the business but lacks enough experience. The rating will depend upon his answers to these questions: • Has he ever owned or worked in this type of business in the past? • To what extent is hands-on experience critical to this type of business? Your client may have worked as a helper in an auto repair shop for a couple of years. The rating will depend on how both of you will assess the importance of actual experience on the nature of jobs that he will be offering. The rating can range from having no experience at all, indirect experience, limited experience, and familiarity with the business.

His skills. Focus on the skills unique to the particular business idea. This will measure the extent of his skills that are useful to the business and how hard or easy it will be for him to learn and acquire such skills.

He is thinking of distributing processed meat and poultry products in the neighborhood and maximize the use of his freezer. How good is he at taking bulk orders, calculating costs and expenses, setting prices, and collecting payments? The rating can range from no skills at all, limited skills, some skills, and extensive skills.

Ease of entry. This item refers to the costs of entering the business and the hindrances that might exist.

He thinks it would not cost him much to run a car wash from his own home. Seeing how busy the car wash businesses in his area were, he thought opening a similar service would not hurt them much. Rating will range from being a crowded field - very difficult to enter, limited entry available - mix of large and small competitors, and unrestricted entry for any business size.

Uniqueness. This refers to his competitive edge. What aspect of his product or service

will set it apart from the competition. It could include any of the following: product quality, after sales service, craftsmanship, price, image, features, terms of payment, method of distribution, customer service, customer awareness, nature of use, availability, customer accessibility, and product range. As a counselor, you may have to advise him that a competitive edge is only temporary. When someone else sees something is working, he will attempt to copy.

Rating can range from no product or service widely available, a few or several others offering the product or service, about one or two others, or no other one is providing the product or service.

After he has made a shortlist, make him trim down the list further by doing together a SWOT Analysis of the ideas in the shortlist. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. This exercise will help him assess his current competitive position. It determines what the business opportunity is good at and what may need attention. Strengths refer to the positive aspects. They may include a dedicated staff, a good network of contacts, personal image, business location, financial resources, cheap and readily available raw materials, little competition, use of existing knowledge and skills, relatively short time needed to make the product or service, and ability to respond to market needs.


Weaknesses point out the negative aspects. They may include the lack of management skills, the size of the premises, absence of a track record in business, market slowdown, lack of awareness of the benefits of the product or service among customers, easy for other producers or service providers to duplicate, and the need for more research. Opportunities refer to the conditions in the environment that can influence the business to grow. These include a rapidly growing market, new customer groups to cater for, alternative resources, good infrastructure, and new technologies. Threats are the conditions in the environment that can have a negative impact on the business. These may consist of an economic downturn, frequent changes in government policy, a geographically dispersed market, increasing cost of electricity, flight of skilled labor, and strong competition.

APPRAISING BUSINESS PROJECTS Whatever business idea your client will decide to pursue, be it a new one, a franchise, or an existing business, the next thing for him to do is prepare a feasibility study or a business plan. This business plan charts the future direction of the business. It is a written document describing relevant internal and external elements and strategies for starting and running the new venture. 6 As a small business counselor, you can only guide him prepare the business plan. Your client will gather all the data he needs and come out with the necessary figures. Your more important role is to evaluate his business project through the business plan. WHY APPRAISE A PROJECT? The only true method of evaluating the worth of a business opportunity is to estimate its future profit potential. Appraisal will ensure your client that his business will not cost him more than the returns that will come. There are four areas that you will look into when appraising a business project. These are the marketing, technical, financial, and management considerations. 1. Market Appraisal The proposed product or service must have the potential for success in the marketplace. This generally concerns the presence or absence of buyers of the product or users of the service and how much income your client can expect to derive from it. Use the following scheme to guide you in appraising the market of the proposed business:

Analyze the primary demand. Primary demand may be defined as the total demand for a class of a product or service, and it is usefully expressed in terms of per capita consumption. Consider your client’s ability in knowing the direction of the shifts in primary demand and in understanding the circumstances in the environment that are causing these shifts. Recognizing and understanding these changes that are at work will enable him to anticipate and forecast how the primary demand will look like in the future.

6 DTI. BSMED. Glossary of Key Terms and Concepts for Micro, Small, and Medium Enterprises, July

2005, p.6


You can ask yourself these questions: • Is primary demand increasing, static, or decreasing? • Why? What environmental forces are affecting primary demand? What changes

are occurring in Gross National Product (GNP) and purchasing power, the general social climate, consumer behavior, distribution channels, competitive activities, technological developments and their applications, government activities, etc.?

Examine the marketing strategy. This essentially refers to the 4Ps and the marketing

mix that your client has chosen. Be guided by these questions: • Does he have a well-defined marketing strategy? • What is the product or service? Are there brand policies that will be followed? • What distribution channels will he use? What method of physical distribution will

he apply? • What margins and prices is he after? • What sales promotional tools will he employ?

Analyze the implementation plan for the marketing mix. Look into what needs to be

done, how it should be done, who is going to do it, and when should it be done. Look also into the use(s) of the marketing plan. Some guide questions: • What functions will have to be performed to achieve the strategic objectives? • What kind of marketing organization is necessary to perform such functions? • What marketing and control information does the business need?

2. Technical Appraisal The technical analysis serves to establish that the project is technically feasible (that is, there are no technical considerations that would prevent its success) and that it provides a basis for estimating costs, particularly: investment costs, operating costs (consisting of manufacturing, selling and distribution, general and administrative costs), start-up costs, and venture initiation costs. The major considerations you need to look into when conducting a technical appraisal include the following: plant location, the proposed products or services, production process, machinery and equipment, production schedule, raw materials and supplies, building and other structures, utilities and services, project scale and timing, start-up preparation for production, technical infrastructure, and maintenance and repairs.

Plant location. Whether your client will choose to locate in a broad geographical area or in various locations within a specific area, as in an industrial park, certain factors will affect his choice. Consider the following factors: • Raw materials supply – their availability, use of substitute materials, price, terms

of sale, transportation costs, and the distance. • Markets – demand versus distance, growth or decline, present and future

competition. • Power and fuel supply – availability of electricity and various types of fuel, costs,

level of power intensiveness of business, availability of supply lines to the plant. • Water supply – quality (temperature, mineral content, bacteriological content),

which is considered critical for a food processing business, quantity, dependability, costs.

• Climate – investment required for construction, humidity and temperature conditions, history of typhoons, floods, and earthquake.


• Transportation – availability of various services and projected rates: rail (dependable for light and heavy shipping distances), highway (regularly used short distance and generally small quantities), water (cheaper, but may be slow and irregular), pipeline (for gases and liquids, particularly for petroleum products), right of way.

• Waste disposal / recovery – regulation laws, air pollution possibilities, disposal, recycling possibilities.

• Labor – availability of skills, labor relations (history and stability in the area), stability of labor rates, adequacy of basic services for workers.

• Regulatory laws – building codes, zoning ordinances, highway restrictions, waste disposal codes.

• Taxes – income, franchise, property. • Site characteristics and topography – contour of site (favorable topography –

minimum tilling, excavation, drainage, etc.), soil structure and weight bearing characteristics, access to rail, highway, and water, room for expansion, costs of site.

• Community – rural or urban, cultural (churches, libraries, theaters), school system, recreation facilities, medical facilities (hospitals, doctors).

• Security – political climate and general industry concentration. • Flood and fire control – fire hazards in surrounding areas, flood history and

control.

Proposed product or service. Assess the technical feasibility of the proposed business as it relates to these particulars: • Principal, secondary, and by-products (whether they are finished products ready

to be used or semi-products for further processing by other companies). • Type, category, specification, and characteristics (including size, shape, physical

properties). • Packaging method and means of transportation. • Possible diversification in the future.

Production process. Confirm your assessment of the product or service using the

following indicators: • Brief description of the process showing the process flow from raw materials to

finished product or completion of the service. • Whether it has fulfilled or not the requirements for a batch or continuous process. • Process flow chart indicating:

o If a processing plant – unit process, unit operations, and/or major processing equipment

o If a manufacturing plant – process sections, sub-assembly, and/or major machinery and equipment

• Material balance summary and/or detailed material balance chart showing raw material input, product, by-product, losses (indicating at what stage the input, output, or losses occur).

• Energy balance summary around fuel-burning or heat transfer equipment (e.g. water cooler, boiler, furnace, etc.).

• Name of other available or substitute process. • Justification for selecting the process, indicating the following:

o Suitability to the type of available raw materials and the proposed end-product

o Acceptability as confirmed by similar plants using the same process o With minimum possibility for obsolescence


o Proof of study done on alternative plant sizes before deciding on the process to use

o Consideration given to plant design for future possible expansion of facilities and flexibility to allow introduction of new technologies

o Strike a balance between the cost of technology (neither too high nor too advanced) and the ability of the enterprise to tap idle resources.

• Names of companies presently using the same process, their location, rated capacity, date of commission and actual capacity upon commission, their experience on the use of the selected process.

Machinery and equipment. Look into the equipment and tools specified by your client

for each operation. Use the following as your guide: • List of major process equipment and/or machinery supported by quotations and

catalogues. • List of all auxiliary equipment and/or machinery supported by quotations and

catalogs. These items include power equipment, motors, pumps, tooling, spares, etc.)

• Layout of machinery and equipment in the floor plan. • Separate list for locally fabricated equipment or equipment component indicating

local supplier or contractor. • Economic life of machinery and equipment. Check out output capacity and quality, labor requirements in terms of number and skills, power, air, water, gas, or other support requirement, reliability, noxious by-products of operation, convenience, and simplicity of use.

Production schedule. Validate the schedule using the following information: • Rated capacities of all major process equipment and machinery as against

economic sizes. • Overall plant rated output capacity versus expected actual production output for

the first five years of operation. • The number of 8-hour shift of the various process sections. • Expected increases in the number of shifts for at least the first five years of

operations of the various processing sections, if any. • Number of days per year of operations; number of days for maintenance and

repairs. • Process cycle time (time required from raw material to end-product). • Estimated material in-process inventory. • Estimated start-up time and/or build-up for material in-process inventory. • The extent of expanding capacity without adding another line, the specific

machinery requirements and their cost.

Raw materials and supplies. Look into the following: • Major specifications to be met by each raw material. • Report of acceptability of raw material. • Basis of quantity requirement of each raw material per unit production. • Possible substitutes. • Distance of local source from site of plant. • Storage facilities for each raw material; sufficiency for meeting inventory

requirements. • Need for securing and availability of contracts for raw materials, copy of

contracts, length of contracts. • Assurances for adequate supply; alternative sources.


• Handling of raw materials. • Hazards posed by raw materials (flammability, acidity, etc.) • Existence of allocation, restriction, or distribution controls that imported raw

materials are subject to (e.g. possibility of strike).

Building and other structures. Determine the need for a building. The size and type of structure should be appropriate and enough to house all activities. Other points to look into include: • Vicinity plan showing plant location with respect to existing infrastructure, such

as highway, pier, etc. • Architectural drawings showing building arrangements and layout of plant,

workstations, warehouse, store, administration, and other service areas. • Layout plans indicating electrical installations, drainage system, internal roads,

and parking spaces. • Detailed building plans and specifications. • Soil bearing capacity • Building permit. • Quantity estimates on buildings and installations pertaining to site preparation

and roadwork, structural steel (supply and erection), general building works, drainage and sanitary systems, electrical installation and communication system, water supply system (deep wells and water storage), machinery foundation/installations, transfer costs, insurance and other costs.

• Construction schedule, particularly timetable showing starting and finishing times of major items of work and estimate final completion and date of trial runs.

Utilities and services. • Power: External power, consider the following:

o Cost per KWH received at the plant connected load o Schedule of power requirements of each machine and average working hours

per day Internal power: plant generator (type: diesel, gasoline or boiler, and capacity to be utilized). Check the following:

o Cost of the power plant and auxiliaries o Fuel consumption at average plant load o Fuel tank capacity and fuel rates


• Water: Sources – deep well/ shallow well, commercial piped-in tap Type – mineral content, hardness Processing of conditioning – softening of water, purification, distillation, annual cost for processing and conditioning Pump – type, brand, horse power, hours utilized, size of storage tank, size of casing, type of drilling made.

Project scale and timing. This includes selection of optimum plant size, how projects should be phased or selection of right time to enter the market with a certain capacity under conditions of growing demand. Things to consider: • Size of prospective domestic as well as foreign markets and its expected growth. • Production and investment costs with alternative plants of different capacities. • Price of competitive products and imports. • Distribution cost of locally manufactured product. • Economics of adding units in the future to increase capacity.

Start-up and preparation for production. Evaluate the required management,

technical, and labor skills. Items to be assessed: manning table of the proposed enterprise, organizational plan, availability of skilled personnel, arrangements for training (if necessary), and cost of training.

Other things to examine: availability of all essential inputs, such as raw materials, utilities and services, spares, etc., availability of detailed operating instructions covering the enter start-up process, availability of alternate plans of action in cases of emergencies that might arise, availability of repair service in case of need, and preparedness in regard to waste disposal.

Maintenance and repairs. Determine the degree of self-sufficiency and dependence on external services.

3. Financial Appraisal The financial appraisal will help you determine the profitability of the proposed enterprise. You will need to ensure that the cost estimates are as close to the actual costs and are neither under- nor over stated. The specific estimates that you will look into are: the project cost, degree of financing, statement of cost of goods manufactured, projected income statement, projected balance sheet, and projected cash flow statement. You may also need to conduct a risk analysis, cash flow analysis, commercial profitability, and social cost benefit analysis.

Estimate project cost. This refers to the total investment necessary to set up the enterprise. It is made up of fixed investment, working capital, and pre-operating or start-up costs.

• Fixed investment – is the cost of land and improvements, buildings and site

facilities, machinery and equipment that the enterprise requires. Make sure that this cost is not underestimated with the exclusion of necessary non-production facilities (such as canteen, locker room) and installation costs in the costs of machinery and equipment.


• Working capital – use gross working capital, not net working capital. Gross

working capital is defined as current assets required. The current assets required for a new enterprise include: minimum cash balance, materials inventory, expendable supplies and parts good for one cycle, and prepaid expenses. Let your client realize the importance of having extra cash at the beginning to meet expenses, such as payroll, utilities, telephone, interest, etc., that must be paid before the enterprise will receive its initial cash inflow from sales. The most common source of error in project cost estimating and a common cause of business failure is inadequate working capital.

• Pre-operating costs – are incurred while making initial investigations and forming

the company. These will likely be considered as capital costs to be amortized over a certain period of time.

Projected income statement. The market analysis provides data for estimating sales

revenue while the technical analysis provides estimates of cost elements. These are the information that will provide you the bases for coming out with the income projections.

This statement will help you gauge whether the enterprise will be profitable at the volume of production that is likely saleable. It should show how much margin your client can expect for repaying debts, for plowing back into the business, for expansion, and for payment of dividends to the owners, if applicable.

Look for these components in the projected income statement: • Sales – data taken from the market analysis. Get estimates of returns and

allowances and discounts from those experienced in the industry.

• Cost of goods sold – refers to the statement of cost of goods sold. Net sales less cost of goods sold will give you an estimate of gross margin (gross profit) for the period.

• Operating expenses – estimates of selling expenses and general and

administrative expenses as provided by figures in the technical analysis. Subtracting operating expenses from gross margin will give you an estimate of operating profit for the period.

• Other revenue and expenses – it is unlikely for a new enterprise to have revenue

other than product or service sales. If such is the case, omit the line, “other revenue earned” and subtract interest expense on borrowed funds from operating profit to arrive at an estimate of Profit Before Tax.

• Net profit after tax – this figure is the all-important “bottom line.” As mentioned

earlier, it provides an estimate of funds that will be available to repay lenders, expand the business, and reward your client.

Projected balance sheet. For a new enterprise, this statement seeks to project “where

the enterprise will be” after a specific period of operation. It lists all resources of the business together with the interests of creditors and owners in those resources. The data in the statement are culled from the projected income statement and projected cash flow statement.


To properly assess the profitability of the proposed enterprise, you will have to look at balance sheet projections for the first five years of operation. Examine the monthly projections made by your client for the first year. • Assets – The resources of the business, grouped into several categories according

to liquidity. Current assets consist of cash and other resources, which, under normal operations are converted into cash within the operating cycle. The cash portion represents that which is on hand and on deposit that is available for general business purposes. Receivables represent money, which, otherwise might be available in cash. Inventories consist of finished goods available for immediate sales, goods in various stages of manufacture or services in various degrees of completion, and materials, which will be used to create the products or complete the service. Prepaid expenses represents payment for services, which will be received in the near future, such as insurance premiums, interest, and rent. These are not converted into cash and will have to be paid eventually.

The total value of current assets is an indicator of funds available to the business

in normal operation. • Liabilities and owner’s equity – These are all claims against the assets of the

business. Current liabilities refer to those that arise from normal current operations of the business and which will require within approximately one year, cash or replacement by another liability.

Current liabilities frequently consist of the following: accounts payable, notes

payable, accrued wages and expenses, and estimated income taxes payable. A long-term liability is an obligation that normally will not be paid within one year from the date of the balance sheet. These may include mortgage notes payable and term loans.

Projected cash flow statement. This shows the movement of cash into and out of the business. Check if the statement will: help your client determine the amount of cash he needs to start his enterprise, plan the timing of loan funds, assure that cash will be available for payments as they are due if the projected cash flows are met.

This is made up of cash receipts and cash disbursements. The cash receipts section lists all sources of cash (e.g., loan, collection of receivables, and estimated beginning balance). Cash disbursements section lists all uses of cash (e.g. purchase of raw materials, payments for the month, etc.).

4. Organizational Appraisal

Evaluating this aspect of a new enterprise aims to determine whether your client is capable of implementing the activities, realizing the sales forecasts and production levels, and meeting the costs associated with setting up and running the business. Organizational appraisal is about looking at the legal form of the business and the people who will run and implement the planned activities.


Legal form

This concerns the type of ownership that the new enterprise will adopt. There are several options for your client to choose from – sole proprietorship, partnership, corporation, or cooperative. Your task will be to see if the form he chooses is appropriate to the size, nature, and operations of the business.

The people

Many small enterprises start with the owner assuming all the major functions, from manager, treasurer, sales person, and technical operations, with the help of the spouse and one or two others. The important things you will look at include the following – organization chart that shows the delineation of responsibilities in the four functional areas of the business, namely, marketing, technical, financial, and human resource. The chart will also identify the positions and number of people under the four areas. On the basis of the business plan (which defined the requirements of the positions and qualifications of the people), you will assess the capability of the entrepreneur to discharge the responsibilities of the role he has chosen to assume. Do the same for the people chosen or assigned to occupy the other key positions.

Systems and procedures

These include a statement of the enterprise’s vision, mission, goals, and objectives (VMGOs), documented policies, rules and regulations, procedures, etc. that govern the administration and operation of the enterprise.

However favorable the marks may be on the organizational appraisal of an enterprise, this does not guarantee its success. An organization is essentially made up of human beings. Organizational appraisal is concerned with men and not with machines. Unlike the other inputs that can be reasonably quantified and projected, organizational competence is much more difficult to measure or predict throughout the life of a business. Much still depends solely on the entrepreneurs capability to plan, organize, direct, and control the activities of the business. One way of appraising your client’s entrepreneurial aptitude and readiness to start an enterprise is by using the ‘Entrepreneurial Self-Assessment’ tool. This instrument measures the personal entrepreneurial characteristics of a person who wants to go into business. You can seek the assistance of the UP Institute for Small-Scale Industries for the particulars of administering and this instrument and processing the result. When appraising your client, be also on the lookout for certain characteristics that could reveal more about his character. Some of these indicators are:

• Having an owner mentality (being proprietary and autocratic); • Financial indiscipline; • Overly ambitious (expanding even before being stable); • Lack of concentration due to some other interests – business and social; • Limited financial resources; • Rigidity, inflexibility, resistance to change; • Lack of expertise; • Inexperienced;


• Imbalanced organization; • Fraud and bad faith.

There are still other ways of assessing your client’s management competence. You’ll think of other ways as you gain field experience.

REGISTERING A BUSINESS After organizing the business, the next step is for your client to legalize his operations. Basically, business registration means enlisting the enterprise with the proper government agencies and securing a permit or a license to do business.

BUSINESS

LICENSEBUSINESS

LICENSE

Many entrepreneurs, particularly those with unregistered businesses, perceive business registration as an unnecessary additional expense. Being in government, you can discuss very well with your client the benefits of operating legally and the hazards of being underground.


WHERE TO REGISTER The legal personality chosen by your client will determine which among the first three government agencies to register the business. Table 4.1 Government Agencies Where an Entrepreneur Registers His Business NO. AGENCY WHAT 1

Department of Trade and Industry (DTI)

A single proprietorship applies for a business name. DTI will issue a certificate of registration of business name. For list of requirements refer to http://www.bnrs.dti.gov.ph

2

Securities and Exchange Commission (SEC)

This is where a partnership or a corporation registers. SEC will issue a certificate of registration. For list of requirements refer to http://www.sec.gov.ph

3

Cooperative Development Authority (CDA)

This is where a cooperative registers. The CDA will issue a certificate of registration. For list of requirements refer to http://www.cda.gov.ph

4

Local Government Unit (LGU)

A business is also required to register with the municipality or city where the business will be set up. This office will issue the business permit.

5

Barangay Hall This office issues the barangay clearance, one of the requirements for getting a business permit.

6

Bureau of Internal Revenue (BIR)

This is where the business applies for a taxpayer identification number (TIN), registration of books of accounts, authority to print receipts, permit to use a cash register machine or point of sales (POS) machine, and permit to adopt a computerized accounting system. All employees of the business are also required to register and apply for their own TIN. For list of requirements refer to http://www.bir.gov.ph

7

Social Security System (SSS)

The business also registers as an employer, your client as a self-employed or as an employee, and the employees. The BIR will issue an SSS number for the business, for your client, as well as for the employees. For list of requirements refer to http://www.sss.gov.ph

8

Department of Labor and Employment (DOLE)

If the business employs five workers or more, it needs to register with DOLE. The DOLE is tasked to promote gainful employment opportunities, protect workers and promote their welfare, develop human resources, and maintain industrial peace. For list of requirements refer to http://www.dole.gov.ph

9

Home Development Mutual Fund (HDMF)

RA 7742 requires all SSS members earning at least P4,000 a month to register with this agency. HDMF administers the Pag-Ibig Fund. For list of requirements refer to http://www.pagibigfund.gov.ph

10

Philippine Health Insurance Corp. (PhilHealth)

The New National Health Insurance Act (RA 7875) as amended by RA 9241 requires all employers of the government and private sectors and their employees to register with this agency. PhilHealth manages and administers the government health care system. For list of requirements refer to http://www.philhealth.gov.ph

The chart on the next page presents the flow of the business registration process. For the list of registration requirements, refer to the websites of the different agencies listed above.


SINGLE

PROPRIETORSHIP PARTNERSHIP OR

CORPORATION COOPERATIVE

1 Register business name with the DTI

Register company with the SEC

Register cooperative with the CDA

2

Secure a Barangay Clearance from the barangay where business will be set up.

3

Secure a Mayor’s Permit / business license from the LGU where business will operate.

4

Register business with the BIR to obtain a Certification of Registration (COR) & a Taxpayer Identification Number (TIN).

5

Register employees with the BIR.

6

Secure authority to print receipts (ATP) and invoices from the BIR.

7

Secure permit to use cash register and/or point of sales(POS) machines from the BIR.

8

Register business with the SSS.

9

Register employees with the SSS.

10

Register business with the DOLE if business will hire five or more employees.

11

Register business with PhilHealth

12

Register employees with PhilHealth.

13

Register with the HDMF.

Fig 4.1 Business Registration Flow


Below are the steps for getting a business permit in the City of Manila. While you can use the flow to illustrate to your client what to expect in applying for a business permit, it would be better for you to draw the steps being followed in your own town or city. 1

Get a business transaction form together with a list of requirements from the Business Promotions and Development Office (BPDO).

2

3 4 5 Fig. 4.2 How to Get a Business Permit in the City of Manila Depending on the nature of the business, your client might need to secure some other permits or licenses from other government entities. Refer to the listing on the next page to guide your client.

Accomplish the form, comply with the requirements, and submit them to the BPDO.

The BPDO personnel will: - encode the business transaction form - assess the completeness and correctness of the documents submitted - compute the corresponding fee - issue a computer-generated business identification number

(BIN) slip

Present BIN to a licensing officer at the License Division of the City Treasurer’s Office for verification of the computation and assessment of business tax and regulatory fees.

Pay the fees at the cashier’s office. A License & Regulatory Fees (LRF) form will be issued as official receipt.

Present the LRF to the BPDO for verification of payment. Wait for the issuance of business permit.


Table 4.2 Government Agencies That Issue Special Permits or Licenses

TYPE OF BUSINESS WHAT AND WHERE Animals and animal products, registration of veterinary

drugs and animal facilities Registration certificate - Dept. of Agriculture - Bureau of Animal Industry (DA-BAI)

Aquatic animals, importation Fishpond lease agreement

Permit - Permit – Bureau of Fisheries and Aquatic Resources (DA-BFAR)

Fertilizer products and registration of pesticide products Registration certificate - Fertilizer and Pesticide Products Authority (DA-FPPA)

Fiber and fiber products processing and trading Registration certificate; commodity clearance - Fiber Development Authority (DA-FIDA)

Film and television production, export and import, booking, etc.

Registration certificate - Movie & Television Review and Classification Board (MTRCB)

Food, chemicals, health related business Registration certificate – Dept. of Health - Bureau of Food and Drugs (DoH-BFAD)

Flour processing, grains wholesaling & retailing, milling, warehousing, exporting, importing, indenting, packaging, threshing, corn shelling, mechanical drying

License – National Food Authority (DA-NFA)

Meat plant accreditation for meat & meat products, slaughterhouse operations

Accreditation certificate, Registration certificate – National Meat Inspection Commission (DA-NMIC)

Pawnshop & lending investor Registration certificate – Dept. of Finance - Bangko Sentral ng Pilipinas (DoF-BSP)

Plants & plant products: nursery accreditation Seed certification and phytosanitary certificate

Permit - Bureau of Plant Industry (DA-BPI) Registration certificate – DA-BPI

Recruitment or placement agency for foreign employment Recruitment or placement agency for local employment

Registration certificate - Dept. of Labor and Employment - Phil. Overseas Employment Administration (DOLE-POEA) Registration certificate – Bureau of Local Employment (DOLE-BLE)

Schools & educational institutions: Educational institution Technical-vocational education, training program

registration and accreditation

Permit - Dept. of Education (DepEd) Registration and accreditation certificate -Technical Education Skills Development Authority (DOLE-TESDA)

Security agency business Permit – Dept. of Interior & Local Government - Philippine National Police (DILG-PNP)

Service and repair shops for: Motor vehicles; automotive & heavy equipment; engine & engineering works, & machine shops; electronics, electrical, air conditioning & refrigeration; office & data processing equipment; medical & industrial equipment; appliances or devices; and private emission centers

Accreditation license: Bureau of Trade Regulation and Consumer Protection (DTI-BTRCP)

Sugar trading, muscovado converting & trading, processing or manufacturing sugar-based products for export

Registration certificate – Sugar Regulatory Administration (DA-SRA)

Telecom business License – Dept. of Transportation & Communication - National Telecommunication Commission, (DOTC-NTC)

Tourism-related projects Registration and accreditation certificate – Dept. of Tourism (DOT)

Transportation: Land transport service Sea transport service

Land Transport Franchise & Regulatory Board (DOTC-LTFRB) Maritime Industry Authority (DOTC-MARINA)

Video production, sales and rental Optical Media Board (OMB), Office of the President


The BMBE LAW The BMBE Law was promulgated for the benefit of micro and small business entrepreneurs like your client. Therefore, it is very important to inform him about the benefits the business can avail and how these can be availed. Being with the DTI, your client will expect to get a good briefing about this Law from you. You might need to gain a mastery of this Law and to have a ready source of information by your side all the time.

THE BUSINESS COUNSELOR’S TOOLS

BUSINESS COUNSELOR’S TOOLS

Chapter 5

You have tools to aid you in your counseling job. However, unlike a doctor, mechanic, or carpenter, your tools are intangible. Some of the analytical tools that will be useful in your job as a counselor are identified in this chapter. In the next four chapters, these tools are described further. Each one is provided with a description, simplified procedures, examples, applications, and limitations.

The tools and strategies presented in this manual are grouped using four functional aspects of management. Some tools may have several applications, while others may have only one. Table 5.1 lists the tools and strategies discussed in this manual alphabetically. It is designed to facilitate your identification of tools and strategies appropriate for a given set of conditions. Table 5.1: Tools and Strategies

Tool/Strategy Page Ref. Purpose Some Applications Functional

Classification

Break-even (BE) analysis 173

Determines the level of sales where a firm neither makes profit nor incurs a loss

• Determine BE point • Determine variable costs • Calculate fixed costs

Marketing Production General Mgmt. Finance

Cause and effect diagram 77 Traces the causes and

effects of a problem

• Quality control • Productivity improvement • Maintenance • Other problems


Channels of distribution chart

119

Analyzes the market intermediaries for efficiency and effectiveness

• Analysis of distribution

costs • Analysis of channel

efficiency • New channel strategy • Analysis of market

penetration strategies



Table 5.1: Tools and Strategies


Classification

Charts and graphs 80

Facilitates understanding of facts and numbers presented in visual form

• Productivity improvement

• Quality control • Sales projections • Project management


Common size financial statements

178

Evaluates the performance of different companies or of the same firm over different periods

• Analysis of financial

performance • Comparative analysis of

different firms


Control charts

151 Indicates the range of variability of a system

• Productivity improvement

• Quality control


Cost benefit analysis 84

Determines whether a proposed action is justified or not

• Project management • Mechanization • Productivity

improvement


Decision tree 86 Examines possible outcomes of choosing a particular option

• Productivity

improvement • Project management


Economic order quantity 155 Determines re-order point

for inventory stock

• Inventory management

and control


Financial ratio analysis 180 Analyzes the financial

performance of a firm

• Liquidity analysis • Leverage analysis • Activity analysis • Profitability analysis


Five forces analysis 122

Assesses the competitive strength and position of a business

• Product development • Market analysis • Opportunity

identification


CHAPTER 5 : BUSINESS COUNSELOR’S TOOLS 73



Classification

Flowchart 89 Traces and examines the manufacturing process for efficiency

• Process improvement • Cost reduction • Materials handling • Productivity

improvement


Flow process chart 157 Details and examines the

manufacturing sequence

• Methods improvement • Plant and workplace

layout • Productivity

improvement • Cost reduction • Elimination of

bottlenecks • Materials handling


Force field analysis 92

Builds an understanding of the forces for or against a change, plan or decision

• Process improvement • Productivity

improvement


Gantt chart 95

Charts the sequence of activities of a given project and the time required to complete each activity

• Production planning • Production scheduling • Project management


Internal rate of return 184 Evaluates the financial

return of investments

• Capital budgeting • Investment decision- making


Just in time 161

Suggests manufacturing practices that can lead to the reduction of unnecessary costs

• Production planning • Production scheduling


Linear responsibility charts

97

Defines management responsibilities for different operating functions

• Management audit • Identification of

organizational weaknesses

• Design of organizational changes

• Analysis of management procedures and functional relationships





Classification

Net present value 190 Evaluates the financial return of investments



Make or buy decision 188

Analyzes the costs associated with making and buying options



Pareto analysis 99 Sorts the critical and vital few from a set of many elements

• Inventory control • Quality control • Product profitability

analysis • Cost analysis


Payback period 193 Estimates the length of time it takes to recover an investment



PERT/CPM 102

Analyzes the duration of processes required to complete a complex task or project

• Production planning • Production scheduling • Project management


Position mapping 124 Determines a product’s position in the market

• Product development • Market analysis


Pricing strategies 126 Presents different pricing methods

• Pricing goods and services


Procedure chart 105 Analyzes forms and develops effective administrative procedures

• Forms analysis • Forms design • Analysis of systems and

procedures


CHAPTER 5 : BUSINESS COUNSELOR’S TOOLS 75



Classification

Product life cycle strategies 134

Presents the distinct stages in the life of a product and suggested strategies at each stage

• Product strategies • Pricing strategies • Distribution strategies • Advertising and

promotion


Product strategies 136 Presents different product

marketing strategies

• Selling goods and

services


Promotion strategies 138

Encourages target market to use or purchase a product or service

• Selling goods and

services


Relations diagram 108

Maps out all the factors in a complicated problem, system or situation

• Quality control • Productivity

improvement • Maintenance


Routing diagram 163 Details the flow of materials in a factory

• Plant layout • Materials handling


Run charts 165 Reveals trends, patterns or shifts in a process over time


improvement


Sales forecasting techniques 140

Presents techniques on how to come up with sales projections

• Sales projections


Scatter diagram 110

Identifies the relationship between two variables


improvement • Marketing strategies • Cost analysis




Classification


Simplified layout planning 167

Improves plant layout by considering the product, quantity, and relationships between processes and time

• Plant layout • Productivity

improvement • Cost reduction


Stakeholder analysis 112

Determines whose interests should be taken into account when developing and/or implementing a policy or project

• Project design and

implementation • Project management


SWOT analysis 115

Identifies the firm’s strengths and weaknesses as well as the opportunities and threats the firm faces

• Opportunity

identification • Project management • Identification of

organizational weaknesses


Value chain analysis 148

Identifies ways on how to create value for products or services

• Competitive advantage


Value engineering and analysis

170

Examines a product’s material, labor cost, etc. components to improve functional utility

• Product development • Cost reduction


Chapter

6

CLASSIC DIAGNOSTIC TOOLS USES AND APPLICATIONS

There are many analytical tools you can use in your counseling job. The 15 tools discussed in this chapter are categorized as “classic” as they find applicability in many of the functional areas of management. Many of these tools will help you organize your thoughts, analyze, and evaluate a wide range of problem situations.

CAUSE AND EFFECT DIAGRAM

CAUSE AND EFFECT DIAGRAM

The cause and effect (C&E) diagram is also known by two other names. It is sometimes called the fishbone diagram as it resembles the skeleton of a fish and at times referred to as the Ishikawa diagram after its Japanese founder Dr. Kaoru Ishikawa.

The C&E diagram is a problem analysis tool that provides a systematic way of looking at effects and the causes that create or contribute to those effects. This tool can be used to diagnose any type of problem as it is designed to identify all contributing root causes likely to be causing a problem. HOW TO DRAW A C&E DIAGRAM

Step 1 Define a specific problem. As

shown on the right, write the problem on the far right side of your diagram and draw a long horizontal arrow pointing towards it.

PROBLEM


Step 2 From the horizontal arrow, branch

off major causes of this problem using lines connected to the central spine (horizontal line).

Determine cause categories that

contribute to the problem. Categories are meant to help you organize your ideas. Decide on the categories that best suit the situation. For example, for manufacturing industries you can use manpower, machine, methods, materials, measurements, and environment. For service industries, you can group causes using policies, procedures, people, and technology as categories.

Step 3 Begin brainstorming and identify the factors within each category that may be

causing the problem at hand. Attach possible causes to the appropriate branches. For each cause identified, continue to ask 'why does that happen?' and attach that information as another bone of the category branch. This will help get you to the true root causes of a problem.

Step 4 Repeat step 3 with each factor under the category to produce sub-factors. Continue

asking, “Why is this happening?” until you no longer get useful information.

PROBLEM

Category 2 Category 1

Category 4 Category 3

When the fishbone is complete, you will have more or less a complete picture of all the possibilities of what could be the root cause for the given problem.

MANPOWER MARKET MATERIALSPoor working

conditionsUnbrandedproducts

One-mansales forceHigh

executivesalaries

Dependenton onesupplier

FINANCIALLOSSES

MACHINES MONEY

Poorcollection

Personalexpensescharged tocompanyLimited

contributionmargin

Sizeable number ofnon-performing assets

Absence of strict cost monitoring

Inflexible pricing policy

Operating at40% capacity

Frequent machinebreakdowns

Nomaintenance

program

Old machines

Lowproductiivity

Oldmachines

90%imported

Unskilledworkers

Limited marketpenetration

Limited clientbase

CHAPTER 6: CLASSIC DIAGNOSTIC TOOLS 79

POOR GASMILEAGE

METHODS MACHINE

PEOPLE MATERIALS

Low octane gas

Improper lubrication

Oil changenot regular

Additionalexpense

High octane is expensive

Poor drivinghabits

No proper training

Poormaintenance

Use wrong gears

Drive too fast

Always late

Impatient

Can't hear engine

Radio too loud

No proper training Underinflated tires

Wrong tire pressure

Not properlytuned

Poormaintenance

No record of righttire pressure

Don't knowrecommended octane

Wrong oilLost owner's

manual

Lostowner'smanual

Fig. 6.1: Sample Cause and Effect Diagrams Analyzing a C&E diagram will help you identify causes that need further investigation. A thick cluster of items in one area usually indicates a need for further study. A main category with only a few specific causes may indicate the need for further identification of causes. Look for causes that appear repeatedly. These usually represent root causes. Identify causes that need immediate corrective action.

TIPS ON DRAWING A C&E DIAGRAM Clearly identify and define the problem. State the problem in the form of a question, such as “Why is the company losing money?” Framing it as a why question will help in brainstorming, as each root cause idea should answer the question. Use the 5-Why analysis method to move past symptoms and understand the true root cause of a problem. It is said that only by asking Why? five times successively can you delve into a problem deeply enough to understand the ultimate root cause. By the time you get to the 4th or 5th why, you will likely be looking squarely at management practices. APPLICATIONS AND LIMITATIONS

Whether you are dealing with a marketing, production, finance or general management problem, you will find the cause and effect diagram very useful. It broadens your thinking about potential or real causes of a problem and facilitates further analysis and examination of these causes. The C&E diagram, like other problem-solving techniques, is a heuristic tool. It is a common sense rule (or set of rules) intended to increase the probability of solving some problem. As such, it helps users organize their thoughts.


A chart or graph is used to present facts in visual form. They show the relationship between changing things or display the relative sizes of numerical quantities. A graph is one of the easiest ways to compare numbers. Common graphs use bars, lines, or parts of a circle to display data.

There are several types of charts and graphs. The more commonly used charts and graphs are listed below.

Pie chart Pie charts are used to show percentages of a whole but do not show changes over time.

Bar graph Bar graphs are used to show how an item or variable changes over

time. It can also be used to compare items or show data frequency (Histogram).

Line graph Line graphs are used to show general trends as well as peaks (ups) and valleys (downs).

Tally chart A tally chart provides a quick method of recording data as events

happen. Data is recorded using vertical strokes.

Organizational chart

This type of chart is used to show the chain of command in an organization.

Flowchart A flowchart shows the sequence of activities of a process. It can be

customized to fit any need or purpose.

Samples of the first four types of graphs listed above are illustrated below using the following data set: brown – 31%; red – 26%; blue –17%; green – 8%; yellow – 11%; orange – 7%. The numbers indicate the quantity of chocolate candies inside an M&M bag, grouped according to color.

PIE CHART

B rown3 1%

R ed2 6 %

B lue 17%

Green 8 %

Y ellow11%

Orange7%

CHARTS AND GRAPHS

CHARTS AND GRAPHS

HISTOGRAM

0

5

10

15

2 0

2 5

B ro wn R ed B lue Green Y ello w Orang e


LINE GRAPH

05

10152025

Brown Red Blue Green Yellow Orange

TALLY CHART Brown Red Blue Green Yellow Orange

No. o

f Can

dies

By using spreadsheets like Excel and Lotus 123, you can create a wide variety of graphs. For instance, in Excel, you can create these types of bar graphs: cluster bar (compares values across categories), stack bar (compares the contribution of each value to a total across categories), and 100% stacked column (compares the percentage each value contributes to a total across categories). In addition, you can enhance the appearance of your bar charts using 3-D effects. There are other types of charts and graphs like the cosmograph which depicts parts of a whole but is less numerical than a pie chart and the pictograph which uses cartoons or simple drawings to depict quantities.

Fig. 6.2: Sample of Cosmograph Source: http://www.ais.msstate.edu/AEE/Tutorial/pdfs/cosmo.pdf

Fig. 6.3: Sample of Pictograph

http://users.vol.net/edwintam/tips/1/TIP1.HTM Source:

http://users.vol.net/edwintam/tips/1/TIP1.HTM


Organizational charts and flowcharts, on the other hand, differ from the first four charts discussed above in that they are not used to represent numbers. Organizational charts are a graphical representation of the arrangement of positions in an organization. It shows the chain of command and hierarchy of responsibility, authority, and accountability in the organization. There are several different types of organizational structures. The simplest is often used in microenterprises, which is basically made of two hierarchic levels: the managing owner and the employees. In this case, the manager holds most of the managing responsibilities, and there is no clear definition of the tasks of the remaining employees.

Owner/Manager

Employee I Employee 2 Employee 3

Fig. 6.4: Flat Structure

Another type of structure often used in small-sized companies or in companies with a limited range of products or services is the so-called "functional structure." It consists of dividing the work and allocating authority and responsibility according to the classical management areas of marketing, production, human resource management (personnel), and finance. Bigger companies have more complicated organizational structures. Some choose to organize according to geographical market coverage while others according to the goods and services it produces or sells.

President

Marketing Production Personnel Finance

Fig. 6.5: Functional Structure

Flowcharts map out the different activities of a process. Details on flowcharting are presented in a separate section of this chapter. APPLICATIONS AND LIMITATIONS Charts and graphs provide a compact and interesting way of conveying information. Your client will be able to quickly visualize what you are saying if you present data graphically instead of rows and columns of numbers. You can drive home your point more convincingly with the aid of a chart. But to be effective, you have to know what type of chart to use. Use Table 6.1 as guide in choosing the right chart.


Table 6.1 Types of Charts

Bar Graph

Pie Chart

Line Graph Cosmograph Pictograph Organizational

Chart Flow Chart

Whole and its parts Yes Yes No Yes In some

cases Yes Yes

Simple Comparisons Yes Yes Yes In some

cases Yes No No

Multiple Comparisons Yes No Yes No In some

cases No No

Trends Yes No Yes No In some cases No No

Frequencies Yes Yes Yes No Yes No No

Sequences No No In some cases

In some cases No Yes Yes

For details on how to draw charts and graphs using PowerPoint or Excel, visit the following websites: http://www.marshall.usc.edu/computing/PDF_Files/PowerPoint/PowerPoint_97_Charts.pdf and http://www.marshall.usc.edu/computing/PDF_Files/Excel/Excel_XP_Charts.pdf Today, there is hardly any limitation to the use of charts and graphs. Software programs have made the task of creating charts and graphs simple. Moreover, with the aid of multi-media these days, one need not spend hours making presentation materials on kraft paper as computer generated charts and graphs can readily be flashed on screen with the aid of an LCD panel.

http://www.marshall.usc.edu/computing/PDF_Files/PowerPoint/PowerPoint_97_Charts.pdf


Cost benefit analysis is a tool wherein all relevant considerations are translated into monetary terms. Briefly, the technique involves adding up the value of the benefits of a course of action and subtracting the costs associated with it. In its simplest form, cost benefit analysis is carried out

using only financial costs and financial benefit. Just like other financial tools (net present value, internal rate of return, and the payback period) the initial expense is compared to expected returns. For example, the decision on whether or not to introduce a new product in the market may be arrived at by comparing total manufacturing and marketing expenses to projected sales for the new product and deciding to proceed with the production of the new product only if the expected revenues eventually recoup the costs.

COST BENEFIT ANALYSIS

COST BENEFIT ANALYSIS

The more sophisticated approach to cost benefit analysis involves assigning financial value on intangible costs and benefits, which in most cases brings an element of subjectivity in the process. HOW TO DO A COST BENEFIT ANALYSIS Step 1 What is the proposed action? Determine how much will it cost to implement. Step 2 Determine what are the benefits – both tangible and intangible – that can be derived

from the proposed action. How much are these benefits worth? Step 3 Where costs or benefits are paid or received over time, determine how long it will

take for the benefits to recover the costs. Here are two examples on cost benefit analysis. The first example involves an entrepreneur who is contemplating on whether or not to acquire a computer-based sales processing system. He only has a few computers and his employees are not computer literate. He knows that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to customers. Should he invest in the new computer system? His financial cost benefit analysis is shown below.

Cost Benefit New computer equipment 10 network-ready PCs 300,000 1 server 150,000 3 printers 165,000 Cabling and installation 25,000 Software 30,000 Training costs Computer basics 40,000 Other costs Lost time due to training (5 days x 10 people x 500/day) 25,000 Lost sales due to disruption (5 days x 2,000/day x 10 people) 100,000 Lost sales due to inefficiency during first month 25,000 TOTAL COST 860,000 Additional sales (1,000 x 22 days x 12 months x 10 people) 2,640,000 Improved customer service 50,000 TOTAL BENEFIT 2,690,000

Payback period: 860,000 ÷ 2,690,000 = approximately 4 months


In the example above, the estimates of the benefits that the new system will bring are quite subjective. Despite this, the entrepreneur is very likely to introduce it, given the very short payback time. Let’s take another example. This time the production manager of DEFG Company is recommending the purchase of a stamping machine that can increase output by 75 more units per hour. Acquiring a stamping machine will mean replacing three workers who are presently doing the job manually. Aside from the increase in output, the machine is expected to produce higher quality units and result in less wastage (rejects) as the units will be cut in uniform sizes. In addition, a 5% savings in raw materials can be realized when large rolls of material are used instead of the individual sheets needed when the work is done by hand. The machine can be acquired at P2.5M (inclusive of taxes and interest). Estimates show that power consumption will increase by P15,000 per month with the use of this machine. The attendant costs and benefits in acquiring a stamping machine are shown below.

Cost Benefit Stamping machine

2,500,000

Installation cost 55,000 Salary of machine operator (550/day x 22 days x 12 mos.) 145,200 Increase in power consumption (15,000/mo x 12 mos.) 180,000 TOTAL COST 2,880,200 Increase in revenues 20/unit x 75 units/hr x 8 hrs/day x 22 days/mo x 12 mo) 3,168,000 Less wastage/rejection (3,000/month x 12 months) 36,000 Reduced material costs (0.10/unit x 158,400 units/yr) 15,840 Reduce labor cost (500/day x 3 employees x 22 days/mo x 12 mo) 396,000 TOTAL BENEFIT 3,615,840

The above analysis shows that the purchase of the stamping machine is justified given that the total benefit exceeds total cost. APPLICATIONS AND LIMITATIONS A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out. When using this tool, be sure you include all the costs and all the benefits and properly quantify them. You can also assign monetary values to less tangible effects such as risk, competitive advantage, damage to environment, etc. Since the assignment of values can be the subject of argument, be sure that you are ready to justify your position.


DECISIONTREE

DECISIONTREE

Decision trees are very useful in choosing the best alternative course of action in situations where one faces uncertainty. They provide a very effective way of laying out options and examining the possible outcomes of choosing a particular option. With the aid of this tool, you will be able to picture the risks and rewards associated with each possible course of action.

HOW TO CONSTRUCT A DECISION TREE Although no one ever knows beforehand what the outcome will be, one generally has some knowledge about what the possible outcomes are and how likely each will occur. This information can be used to select the option that is most likely to yield the most favorable results. Here are the steps in constructing a decision tree: Step 1 On the left side, middle section of a large sheet of paper draw a small square to

represent the decision that needs to be made. From this box, draw lines extending to the right for each possible solution, and write the solution along the line.

To minimize the complexity of the final decision tree, limit your options to a maximum of four actions.

Step 2 At the end of each line, consider the results. If the result of taking that option is

uncertain, draw a small circle. If the result is another decision that has to be made, draw another square.

Starting from the new decision squares on the diagram branch out lines representing

the alternatives that you can select from. From the circles draw lines representing possible outcomes. Keep on doing this until you have exhausted all the possible outcomes and decisions.

Step 3 If necessary redraw your decision tree if parts of it are too crowded or untidy. Step 4 Evaluate your decision tree. Start assigning a cash value and probability to each

possible outcome. If you use percentages, be sure that the total at each circle adds up to 100%.

Step 5 Calculate the value of outcomes by multiplying the cash value of each outcome by its

probability. The total for a particular node of the tree is the sum of all the products in that node.

Step 6 Evaluate each decision node. Write down the cost associated with each option along

each decision line. Subtract the cost from the calculated outcome value. The result gives the value that represents the benefit of that decision. The option that has the largest benefit is the best decision.

To illustrate how a decision tree is done, let us suppose a small-scale manufacturer of snack foods must decide on whether to expand now or wait another year. He is told that if he expands now and economic conditions remain good, he will make additional profits of P1.5 M; if he expands now and there is a recession, he will incur losses of P500,000; if he delays his expansion and economic conditions remain good, he is likely to realize profits of P1.0M; and if he waits another year and there is a recession, there will be a small profit of P100,000.


After completing Steps 1-6, it seems that there is not much difference if the manufacturer expanded now or postponed his plans. But wait, there is still the last step. Let’s assume further that the manufacturer will have to acquire a machine to expand his capacity. A supplier informs the manufacturer that the going price of an extruder is P475,000 but will go up by another P40,000 next year. Should the manufacturer expand now or not?

Expa

nd no

wDe

lay ex

pans

ion

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

.55 x P 1.5M = P 825,000

.45 x P 0.5M = (P 225,000)

.55 x P 1.0M = P 550,000

.45 x P 0.1M = P 45,000

P 600,000

P 595,000

Expa

nd no

wDe

lay ex

pans

ion

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

.55 x P 1.5M = P 825,000

.45 x P 0.5M = (P 225,000)

.55 x P 1.0M = P 550,000

.45 x P 0.1M = P 45,000

P 600,000

P 595,000

Cost

= P 47

5,000

Cost

= P 51

5,000

Expa

nd no

wDe

lay ex

pans

ion

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

.55 x P 1.5M = P 825,000

.45 x P 0.5M = (P 225,000)

.55 x P 1.0M = P 550,000

.45 x P 0.1M = P 45,000

P 600,000

P 595,000

Expa

nd no

wDe

lay ex

pans

ion

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.5M

(Php 0.5M)

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

Good economic

conditions

Recession

55%

45%

Php 1.0M

Php 0.1M

.55 x P 1.5M = P 825,000

.45 x P 0.5M = (P 225,000)

.55 x P 1.0M = P 550,000

.45 x P 0.1M = P 45,000

P 600,000

P 595,000

Cost

= P 47

5,000

Cost

= P 51

5,000

Fig. 6.6: Decision Tree Sample 1

Here is another example (downloaded from the internet) 7:

The basic decision tree, as shown on the left, details the options of a hypothetical firm deciding on what strategy to pursue to sustain its position in the market: should it develop a new product or should it just consolidate? The firm can choose to develop a new product in either one of two ways: through thorough development or through rapid development. In either case, the market is perceived to react differently. If the firm chooses to consolidate, it can do so by strengthening its current product line or else start reaping its products. Again, the market is perceived to react differently. Next, numeric (probabilities) and cash values are assigned to each option to determine which alternative will yield the greatest benefits. These are shown in Fig. 6.8.


7 http:www.psychwww.commtsite/dectree.html


Cost = 75,000

Cost = 40,000

Cost = 15,000

Cost = 0

Cost = 75,000

Cost = 40,000

Cost = 15,000

Cost = 0


Analyze the decision tree on the left. What course of action should the firm take? Work on the figures and determine the best alternative. Which option gives the highest benefit? From the diagram, the best option is for the firm to take its time in thoroughly developing a new product rather than rushing a new product (rapid development) into the market. It is interesting to note that the benefits that can be derived from improving on the company’s existing lines are far greater than the benefits that can be realized if a new product is rushed into the market.

APPLICATIONS and LIMITATIONS The decision tree is a good decision making tool as it allows you to clearly lay out a problem, consider all possible alternatives, weigh the pros and cons, and evaluate likely outcomes of choosing those options. Typically decision trees are used in making decisions involving maximizing something desirable (such as profit, sales, productivity or satisfaction) or reducing something undesirable (such as defects, time taken, or scrap).


FLOWCHARTFLOWCHART

A flowchart is a graphical representation of the sequence of operations, movements, inspections, delays, decisions, and storage activities of a process. It can be customized to fit any need or purpose. For this reason, flowcharts have been recognized as a very unique quality improvement method.

There are two types of flowcharts: general and detailed. While the former sketches the relationships between processes, the later provides greater detail by classifying the other steps into operation, delay, storage, inspection, or transport, using a symbolic language.

Fig. 6.9: General Flowchart of Essential Oil Extraction

Fig. 6.10: Detailed Flowchart of Essential Oil Extraction

LEMON GRASS WATER CHEMICAL BOTTLESLABEL/

BOX

WeighingMoisturecontentchecking

Loading totrays

Loading toextractor

Transporting ofRM to extractor

Extractionprocess

Cooling ofextracted oil

Collection ofoil

Transport tolaboratory

Treatment withchemicals andquality control

Bottling andsealing

Transport topackaging

Labelling of bottlesand packaging inboxes

Finished good forstorage

Refrigeration

PLANT MATERIALS

WEIGHING

LOADING IN TRAYS

LOADING IN EXTRACTOR

CONDENSING

WATER

OIL WATER

COLLECTING

STORING

BOTTLING

TREATING

COLLECTING

FLOWCHART SYMBOLS Flowcharting symbols are used to represent types of operations and processes. The use of a standardized set of symbols makes flowcharts easier to interpret. Only the most useful basic symbols used in industrial engineering are shown below. The wide variety of templates offered by software packages, like VISIO, makes flowcharting simple, fun, and easy.


Operation

A circle denotes an operation. An operation occurs when an object (e.g., a product or document) is intentionally changed in any of its physical or chemical characteristics or staged for another operation, transportation, inspection or storage. Operations also occur when information is transmitted, or received or when planning or calculations take place.

A Connector

This symbol shows continuation of the flowchart from one page to another or from a decision diamond to another page or process. When you reach the bottom of a page, draw a flowchart connector symbol and connect it to the last item in the chart. Label the symbol with a letter. Draw another flowchart connector and label it with the same letter at the page and point where the process continues.

Inspection

An inspection, verification or measurement happens when an object is examined for identification or verified for quantity or quality for any of its characteristics.

Operation

and Inspection

This symbol is used when two operations are performed in the same work station or concurrently.

Decision

The diamond symbol represents a decision or approval point. Typically, if the answer to a decision question is “yes” the task sequence flows to the right, if “no” it flows to the left.

Delay

A temporary delay is usually denoted with a capital letter D. A delay occurs to an object when the conditions do not require immediate performance of the next planned step.

Transport

An arrow is used to denote a transfer or movement of an object or material.

Storage

Triangles are used to denote storage. The upright triangle denotes storage of finished goods. The inverted triangle represents materials storage.

Fig. 6.11: Basic Flowchart Symbols

HOW TO CONSTRUCT A FLOWCHART Flowcharting is not really complicated. If you are new or have had very little experience at it, let this section guide you and help you hone your skills in flowcharting. The steps as enumerated and described below are very simple and easy to follow.

Step 1 Determine the boundaries at the outset. Establish where the process begins and where

the process ends.


Step 2 Write down the steps. Use a verb to start each task description. It is advisable to use

post-it paper so you can move and rearrange tasks easily. Step 3 Once you have the different tasks and activities in sequence, draw the appropriate

symbols. Start with the basic symbols:

1. Boxes or rectangles show task or activity performed in the process. 2. Arrows show process direction flow. 3. Diamonds show points in the process where yes/no questions are asked or a

decision is required. 4. Usually there is only one arrow out of an activity box. If there is more than one

arrow, you will need a decision diamond. 5. If there are feedback arrows, make sure the feedback loop is closed: it should

take you back to the input box.

Step 4 Include pertinent chart information, like title and date, for easy reference. Step 5 Have someone who is familiar with the process review the chart and check for its

accuracy and completeness.

APPLICATIONS AND LIMITATIONS You will find great use for flowcharts as a small business counselor. Learning a new production process can be simplified using a flowchart. Flowcharts are a good form of documenting a process, and quite often are useful when examining how various steps in a process fit together. The flowchart is the simplest tool you can use when investigating manufacturing processes. By tracing the manufacturing sequence, you should be able to identify bottlenecks and pinpoint actions that can be eliminated, combined or rearranged to achieve greater efficiency. There are no limitations on the use of flowcharts.


The force field diagram is derived from the work of social psychologist Kurt Lewin. He theorized that forces – persons, habits, customs, and attitudes – both drive or restrain change. These forces can be positive, driving one to accept the proposed change, or negative, restraining one to accept the proposed

change. Force field analysis is a simple but powerful technique for building an understanding of the forces for or against a change, plan or decision. It provides a framework for looking at various factors that influence a decision. By carrying out the analysis you can plan on how to strengthen the forces supporting a decision and reduce the impact of opposing it. In the context of process improvement, driving forces can be seen as pushing for change while restraining forces stand in the way of change. A force field diagram can be used to analyze these opposing forces and set the stage for making change possible. Logically, change will not occur when both the driving forces and restraining forces are equal, or when the restraining forces are stronger than the driving forces. For change to take place, the driving forces must overcome the restraining forces. HOW TO DO FORCE FIELD ANALYSIS Step 1 Create two columns, with one header running

across both columns. Write the planned changed in the header area. Label the left column “Driving Forces” and label the right column as “Restraining Forces”.

DRIVING FORCES

RESTRAINING FORCES

Step 2 List down in the left column all the forces that are for a proposed change or plan and in the right column, the forces that are against the proposed change or plan.

FORCE FIELD ANALYSIS

Step 3 When all the forces are listed down, rate each force using a numerical scale. For

instance you can use a scale of “1” (weak) to “5” (strong). Step 4 Analyze each force. Are they valid? Can they be changed? What are the critical

forces? Determine which of the driving forces can be strengthened and which of the restraining forces can be removed or weakened.

For example, your client cannot decide if he should buy a P1.0 M piece of production equipment. He shares with you the pros and cons of acquiring the new equipment. Among others, the machine will enable your client to manufacture new products, increase volume of output, increase efficiency, and in the long run, reduce production cost. Apart from huge capital outlay, he expects to meet resistance from his employees because of the reduction in overtime and the refusal to adopt new technology. If you were to draw a force field diagram of the situation, it may resemble Fig. 6.12.


Fig. 6.12: Force Field Analysis Diagram

Plan: Upgrade Operations By Purchasing New Equipment

DRIVING FORCES RESTRAINING FORCES

Customers want new products

Improvement in productionefficiency

Increase volume of output

Lower maintenance cost

Loss of staff overtime

Cost

Employees' apprehension onadopting a new technology

Environmental impact of newtechnology

Temporary disruption of operations

4

3

3

1

4

3

2

2

1

TOTAL 11 TOTAL 12

Given the above situation what would you advise your client? How can you reduce the strength of the forces opposing the purchase of the equipment? Based on the diagram, you can suggest to your client the adoption of the following measures:

By training staff (increase cost by 1) you could eliminate fear of technology (reduce fear by 1)

It would be useful to show staff that change is necessary for business survival (new force in favor, +3)

You could raise wages to reflect new productivity (cost +1, loss of overtime -2) Slightly different machines with filters to eliminate pollution could be installed

(environmental impact –2, cost +1)

The foregoing suggestions would swing the balance from 11:12 (against the plan), to 14:10 (in favor of the plan) as shown below.

Fig. 6.13: Revised Force Field Analysis Diagram

DRIVING FORCES RESTRAINING FORCES

Customers want new products

Improvement in productionefficiency

Increase volume of output

Lower maintenance cost

Loss of staff overtime

Cost

Employees' apprehension onadopting a new technology

Environmental impact of newtechnology

Temporary disruption of operations

4

3

3

1

2

6

1

0

1

TOTAL 14 TOTAL 10

Revised Plan: Upgrade Operations By Purchasing New Equipment

Necessary for business survival3


APPLICATIONS AND LIMITATIONS

Force field analysis enables you to look at all the forces for and against a plan. It helps you to weigh the importance of these factors and decide whether a plan is worth implementing. You can also use a force field diagram to list and analyze pros and cons, actions and reactions, and strengths and weaknesses. It can also be useful when comparing ideal situations with reality as well as perceptions of opposing parties.


Henry Laurence Gantt, an American mechanical engineer, management consultant, and industry advisor, developed the Gantt chart as a production control tool in 1917. Today, the usefulness of Gantt charts is no longer limited to production planning and control. It is useful for planning and scheduling all types of projects. With this tool, the scheduling of

specific project tasks can be planned and a project’s actual progress monitored, coordinated, and tracked down with relative ease. More specifically, Gantt charts allow you to:

Assess how long a project should take; Lay out the order in which tasks need to be carried out; Communicate the project plan to others; Mark milestones in the project sequence; Manage the dependencies between tasks; and Monitor the progress of a project.

DRAWING A GANTT CHART The Gantt chart looks like a table with a horizontal and a vertical axis. The graph area contains horizontal bars which indicate when a particular activity or task starts and when it ends. The horizontal axis of the Gantt chart represents the total time span of the project that is expressed either in absolute time (i.e., specific dates or months) or in relative time referenced to the beginning of the project (e.g., Week 1… Week 5 or Month 1…Month 5). The vertical axis of the Gantt chart is where the different project activities that need to be undertaken are listed in sequence. Varying lengths of horizontal bars, lines, brackets, shading and other devices are drawn opposite each activity to mark the sequencing, timing, and duration of each activity.

Time

Month 1 Month 2 Month 3 Month 4 Month 5 Activity 1 Activity 2 Activity 3 Activity 4

A

ctivities

Activity 5

GANTT CHARTGANTT CHART

To make a Gantt chart, follow these steps: Step 1 Break the project into its component activities or tasks. Step 2 Draw your horizontal and vertical axis. Step 3 List down in sequential order the component activities on the vertical axis of your

chart. Step 4 Divide your horizontal axis into sections and indicate appropriate time periods. Step 5 Draw a horizontal bar opposite each activity to indicate when an activity is supposed

to start and end. Some activities are dependent on other activities being completed first. These dependent activities need to be completed in a sequence, with each stage


being more-or-less completed before the next activity can begin. These dependent activities are called sequential activities.

Other activities are not dependent on completion of any other tasks. These may be done at any time before or after a particular stage is reached. These are non-dependent or 'parallel' tasks. In such cases, the horizontal bars overlap.

There are variations that can be made with the simple Gantt chart to communicate more information. A column can be added where the initials of the person responsible for a given task or resources to be allocated can be written down. Or, as the project progresses, secondary bars, arrowheads, or darkened bars may be added to indicate completed tasks. You too, can choose to put milestones or important checkpoints or interim goals of the project in the chart.

2005 2006 Activities Oct. Nov. Dec. Jan 1 2 3 4 1 2 3 4 1 2 3 4 1 2 Develop program design Recruit Train Evaluate Prepare report Submit report

Activities Person Assigned

Jan 10

Jan 25

Feb 1

Feb 15

Mar 9

Mar 25

Apr 25

May 3

May 20

Develop questionnaire JPA Mail questionnaire MRQ Receive responses MRQ Data entry DPO Data analysis JPA Write draft report JPA, FBC Solicit comments ARP Finalize report JPA, FBC Fig. 6.14: Simple Gantt Charts APPLICATIONS AND LIMITATIONS

The Gantt chart’s most important application is in planning, scheduling, and controlling of project implementation. It is an effective tool for presenting a project and the status of each activity with all the pertinent information captured in a single page. It singles out the activities that are either behind or ahead of schedule so that additional resources can be committed to the completion of a delayed task. Although Gantt charts give a clear illustration of project status, they, however, do not indicate task dependencies. That is, you cannot tell how one task falling behind schedule affects other tasks.

There are quite a number of software programs that make the preparation of complicated Gantt charts easy. These include KIDASA Software’s Milestones Professional, Milestones Project Companion, and Milestones Simplicity. For more ideas on how you can use a Gantt chart in scheduling and planning activities, visit http://www.ganttchart.com/Examples.html.

http://www.ganttchart.com/Examples.html


The linear responsibility chart was first introduced in 1954 by the Serge A. Birn Company of Louisville, Kentucky. It is a two-dimensional matrix designed to clarify roles and responsibilities within an organization or project. Unlike the traditional line and block organizational charts, the linear responsibility chart

captures the essence of roles and responsibilities of people on a single page.

LINEAR RESPONSIBILITY

CHART

LINEAR RESPONSIBILITY

CHART

Listed on the top row of the matrix are the names of people in the organization or project and on the leftmost column the different responsibilities. Codes in each cell of the matrix indicate the precise nature of each person’s responsibility. This chart is very useful when doing a management audit. You can easily spot organizational shortcomings and analyze and improve procedures.

HOW TO DO A LINEAR RESPONSIBILITY CHART

Step 1 Create a matrix. On the first column, list down the activities in the organization or project and on the top row write down the positions or names of personnel.

Step 2 On a separate sheet of paper, list down and describe responsibilities of people. Assign a code for each type of responsibility. An example of a chart of responsibilities, which covers practically any activity, is shown below.8

CODE DESCRIPTION

A Work is done – The activity or function is actually performed by the designated individual.

B General supervision – This covers supervision and control of the function involved where close direction is not called for.

C Direct supervision – This requires close supervision of a subordinate’s work.

D Supervision with coordination – This covers a committee chairman’s type of supervision where coordination of the activities of two or more persons is more important than supervision as such.

E Decision on points specifically submitted – This applies when an individual either delegates decisions only on specific points to designated subordinates, or in reverse, delegates all decisions to a subordinate, with the exception of decisions on specific points he keeps for himself.

F Person must be consulted – The person indicated must be heard, although his advice need not necessarily be followed.

G Person must be notified – The person must be advised of a decision or action, since this knowledge will assist him in carrying out his work.

H Person may be called in for an exchange of views – The emphasis here is on “may.” There is no obligation to consult or right of consultation.

It is important that your list of activities is complete and that all personnel involved agree with the list of activities and the description of responsibilities.

8 Technonet Asia. Industrial Extension Manual for Small and Medium Industries in Developing

Countries. Singapore, 1985, p. 176.


Step 3 Going back to your matrix, for each activity listed, write in the appropriate cell (intersection of column and row) the code that best describes the nature of the person’s responsibility listed in the column heading. If the activity has nothing to do with the function, leave the cell blank. A sample linear responsibility chart is shown below.

APPLICATIONS AND LIMITATIONS With a linear responsibility chart, you can easily spot organizational errors like overlapping of responsibilities, responsibility not specifically assigned, authority not commensurate with responsibility, etc. This tool simplifies and facilitates the conduct of a management audit. Instead of taking extensive notes on interviews with personnel, you can simply mark a blank chart using codes. The linear responsibility chart finds very limited use for micro and small enterprises, where all decisions and responsibilities are vested in only one or two people. Table 6.2: Sample Linear Responsibility Chart

Activities

Production Manager

R & D Manager

HRD Manager

Marketing Manager

Finance Manager

Product Development G A

F

Sales Planning A Advertising & Promotion A F Price Lists A F Special Pricing A G Sales Training A A Customer Complaints F F A F Technical Service A Wage & Salary Administration A F F Selecting & Hiring A A F Personnel Counseling A Production Planning A H H Product Formulation B A Quality Control F A Inventory Control A H H Purchase Contracts G Packaging Design A F Investments H A Office Procedures A Budgets F F F F A Credit Management G A Product Coding G Financial Statements A


Pareto analysis is a simple diagnostic tool developed by Italian economist Vilfredo Pareto who theorized that 80% of problems usually stem from 20% of the causes. It is a special form of a bar graph used to display the relative importance of items, problems, events, and conditions. This tool provides answers to questions such as: “From among 100 items being

sold, which products generate 80% of total profit?” or “Which of the 10 identified factors cause 80% of product defects?” or “Has the initiation of a quality improvement program reduced the number of defects?”

PARETO ANALYSISPARETO

ANALYSIS

A Pareto Chart can be used to: 1. Zero in on critical issues by ranking them in terms of importance and frequency; 2. Prioritize problems or causes to efficiently initiate problem solving; 3. Analyze problems or causes by different groupings; and 4. Analyze the before and after impact of changes made in a process.

Generally, data is arranged such that the few vital factors reveal themselves. In most cases, two or three categories will dominate the others. These few categories that account for the bulk will be the high-impact points where one needs to focus. Thus, concentrating efforts on these few items will bring about a greater impact and be more cost-effective than undirected efforts.

STEPS IN CONSTRUCTING A PARETO CHART

To construct a Pareto Chart, follow these steps: Step 1 List down the categories to be compared. Step 2 Choose a standard unit of measurement and the time period to be studied. For

example, it can be a measure of how something occurs (defects, errors, expenses, etc.); frequencies of reasons cited in a survey as the cause of a particular problem or a specific measurement of volume or size. Be sure that the time period to be studied is of a reasonable length of time to enable the collection of sufficient data.

Step 3 Gather pertinent data for each category and summarize these in a three-column table.

Use the following column headings: “Category”, “Frequency”, and “Percent to Total”. In the first column, list the specific items or categories. Under the “Frequency” column write corresponding frequencies for each category. To get the percentage to total for each category divide each number in the second column by the total of the frequency column.

Step 4 Arrange the order of categories in descending order using the figures in the “Percent

to Total” column as basis. Step 5 Create the frame for your Pareto Chart. Indicate the different categories on the

horizontal axis. Your Pareto Chart has two vertical axes: one on the far left and the other on the far right of the graph. The vertical axis on the left will indicate the frequency of each category while the right vertical axis will represent the percentage scale. The scale on the right vertical axis should be scaled so that the point for the number of occurrences (frequency) matches the corresponding percentage frequency on the right.


Step 6 With the bar graph format plot the frequencies for each category using the left vertical axis of your chart. Be sure to scale your left axis up to the total number of frequencies (i.e., the total of column 2).

Step 7 Plot the cumulative percentage line by placing a dot above each bar at the height

corresponding to the scale on the right vertical axis. Connect the dots from left to right, ending with 100% point.

Step 8 Identify the categories or elements corresponding to 80%, 90%, and 100%. For the sake of simplicity here is an example that involves only nine elements or categories. A stuffed toy manufacturer wants to know which of her product lines are responsible for 80% of her sales. Culling from her 2005 sales records, she draws up a summary of her sales as shown in the table below.

Category Frequency (in thousand pesos) Percent to Total

Doll 5 550 27.50 Bear 495 24.75 Doll 2 350 17.50 Doll 1 200 10.00 Doll 3 105 5.25 Dalmatian 100 5.00 Doll 4 85 4.25 Poodle 64 3.20 Pig 51 2.55

TOTAL 2,000 100.00 A Pareto Chart drawn using the above information is shown below.

What can you infer from the chart on the left? What product lines contribute to at least 80% of the stuffed toy manufacturer’s sales?

0

500

1000

1500

2000

Doll 5 Bear Doll 2 Doll 1 Doll 3 Dalmatian Doll 4 Poodle PigProduct Line Categories

Freq

uenc

y (Sa

les in

Tho

usan

d Pes

os)

0

25%

50%

75%

100%

Percentage to Total

27.5%

52.25%

69.75%

79.75%85.00%

90.00% 94.25%97.45%

0

500

1000

1500

2000

Doll 5 Bear Doll 2 Doll 1 Doll 3 Dalmatian Doll 4 Poodle PigProduct Line Categories

Freq

uenc

y (Sa

les in

Tho

usan

d Pes

os)

0

25%

50%

75%

100%

Percentage to Total

27.5%

52.25%

69.75%

79.75%85.00%

90.00% 94.25%97.45%

Fig. 6.15: Sample Pareto Chart



You can use the Pareto analysis in many situations involving sorting, classifying, and prioritizing a large number of categories. Some applications include identifying categories or factors that contribute to 80% of sales, overall profit, inventory cost, rejects, and total expenses.

1. Sales and profit. As shown above, the Pareto analysis can be used to determine which of the product lines bring in 80% of the revenues. If figures on profit margins are available the same procedure can be done to determine which product lines contribute 80% to the overall profits of a firm. Similarly, for a firm that employs several salesmen, Pareto analysis can be used to determine who brings in 80% of total sales.

2. Inventory control. Pareto analysis is known as the ABC classification system in inventory management. It can be used to group inventory items into: “A” items – high usage or fast moving items; “B” items – medium usage or average moving items; or “C” items – low usage or slow moving items.

A retailer who finds the cost of carrying too much items in inventory a financial burden can do a Pareto analysis to classify inventory stocks. If it turns out that only a few items account for 80% of his total inventory and that these few items are “C” items, then it is advisable that he limit the number of such items in stock.

3. Quality control. Pareto analysis can help identify the vital few which cause 80% of complaints or rejects. For instance, following complaints from customers, a department store returns 50 ladies’ bags to its manufacturer. The manufacturer discovers that 80% of the complaints were traceable to four defective parts against a total of 15.

4. Finance. Pareto analysis is a good way of examining and classifying the different cost elements according to priority. It is useful in determining which costs can be reduced when a firm has to cut down on some expenses.

When interpreting a Pareto Chart, let your common sense dominate. The most frequent or most costly events are not always the most important, e.g., two fatal accidents deserve more attention than 25 cut fingers. Investigate further to solve problems. Ask yourself: “What makes the biggest difference? What will it cost to correct the problems? What will happen if the problem is not corrected?”


The Program Evaluation and Review Technique (PERT) is a project management tool used to schedule, organize, and coordinate tasks within a project. It was developed by the U.S. Navy in 1958 to manage the Polaris submarine missile program. A similar methodology, the Critical Path Method (CPM), which was developed for project management in the private

sector at around the same time, has become synonymous with PERT. While CPM is easy to understand and use, it fails to consider the time variations that can have a great impact on the completion time of a complex project.

PERT/CPMPERT/CPM

The PERT/CPM is used by managers in planning, scheduling, and controlling resources and costs. It can be used to answer questions such as: How long will it take to complete the entire project? What are the risks involved? Is the project on schedule, behind schedule, or ahead of schedule? What are the critical activities in the project which can delay the entire project if they are not completed on time? HOW TO DO PERT/CPM The six steps listed below are common to both techniques. Step 1 Define the project and all its activities and milestones. A project, which is made up

of several tasks, should have only a single start activity and a single finish activity. Activities are the tasks required to complete a project while the milestones are the events that mark the beginning and the end of one or more activities.

Step 2 Determine the sequence of activities. Step 3 Construct the network diagram to connect all the activities. Use an arrowed line to

represent an activity and a circle or node to represent an event or milestone. Milestones are numbered sequentially.

Step 4 Assign time estimates for each activity. Any unit of time can be assigned but only one

unit of time should be used consistently in a diagram. A unique feature of PERT is its ability to deal with uncertainty in activity completion

times. For each activity, PERT usually includes three time estimates:

Optimistic time – This is generally the shortest time in which the activity can be completed

Most likely time – This is the completion time having the highest probability. This is different from the expected time.

Pessimistic time – This is the longest time that an activity may require.


PERT assumes a beta distribution for time estimates. For a beta distribution, the expected time for each activity can be approximated using the following weighted average: Expected time = (Optimistic time + 4 x most likely time + pessimistic time) 6 The expected time and sequence of activities of a hypothetical project is displayed on the network diagram as shown on the right. The sequence of activities is denoted by the letters A to E while the milestones are numbered 1 to 5. In some cases, the cost involved for each activity is also shown in the diagram.

1

3

4

52A

B

C

D

E

t = 3 weeks

t = 3 weeks

t = 2 weekst = 4 weeks

t = 2 weeks

t = 1 weekF

1

3

4

52A

B

C

D

E

t = 3 weeks

t = 3 weeks

t = 2 weekst = 4 weeks

t = 2 weeks

t = 1 weekF

Fig. 6.16: Simple PERT Network

Step 5 Compute for the longest time path through the network. This is called the critical path which represents the total amount of time required for the project. It is determined by adding the times for the activities in each sequence and determining the longest path of the project. If activities outside the critical path speed up or slow down, the total project time does not change. The amount of time that a non-critical path activity can be delayed without delaying the outcome of the entire project is referred to as slack time.

Step 6 Use the PERT chart to monitor and control the project as it progresses. As the project

comes on stream, the estimated times can be replace with actual times. In case, there are delays, additional resources may be needed to stay on schedule and the PERT chart may be modified to reflect the new situation.

For purposes of illustration let’s take the following example. A large trading firm is intending to buy a new computer system. The activities involved are as follows:

Activity Activity Designation

Expected Time (in days)

Create schedule 1 – 2 10 Buy hardware 1 – 3 5 Installation 3 – 5 5 Programming 2 – 4 20 Test code 4 – 8 20 Write manual 5 – 7 15 Conversion 5 – 6 5 Test system 8 – 10 10 Training 7 – 9 5 User test 9 – 11 10


The following PERT chart is drawn based on the above information.

1

3

2 4

5

6

7

8

9 11

10

10 days

5 days

20 days

5 days 15 days

5 days

20 days 10 days

5 days 10 days

11

33

22 44

55

66

77

88

99 1111

1010

10 days

5 days

20 days

5 days 15 days

5 days

20 days 10 days

5 days 10 days

Fig. 6.17: Sample PERT chart

The direction of the arrows indicates the sequence of the tasks. In the diagram, the tasks between 1, 2, 4, 8, and 10 must be completed in sequence. These are called dependent or serial tasks. In contrast, the tasks between 1 and 2 and tasks 1 and 3 are not dependent on the completion of one to start the other and can be done simultaneously. These tasks are called parallel tasks or concurrent tasks. Tasks that must be completed in sequence but that don’t require resources or completion time are considered event dependent. These are represented by dotted lines and are called dummy activities. In the above example, the dashed arrow linking tasks 6 and 9 indicates that the system files must be converted before the user test can take place, but that the resources and time required to prepare for the user test (writing the user manual and user training) are on another path. The critical path runs through activities 1-2-4-8-10-9-11. APPLICATION AND LIMITATIONS The PERT/CPM chart is often preferred over the Gantt chart, another popular project management charting method, because it clearly illustrates task dependencies. However, the PERT/CPM chart is more difficult to interpret, especially on complex projects. This tool provides the following information: expected project completion time, probability of completion before a specified date, activity start and end dates, the critical path activities that directly impact on the completion time, and the activities that have slack time and that can lend resources to critical path activities. PERT/CPM has its weaknesses too. Time estimates can be subjective or mere guesses especially if these are set by people with little experience in performing the activity. In some cases, if the person or group performing the activity sets the time, there may be a bias in the estimate.


PROCEDURE CHART

PROCEDURE CHART

This tool is used to trace the complete flow of a particular document and the operating steps required to process it. It is made of several columns. A separate column is created for each department or section the document passes through.

STEPS IN CONSTRUCTING A PROCEDURE CHART

Step 1 Decide on the procedure you wish to chart. Step 2 Gather pertinent information on the procedure. Step 3 On a large sheet of paper draw several columns. The number of columns will depend

on how many departments or sections a document will pass through. Step 4 Chart the procedural steps and the flow of documents using the basic standards9

appearing on the next page. APPLICATIONS AND LIMITATIONS You can use this tool to analyze the existing flow of documents in a company. On Fig. 6.19, a sample procedure chart involving the processing of a non-stock requisition is shown. If warranted, you can redesign a new procedural flow to simplify paperwork procedures. The same tool can be used to detail procedures for proposed systems.

9 Technonet Asia, Industrial Extension Manual for Small and Medium Industries in Developing

Country, Volume One, April 1985, page 112.


DOCUMENTS THE NAMES OF SECTIONS OR DEPARTMENTS ARE DESIGNATED

IN THESE COLUMNS Documents are listed in the order of their use in the procedure with the name and form number shown. This symbol represents the document and the number of copies and appears on the chart opposite its title shown in this column. (Note: Form numbers used are for illustration only and do not refer to actual number of forms in use.)

1. This illustrates that the

document originated in the procedure at this step.

2. Procedural steps explaining action taken are numbered consecutively.

3. The arrow shows the movement of the document.

Indicate where sent or how disposed of

Indicate from where 4. This illustrates the

receipt of the document from a source not indicated in the columnar headings and shows the combined movement of both documents to a third section.

Indicate

where sent or how

disposed of

5. Shows disposition of a

document (e.g., file and routing within the chart)

Same as origin

9. Broken line indicates when actual number of documents is variable or undetermined.

10. Dotted line indicates an alternate flow

Indicates destroy

6. Indicates a multiple copy document and distribution of same.

Indicate disposition

Indicate disposition

11. Indicates alternate action and disposition of document.

Indicates file

7. Explain action taken

and routing or original and duplicate.

8. Broken line indicates

that action is suspended until further steps are taken.

Fig. 6.18: Standards for Procedure Charting

1 1

1 1 2

3

1

2 1

3 1

2 3

1

The illustrations above show basic standards to follow in the flowcharting of procedures and related paper.

Key:Normal movement of formAlternate movement of formsSecond alternate movement

Form is originated

Into or out of pending file

File or destroy



Form is originated


File or destroy



Form is originated


File or destroy



Form is originated


File or destroy


Department Secretary Purchasing Department Accounting Department

1. Receives request for non-stock materials.

2. Prepares non-stock requisition form in duplicate.

Non-Stock RequisitionForm

3. Forwards forms to head for approval.

4. Canvasses items from suppliers.

5. Purchases items on credit.

6. Hands over materials todepartment secretary.

Invoice

Requisition Form

Requisition Form

Invoice

From supplier

9. Prepares voucher and check.10. Attaches requisition form to voucher.11. Informs supplier payment is ready for pick-up.

12. Has supplier sign voucher to acknowledge receipt of payment.

13. Files voucher.

Voucher and check

To supplier

VoucherFile

Check

8. Attaches invoice to requisition form.

Requisition Form

7. Acknowledges receipt of materials by signing bottom portion of requisition form.

File

Requisition Form

Department Secretary Purchasing Department Accounting Department

1. Receives request for non-stock materials.

2. Prepares non-stock requisition form in duplicate.

Non-Stock RequisitionForm

3. Forwards forms to head for approval.

Requisition Form

Requisition Form

4. Canvasses items from suppliers.

5. Purchases items on credit.

6. Hands over materials todepartment secretary.

Invoice

Requisition Form

Invoice

From supplier

9. Prepares voucher and check.10. Attaches requisition form to voucher.11. Informs supplier payment is ready for pick-up.

12. Has supplier sign voucher to acknowledge receipt of payment.

13. Files voucher.

Voucher and check

To supplier

VoucherFile

Check

8. Attaches invoice to requisition form.

7. Acknowledges receipt of materials by signing bottom portion of requisition form.

File

Requisition Form

Fig. 6.19: A Procedure Chart Sample


The relations diagram is a graphical representation of all the factors or elements in a complicated problem, system, or situation. It is also called the interrelationship digraph or network diagram. This tool is used to identify the key issue, the root

cause of existing problems, and the area of greatest impact for improvement. Instead of one element following another in a logical sequence, each element is connected to many other factors to show that they have impact on each other.

RELATIONSDIAGRAM

RELATIONSDIAGRAM

DRAWING A RELATIONS DIAGRAM Step 1 Define the issue or problem you wish to explore. Write the issue or problem on a

card and stick it on the board. Step 2 Brainstorm ideas about the issue and write each element or factor related to the issue

on a separate card. Step 3 Position cards on the board. Place one card at a time and ask yourself: “Is this

element related to the others?” Leave space between cards to allow for drawing arrows later.

Step 4 Compare each element to all the others. For each element ask: “Does this cause or

influence any other element?” Draw arrows to connect related elements. The arrows should be drawn from the element that influences to the one that is influenced (i.e., from the “cause” card to the “effect” card). If two elements influence each other, the arrow should be drawn to reflect the stronger influence. Repeat this step until you have completely considered all elements.

Step 5 Count the arrows in and out of each element. Write the counts at the bottom of each

card. Identify the root causes (many arrows out, few arrows in) and the root effects (many arrows in, few arrows out).

Example10: A computer support group is planning a major project: replacing the mainframe

computer. The group drew up a relations diagram to sort out a confusing set of elements involved in this project.

10 http://www.asq.org/lern-about-quality/new-management-planning-tools/overview/relations-

diagram.html

http://www.asq.org/lern-about-quality/new-management-planning


Fig. 6.20: Relations Diagram Example

COMPUTERREPLACEMENT

PROJECT

New software

Higher level ofcustomer service

Growth and higherprofit potential

Install newmainframe

Train usersTrain operators

Upgrade supportequipment

Serviceinterruptions

Telecommuni-cations changes

Negotiate newmaintenance

contracts

Expand computerroom

More utilities(heat, air electricity)

Staff increases

Increasedprocessing cost

In/Out

1/0

2/0

2/0

1/1

1/1

3/0

3/0

1/1

1/12/0

1/2

1/4

1/0

1/6

Issues around computer replacement project

“Computer replacement project” is the card identifying the issue. The ideas that were brainstormed were a mixture of action steps, problems, desired results and less-desirable effects to be handled. All these ideas went onto the diagram together. As the questions were asked about relationships and causes, the mixture of ideas began to sort itself out. After all the arrows were drawn, key issues became clear. They are outlined with bold lines. “New software” has one arrow in and six arrows out. “Install new mainframe” has one arrow in and four out. Both ideas are basic causes. “Service interruptions” and “Increased processing cost” both have three arrows in, and the group identified them as key effects to avoid. APPLICATIONS AND LIMITATIONS The relations diagram can be used in any situation that calls for distinguishing between causes and effects and getting to the root cause(s) and effect(s) of a problem. A word of caution: the number of arrows is only an indicator and not an absolute rule.


A scatter diagram (also referred to as scatter plot) is used to study the possible relationship between two variables, i.e., what happens to one variable when the other variable is changed. It is composed of a horizontal axis containing the values of independent variable and a vertical axis representing the measurements of the dependent variable. Although

these diagrams cannot prove that one variable causes the other, they do indicate however, the existence of a relationship, as well as the strength of that relationship.

SCATTERDIAGRAMSCATTERDIAGRAM

The slope of the diagram indicates the type of relationship that exists between variables. There are several different patterns (meanings) that scatter diagrams can have. The wider the pattern of scattering, the lower the degree of association between the independent and dependent variable. Generally, a scatter diagram may take one of three patterns:

The figure on the left shows the existence of a positive correlation between two variables: Advertising budget and number of pairs of jeans sold. That is, as the advertising budget increases, the number of pairs of jeans sold increases. It is not always right to conclude, however, that this is a cause and effect relationship because correlation does not necessarily mean causality. The relationship may be caused by a third variable like number of outlets or store location.

This time, the figure on the left shows a negative correlation between two variables: demand for a good and selling price. That is, an increase in selling prices will cause a decrease in quantity demanded. It is possible that other than price, the decline in demand may be caused by a third variable like reduced income or inferior product quality.

0

50

100

150

200

250

0 500 1000 1500 2000 2500

Advertising Budget (in thousand pesos)

No.

of J

eans

Sol

d (in

thou

sand

s)

Positive correlation:

y increases as x increases

0

20

40

60

80

100

120

0 50 100 150

Quantity Demanded (in thousands)

Sel

ling

Pric

e(in

pes

os)

Negative Correlation:

As y increases, x decreases


There is also the no correlation category. The points on the diagram on the left are so random that there is no apparent correlation between the two variables: quantity of greeting cards sold and the age of customers.

0

20

40

60

80

100

120

15 20 25 30 35 40 45

Age

Qua

ntity

Sol

d

No Correlation

Draw a straight line or curve running through the data so that it “fits” as well as possible. The more points cluster around the line of best fit, the stronger the relationship that exists between the two variables. However, if the points show no significant clustering, there is likely to be no correlation.

Positive Correlation

0

20

40

60

80

100

120

15 25 35 45

Age

Qua

ntity

Dem

ande

d

0

20

40

60

80

100

120

0 50 100 150

Quantity Demanded (in thousands)

Sel

ling

Pric

e(in

pes

os)

Negative Correlation

0

50

100

150

200

250

0 500 1000 1500 2000 2500

Advertising Budget (in thousand pesos)

No. o

f Jea

ns S

old (in

thou

sand

s)

No Correlation

APPLICATIONS AND LIMITATIONS Correlation does not imply causality. Your scatter plot may show that a relationship exists, but it does not and cannot prove that one variable is causing the other. There could be a third factor involved which is causing both, some other systemic cause, or the apparent relationship could just be a coincidence. Nonetheless, the scatter plot is a very useful tool. It can give you a clue that two things might be related, and if so, how they move together.


Stakeholders are the groups (e.g., legal and political entities, public at large, suppliers, consumers, customers, operators, employees, etc.) that have interest in the project, program, policy or system under analysis. They may either be positively (beneficiaries) or negatively affected by the implementation of the project, program, policy or system and may either be

involved or excluded from the decision-making process.

STAKEHOLDERANALYSIS

STAKEHOLDERANALYSIS

Stakeholder analysis is a technique that involves identifying, gathering, and analyzing qualitative information on stakeholders, an assessment of their interests, and the ways in which these interests affect the implementation of a project, program, policy or system (from hereon collectively referred to as project). By identifying the stakeholders and their interests, you can predict who will support or block project implementation efforts. The information gathered can likewise be used to provide input for other analyses (e.g., strategic planning and institutional assessment); to develop action plans to increase support for a project; and as a guide to participatory consensus-building process. HOW TO DO A STAKEHOLDER ANALYSIS Step 1 Select and define the specific project to be analyzed. Step 2 Identify who stakeholders are and draw up a stakeholder table. You can design your

own table to suit your particular needs. The next table is a modified version of stakeholder table taken from the internet.11

Resources

Stakeholder Position

(S, MS, N, MO, O)

Interests

What does the project expect the stakeholder

to provide? Quantity (3,2,1)

Ability to mobilize (3,2,1)

Power Leader (Yes/ No)

Primary Secondary

Step 3 Fill in the stakeholder table. Stakeholder. List down people and entities that may be affected, have interest in, or

can affect the implementation of the project under analysis. Categorize stakeholders into primary and secondary stakeholders. Primary stakeholders are those people and groups that are ultimately affected – whether positively or negatively – by the project. Secondary stakeholders are the intermediaries (like the funding organization, advocacy group, private sector organizations, and government agencies) involved in the implementation process.

Position. Indicate in this column whether the stakeholder supports, opposes or is neutral about the project. This will serve as the key to establishing whether or not the stakeholder will block the implementation of the project. Stakeholders who agree with the implementation of the project are supporters (S); those who disagree with the

11 http://www.lachsr.org/docuents/policytoolkitforstrengtheninghealthsectorreformpartii-EN.pdf

http://www.lachsr.org/docuents/policytoolkitfor


implementation are oppositionists (O); those with no clear opinion are considered neutral (N); those who express some, but not in total agreement with the project are classified as moderate supporters (MS); and those who express some, but not in total opposition to the project are classified as moderate opponents (MO). Interests. Determining a stakeholder’s vested interest will help in understanding his position. What are the stakeholder’s interests in the project, or the advantages and disadvantages that implementation of the project may bring to his organization or department? Find out the answers to these questions: What financial or emotional interest does a stakeholder have in the outcome of the project? What are the stakeholder’s expectations? What benefits are there likely for the stakeholder? Does the stakeholder have other interests which may conflict with the project under analysis?

Resources. How many resources can the stakeholder mobilize? Classify the quantity

of resources stakeholder can mobilize as follows: 3 = many, 2 = some, and 1 = few. Does the stakeholder have the ability to mobilize resources? Quantify the stakeholder ability to mobilize resources in terms of: 1 = stakeholder can make decisions regarding the use of resources in his organization; 2 = the stakeholder is one of several persons that make decisions regarding the use of resources; and 3 = the stakeholder cannot make decisions regarding the use of resources.

Power. This is defined as the combined measurement of the amount of resources a

stakeholder has and his capacity to mobilize them. The two resource scores are averaged. The resulting score is interpreted as follows: 3 = high power, 2 = medium power, and 1 = little power.

Leader. This is defined as the willingness to initiate or block the implementation of

the project. The stakeholder either possesses this trait (yes) or lacks it (no). Step 4 Once the stakeholder table is completed, analyze the information. Organize the

information from the stakeholder table in a Power/Interest Grid. (See Fig. 6.21) One’s position on the grid signals the type of action that needs to be taken to win them over.

POWER

INTEREST

LOW

HIGH

HIGH

POWER

INTEREST

LOW

HIGH

HIGH

Fig. 6.21: Power/Interest Grid

The people in the high power, high interest category must be fully engaged and completely satisfied.


Efforts must be exerted to keep those in the high power, low interest quadrant pleased and content. Keep the people in the low power, high interest group adequately informed and assure them that no major issues are arising. Although they may belong to the low power, low interest group, be sure you monitor them but do not bore them with excessive communication. Step 5 Develop strategies on how to: 1) Sustain the support of stakeholders who are currently supporters; 2) Increase the power and leadership of the supporters; 3) Convert oppositionists to supporters; 4) Weaken the power and leadership of oppositionists; and 5) Convert the neutral stakeholders into active supporters. APPLICATIONS AND LIMITATIONS This tool helps decision makers to assess a project environment. It is used to identify the key actors and to assess their knowledge, interest, positions, alliances, and importance to the project on hand. More specifically, a stakeholder analysis can: 1) draw out interests of stakeholders in relation to the problems which the project is seeking to address; 2) identify conflicts of interests between stakeholders; 3) help identify relations between stakeholders; and 4) help assess the right type of participation by different stakeholders. When a stakeholder analysis is done prior to the implementation of a system, policy or program, policymakers and managers can detect and act to prevent potential misunderstandings. As a result, implementation is more likely to proceed smoothly.


The letters SWOT stand for strengths, weaknesses, opportunities, and threats. SWOT analysis is a practical tool for analyzing an organization and its environment. It is commonly used in strategic planning activities.

SWOTANALYSIS

SWOTANALYSIS

Strengths refer to the firm’s resources and capabilities. In contrast to strengths, weaknesses are the shortcomings, problems, or difficulties encountered by a company. Since both strengths and weaknesses are conditions internal in nature, they can be controlled and made to work in favor of the organization. Thus, strengths can be honed further and weaknesses surmounted. Opportunities are conditions in the external environment that pose prospects for profit and growth of a firm. Threats, on the other hand, are conditions outside the organization that may in one way or another negatively affect the entity’s future. Unlike strengths and weaknesses, opportunities and threats are beyond organization control. Possible strengths include: a new, innovative product or service; doing business in a strategic business location; having quality processes and procedures; a strong brand name; enjoying good reputation among customers; and the favorable access to a distribution network. Weaknesses may include: lack of marketing expertise, undifferentiated products or services; poor business location; weak brand name; high cost structure; no access to credit; lack of access to key distribution channels; and limited production capacity. The environment may bring in opportunities such as: an unfulfilled customer need; new technologies; removal of international trade barriers; mergers, joint ventures or strategic alliances; and the opening of new international markets. In contrast, the following can pose as threats: a new competitor, shift in consumer taste from the firm’s products; increased trade barriers; emergence of substitute products; recession; new government regulations; price wars from competitors; and inflation. DOING A SWOT ANALYSIS Doing a SWOT analysis requires an extensive examination of a business and the industry affecting it. Basically it involves identifying where the business is now and what is likely to happen to it in the future. It is worth mentioning that this tool helps thresh out opportunities your client may not have thought of before. It also highlights threats and internal resources which were not evident during the setting of long-term goals. From these, courses of action and strategies can be developed to enable your client to achieve desired goals. The items that normally should be examined are listed in the SWOT chart that follows. Familiarize yourself with the chart and suggest to your client which critical areas to look out for.


SWOT ANALYSIS CHART

STRENGTHS and WEAKNESSES

(Controllable factors)

OPPORTUNITIES and THREATS (Uncontrollable factors)

MARKETING PERSONNEL PRODUCTION FINANCE

• Product (features/lines/life cycle/quality)

• Store location • Public image • Pricing • Promotion and advertising

activities • Distribution network • Labor force (size, skills,

productivity, morale, relations with management)

• Management (skills, network, expertise)

• Plant capacity, equipment,

machinery • Production methods • Quality control • Research and development • Purchasing and supply of

raw materials • Cash flow • Leverage • Capital for expansion and

reinvestment • Assets • Profitability • Cost structure

COMPETITION POLITICAL SOCIAL ECONOMIC TECHNOLOGY

CUSTOMER SUPPLIERS

• Who are the main competitors? What are they doing to gain a bigger market share?

• What are their pricing and promotion strategies?

• What is the political

scenario in the country? • What are the present

administration’s policies on taxation, imports, labor, consumer protection, etc?

• What is the agenda of the current administration?

• Population trends –

demographics • Values, preferences, and

attitudes of consumers

• Inflation trends • Interest rates • Unemployment • Demand • Foreign currency rates

• New products, new processes

• Obsolescence • Changes in consumer taste

and preferences • Level of disposable

income • Identification of target

market • Price movements • Source and location • Mergers/monopolies

Fig. 6.22: SWOT Analysis Chart An organization need not necessarily focus its efforts in achieving the most lucrative opportunity. In some cases, a firm may have a better chance of success if it develops a competitive advantage by identifying a fit between the firm’s strengths and the opportunities in the offing.


To develop strategies that take into account the SWOT profile, a combination of these factors can be taken into account. S-O strategies pursue opportunities that fit well with

the organization’s strengths. W-O strategies require that organizational weaknesses

are overcome before it pursues opportunities. S-T strategies imply capitalizing on the

organization’s strengths to reduce its vulnerability to external threats.

W-T Strategies

S-T StrategiesThreats

W-O Strategies

S-O StrategiesOpportunities

WeaknessesStrengths

W-T Strategies

S-T StrategiesThreats

W-O Strategies

S-O StrategiesOpportunities

WeaknessesStrengths

W-T strategies call for a defensive plan which will prevent the organization’s weaknesses from making it highly vulnerable to external threats.

APPLICATION AND LIMITATIONS SWOT analysis is a very popular tool because it is quick and easy to learn. However, a word of caution, SWOT analysis can be very subjective. Be realistic when identifying the strengths and weaknesses of your client. Always use competition as bases for analysis, i.e., is your client better than or worse than his competitors? Don’t rely on SWOT analysis too much. Once you’ve identified key issues, use other tools to audit and analyze an organization.

Chapter 7

MARKETING TOOLS AND STRATEGIES GETTING THE LION’S SHARE OF THE MARKET

To stay in business, entrepreneurs, at the very least, need to maintain the demand for their products and services. In many instances this is far from easy. For new entrepreneurs, penetrating and getting a share of a market can be even more difficult. The tools and strategies presented in this chapter are intended to reinforce your knowledge in the strategies associated with the 4Ps of marketing and sales forecasting techniques.

Putting up a branch, plant or factory site in every place where one has customers is not a wise decision as this move is likely to result in an immense capital outlay, inefficient operations, higher operating costs, excess capacity, and poor resource management. It is important that distribution channels are properly identified as each step in the distribution process adds

to the cost of the product, which in turns affects prices and the product’s marketability.

CHANNELS OF DISTRIBUTION

CHART

CHANNELS OF DISTRIBUTION

CHART

DISTRIBUTION CONSIDERATIONS Different products require different distribution channels. The decision of whether it is best to sell directly to end-users or to use middlemen depends on factors such as those summarized in the next page.


Preferable to use middlemen Preferable to sell directly

Simple Sophisticated Durable Highly perishable Convenience goods12 Unsought consumer products13

Type of Product

Bulky Small, compact Price Low High Volume Large Minimal Frequency of purchase Frequent Seldom or rarely After sales service Few Critical Geographical location of customers

Wide and extensive

Limited

Company resources Weak Strong What is the most practical and ideal marketing channel to use? When one is constrained by capital, naturally the most practical channel would be one wherein there are a few sales agents, a couple of wholesalers, several retailers, a few trucking companies and warehouses. When the product is highly perishable, it is a must to employ direct marketing to avoid delays and too much handling. Keep in mind that each distribution channel alternative will produce a different level of cost and sales volume. Encourage your client to do a periodic review and analyze his different channels of distribution. This is especially useful when he wants to create “new” markets or expand “old” markets. The channels of distribution chart can ease such review and analysis. HOW TO DO A CHANNELS OF DISTRIBUTION CHART Step 1 Specify the various distribution channels that link your client to his end users. Step 2 Determine the volume of products handled by each channel. Step 3 Estimate the cost of maintaining the channels over a specified period. These costs

include commissions, discounts, wholesalers’ margin, and retailers’ margin that your client pays for use of the channels’ services.

Step 4 Analyze and interpret the results.

12 Refer to consumer products that are purchased frequently with little comparison or shopping effort

on the part of consumer. Examples include: toothpaste, magazines, laundry soap, and detergent. 13 Refer to consumers goods where there is little consumer awareness, or if awareness exists,

consumers exhibit little interest or negative interest. Examples include: encyclopedias, memorial plan, and life insurance.

CHAPTER 7: MARKETING TOOLS AND STRATEGIES 121

Let’s assume that Mrs. Del Rosario, owner and manager of Virgin Coconut Oil Company, is going over her marketing operations. A review of her distribution channels reveals that she has four active channels: direct to end-users, through XYZ Network, XYZ Network to three small retailers, and other jobbers.

VIRGIN COCONUT OILCOMPANY

XYZ Network

Retailers

END-USERS

Other Jobbers

Fig. 7.1: Sample of Channels of Distribution Chart Based on last year’s operations, the volume sold per channel and discounts paid are as follows:

Total Volume Handled Monthly Channel Cost

Channel Monthly Volume

(in boxes)

Ave. Price Per

Box

Peso Value % Discount

(%) Discount

Value Percentage

to Total

Direct 50 2,500 125,000 4.00 15 18,750 5.98 XYZ 500 2,200 1,100,000 35.20 5 55,000 17.53 Retailers 700 2,000 1,400,000 44.80 10 140,000 44.62 Jobbers 200 2,500 500,000 16.00 20 100,000 31.87

Total 1,450 3,125,000 100.00 313,750 100.00 The above information shows the efficiency of each channel. The following conclusions can be drawn from the table: 1. The three retailers account for the biggest monthly volume, followed by XYZ Network and the other jobbers. 2. Despite the smaller volume contribution of jobbers, the cost of maintaining them is

almost twice the cost of maintaining XYZ Network. 3. Giving ample discounts to jobbers, retailers, and XYZ Network, these channels are able

to “push” the product to the market. 4. It takes more effort and a bigger discount to entice directly end-users to buy the product. If Mrs. Del Rosario pursues her plans to penetrate new markets, what channel would be the most effective one to use? APPLICATIONS AND LIMITATIONS The choice of distribution channels will vary for each type of product and intended market. There are reasons for having or not having multi-level distribution channels. Before deciding or suggesting which distribution channels to use, it is wise to assess each channel’s economic value.


FIVE FORCESANALYSIS

FIVE FORCESANALYSIS

The five forces model developed by Michael Porter will guide you in the analysis of an organization’s environment and the attractiveness of the industry to which it belongs. It provides a simple perspective for assessing and analyzing the competitive strength and position of a business entity.

This tool assumes that there are five important forces that determine one’s competitive power in a situation:

1. Supplier power. This is the power of suppliers to drive up the prices of inputs. Thus, the fewer the number of suppliers present, the more suppliers can dictate prices.

2. Buyer power. Relates to the power of customers to drive down prices. If your client

deals with only a handful of buyers, he may have to give in to the prices dictated by them.

3. Competitive rivalry. This refers to the relative strength of competition in the

industry. What is important here is the number and capability of competitors in the market. If there are many competitors, each offering equally attractive products and services, then each competitor is not likely to have much power. On the other hand, if your client has something unique to offer, then he has tremendous strength.

4. Threat of substitution. This relates to the extent to which different products and

services can be used in place of another. If your client is in an industry where substitution is easy and inexpensive, then his competitive power is weak.

5. Threat of new entry. Power is affected by the ability of people to enter the market. If

barriers to entry are low, new competitors are bound to enter the market if they see that people are making good profits. New competitors can easily weaken your client’s position in the market.


Porter’s Five Forces are brought together in a diagram like the one below.

THREAT OF NEW ENTRY COMPETITIVE RIVALRY

• Number of competitors • Quality differences • Other differences • Switching costs • Customer loyalty • Costs of leaving the

market • Etc.

• Time and cost of entry • Specialist knowledge • Economies of scale

THREAT OFNEW ENTRY

• Cost advantages • Technology protection • Low barriers to entry • Etc.

HOW TO USE THIS TOOL Step 1 Brainstorm the relevant factors taking place in your client’s business. Step 2 Using Fig. 7.2 as framework, assess your client’s situation. Opposite each factor

indicate a “+” sign if the force works in favor of your client and a “-” sign if the force goes against your client.

Step 3 Analyze the situation. Think through what can be done to increase your client’s

power with respect to each force. APPLICATIONS AND LIMITATIONS Conventionally, this tool is used to identify whether new products, services or businesses have the potential to be profitable. However, it can be very enlightening when used to understand the balance of power in other situations. By thinking through how each of the five forces affects your client, and by identifying the strength and direction of each force, you can quickly assess the strength of your client’s position and his chances of making profits in the business. With careful planning, you can swing the balance of power in favor of your client.

Fig. 7.2: Porter’s Five Forces

SUPPLIER POWER • Number of suppliers • Size of suppliers • Uniqueness of service • Ability to substitute • Costs of changing • Etc.

BUYER POWER • Number of customers • Size of each order • Differences between

competitors • Price sensitivity • Ability to substitute • Costs of changing • Etc.

COMPETITIVE RIVALRY

THREAT OF SUBSTITUTION • Substitute performance • Cost of change

SUPPLIER POWER

SUPPLIER POWER

BUYER POWER

THREAT OF SUBSTITUTION


This tool is an aid in market and competition analysis. Basically, position mapping classifies a set of products according to a set of dichotomous criteria (i.e., opposites of a characteristic). The map clearly shows where a firm’s product is in relation to competing products. With this simple tool, you can help your client decide whether to keep the product in the same

market or reposition it in other markets.

POSITIONING MAP

POSITIONING MAP

HOW TO CREATE A POSITIONING MAP Step 1 Identify the dichotomous criteria. At least two criteria can be operated. Step 2 Draw four quadrants. Write your criteria. Step 3 Using the selected criteria as basis, position the products in the appropriate quadrants. Step 4 Decide on how to compete. Let’s suppose a wannabe entrepreneur with P 5,000,000 is considering going into the food business and locating in Katipunan Avenue, Quezon City. She is targeting the students, residents and young professionals in the area. As she is not sure what type of food to specialize in, she goes to you for advice. How can you help her? A good starting point is to draw a positioning map of the food businesses in the area like the one shown below.

EXPENSIVE

* Cravings * Angelinos, Seiki

* Sweet Inspiration * Max’s, Pancake House

* Bon Appetit, Le Coeur de France *Starbucks/Seattle Coffee

Yellow Cab* Shakey’s, Pizza Hut *

Mocha Blends * * Old Spaghetti House * Chicken Bacolod House

FINE DINING

Cabalen, Katips *

Greenwich *

* Red Ribbon Kenny Rogers, KFC

* Pansit ng Taga Malabon *

Jollibee, McDonalds *

Fruit Magic * * Queen Grill

Mini-Stop* Dunkin Donuts/Mister Donut *

FAST FOOD TYPE

INEXPENSIVE

Fig. 7.3: Sample of Positioning Map Given the above information, what type of business do you advise your client get into? Why?


APPLICATIONS AND LIMITATIONS The positioning map is ideal for gauging the extent of competition, determining appropriate product positions, and identifying new markets. Care must be taken when creating a positioning map. Be sure you select a good set of criteria. Misreading market trends can result in the wrong choice of product criteria.


PRICINGSTRATEGIES

PRICINGSTRATEGIES

How should your client set his prices? The task of setting prices is not easy, as several pricing considerations need to be taken into account before the right price is determined. The price of a product or service is not dictated by internal factors alone. External factors influence pricing too.

INTERNAL FACTORS AFFECTING PRICING DECISIONS Company costs. The costs incurred in the course of producing, distributing, and selling a product is an important element in the pricing decision of a company. Since your client expects a fair return on his investment, the minimum selling price he sets must cover total costs incurred plus the desired return. Marketing objectives. Aside from costs, pricing is largely influenced by decisions on market positioning. If your client is targeting the lower income groups then necessarily prices have to be low. Other marketing objectives include profit maximization, survival, market-share leadership, and product-quality leadership. If your client is after profit maximization, then he will have to estimate demands and costs for his products at different prices and then settle for the price that will yield the highest profit or return on investment. A client that is beset with problems like overcapacity, intense competition, and changing consumer wants should set his main objective as survival. Making profits is not the primary goal but rather how to keep the business going. Thus, even if prices are low, so long as they are able to cover variable costs and a portion of fixed costs, then that should suffice to tide operations temporarily. Such an arrangement should not be considered permanent. Your client should work fast to improve his product so as to induce more sales and thus, ensure the continued business operation in the long run. If your client wants to maintain market-share leadership, prices have to be kept low to prevent competition from taking a bite off his share of the pie. In case your client is trying to establish himself as a leader in quality products, then necessarily he will have to charge high prices to cover R&D expenses and high product quality. Marketing-mix strategies. All the other Ps of marketing (product, place, and promotion) entail costs and thus need to be coordinated as they are likely to affect the pricing decision of a firm. For instance, your client may decide to use several distribution channels to get a new product from the plant to the end users. He may also decide to do some hard selling and promotional activities to get a new product off the ground. These decisions necessarily mean having to price the product higher to recover the costs of distribution and promotion. Organizational considerations. The fourth internal factor that affects pricing decision is the question of who sets the price. Management must decide who in the organization should set the price. Will it be the owner? the board? the head of production? the marketing manager? the cost accountant or the financial manager?


EXTERNAL FACTORS AFFECTING PRICING DECISIONS External factors that affect pricing decisions are not within the control of management and as such are difficult to control. Perceptions on price and value. In setting prices, your client must take into consideration the market's perceptions of price and value as these affect buying decisions. When buyers pay for a product they let go of their money in exchange for something they perceive as having value (the benefits that can be derived from the use of the product). If customers perceive that the price is greater than the product's value, they are not likely to buy the product. Conversely, if customers perceive that the price is below the product's value, they will not hesitate to buy it, but your client stands to lose profit opportunities. Advise your client that pricing decisions, like other marketing mix decisions, must be buyer-oriented. He needs to know how much value consumers place on the benefits they will derive from his products and the price that fits this value. It is not easy to price value perceptions. But nonetheless, consumers do use these values to evaluate a product's price. The nature of the market. There are four types of markets: monopoly, oligopoly, monopolistic competition, and pure competition. If you are to give advice to a client on how to price his products, it is important that you know the nature of the market to which his business belongs.

Type of Market No. of Sellers

Characteristics

Pure monopoly One In the case of pure monopoly one firm is the lone producer of a good or service that has no close substitutes. The lone seller usually sets the selling price at the level the market can bear.

Oligopoly Few The distinctive characteristic of an oligopoly market is that the number of firms is small enough such that actions of an individual firm in the industry on price, output, product style or quality, introduction of new models, and the terms of sale have a perceptible impact on the sales of other firms in the industry. Sellers in the market are sensitive to each other's pricing and marketing strategies.

Monopolistic competition

Many Many buyers and sellers trade over a range of prices rather than a single market price. Prices range because sellers are able to differentiate their products. Buyers see differences in products and are willing to pay for these different product features.


Pure competition

Many No single buyer or seller controls the market. No product differentiation exists from firm to firm, firms are free to enter and exit from the industry (i.e., there are low barriers to entry and exit), and there is no collusion in the industry. In this type of market, market research, product development, pricing, advertising, promotion have little or no effect. The individual firm in a purely competitive industry is effectively a price taker since the products of every producer are perfect substitutes for the products of every other producer.

The nature of demand. The quantity people buy varies at different price levels. Generally, people buy more if the price is low and relatively much less when the price is high. This is why the demand curve is downward slopping. However, the drop in quantity vis-à-vis an increase in price is not the same for all products. Some products are more sensitive (i.e. quantity demanded will drop at a faster rate) to a price increase than others. Such sensitivity is called price elasticity -- the change in demand following a change in price. The term elasticity expresses the relationship between changes in price and quantity demanded. The measurement of price elasticity allows companies to evaluate how price changes will affect total revenue.

Elastic Demand

If elasticity >1 (i.e., the % change in quantity Q > % change in price P) then the product is said to have an elastic demand. Consumers are relatively more responsive to price changes when demand is elastic. Demand is elastic when comparable substitute products are available in the market. Since there are cheaper product substitutes available consumers will not hesitate to switch products when the price of their current brand increases.

Inelastic Demand

If elasticity <1 (i.e., the % change in quantity Q < % change in price P) then the product is said have an inelastic demand. Buyers are less price sensitive to price changes when demand is inelastic. This is usually the case when the product is unique, the quality is high, or when comparable product substitutes are not available.

PRICE

QUANTITY

P1P2

Q1 Q2

0

D1D2

PRICE

QUANTITY

PRICE

QUANTITY

P1P2

Q1 Q2

0

D1D2

0

PRICE

QUANTITY

P1

P2

Q1 Q2

D1

D2

0

PRICE

QUANTITY

PRICE

QUANTITY

P1

P2

P1

P2

Q1 Q2

D1

D2


Unit Elastic Demand

If elasticity =1 (i.e., the % change in quantity Q = % change in price P) then the product is said to have a unit elastic demand. A price decrease is compensated by an increase in quantity demanded. Thus, within a narrow range, total revenue remains unchanged.

Perfectly Elastic Demand

Elasticity is infinite when the product has a perfectly elastic demand. People are willing to buy different quantities at the given price.

Perfectly Inelastic Demand

In cases where elasticity = 0 (i.e., quantity is unaffected by price changes) the product is said to have a perfectly inelastic demand. People are willing to buy the same amount of product regardless of how much it costs.

PRICE

QUANTITY

P1

P2

Q1 Q2

0

D1

D2

PRICE

QUANTITY

PRICE

QUANTITY

P1

P2

Q1 Q2

0

D1

D2

PRICE

QUANTITY

P

Q1 Q2

0

D1 D2

PRICE

QUANTITY

P

Q1 Q2

0

D1 D2

PRICE

QUANTITY

P1

P2

0

D1

D2

Q1

PRICE

QUANTITY

P1

P2

P1

P2

0

D1

D2

D1

D2

Q1

Competition. Consumers have a tendency to compare prices whenever product substitutes are available. If a cheaper product substitute can perform the same job why purchase a more expensive brand? A good example is matches. A matchstick can only be used once after which it is discarded. Consequently, manufacturers of matches watch each other’s pricing moves because given the limited purpose of their product consumers tend to pick out the cheapest brand of matches. The same is also true for many consumer goods like detergent, shampoo, bath soap, coffee, etc. Consumers will choose the cheaper brand if a comparable product substitute is available. Appliance manufacturers keep a close watch over their competitors' pricing, innovations, and promotional strategies. They know that with the presence of competition, product substitution is possible and losing a customer to a competitor can easily be done if a customer is offered a comparable low-price product substitute.


A high-price, high margin business is likely to attract new entrants to the industry. A low-price, low margin business is likely to face lesser competition. Other external factors. The country's economic condition is one external factor that can have a strong influence on the pricing decisions of a firm. Recession, inflation, taxes, and prevailing interest rates affect the purchasing power of customers and their perceptions of a product's value and price. Given the same conditions, your client is likely to experience higher production costs and possibly, a reduction in sales volume. Government is another external influence that can affect the pricing decisions of your client. To ease inflation, government may enforce the regulation of prices of some commodities. Under such conditions, your client will be compelled to keep prices at a certain level. Social and environmental concerns can likewise affect your client’s pricing decision. With the growing clamor to reduce the use of non-biodegradable materials, firms may have to seek alternative solutions to reduce/recycle materials. Since your client has no control over external factors, he will have to take into account such considerations, review his sales targets, temper profit goals, and more importantly, adapt pricing decisions accordingly. PRICING METHODS Product costs and consumer perceptions of the product's value set the extreme points at which your client should set his prices. When he sets prices below product cost, he should not expect to earn profits no matter how many units he sells. On the other hand, if he sets prices too high, customers will hesitate to buy because they perceive the product to be overvalued. Advise your client to set his price between these extreme points with due consideration given to the internal and external factors discussed in the foregoing sections. There are three basic pricing methods: cost-based pricing, value-based pricing, and competition-based pricing. Cost-based pricing. Most businesses set their prices on the basis of how much went into the cost of producing the product. There are two kinds of cost-based pricing techniques: cost-plus pricing and break-even pricing.

● Cost-plus pricing. This is the simplest pricing method. In this method, all costs are added up and then divided by the number of units produced. To this unit cost figure, a certain percentage (commonly known as the mark-up), which represents the desired return on sales, is added to arrive at the selling price.

This method may be the easiest but it fails to take into consideration factors such as demand and competitors' prices.

● Break-even pricing. Under the break-even technique, the minimum price is determined at the level where total sales equal total cost. The break-even selling price, volume, and sales can be determined using the general equation: Total Sales = Total Costs


with Total Sales = Unit Selling Price (USP) x Volume (Y) (Equation 1)

and Total Costs = Total Fixed Cost (TFC) + [Unit Variable Cost (UVC) x Volume (Y)] (Equation 2)

Substituting equations 1 and 2 to the general equation will yield USP x Y = TFC + [(UVC) x (Y)] (Equation 3)

By simplifying equation 3, you can compute for unit selling price with equation 4: USP = TFC + UVC

Y (Equation 4)

USP is the selling price that will yield zero profits. Selling below this break-even price will mean definite losses for the business. It is only when the business sells above the break-even price that profits will start coming in.

Value-based pricing. Value-based pricing uses buyers' perceptions of value and not the seller's costs, as the key to pricing. If your client decides to use this method he needs to find out first what value buyers assign to different competitive offers. This method of pricing is not easy, as the task of measuring and establishing the perceived value of a product is difficult. Customers should be asked how much they are willing to pay for a basic product and for each benefit added to the product.

Competition-based pricing. Under this method, prices are set in relation to the price of competitors. This does not necessarily mean that your client will charge exactly the same price as his competitors do. He may opt to keep his prices slightly higher or lower than competition. PRICING STRATEGIES There are different pricing strategies to suit the different stages of a product's life cycle. New product pricing strategies. If your client is introducing an imitative new product, he can make use of any one of the four price-quality strategies. The choice will depend largely on the price-quality product positioning move your client wishes to establish vis-à-vis his competitors.


PRICE Higher Lower

Higher

Premium Strategy

Good-value

Strategy

QU

ALI

TY

Lower

Overcharging Strategy

Economy Strategy

On the other hand, if your client is introducing an innovative, patent protected product he is faced with the task of setting prices for the first time. He can then choose from either one of two pricing strategies: market skimming pricing and market penetration pricing.

● Market skimming pricing. Prices initially set are high to skim maximum revenues from the segments willing to pay the high price. This is used specially for innovative products without competition. As sales slow down and competitors come up with their own version of a similar product, prices are lowered to draw in the next price-sensitive layer of customers.

● Market penetration pricing. Prices are set low for a new product in order to attract a

many buyers and get a larger chunk of the market. For this strategy to be effective, the product must be highly sensitive so that a low price produces more market growth. Advise your client to be careful when opting to offer a new product at a low introductory price as it may create a permanent price image that may be difficult to change over time.

Product mix pricing strategies. Pricing a product may be difficult if it is part of a product mix because each of the products in the mix has its own demand, costs, and competition. There are five product-mix strategies, to wit:

● Product line pricing. Some companies manufacture more than one brand of a particular product. Procter and Gamble manufactures not one but two brands of deodorants -- Secret and Sure; not two but three bath soaps -- Safeguard, Camay, and Ivory. Kimberly-Clark Philippines carries three brands of bathroom tissue -- Scott, Joy, and Kleenex. 3D has more than five models of stand fans. In product line pricing, management must decide on the price differentials between the various products in a line by taking into consideration customer evaluations of their different features and competitors' prices. If the price difference between two brands is small, buyers will buy the more advanced product. If the price difference is large, customers will generally settle for the cheaper product.

● Optional product pricing. When companies choose to sell optional or accessory

products along with their main product then they are employing optional product pricing. Car dealers commonly use this pricing strategy. They have stripped-down, semi-loaded, and fully loaded car models all priced at varying levels to meet different budgets.

● Captive product pricing. There are some firms that make products that must be used

along with a main product. A few examples of captive product pricing include camera and film (Kodak), cars and spare parts, pens and refills (Parker), laser printers and toners (Hewlett Packard), and razors and blades (Gillette). Under this strategy,


companies try to price the main product low to attract buyers and then recover from the bigger volume of sale of accessories or consumables.

● By-product pricing. Many businesses often have by-products (e.g., meat processing,

oil refinery, sawmills, furniture making, etc.). If by-products are of no further use to the business, these establishments look for a market for these by-products to dispose of them. By-products are priced at a level where the business can recover storage costs.

● Product-bundle pricing. This strategy involves combining several products and

offering the bundle at a reduced price. Examples of product-bundle pricing include Eat All You Can extravaganzas and value meals of fast food restaurants. Some travel agencies offer airfares inclusive of accommodations. Wedding receptions at five-star hotels are priced for a package with wedding cake, doves, bridal car, flower arrangements, overnight stay at the honeymoon suite, welcome drinks, and other amenities. The reasoning behind product bundle pricing is that the whole is cheaper than the parts taken separately.

Product adjustment pricing strategies. Prices are never fixed. Companies usually have to adjust their prices to stay attuned to changes in customer differences and changing market situations. There are seven price-adjustment strategies. These are:

● Discount and allowance pricing. Discounts are given to customers who pay their bills before due date, buy in volume, or else buy during off-seasons. Allowances are another form of discount. Trade-in allowances are price reductions given for turning in an old item when buying a new one. Promotional allowances, on the other hand, are price reductions given to reward dealers for participating in advertising and sales-support programs.

● Segmented pricing. With segmented pricing, a company sells a product at two or

more prices, even though the difference in prices is not based on product costs. Senior citizens enjoy a 20% discount on their medicines and the food they eat in restaurants. At French Baker and Triple V Express, customers enjoy a 40% off on food items if purchases are made 30 minutes before closing time.

● Psychological pricing. In using psychological pricing, sellers consider the

psychology of prices and not simply economics. Some consumers equate price to quality -- i.e., the higher the price, the higher the perceived quality.

● Promotional pricing. Under promotional pricing strategy, products are temporarily

marked down below the list price to increase short-run sales. Supermarkets and department stores usually price some items below the normal list price in the hope that more customers will come in and buy other items at normal mark-ups.

● Value pricing. Marketers who adopt the value pricing strategy are out to offer the

right combination of quality and good services at a fair price. ● Geographical pricing. There are times when the client base of a firm spans the entire

country. In such cases, the firm must decide how to price its products for customers located in different parts of the country. It is not unusual for a company to charge customers in far places higher prices to cover shipping costs.


The life span of products differs from one another -- some are short-lived, while others span generations. Nonetheless, every product goes through four distinct stages in its life: introduction, growth, maturity, and decline. If we were to graph the life cycle of a typical product

it would look like Fig. 7.3. It is difficult to pinpoint with certainty where each stage begins and ends. However, the passing from one stage to another is usually marked by shifts in growth or decline in sales and profits.

PRODUCT LIFE CYCLE STRATEGIES

PRODUCT LIFE CYCLE STRATEGIES

TIME

SALES

SALES

PROFIT

Introduction

Period of slow sales growth as product is being introduced in the market. Profits are non -existent because of heavy expenses of product introduction.

Growth

Characterized by rapid market acceptance and substantial profit improvement.

Maturity

A period of slowdown in sales growth. Profits either stabilize or decline.

Decline

The period when sales growth shows a strong downward drift and profits erode.

TIME

SALES

SALES

PROFIT

TIME

SALES

SALES

PROFIT

Introduction


Growth


Maturity


Decline


TIME

SALES

SALES

PROFIT

TIME

SALES

SALES

PROFIT

Introduction


Growth


Maturity


Decline


TIME

SALES

SALES

PROFIT

TIME

SALES

SALES

PROFIT

Introduction


Growth


Maturity


Decline


TIME

SALES

SALES

PROFIT

TIME

SALES

SALES

PROFIT

Introduction


Growth


Maturity


Decline


Fig. 7.4: Product Life Cycle

Different stages call for different strategies. Thus, it is important that you know at what stage your client’s product is currently in. Philip Kotler developed the table of strategies in his book Marketing Management: Analysis, Planning and Control.14 He cautions that not all would agree with all suggested strategies in the table. Nonetheless, they represent a consensus of what a number of marketers would advise. According to him, "the best marketing strategy to follow in a given stage of the product life cycle is not necessarily the one prescribed in the table. Every company needs to develop a distinctive strategy at each stage, not the one everyone else is using." Table 7.1: Summary of Product Life Cycle Characteristics, Objectives, and Strategies

14 Kotler, Philip and Armstrong, Gary, Principles of Marketing, 7th Edition., Prentice-Hall, 1996, p.

332.


TIME

SALES

SALES

TIME

SALES

SALES

INTRODUCTION GROWTH MATURITY

DECLINE

CHARACTERISTICS SALES Low sales Rapidly rising

sales Peak sales Declining sales

COSTS High cost per customer

Average cost per customer

Low cost per customer

Low cost per customer

PROFITS Negative Rising profits High profits Declining profits CUSTOMERS Innovators Early adopters Middle majority Laggards COMPETITORS Few Growing number Stable number

beginning to decline

Declining number

MARKETING OBJECTIVES

Create product awareness and trial

Maximize market share

Maximize profit while defending market share

Reduce expenditures and milk the brand

STRATEGIES

PRODUCT Offer a basic product

Offer product extensions, service, warranty

Diversify brands and models

Phase out weak items

PRICE Use cost-plus Price to penetrate the market

Price to match or beat competitors

Cut price

DISTRIBUTION Build selective distribution

Build intensive distribution

Build more intensive distribution

Go selective -- phase out unprofitable outlets

ADVERTISING Build product awareness among early adopters and dealers

Build awareness and interest in the mass market

Stress brand differences and benefits

Reduce to level needed to retain hardcore loyalists

SALES PROMOTION Use heavy sales promotion to entice trial

Reduce to take advantage of heavy consumer demand

Increase to encourage brand switching

Reduce to minimal level


PRODUCT STRATEGIES

PRODUCT STRATEGIES

Customers view a product as a bundle of physical attributes and features. Your client can use product features as a competitive tool for differentiating his products from those of his competitors. Constant innovation and adding new valued product features will keep your client one step ahead of competition.

The following list of product features indicates the range of options your client can use to enhance customers' interest.

Color Upgrading ability Sizes Smell Packaging Style and design Durability Formulation Labels Brand name Consistency Weight Accessories Product image Flavors Length Quality Ingredients Scent Width Options Freshness Taste Additional uses

In addition, your client can opt to offer service features that will enhance a product. Since good customer service is an essential component of total customer satisfaction and a satisfied customer will continuously patronize and/or endorse a product(s)/service(s), it will be to your client’s advantage to put in free additional services like: 24-hour service, free pick-up and delivery, and warranty. There are four general types of product marketing strategies and these are shown below:

CURRENT PRODUCTS

NEW PRODUCTS

CURRENT MARKETS Market

Penetration Strategy

Product Development

Strategy

NEW MARKETS Market

Development Strategy

Diversification Strategy

Market penetration strategy. The idea here is to look for ways to increase the current market share of your client without having to change his present product lines. Some market penetration strategies include:

1) Encouraging customers to use the product more often.

2) Increasing the number of sales outlets, dealers, and distributors to make the product more accessible to customers.

3) Obtaining more shelf spaces for display of product in present store outlets for greater

visibility.

4) Intensifying advertising and promotion activities to attract users of another brand to switch brands and convince non-users to start using the product.


5) If the product is a convenient product (i.e., a consumer good that is purchased frequently and with a minimum of comparison), reduce price to encourage more sales.

6) Encouraging store personnel to endorse or recommend a product.

Market development strategy. In this case, the idea is to look for new markets whose needs might be met by your client’s existing products. Strategies under this category emphasize on expansion of distribution channels and looking for new market segments with a different set of demographic profile. Product development strategy. Under this strategy, your client should try to consider new-product development possibilities for his present markets. For instance, in the beginning, all toothpaste manufacturers promised the same thing: clean teeth. It was years later when they came up with improved toothpaste products for whiter teeth, fresher breath, fluoride protection against cavities, and calcium for stronger teeth. In the same way shampoo manufacturers have come up with different product variants through the years. Shampoo manufacturers have developed dandruff-free shampoo, shampoo and conditioner in one, dandruff control and conditioner in one, and shampoo for oily, dry, and normal hair. Another familiar example is the yellow box of crayons. Crayola crayons were developed in the U.S. in 1903. Over the years, the Crayola line has grown to include many new sizes and colors (box of crayons in 8s, 16s, 24s, 48s, 96s, and 120s), shapes (standard three-inch crayon sticks, jumbo, and "So Big"), and new products (erasable crayons, washable crayons, colored pencils, markers, paint, and modeling compounds). All these are the outcome of what is called product development strategy. It’s basically the same product but with new product attributes. Diversification strategy. Diversification calls for new products in completely new markets/businesses. Diversification strategy makes sense when good opportunities can be found outside the present business. A shampoo and conditioner manufacturer may have made a name for itself in the industry and may like to explore the possibility of engaging in the manufacture of other hair grooming products like gels, spray nets, and hair dyes. Diversification, however, does not need to be limited to the same line of business or related industry. San Miguel Corporation (SMC) is not just in the business of manufacturing beer. SMC is a highly diversified business conglomerate that is into the manufacture of beer (e.g., San Miguel, Miller, Cerveza Negra, Red Horse, Blue Ice, Gold Eagle etc.), non-alcoholic malt beverages (e.g., Cali, San Miguel NAB etc.), wines and spirits (e.g., Ginebra San Miguel, Añejo Rum, Tondeña Manila Rum, etc.), juice drinks (e.g., Zip Juice, Magnolia Fruit Drinks etc.), bottled water (e.g., Viva!, First Distilled Drinking Water, Wilkins), butter, cheese and margarine (e.g., Anchor, Dari Crème, Buttercup, Star, Primex, Baker's Best, etc.), processed meat (e.g., Moby, CampoCarne, Valiente, Great Bite, Bonanza), value-added meat products (e.g., Monterey), basic meat products (Magnolia Chicken), packaging (glass, metal, plastic, paper and composite materials), coconut oil and commercial feeds products (e.g., B-Meg), and real estate (e.g., The Legacy, Maravilla, Greenwoods, etc.).


Marketing involves more than just developing a product that satisfies a need, pricing it attractively, and then making it available to the target market. Necessarily, your client needs to communicate with his target market to encourage the use/purchase of his product or service. Generally there are four ways of promoting a product: advertising, personal selling,

sales promotion, and public relations. The choice of medium depends to a great extent on desired reach (the number of people in the target market exposed to an ad campaign during a given period), impact, frequency, habits of target consumers, and cost. Each of these four activities has its unique characteristics and these are summarized below.

PROMOTIONSTRATEGIESPROMOTIONSTRATEGIES

Table 7.2: Characteristics of Promotional Activities

ADVERTISING

PERSONAL SELLING

SALES PROMOTION

PUBLIC RELATIONS

Reach Very extensive; can reach geographically dispersed buyers; message can be repeated many times over

Limited Wide but not as extensive as advertising

Many but not as extensive or wide as advertising and sales promotion

Tools Print, radio, and television ads, billboards, direct mail, posters, leaflets, display signs, packaging, catalogs

Telemarketing, sales presentations, salesmen samples

Sampling, coupons, price packs, exhibits, giveaways, contests, games, discounts, fairs trade shows

News stories, press releases, speeches, special events, annual reports, brochures, company newsletters

Cost Expensive but comparatively low cost per exposure because it can be repeated several times over

Most expensive promotional tool because of the need to maintain a sales force

Expensive Economical

Form With the use of visuals, print, sound and color, ads are a very expressive form of promotion

Personal interaction between 2 or more people

Any form of inducement that gives consumers added value for their purchase

Effective means of informing the public about what is happening in the company

Impact Impersonal; not as persuasive as using company sales people; very effective in drawing customer awareness

Very personal and persuasive; very effective when nearing the point of closing a sale

Provides strong incentive to purchase "now"

Seldom used to generate sales but an effective tool in drawing awareness

Before you advise your client what form of promotion to take, be sure you have adequate information on your client’s type of product/market, buyer readiness stage, product’s lifecycle stage, and whether or not the push or pull strategy is employed. Type of product or market. When it comes to the use of the different promotional activities, manufacturers of consumer goods and industrial goods differ in preference. Consumer good manufacturers put a larger chunk of their funds in advertising followed by sales promotion, personal selling, and then public relations. On the other hand, manufacturers of industrial goods put more emphasis on personal selling, followed by sales promotion, advertising, and then public relations. The reason for the difference lies in the fact that


industrial goods, being more expensive and difficult to move vis-à-vis consumer goods, entail more persuasion, effort, and personal interaction to sell. Buyer’s readiness stage. Before your client can expect his target clients to buy his product, he must first build awareness and knowledge about his product. Once consumers are aware and know more about a new product, it is important to create the positive feelings of liking (the desire to have), preference (wanting a brand over another), and conviction (believing a particular brand is the best one to own) in the minds of target clients. This mind-set will ultimately bring target clients to buy the product. Advertising and public relations play major roles in the awareness and knowledge stages. Creating customer liking, preference, and conviction are best achieved by personal selling and advertising. Finally, closing a sale is best done with sales calls and sales promotion. Stage of product’s life cycle. The choice of which promotional tool to use also depends upon the product’s lifecycle. During the introductory stage, any of the four promotional tools will be useful. With the product still relatively new, building awareness and interest in the product can be achieved through advertising and public relations. Heavy use of sales promotion gimmicks is suggested to entice trial and encourage usage. The company’s sales force is deployed to engage in personal selling. As the product moves on to the growth stage, advertising and public relations continue to be powerful tools. At this stage, sales promotion activities can be reduced to take advantage of the prevailing heavy consumer demand. Thus, fewer incentives are needed to encourage the target market to buy the product. In the mature stage, sales promotion activities are increased to give sales a further boost. Moreover, promotional gimmicks are set off to encourage brand switching. Advertising campaigns designed to stress brand differences and benefits are resorted to keep the product in the minds of buyers. During the decline stage, companies reduce advertising activities to just about the level needed to retain hardcore loyalists. However, public relations activities are dropped and the company’s sales force puts little attention in pushing the “old” product. Sales promotional activities can still be pursued but these are normally kept at a minimum level. Push or pull strategy. The promotional mix is influenced by the decision of whether the producer wishes to employ a push or a pull strategy. A push strategy is a form of promotion strategy where the producer promotes his product to wholesalers who in turn promote to retailers and finally the retailers promote to consumers. In this case, the producer makes use of personal selling, trade promotion, etc. to induce his channel members to carry his product and promote it to final consumers. On the other hand, the pull strategy has the producer directing his marketing activities towards the end users encouraging them to buy the product. In this case, the marketing activities are primarily advertising and consumer sales promotion.


For many small entrepreneurs, determining the size of the target market is nothing more than a "guess-estimate." To be able to assist your client determine the size of his target market, you need to gather, process, and analyze relevant information relating to each intended market segment. The collection of primary market

data can be done with the use of mail questionnaire or personal interview. However, owing to budget constraints, manpower requirements and time limitations, heavy reliance is normally placed on secondary data. Secondary data sources include published materials in libraries, government agencies, academic institutions, trade and professional agencies, etc.

SALES FORECASTING TECHNIQUES

SALES FORECASTING TECHNIQUES

Assuming that sufficient data is on hand, there are several techniques in estimating the size of the potential market given existing economic conditions and competition.

TIPS ON FORECASTING When estimating the sales potential of selected market segments, keep the following points in mind: 1. If your client intends to sell more than one type of product or service, it is advisable to

prepare a separate sales estimate for each service or product group. 2. Estimates are only good if the assumptions used are realistic. Get information from

someone familiar with the line of business so that you avoid biased assumptions and ensure that estimates are realistic.

3. Don’t rely solely on secondary data. Interview people and gather first hand information

whenever possible. 4. Trend analysis treats the past and future demand for a particular product as a function of

time alone without considering other factors that may influence past or future demand fluctuations.

5. At best, results of analysis of historical trends present only prospects. Keep in mind that

business conditions are continuously changing and thus caution should be taken when presuming that the past will always reflect the future.

SALES FORECASTING TECHNIQUES Sales estimates can be calculated in many ways. These include:

1. Percentage share of total market 2. Executive poll method 3. Derived demand method 4. Market indicators method 5. Arithmetical straight line method 6. Arithmetical geometric curve method 7. Time-series analysis


Method 1: Percentage share of total market This is the simplest of all methods. The total market for the product or service is first quantified using the following equation:

Q = n x q x p where Q = represents total market demand n = number of buyers in the market q = quantity purchased by an average buyer in a given period p = price per unit. Once you have established the total market, evaluate your client’s share. For an existing firm in the industry, determining its share of the market is no problem. Simply divide the firm's current sales figure by the total market to get the firm’s percentage share of the total market. Consequently, the firm's future sales can be estimated by forecasting the total market and then applying the computed percentage share. When your client is new in the business, you will need to get data on the different firms in the industry and their respective shares of the market. How much of the market does your client expect to take? Is this a reasonable estimate? How does his estimate compare with other firms of the same size? Method 2: Executive opinion poll This non-mathematical sales forecasting approach is commonly used by those who have been in business for some time. Companies that have a sizeable sales force use this method. The procedure begins with the company’s salesmen submitting their individual estimates of future sales in their respective areas. The submitted estimates are reviewed and adjusted (if necessary) by the immediate sales managers. These are then forwarded to a committee (usually composed of the president, treasurer, secretary, marketing head, and the production head) for review. The committee, prior to finalizing the sales forecasts for a given period, reviews the sales managers’ estimates giving due consideration to the following factors:

1. Changes in employment, income distribution, and other economic indicators: 2. Expected changes in product design; 3. Possible increase in marketing efforts; 4. Probable adjustments in selling price; 5. Improvements in product quality; and 6. Revision in marketing strategies.

Once revisions and adjustments are made, the revised figure then represents the final sales forecast for a particular period. Method 3: Derived demand method This method is highly applicable to businesses that are dependent on the orders of another company. The forecast is totally based on the sales projections of the other company. A good example would be a small company manufacturing jute sacks for the rice millers of Nueva Ecija. This small company can base its sales forecast figures on the aggregate sales projections of the rice millers in the province.


Method 4: Market indicators method Another practical approach to sales forecasting is through the use of “market indicators.” These are economic factors that influence the demand for the product. The main idea is to obtain the rate of increase/decrease of a particular market indicator for a product and use this information as a possible increase/decrease rate of sales volume. This method is applicable only to products that behave according to a specific market indicator. It is difficult to use this method when a product is directly affected by more than one market indicators. Demographic changes are the most commonly used market indicators. These include changes in population growth rate, birth, marriage and mortality rates, migration movement, and age distribution. For instance, an entrepreneur intending to go into casket manufacturing can project its sales by using the mortality rate as basis just as an entrepreneur wanting to engage in the production of children’s books will necessarily look into the age profile of the population. Method 5: Arithmetical straight-line method A company that has been in business for several years can use its past sales figures and apply quantitative methods to forecast sales. Through the use of simple mathematical models or formulas, past sales figures are used to project future sales performance. The arithmetical straight-line method is the simplest quantitative approach to sales forecasting. Under this method, the incremental average increase or decrease for a certain forecast period is computed. The most commonly used period forecast would be in terms of simple average annual increase (SAAI). Let’s make use of some hypothetical figures to illustrate this method. Assume that a company registered the following sales from 2000 to 2005:

YEAR

Sales (in million pesos)

2000 16.7 2001 17.9 2002 19.2 2003 18.5 2004 19.9 2005 20.2

To get the SAAI, compute for the difference in sales totals of the first year and the last year. In this case, our make-believe company realized an incremental increase of P 3.2 million over the last 4 years. Divide the incremental increase by the number of years under review. Our SAAI is P 0.70 per annum (P3.5/5).


To project sales for the subsequent years, simply add the SAAI to the previous year’s sales figure. Thus, sales forecast for 2006 to year 2008 would be as follows:

YEAR

Actual Sales (in ‘000 pesos)

Plus: SAAI

Projected Sales (in ‘000 pesos)

2005 20.2 .70 2006 20.9 (20.2 + .70) 2007 21.6 (20.9 + .70) 2008 22.3 (21.6 + .70)

Method 6: Arithmetical geometric curve method A second quantitative method for projecting sales figures is called the arithmetical geometric curve method. Just like the arithmetical straight-line method, this technique uses historical data. This method, however, is a little bit more complicated. Step 1 Calculate the annual rate of increase or decrease for a particular forecast period. Step 2 Compare the increase or decrease of the current year’s sales with the previous year’s

sales total and then express the difference in terms of percentage. Using this method on our hypothetical example, you will get the following:

Year Actual Sales (in million pesos)

Year to Year Increase/(Decrease)

Comparative Inc./(Dec.)

(in %)

2000 16.7 - - 2001 17.9 1.2 7.18 2002 19.2 1.3 7.26 2003 18.5 (.7) (3.65) 2004 19.9 1.4 7.57 2005 20.2 0.3 1.51

This was computed as follows: 17.9 – 16.7 16.7

Step 3 Compute for the algebraic sum of the last column. To do this, sum up all the positive

figures and the negative figures separately and then subtract the negative value from the sum of positive values. The algebraic sum for the above example is equal to 19.87.

Step 4 Divide the algebraic sum by the number of years covered to get the yearly percentage

increase. In our example the yearly percentage increase is 3.97%. Step 5 Use the yearly percentage increase figure to forecast sales of the subsequent years.

Thus, for 2006 sales are projected to be P 21.0M (P 20.2 + [P 20.2 x 0.0397]). Method 8: Time series analysis This is the third quantitative approach to projecting sales using historical figures. Compared to the two preceding ones, the time series analysis is more sophisticated and complicated. The term “time series” refers to statistical data that are collected, observed, or recorded regularly.


Although in forecasting one's concern is with the future, time series begins by looking backward. This method involves looking for observable regularities and patterns (or trends) in historical series. The trend is projected into the future, and the result is used as the basis for the forecast. Let’s take another hypothetical example, Fragrant Blooms (a flower shop). Its sales for the last 10 years are tabulated and graphed on below.

YEAR SALES (in pesos)

1996 989,977 1997 983,894 1998 979,807 1999 1,039,843 2000 1,053,025 2001 1,098,922 2002 1,082,850 2003 1,087,287 2004 1,097,420 2005 1,107,286

FRAGRANT BLOOMS

900000

950000

1000000

1050000

1100000

1150000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

In P

esos

To forecast future sales, fit a trend line passing near these points by using the following linear equations: First, let’s deal with the variables y, x, n, a, and b. Assign these letters to mean the following: Let

y = sales

X = year number N = number of observations a and b = sales parameter constants

“Σ” is the summation sign . To draw a trend line, you need the basic linear equation:

ÿ = a + bx (Equation 1) The numerical constants a and b are estimated from the sample data using equations 2 and 3 below. Once the values of a and b have been determined, substitute a given value for x into equation 1 and calculate the predicted value of ÿ.

Σ y = na + b(Σ x) (Equation 2) Σ xy = a(Σ x) + b(Σ x2) (Equation 3)

You can simplify the work of fitting a trend line by performing a change of scale, or coding the x values, such that in the new scale the sum of the x values is zero. Here is how to re-scale or code x values:


1. If the series of data has an odd number of years, assign the middle year the value x = 0 and 1, 2, 3…. to the years that follow it and -1, -2, -3…. to the years that precede it.

2. If your series of data has an even number of years then you have 2 middle years instead of one. Assign x = -1 to the first of the 2 middle years. To the years immediately preceding it assign x = -3, x = -5 and so on. To the second of the 2 middle years, assign x = 1. To the year following it, assign the succeeding years as x = 3, x = 5 and so on.

Below are 2 tables. The table on the left has 7 x values (referring to the number of years) while the table on the right has 8 x values. See how re-scaling of x values is done.

x = Re-scaled x = Years

Re-scaled x

values

1980 -3 1981 -2 1982 -1 1983 0 1984 1 1985 2 1986 3

x Years values

1980 -7 1981 -5 1982 -3 1983 -1 1984 1 1985 3 1986 5 1987 7

The advantage of this kind of coding is evident. Whether you are working on an even or an odd number of years in the series, the sum of x (i.e., Σ x) will always be equal to zero. And substituting this to equations 2 and 3, you can easily solve for a and b using the following equations:

a = Σ y n (Equation 4)

b = Σ xy

Σ x2 (Equation 5)

Now, use these equations for Fragrant Blooms. The sales data of Fragrant Blooms are shown on the third column of the next table. Coding the years, you get x values on the second column. For the fourth column, the x values were multiplied with the corresponding y values. Finally, for the last column, the x values were multiplied by itself to get x2.


YEAR x

SALES (in ‘000)

y

xy

x2 1996 -9 989,977 -8,909,793 81 1997 -7 983,894 -6,887,258 49 1998 -5 979,807 -4,899,035 25 1999 -3 1,039,843 -3,119,529 9 2000 -1 1,053,025 -1,053,025 1 2001 1 1,098,922 1,098,922 1 2002 3 1,082,850 3,248,550 9 2003 5 1,087,287 5,436,435 25 2004 7 1,097,420 7,681,940 49 2005 9 1,107,286 9,965,574 81

Σ

0

10,520,311

2,562,781

330

Now, you have your figures ready. To solve for a and b, simply substitute the figures above to equations 4 and 5 as shown below:

a = Σ y = 10,520,311 = 1,052,031.1 n 10 b = Σ xy = 2,562,781 = 7,766 Σ x2 330

Thus, the trend line for Fragran Blooms Company is as follows:

ÿ = 1,052,031.1 + 7,766 x Having calculated the trend equation, you can now determine the trend value for any year simply by substituting into the equation the value of x corresponding to that year. APPLICATIONS AND LIMITATIONS Forecasting is difficult. When you are forecasting sales you are trying to determine future demand by anticipating how much buyers are likely to purchase under a given set of future conditions. The result will always be a "guess-estimate." But nonetheless, using a forecasting technique is far better than just picking out a sales figure from thin air. Business conditions are always changing. Changes in pricing policies, advertising/promotional activities, competition, seasonal variations, production capacity, and economic conditions can have adverse repercussions on firm’s sales performance. Keep in mind the following:

On pricing policies: Increase the price of a product and you may find fewer people buying it. Decrease the price and you might just find people clamoring for more. Any increase or decrease in the price of product will definitely affect the projected sales volume. This is especially true when projections are made in terms of peso values instead of unit values.


On advertising/promotional activities: Companies invest considerable amounts on

advertising and promotional gimmicks because of one reason. And that is, advertising and promotional activities greatly affect the product’s salability. Thus, if an increase in advertising/promotional activities is in the offing, forecasts should be correspondingly adjusted to reflect extent of advertising efforts.

On competition: Admittedly, firms in the same industry are competing for the same

market. Thus, if a firm wishes to maintain its market share, management should anticipate all the possible moves and strategies of its competitors.

On seasonal variations: Some products follow a seasonal trend (that is, for certain months

of the year there is a big demand for the product and then tapers off for the rest of the year). Fluctuations should be taken into consideration so that inventories do not build up unnecessarily.

On production capacity: Sales projections are of course limited by the firm's production

capacity. Therefore, it does not make sense to estimate sales that is beyond the firm's ability to produce.

On economic conditions: Recession is marked by a decline in business activity. When

such condition occurs, sales projections should be reviewed and corrected accordingly.


It is important that your small entrepreneur client has something beneficial to offer in his products. In most cases, customers are prepared to pay a good price for a product or service they find value in. The more value there is in a product or service, the more people will continue to buy. So how do you create value for your client’s products?

With this next tool you will be able to work out ways on how you can create services or products of real value for your client’s customers.

VALUE CHAINANALYSIS

VALUE CHAINANALYSIS

HOW TO DO A VALUE CHAIN ANALYSIS Value chain analysis was developed by Michael Porter, the same creator of Five Forces tool. It involves a three-step process. Step 1 Identify the activities undertaken to deliver a product or service.

Brainstorm the activities that contribute to the customer’s experience. These activities refer to different business processes used to serve a customer. These include marketing activities, sales and order-taking, operational processes, delivery, support services, etc.

Once you’ve come up with the activities which add value for the company, list them down. A useful way of doing this is to list them down as a simplified flowchart running down the page.

Step 2 For each activity, identifying the things that customers value in the way each activity

is conducted. These are called Value Factors. Here are some examples. If your client is an optometrist running an optical shop, his

customer will value a polite, knowledgeable, and easy to understand answer to his queries and an efficient and quick resolution to his problem. A customer that calls for pizza delivery service expects a quick and polite answer to his call, efficient taking of order details, and fast delivery. Buyers in a wet market value fresh produce, cleanliness, getting the right weight of the goods they pay for, and added services like scaling/cleaning of fish and deboning.

Opposite each value factor, write down what needs to be done or changed to provide

great value for each factor identified. Step 3 Evaluate whether such activity is work undertaking and then formulate plan for

action.

By this time you must have come up with several ideas for increasing the value your client can deliver to his customers. Go over your list of ideas and pick out the quick, easy ,and cheap to implement. Screen the more difficult ones. Some may be impractical as they may require a great cost to deliver and yet bring in only marginal improvements. It is best to drop these ideas. Prioritize the best ideas and plan how to implement them.


Here is a good example of value chain analysis.15 Example: Lakshmi is a software development manager for a software house. She and her team handle short software enhancements for many clients. They use value chain analysis to think about how they can deliver excellent service to their clients. They have identified the following activities that create value for their clients: order taking, enhancement specification, scheduling, software development, programmer testing, secondary testing, delivery, and support. (The first three are shown in Fig. 7.5.) Lakshmi also identified the following support activities as important: recruitment (choosing the people who will work well with the team) and training (learning about new software, techniques, and technologies as they are developed). Next Lakshmi and her team focus on the order taking process, and identify the factors that will give the greatest value to customers. They identified the following value factors: giving a quick answer to incoming calls; having a good knowledge of the customer’s business, situation and system, so they do not waste the customer’s time with unnecessary explanation; asking all the right questions, and getting a full and accurate understanding of the customer’s needs; and explaining the development process to the customer and managing his expectations as to the likely timetable for delivery. (See “Value Factors” column of Fig. 7.5.) They then look at what they need to do to deliver the maximum value to the customer. These things are listed in Fig. 7.5 under the “Changes Needed” column. They do the same for the next two processes.

VALUE CHAIN VALUE FACTORS CHANGES NEEDED

ORDER TAKING • Fast answer to phone calls • Knowledge of customer’s

situation and system • Understand needs accurately • Manage expectations

• 3 Rings Rule then all ring • Team updates on clients • Team training on systems • Training on client industry • Client briefing at end of call

SPECIFICATION • Accurate, comprehensive description of modifications

• Easily understandable • Lists all activities • Explains basis of price

• Detailed description of changes to software

• Training in writing and proofing

• Internal review for clarity • Use aide memoire to ensure

all points considered • Description of all activities

SCHEDULING • Set expectations clearly • Clear statement • Meet commitments • Timely job start

• Accurate time estimation needed

• Scheduling system needed • Need contingency time in

schedule • Need sufficient capacity

Fig. 7.5: Value Chain Analysis Example

15 http://www.mindtools.com/page/article/newTMC_10.htm


Once the brainstorming is complete, Lakshmi and her team identify the best options, reject low yield or high cost options, and agree their priorities for implementation. APPLICATIONS AND LIMITATIONS You can use the value chain analysis to develop your client’s competitive advantage. If you can, present your conclusions to your client’s customers to get their feedback. This is one way of either confirming that you’re right or of getting a better understanding of what the customers really want.

Chapter 8

PRODUCTION ENHANCEMENT TOOLS SPOTTING BOTTLENECKS

At the heart of any manufacturing enterprise is the production operation. Any drawback in the manufacturing process causes not only delay in deliveries but also gives rise to unnecessary expenses. It is important that manufacturing problems are identified at the outset and resolved immediately to minimize expenses and ensure the smooth flow of production operations.

If your client is into manufacturing, it is important that he monitors the extent to which his products meet specifications. The general approach to quality control is clear-cut: random samples are taken from the on-going production process and line charts of the variability from the samples are drawn to see their

closeness to target specifications. If samples fall outside the pre-specified limits, then the process is said to be out of control and action must be taken to find and correct the cause of the problem. These line charts are referred to as Shewhart control charts named after Walter A. Shewhart, a statistician who is generally credited for setting the foundation of what is now commonly referred to as statistical process control (SPC).

CONTROL CHARTS

CONTROL CHARTS

SPC is anchored on the concept of process variability. There are two types of variation: natural process variation and special cause variation. The former, also referred to as common cause or system variation, occurs naturally and is inherent in all processes. The latter, on the other hand, is caused by some problem or extraordinary occurrence in the system. With SPC, a manufacturing process is monitored through sampling. From the results of the sample, the process is investigated to determine the root cause, and subsequently adjustments made to correct the process. All control charts have three basic components: 1) a centerline, usually the mathematical average of all the samples plotted; 2) upper (UCL) and lower (LCL) statistical control limits that define the constraints of common cause variations; and 3) data points, recorded from random samples taken from the production process over time.


Fig. 8.1: Statistical Control Charts The chart on the left shows a process in statistical control. Note that all the points lie within the UCL and LCL. The fluctuations indicate common cause variation. The chart on the right shows a process out of control. Two points can be found outside the control limits, indicating the presence of a special cause variation. A point outside the control limits is the most easily detectable out of control condition. HOW TO MAKE A CONTROL CHART Step 1 Get a sample of a certain size from the ongoing production process. Step 2 Decide on the characteristic to be controlled and determine the upper and lower

control limits. (This requires knowledge and application of principles of statistics.) The following control charts are used for controlling variables:

X-bar chart: In this chart the sample means are plotted to control mean value (e.g., diameter of rings, strength of materials, etc.)

R chart: In this chart, the sample ranges are plotted to control a variable’s inconsistency.

S chart: In this chart, the sample standard deviations are plotted to control a variable’s variability.

S**2 chart: In this chart, the sample variances are plotted to control variable’s irregularity.

For controlling quality characteristics that represent attributes (e.g., defects), the following charts are constructed: C chart: This chart assumes that the defects of the quality attribute are rare

and the control limits in this chart are computed based on Poisson distribution (distribution of rare events).

Np chart: The control limits of this chart are based on binomial distribution. This chart is used if the attribute’s occurrence is not rare (i.e., it occurs in more than 5% of the units inspected).

P chart: This chart shows the fraction of nonconforming or defective products produced by a manufacturing process. It is also called the control chart for fraction nonconforming.

Step 3 Plot the data

Time

UCL

LCL

CL

Time

UCL

LCL

CL

Process in Statistical Control

Time

UCL

LCL

CL

Time

Process Out of Statistical Control

UCL

LCL

CL

CHAPTER 8: PRODUCTION ENHANCEMENT TOOLS 153

APPLICATIONS AND LIMITATIONS The control chart is the most useful tool in detecting “special causes of variation” and changes in performance. Abnormal points on the graph, such as those shown below, signal the presence of special causes of variation.

One or more points are outside the control limits

Seven or more consecutive points on one side of the centerline

Six points in a row steadily increasing or decreasing

Fourteen points alternating up and down

Two out of three consecutive points in the outer third of the control region

Fifteen points in a row within the center third of the control group

Eight points on both sides of the centerline with none in the center third of the control region

Fig. 8.2: Abnormal Points in a Control Chart


The control chart simplest interpretation is to use only the first test listed. The others may indeed be useful (and there are more not listed here), but be mindful that, as you apply more tests, your chances of making Type I errors, i.e., getting false positives, go up significantly.

Time

UCL

LCL

CL

Fig. 8.3: Control Charts: Out of Control, In Control, and Process Improvement When selecting a sample for control chart purposes be sure that it is small enough to be economically and practically feasible but large enough to have a normal distribution (The central limit theorem states that the larger the sample size, the more likely it is that the distribution of sample means will follow a normal distribution.). Moreover, samples must be collected frequently enough to be useful in identifying and solving problems. The spacing between samples should not be exactly uniform. Chart samples from each machine separately. Control charts are applicable to one and only one process at a time.

UCL

LCL

CL

UCL

LCL

Out of Control In Control Process Improvement(reduced variation)

Time

UCL

LCL

CL

UCL

LCL

Out of Control In Control Process Improvement(reduced variation)

UCL

LCL

CL


ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANTITY

“To many small business owners, inventory is simply the stuff they keep on the shelves to generate sales. Despite the investment required to maintain appropriate levels of inventory, they put little effort into monitoring it.”16 These two statements best describe local entrepreneurs and their inventory management practices.

Inventory is usually a company’s largest current asset. It is important that your client knows how to manage and control her inventory so that she does not run out of stocks nor have too much than what is needed in stock. Neither of these two situations is desirable. When your client runs out of goods to sell, she loses the opportunity to make more sales, while not having raw materials in stock means she will have to put her production to a stop. On the other hand, overstocking means she is tying up capital in unproductive assets, not to mention running the risk of deteriorating stocks. HOW TO COMPUTE FOR EOQ Inventory control is concerned with minimizing the total cost of inventory. The Economic Order Quantity (EOQ) is an inventory model originally developed by F.W. Harris in 1915, although R. H. Wilson is credited for his early in-depth analysis of the model. The model defines the optimal order quantity that minimizes total variable costs required to order and hold inventory. It basically answers two questions: how much should be ordered and how often should an order be placed. The important costs that need to be considered are the ordering cost (the cost of placing an order) and the carrying cost (cost of holding a unit of inventory in stock). The ordering cost refers to all the costs incurred each time an item is ordered. Such costs are not associated with the quantity ordered but rather the physical activities required to process the order. Carrying cost, also called holding cost, is the cost associated with having inventory on hand. It is primarily made up of the costs associated with storage and inventory investment. Hence, using the following variables: Q = optimal order quantity C = cost per order R = monthly demand for the product P = purchase cost per unit F = holding cost factor H = holding cost per unit per month the optimal order quantity is computed in the following manner:

Total Inventory Cost = Purchase Cost + Ordering Cost + Holding Cost which corresponds to:

TC (Q) = PR + CR + PFQ Q 2

Taking the derivative of both sides and equating it to zero, you get: 16 J. Tol Broome, Jr., The Benefits of Smart Inventory Management, June 1999. The article is found

in http://calbears.findarticles.com/p/articles/mi_m1154/is_6_87/ai_54695720


dTC(Q) = d PR + CR + PFQ = 0

dQ Q 2 The result of this differentiation is:

PF - CR = 0 2 Q2 Solving for Q will give you:

Q2 = 2CR PF or

Q* = 2CR = 2CR PF H Here is an example. JKL Company is trying to minimize total inventory cost. The cost of each unit is P25.00. The cost of capital is 20% and the physical cost of maintaining this inventory is currently at 7%. The purchasing officer can place an order in 30 minutes with materials and overhead cost at P35.00 per order. The purchase officer is currently paid P50 per hour. Records show average weekly sales to be 1,000 units. How many units should JKL Company order? How often should JKL Company order? Solution: Annual demand = 52,000 units (i.e., 1,000 units x 52 weeks in a year) Ordering cost = 25.00 + 35.00 = 60.00 Holding cost = 6.75 (i.e., [20% + 7%] x 25.00) Plugging in the above values into the equation will result in the optimal order quantity

Q* = 961.48 units or 962 units per order

Dividing the total annual demand of 52,000 by Q* means that if JKL Company wants to minimize on its inventory cost, it will place 54 orders (52,000/962) during the year or every week.


A Flow Process Chart (FPC) is an expansion of the flow chart’s usefulness in documenting operations. It is a valuable tool for uncovering hidden costs, unnecessary steps, delays, and other vital information that lead to the identification of bottlenecks and causes of low productivity. There are three types of FPCs:

worker, material, and machine.

FLOW PROCESS CHART

FLOW PROCESS CHART

The American Society of Mechanical Engineers came out with a set of process chart symbols. These five symbols, known as the ASME symbols and similarly used in flowcharting, are:

Operation

Transport

Delay or

temporary storage

Inspection

Holding and

Storage

A main step, where the part, material or product is usually modified or changed

Movement of workers, materials or equipment

A delay in the process, or an object is set aside until required

A check for quality and quantity

Controlled storage where material is received into or issued from a storage, or an item is retained for reference purposes

Many processes consist of a series of simple actions, such as moving, waiting or inspecting. If these individual actions are identified and closely examined, then it becomes easier to find ways of improving the process. The FPC can be used to streamline activities involving even a simple office procedure. The example on the next page shows the step-by-step activities involved in purchasing supplies in a company. After examining the process, a more simplified and efficient method can be adopted (Fig. 8.5). The summary table on the bottom right-hand corner of Fig. 8.5 reveals that the proposed method is a lot more efficient than the existing method of requisitioning and purchasing of supplies.


PROCESS CHART

Existing Method: Date: January 3, 2006 Proposed Method: Chart Prepared by: Juan de la Cruz Subject Charted: Requisition and purchase for supplies Chart No.: R24 Branch: Makati Laboratory Sheet No.: 1 of 1 DISTANCE

IN FEET TIME IN MINUTES CHART SYMBOLS PROCESS DESCRIPTION

Requisition written by supervisor (one copy)

On supervisor's desk (awaiting messenger)

65 By messenger to superintendent's secretary

On secretary's desk (awaiting typing)

Requisition typed (original requisition copied)

15 By secretary to superintendent

On superintendent's desk (awaiting approval)

Examined and approved by superintendent

On superintendent's desk (awaiting messenger)

20 To purchasing department

On purchasing agent's desk (awaiting approval)

Examined and approved

On purchasing agent’s desk (awaiting messenger)

5 To typist’s desk

On typist’s desk (awaiting typing of Purchase Order)

Purchase Order typed

On typist’s desk (awaiting transfer to main office)

105 3 4 2 8 TOTAL

Fig. 8.4: Flow Process Chart 1


PROCESS CHART

Existing Method: Date: January 23, 2006 Proposed Method: Chart Prepared by: Juan de la Cruz Subject Charted: Requisition and purchase for supplies Chart No.: R34 Branch: Makati Laboratory Sheet No.: 1 of 1 DISTANCE

IN FEET TIME IN MINUTES CHART SYMBOLS PROCESS DESCRIPTION

Purchase Order written in triplicate by supervisor

On supervisor's desk (awaiting messenger)

75 By messenger to purchasing agent’s desk

On purchasing agent’s desk (awaiting approval)

Examined and approved by purchasing agent

On purchasing agent’s desk (awaiting transfer to main office)

SUMMARY

Present Method

Proposed Method Difference

Operations 3 1 2

Transportation 4 1 3

Inspections 2 1 1

Delays 8 3 5

Distance Traveled in Feet 105 75 30

75 1 1 1 3 TOTAL Fig. 8.5: Flow Process Chart 2 HOW TO DO A FLOW PROCESS CHART Step 1 Determine the process boundaries: where does the process start and where does it

end? Step 2 List each activity or step on an FPC similar to the one illustrated above. To

understand what each activity entails, consult with and observe the person doing the job.

Step 3 Using a line, join the appropriate symbols to show the present flow of the process.

Determine and check the sequence with the people involved. Step 4 Calculate the distance traveled and/or the time it takes to complete each of the steps.

To determine time, ask the people involved to provide a best estimate, take a sample or apply a standard time measurement. Add these up to determine the overall physical length of the process and its cycle (elapsed) time.

Step 5 Add up the number of steps recorded against each symbol. Step 6 Analyze the FPC and find out where you can improve on the process. Determine non-

value adding activities which can be eliminated.


Step 7 Draw improved method. Do not mix present and proposed methods on one chart.

APPLICATIONS AND LIMITATIONS FPCs contain more information than a flow chart as it provides a micro view of the process and describes the work activity and tasks in detail. As a result, value-adding and non-value-adding activities within processes can be identified. By eliminating the non-value-adding activities, improvements in the system can be expected. FPCs are used as well in documenting the workflow in procedures and instructions within the Management Systems (ISO 9000/ ISO 14000/ OH&S) and in the preparation of Process Control Plans for QS-9000.

This tool is also used in business process management and re-engineering, productivity and work methods analysis, and benchmarking studies.

The charting of work flows, working processes, systems, and procedures is a useful way of recording the essential features of a work situation for subsequent analysis. To maintain the chart’s value for future reference, it is best to include the following information in your FPCs: 1) product, material or worker charted; 2) activity analyzed; 3) location of the activity; 4) reference number, sheet number, and total number of sheets; 5) name of person who did the chart; 6) date charted; 7) summary of distance, time, labor and material costs. Since this tool requires a lot of details, do not attempt to chart from memory. Neither should you critically analyze with incomplete information.


JUST IN TIMEJUST IN TIMEJust In Time (JIT) is a Japanese management philosophy that strives to eliminate sources of manufacturing waste by producing the right part in the right place at the right time. This method allows companies to reduce unnecessary costs associated with both inventory and the entire production chain.

SOME KEY ELEMENTS OF JIT There are no step-by-step procedures in implementing the JIT philosophy. However, an internet article 17 recommends the following JIT techniques which you can suggest to your client to cut down on unnecessary costs. 1. Reduce or eliminate setup times. Aim for single digit setup times (less than 10 minutes)

or "one touch" setup. This can be done through better planning, process redesign, and product redesign.

2. Reduce lot sizes (manufacturing and purchase). Reducing setup times allows economical

production of smaller lots. Close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries.

3. Reduce lead times (production and delivery). Production lead times can be reduced by

moving work stations closer together, applying group technology and cellular manufacturing concepts, reducing queue length (reducing the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes; delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.

4. Encourage preventive maintenance. Use machine and workers’ idle time to maintain

equipment and prevent breakdowns. 5. Develop a flexible work force. Workers should be trained to operate several machines, to

perform maintenance tasks, and to perform quality inspections. 6. Require supplier quality assurance and implement a zero defects quality program. Errors

leading to defective items must be eliminated, since there are no buffers of excess parts. A quality at the source (jidoka) program must be implemented to give workers the personal responsibility for the quality of the work they do, and the authority to stop production when something goes wrong. Use techniques such as "JIT lights" (to indicate line slowdowns or stoppages) and "tally boards" (to record and analyze causes of production stoppages and slowdowns to facilitate correcting them later).

17 http://personal.ashland.edu/~rjacobs/m503jit.html


7. Use a kanban (card) system (or other signaling system) to convey parts between work stations in small quantities (ideally, one unit at a time). In its largest sense, JIT is not the same thing as a kanban system, and a kanban system is not required to implement JIT (some companies have instituted a JIT program along with a Materials Requirement Planning or MRP system), although JIT is required to implement a kanban system and the two concepts are frequently equated with one another.

A kanban is a card that is attached to a storage and transport container. It identifies the part number and container capacity, along with other information. There are two main types of kanban (some other variations are also used): the Production Kanban (P-kanban) signals the need to produce more parts and the Conveyance Kanban (C-kanban) signals the need to deliver more parts to the next work center (also called a "move kanban" or a "withdrawal kanban").

A kanban system is a pull system, in which the kanban is used to pull parts to the next production stage when they are needed; an MRP system or any schedule based system is a push system, in which a detailed production schedule for each part is used to push parts to the next production stage when scheduled. The weakness of a push system (MRP) is that customer demand must be forecast and production lead times, estimated. Bad guesses (forecasts or estimates) result in excess inventory, and the longer the lead time, the more room for error. The weakness of kanban is that following the JIT production philosophy is essential, especially concerning the elements of short setup times and small lot sizes.


The routing diagram is a scaled factory plant layout that shows the location of machines, work stations, and auxiliary service facilities such as tool bins, temporary storage areas, doors, posts, windows, etc. By tracing and examining the movement of materials, parts or sub-assemblies as they go through your

client’s plant, you can considerably improve plant layout and efficiency of operations.

ROUTINGDIAGRAMROUTINGDIAGRAM

One technique for recording routing diagram is done with the use of a string. A string or thread is used to trace and measure the path of workers, materials, and sub-assemblies as products going through the manufacturing process.

HOW TO DO A ROUTING DIAGRAM Step 1 Get a scaled and detailed plant layout. It should show where doors, posts, windows,

electrical outlets and other building service units are situated. Disregard moveable items like work table, equipment and tools, etc.

Step 2 With the use of cardboard or pieces of paper, make templates of the plant’s

machinery and equipment. Step 3 Pin the templates to the scale layout approximating the existing condition. Provide

spare pins in doors where materials will pass through. Step 4 Using thread, trace the materials or personnel flow, from beginning of the

manufacturing process to the end. Step 5 Record observations and note what changes are needed, unnecessary movements that

can be eliminated, etc. Step 6 Remove the strings and measure their individual lengths.

Step 7 Using the observations generated in Step 5, rearrange the position of the machinery,

work tables, etc., to shorten the distance traveled by workers, materials, etc. Step 8 Repeat Steps 3 to 7 until an acceptable solution (usually the shortest thread length) is

attained. APPLICATIONS AND LIMITATIONS The string method of routing diagram is used to create or improve plant layouts. Use the string diagram to explain plant layout changes to entrepreneurs, supervisors, and workers. If the original and improved layouts are compared, the difference is often remarkable. In many cases, materials and people follow more than one path. Selecting the path most frequently used can be time consuming.


C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTION

INSPECTION

A AA A

B BBB

C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTION

A AA A

B BBB

INSPECTION

EXISTING SITUATION

IMPROVED SITUATION

C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTION

INSPECTION

A AA A

B BBB

C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTION

INSPECTION

AA AAAA AA

BB BBBBBB

C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTION

A AA A

B BBB

INSPECTION

C A

S T

I N

G S

E C

T I

O N

STOC

KR

OO

M

INSPECTIONINSPECTION

AA AAAA AA

BB BBBBBB

INSPECTIONINSPECTION

EXISTING SITUATION

IMPROVED SITUATION

Fig. 8.6: Routing Diagram Sample


A run chart is a line graph that shows data plotted in the order in which they occur. By collecting and charting data over time, you can find trends, patterns, shifts or variations in a process over time.

RUNCHARTS

RUNCHARTS

HOW TO CONSTRUCT A RUN CHART

Step 1 Draw and label the vertical axis using the measurement unit you are tracking (e.g.,

units sold, number of defectives, percent defective, diameter, etc.). Step 2 Draw and label the horizontal axis to reflect the sequence in which the data points are

collected (e.g., week 1, week 2, week 3…. or 1999, 2000….2005) Step 3 Plot the data points on the chart and connect the points. Step 4 Calculate the average from the data and draw a horizontal line across the charts at the

level of the average. Step 5 Interpret the chart and decide what action to take. Is there any trend? Example: Company XYZ, a distributor of farm machineries, has maintained 10-man sales force through the years. The average sales (in units) in the last 22 years are as follows:

Year Average Sales (in units) Year Average Sales

(in units) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

139 130 61

164 129 100 108 110 68 78 57

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2005

77 38 53 50 81

105 65 97 62 96 93


If you were to plot the data above in a run chart, your chart would look like the one below.

Run Chart - Average Sales

0

20

40

60

80

100

120

140

160

180

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ave

rage

Sal

es (i

n U

nits

)

Run Chart - Average Sales

0

20

40

60

80

100

120

140

160

180

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ave

rage

Sal

es (i

n U

nits

)

What can you deduce from the chart on the left? It is obvious from the chart that the average sales in the late eighties continued to drop, rebounded in 1997 but still lower than the 1986-1991 levels.

APPLICATIONS AND LIMITATIONS Run charts focus more on time patterns while a control chart focuses more on acceptable limits of the process.


Plant layout is important for the following reasons: 1) materials handling costs comprise a big chunk of total manufacturing costs; 2) modifications and rearrangements are usually costly in terms of both time and money; and 3) allows for the efficient handling of materials, elimination of congestion, and better

process flow.

SIMPLIFIED PLANT LAYOUT

SIMPLIFIED PLANT LAYOUT

How does one go about designing a good plant layout? Designing a plant layout is far from easy. You need to take into account every phase of the company’s operations plus diverse considerations such as ventilation, comfort rooms, locker rooms for employees, reception area, storage, and materials handling. A systematic approach to designing the “best” layout is documented in Richard Muther’s Simplified Systematic Layout Planning (1994). This method is broken down into six basic steps. HOW TO DO A PLANT LAYOUT18

Step 1 Chart the relationships

Identify the different departments, activities, and work centers. Limit the number to a maximum of 20. Create a Relationship Chart to document the desired “closeness” between work centers. Indicate the closeness between each pair of activities or work centers using the following table as guide:

CODE Level of Closeness

A Absolutely necessary E Especially important I Important O Ordinary U Unimportant X Not desirable

If relationships for a certain work center or activity are similar to those another work center, consider consolidating or combining work centers in a common area.

Step 2 Establish space requirements

Prepare an Activities Area & Feature Sheet. It is at this point where you have to determine the area required for each activity, work center, or department. You also need to document other physical features that may be required, such as: overhead clearance, maximum overhead supported load, maximum floor loading,

18 Portions, including illustrations, of this section were taken from:

http://www.ciras.iastate.edu/publications/management/SimplifiedSystematicPlantLayout(1999Fall).pdf


minimum column spacing, drainage, ventilation, water and electrical connections.

Step 3 Diagram activity relationships

Construct a node diagram showing the different activities and their closeness relationships. Each node represents an activity. Starting with the code “A” relationships, draw in nodes for the activities that share “A” relationships. Then, connect the nodes with four parallel lines. These four lines represent an “A” relationship. When you’ve drawn all the “A” relationships along with the relationship lines, rearrange and redraw as necessary to achieve the best arrangement. Do the same for the other relationships and activities using three lines for code “E” relationships, two lines for code “I,” and one line for “O” relationships. Do not use any lines for code “U” relationships. For code “X” relationships, use a zigzag or wiggly line. Again, after adding each set of relationships and the necessary activities, rearrange or redraw as necessary to get the best arrangement.

Step 4 Draw space relationship layouts

Combine the relationships diagram with the space requirements for each activity. Use graphing paper and set the scale so that the entire drawing will fit into one sheet. Draw each activity on the graphing paper according to its area requirements. Adjust drawing to fit the actual wall configurations. Make sure that any major physical features such as columns, doors, walls, etc. are included in your drawing.

Step 5 Evaluate alternative arrangements

The first step in evaluating different arrangements is to decide on the criteria by which the layout is to be evaluated. You may choose to evaluate according to ease of supervision, flexibility in expansion, cost, material flow, convenience of service, etc. Prioritize your criteria and assign a weight value with the highest priority factor being “10”. Evaluate and rate each alternative layout by these factors using the same A, E, I, O, U ratings. After rating each alternative, convert the letters to numbers (A=4, E=3, I=2, O=1, U=0) and multiply by their


respective weight values. Sum up all the weighted rate values for each layout option. The layout with the highest score is the best alternative.

Step 6 Detail the selected plant layout

Up until now, your layout is made up of blocks of various shapes and sizes representing the different departments and areas. You will now develop the final plan that will be used as guide to show precisely where everything goes. Reproduce the selected layout plan, preferably to a scale of 1/8- or ¼- inch equals a foot. Identify and draw in the activities and major features, equipment, and primary services not yet included. Then begin to draw in the details of individual equipment, machinery, utilities, or auxiliary services, and label them. You may find yourself re-evaluating the fit of these details and making minor adjustments for such things as adequate aisle spacing or space for maintenance or service. One of the best ways to do this is to get the opinion of employees who will work in these areas. Finally, indicate in your layout drawing the type of scale used.


This tool is very useful in designing job shops or process layouts for small-scale operations. Where there is no consistent process flow, the development of a relationship chart may be the best data you have to determine relative placement of separate work areas. Muther cautions that this simplified method should be limited to layout projects that include individual office areas less than 3,000 square feet, individual shop areas no bigger than 5,000 square feet, and individual storage areas of up to 10,000 square feet. When designing a layout manually, increasing the size and number of work areas drastically increases the difficulty in creating alternatives and evaluating them.


Value analysis and value engineering (VAVE) is anchored on the philosophy that there is always a better way of doing things. Briefly, VAVE involves finding ways to deliver a product or service at the best price by incorporating value characteristics (benefits) deemed most important by the customer.

VALUE ANALYSIS & VALUE ENGINEERINGVALUE ANALYSIS &

VALUE ENGINEERING

The term “value” has different meanings for the customer and the manufacturer. To the customer, value is “suitability” of a product divided its price. The more suitable a product is to a customer and the cheaper the price, the higher the value. In contrast, to a manufacturer, value is the “function(s)” of the product divided by the cost. Thus, the lower the cost of a product and the more functions derived from it, the higher the value. There are two ways to increase value: 1) by reducing costs and keeping on increasing the benefit; and 2) increasing the benefit by maintaining or reducing the cost. VAVE involves a team of people following a structured process. The process helps team members communicate across boundaries, understand different perspectives, innovate, and analyze. Before using this tool, be sure that the needs and motivations of customers are completely understood to get a good grasp of the relative importance of product functions. HOW TO DO VALUE ENGINEERING AND ANALYSIS Step 1 Identify components of the product. For example, a lamp shade is made up of the

main body, shade, plug, cord, bulb base, bulb, and switch. Step 2 Describe the product’s primary functions. To describe a function, use an active verb

and a noun. Here are a few examples. The function of a website is to “inform reader”; shampoo, “clean hair”; car, “transport people”; water, “quench thirst”; detergent, “remove dirt”; shoes, “protect feet”; and bulb, “produce light”.

Step 3 Estimate component costs and calculate these as a percentage of total cost. Step 4 Spread component costs appropriately among the product functions to which these

contribute. Step 5 Calculate the cost of each function. Step 6 Identify high cost/low value and low cost/high value parts. Using a lamp shade for an

example, the following cost-function matrix was developed:


Functions Total Cost

% to Cost Provide light Decorate table

Main body

750.00

55.35 50.00 700.00

Shade 450.00 33.21 25.00 425.00 Plug 10.00 0.74 10.00 Cord 5.00 0.37 5.00 Bulb base 5.00 0.37 5.00 Bulb 125.00 9.22 125.00 Switch 10.00 0.74 10.00

1,355.00 100.00 230.00 1,125.00 16.97 83.03

Low High

Step 3 Step 2

Step 1 Step 4

Step 5

Step 6 Step 7 Brainstorm to generate ideas on how to deliver the function in a better and less

expensive way. How can the product be modified? Which of the high cost parts can be removed or reduced without sacrificing quality, reliability or customer acceptance? Can the process be simplified? Which of the product components do not contribute to the primary function? How else, other than the way it is now, can the product deliver this function?

Step 8 Analyze and weigh all ideas speculated in the previous step with respect to cost

implications, functions, and feasibility. Step 9 Rank promising ideas according to ease of implementation. Ask your client to choose

from the ideas and formulate a plan of action.

APPLICATIONS AND LIMITATIONS The terms value analysis/value engineering originated in the early days of development of the techniques. The first approach was to be able to increase values rather than to reduce costs. VAVE can be applied with equal success to any other cost generating-areas. It can improve your ability to manage projects, solve problems, innovate, and communicate. A VAVE program in an organization can provide it with a definitive tool to improve value in any product, project or process.

Chapter 9

FINANCIAL TOOLS GETTING TO THE BOTTOM OF THINGS

Analyzing financial data is not an easy task. The tools described in this section will help you evaluate the performance of a business entity. As a business counselor, it is important that you develop your skills in financial analysis and are able to interpret and explain financial information in a manner that can be understood by your client.

Break-even analysis involves finding the level of sales where total costs equal total revenues. It is at this level where a business does not make nor lose money. The basic mathematical formula for computing break-even is:

BREAK-EVEN ANALYSIS

BREAK-EVEN ANALYSIS

Total Expenses = Gross Sales You will find all the figures you need to do a break-even analysis from the income statement. If your client is just starting his business and hence has no income statement yet, you need to come up with projections to compute for his break-even. Before you start computing for the break-even point, it is important that you have a clear understanding of the next four terms:

Selling price (SP): This is the price at which each unit is sold.

Fixed costs (FC): These are expense items which generally do not change in the short run, regardless of how much is produced or sold. Examples of fixed costs include but are not limited to rent, depreciation, utilities, telephone charges, advertising, real estate tax, insurance, repair and maintenance, administrative salaries, general office supplies, and interest charges. All these expense items are fixed costs whether the business is into manufacturing, trading, or service.


Variable costs (VC): These are the expense items that change with the level of either production or sales. Generally, these costs increase with increased production or sales because they are directly involved in either making the product or making the sale. Examples of variable costs for manufacturing firms include direct materials and direct labor. For trading companies, variable costs include the cost of goods, packaging, and sales commissions. For service companies, variable costs include, among others, supplies consumed and sales commissions.

At times you may find yourself in a quandary as some items seem to have both fixed and variable characteristics. If so, try to determine what portion of the cost is fixed and what portion is variable. For example, if your client is in the call center business, you can split telephone costs into 75% variable and 25% fixed. This will involve a good deal of judgment on your part. Just see to it that you have good reasons for your classifications.

Contribution margin (CM): This is the difference between the selling price and variable cost per unit.

THE BREAKEVEN CHART The easiest way to understand the break-even concept is through the use of a break-even chart. In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart along with the corresponding levels of sales revenue. The point at which neither profit nor loss is made is known as the "break-even point" and is represented in the chart by the intersection of two lines --- the sales line and the total cost line --- as shown below.

SALE

S/C

OST

(in

Pes

os)

VOLUME (in Units)

Fixed Cost Line

Total Cost Line

Variable Cost Line

Loss Area

Profit Area Total Sales Line

Breakeven Point

SALE

S/C

OST

(in

Pes

os)

VOLUME (in Units)

Fixed Cost Line

Total Cost Line

Variable Cost Line

Loss Area

Profit Area Total Sales Line

Breakeven Point

Fig. 9.1: Break-even Chart

CHAPTER 9 : FINANCIAL TOOLS 175

A break-even chart is helpful in understanding the concept of the break-even point. To construct a break-even chart follow these steps:

Step 1 Classify all expenses into either fixed or variable cost. Step 2 Create a graph with the vertical axis representing sales/cost, scaled in monetary terms

and the horizontal axis representing volume, scaled in units. Step 3 Plot total sales, total fixed cost, and total variable cost lines. For illustrative purposes, let’s assume you have the following data set:

Quantity (in thousands)

Total Sales Total Fixed Cost Total Variable Cost

0 0 10,000.00 0 1 7,000 10,000.00 5,000 2 14,000 10,000.00 10,000 3 21,000 10,000.00 15,000 4 28,000 10,000.00 20,000 5 35,000 10,000.00 25,000 6 42,000 10,000.00 30,000 7 49,000 10,000.00 35,000 8 56,000 10,000.00 40,000 9 63,000 10,000.00 45,000

10 70,000 10,000.00 50,000

Plotting the foregoing figures, the resulting break-even chart would look like the one shown below:

0

10

20

30

40

50

60

70

0 1 2 3 4 5 6 7 8 9 10

QUANTITY (in thousands)

SALE

S/C

OST

(in

thou

sand

Pes

os)

Sales Fixed Cost Variable Cost Total Cost

Break-even Point

Reading from the chart above, total fixed cost is at P10,000.00 and to break-even the firm must sell 5,000 units, the point where the total cost line intersects the total sales line. The total fixed cost line, as shown in the graph above, is a horizontal line which means that within a


given range, it does not change regardless of the level of production. Variable costs, on the other hand, change in direct relation to volume of output. The total variable cost line is upward sloping, which illustrates that total variable cost increases as production increases.

For those who find graphing tedious, do not worry as there is another way of determining the break-even point. SOLVING FOR BREAK-EVEN

The following steps are involved in calculating the break-even point for a business.

1. At break-even, total sales (or revenues) equal total costs (fixed + variable). Thus,

Total Sales = Variable Cost + Fixed Cost (Equation 1) 2. Expand Equation 1 to get the following: (Selling Price x Quantity) = (Variable Cost/unit x Quantity) + Fixed Costs or (SP x Q) = (VC x Q) + FC

(Equation 2)

3. Rearrange Equation 2 to get break-even point Q:

Q = FC SP- VC (Equation 3) 4. Multiply Q by the selling price to get break-even sales in pesos.

Occasionally, the selling price and variable costs are not identified separately; instead, a contribution margin (CM) is given. The CM can still be used in the break-even calculation by replacing the denominator in Equation 3 with the CM. Using the data given above, let’s compute for break-even mathematically. We have fixed cost at P10,000, unit selling price at P7.00, and unit variable cost at P5.00. Plugging these figures into Equation 3, you get break-even volume (Q) as follows:

Q = FC = 10,000 = 5,000 units

SP – VC 7.00 – 5.00 To get the break-even sales, simply multiply break-even volume by the selling price. Thus, in our example, it is:

Q x Selling Price = Break-even sales 5,000 x P7.00/unit = P35,000.00


APPLICATIONS AND LIMITATIONS Break-even analysis is used primarily to determine the lowest amount of sales that is necessary to prevent losses. Break-even analysis can also solve other managerial problems like setting price levels, targeting optimal variable and fixed cost combinations, and determining the feasibility of different strategic options. Despite the simplicity of this tool, break-even analysis has its limitations. First, since not all items have the same profitability level, a product-by-product break-even is more meaningful than using a storewide or company-wide break-even. Thus, if your client is a trader or a manufacturer of several product lines, computing for break-even on a product-by-product basis can be tedious. Second, some costs do not behave linearly. As costs tend to change over a period of time, the break-even point is only correct for a certain period. Third, break-even analysis is useful only over a limited sales volume range. Moving way beyond that range will require additional capital expenditures for more floor space, more machines, or more labor, which will distort the estimates for fixed and variable costs. Finally, break-even analysis assumes that the cost-revenue relationship is linear. But this is not always the case. You should guide your client to make profit and not just break-even. By knowing where your client breaks-even, you can direct your client to:

1. Allocate sales and marketing efforts that will enable him/her to get pass break-even point; and 2. Minimize expenses during months when projected sales volume is below break-even. Advise your client to try bringing down break-even volume. You can suggest any of the following: 1. Lower direct costs to increase gross margin. This can be done by being more

conscientious when it comes to purchasing materials, controlling inventory, and increasing productivity of the labor force thru effective scheduling and improving on technology.

2. Control fixed expenses. Cut down on unnecessary costs. 3. Raise prices. Most entrepreneurs are reluctant to raise prices because they think that sales

might decline. Usually this doesn’t happen unless your client is in a very price-sensitive market.


Common size ratios are used to evaluate the performance of different companies or of the same firm over different periods. By expressing each balance sheet and income statement account in proportion to a specific reference account, like total assets or total revenues, standardized financial statements can be used to reveal trends and give insight as to how different firms compare.

HOW TO CREATE COMMON-SIZE FINANCIAL STATEMENTS A practical tool in analyzing financial statements is the common-size financial statements. For the untrained, it is not easy to analyze what is happening to a firm simply by looking at the rows and columns of numbers that appear in the financial statements. At best, one can spot increasing and decreasing trends. But whether such trends are an indication of better performance cannot easily be discerned unless financial information is transformed into common-size financial statements. Only then will important changes in the firm’s operations be revealed. To create common size financial statements simply express each balance sheet account as a percentage of total assets and each income statement account as a percentage of total revenues. The common size ratio for each income statement account is calculated as follows:

For the balance sheet, common size ratios are computed as:

The following example shows the income statements of ABC Enterprises expressed in pesos and the common size ratios.

ABC ENTERPRISES Income Statement Common Size Income Statement (in Pesos) (in Percentages)

2003 2004 2005 2003 2004 2005

Gross Revenues

161,669

199,763

205,734 100.00 100.00 100.00

Less: Cost of Goods Sold

53,786

56,523

51,434 33.27 28.30 25.00

Gross Profit

107,883

143,240

154,301 66.73 71.70 75.00

Less: General and Administrative Expenses

28,470

35,588

46,342 17.61 17.81 22.53

Operating Income

79,413

107,653

107,959 49.12 53.89 52.47

Less: Interest Expense

42

42

42 0.03 0.02 0.02

Income Before Taxes

79,371

107,611

107,917 49.09 53.87 52.45

Less: Provision of Income Taxes

31,748

43,044

43,167 0.20 0.22 0.21

Net Income

47,622

64,566

64,750

COMMON SIZE

FINANCIAL STATEMENTS

Account itemCommon size ratio =

Total Revenues

Account itemCommon size ratio =

Total Assets

29.46 32.32 31.47


At a glance, the peso values above do not reveal much about the operations of ABC Enterprise other than the fact that gross revenues, net income, and general and administrative expenses have been increasing from 2003 to 2005. As a small business counselor, you should not be content with merely spotting increasing and decreasing trends. More importantly, you should be able to infer what factors brought about such changes. The common-size income statements of ABC Enterprise are prepared in vertical analysis, with each line item referenced against the gross revenues for the given period. What can you conclude from the figures in the last three columns? Why has gross profit increased? Has the firm raised prices, sourced from a new supplier (hence a lower cost of goods sold), changed product mix to higher margin products, or adopted some other strategy? What brought about the increase in general and administrative expenses? APPLICATIONS AND LIMITATIONS Common-size financial statements can be used to compare different companies at the same point in time. It is especially useful when comparing a firm to the best performing firm in the industry (benchmarking). With this tool, a firm can also be compared to the industry as a whole. To compare to the industry, ratios are calculated for each firm in the industry and the industry average is calculated. Comparative statements may then be constructed with the firm’s ratios in one column and the industry averages in the next column. This will give a quick view of how the firm fares in the industry.

The limitations on the use of common-size statements stem from the accounting data used to construct them. For instance, different firms adopt different accounting policies and practices. Also, different firms may use different accounting calendars. Adjustments should be made to ensure that information is comparable.


A firms performance is best evaluated using financial ratios. It is a vital tool used by financial institutions in determining a firm’s viability, profit potential, and capability to pay a new debt. Referencing ratios of one firm with those of another allows for comparison between firms.

Most ratios can be computed using data provided by financial statements. A ratio is a number that shows the relationship between figures. For a ratio to be meaningful, there must exist a significant connection between the figures. Four classifications of financial ratios have gained widespread use in evaluating a firm’s financial position and performance. These are: profitability ratios, activity ratios, liquidity ratios, and leverage ratios.

PROFITABILITY RATIOS

This group of ratios shows the company’s ability to generate surplus and recover operating expenses.

This ratio measures the gross profit earned on sales. The difference between sales and the cost of sales figures is the amount left to pay off operating expenses and yield a profit. The smaller the difference, the lower the gross profit margin. A negative gross profit margin implies that the firm has been selling at a level way below the cost of its manufactured or purchase cost of merchandise. Changes in gross profit over time should be analyzed to determine the cause. Changes may be due to factors such as change in inventory valuation methods, level of capacity utilization, change in prices, the introduction of a new product line with a different margin of profit than the firm’s other products, government price controls, etc. A decreasing gross profit margin may be a result of the management’s decision to decrease prices to increase sales volume and capture a larger market share. On the other hand, a decreasing gross profit margin may also be a result of the firm’s failure to pass on price increases to customers.

The net profit margin indicates the firm’s ability to generate profits. The higher the net profit margin, the better as this implies more profits for every peso of sales.

Sales Net income

Net Profit Margin =

Sales – Cost of Goods SoldSales

Gross Profit Margin =

FINANCIAL RATIOANALYSIS

FINANCIAL RATIOANALYSIS


The return on equity reveals how much the owner(s) get on his/their investment. The higher the ratio the better as this means more returns for every peso invested.

This ratio indicates how effective total assets are used to generate profit. The ratio can be increased by increasing profits and reducing total assets. Profits can be improved by increasing prices or volume of sales, lowering cost of sales, lowering selling and administrative expenses, a better product mix, higher production efficiency, etc. Total assets can be reduced through effective use of idle assets, reducing inventories to a minimum, etc.

Net Income Return on Equity =

Ave. Equity

Return on Assets = Operating Income

Total Assets

TURNOVER RATIOS Turnover ratios indicate the efficiency in the utilization of the firm’s assets.

This ratio reflects the aggregate, company-wide efficiency in the utilization of its assets. A high ratio usually indicates the efficient use of assets.

The fixed asset turnover measures the efficiency with which the firm has been using its fixed assets to generate sales. Generally, higher fixed asset turnovers are preferred since they reflect greater efficiency of fixed asset utilization.

This ratio indicates effectiveness of credit collection. A high ratio, which corresponds to a shorter average collection period, may suggest efficient collection but at the same time may mean a lot of lost sales due to strict credit terms.

Total Asset Turnover = Sales

Ave. Total Assets

Fixed Asset Turnover = Sales

Ave. Fixed Assets

Receivable Turnover = Credit Sales

Ave. Receivables


Average Collection Period = 365 Receivable Turnover

The receivable turnover is often reported in terms of the number of days that credit sales remain as receivables before they are collected. This number, known as the collection period, is only meaningful when compared to the firm’s credit terms. If the computed collection period is higher than the prescribed credit terms, then the firm is having problems collecting its receivables.

This ratio shows the number of times the same volume of goods is sold during the period. A low turnover is definitely not good as this means the firm’s resources are tied down unproductively in a huge volume of inventory of stocks and slow-moving goods.

The days inventory figure is a rough estimate of the firm’s replenishment cycle.

Average Collection Period = 365

Receivable Turnover

365

Inventory Turnover Days Inventory =

LIQUIDITY RATIOS Liquidity ratios measure a firm’s capacity to meet short-term financial obligations from its

current assets.

This is the simplest measure of a firm’s ability to raise funds to meet short-term obligations. If the ratio is too low, the firm may experience difficulty meeting short-run commitments. When a firm has a high current ratio, it normally faces a lower risk of defaulting on its short-term liabilities. A high current ratio, however, does not provide much buffer if the bulk of current assets are slow-moving inventories. Thus, a detailed analysis of the composition of current assets and maturities of current liabilities should be undertaken.

The quick ratio (also known as acid test ratio) measures the firm’s ability to pay short-term debts without having to sell inventories. The current assets used in the quick ratio are cash, marketable securities, accounts receivable, and notes receivable.

LEVERAGE RATIOS

The ratios under this group reflect the extent of a firm’s dependence on external financing vis-à-vis internal financing.

Current Assets

Current Liabilities Current Ratio =

Current Assets - Inventory

Current Liabilities Quick Ratio =


The debt equity ratio has come to be associated with financial leverage, i.e., the use of long-term debts to fund firm’s financial requirements. A high debt equity ratio is not desirable.

In this ratio, all debt – regardless of whether current or long-term – are compared with total assets. This ratio simply indicates the proportion of total assets financed by creditors.

Long-Term Debt

Equity Long-Term Debt Equity Ratio =

Total Debt

Total Assets Debt to Total Asset Ratio =

APPLICATIONS AND LIMITATIONS Financial ratios have been in wide use because of their relative ease of computation and interpretation. It allows easy comparison across firms of different sizes. First and foremost, analysis and interpretation of various ratios gives a better understanding of the financial condition and performance of a firm than the mere analysis of financial data alone. When financial ratios covering a period of several years are arrayed on a spreadsheet, one can study the composition of change and determine whether there has been an improvement or deterioration in the firm’s financial condition and performance over time. You can use any one of the following as “yardstick” when evaluating and comparing the performance of your client’s business: preceding period’s financial ratios, a competitor’s financial ratios, and industry averages. Not all industries are alike. Financial ratios are useful in drawing up a description of the inherent financial characteristics of industries. Thus, you should avoid using “rule of thumb” indiscriminately for all industries. Financial ratios have also found application in contracts. The most familiar are the restrictions imposed on loan contracts such as minimum current ratio or a maximum debt equity ratio of 80:20. Since year-end values may not be representative, as certain accounts may increase or decrease at the end of the accounting period because of seasonal factors and thus distort the value of the ratio, it is advisable to use average values.19 Keep in mind too, that ratios are subject to the limitations of accounting methods. Different accounting methods may result in significantly different ratio values thus making the comparison of firms erroneous.

19 Average = Beginning value + Ending value 2


One way to decide whether an investment or project should be undertaken is to calculate the investment or project’s internal rate of return (IRR). The IRR is the discount rate that makes the net present value (NPV) equal to zero. Expressed in another way, the IRR is the discount rate that makes the present

value of a project’s expected cash inflows equal to the present value of the expected cash outflows.

INTERNAL RATE OF RETURN

INTERNAL RATE OF RETURN

The IRR, denoted by k, is the rate that satisfies the following equation:

CF0 + CF1 + CF2 + CF3 + …. + CFn = 0 (1 + k)1 (1 + k)2 (1 + k)3 (1 + k)n

where CFn refers to cash flow in period n, n is the number of periods, and k is the rate that discounts the periodic future cash flows to equal the investment cost. If the initial cast outlay is the only investment cost involved, the above equation can be expressed as follows:

CF0 = n Σ CFt t=1 (1+k)t

The general rule is: if IRR ≥ r Accept (because the project meets the required rate of return) if IRR ≤ r Reject (because the project fails to meet required rate of return) HOW TO COMPUTE FOR IRR For illustrative purposes let’s use the following example. Mr. dela Cruz is reviewing a proposal that will bring him annual cash flows of P118,000 after investing P500,000 in a piece of equipment. Getting the IRR is simply finding the discount factor (k) which when applied to the annual cash flow of P118,000 will equal P500,000. Step 1 Prepare a diagram of relevant expected cash inflows and outflows. Although a sketch

is not actually essential, it serves to clarify things. Indicate outflows in parenthesis. Position the outflow at time zero, the date of acquisition.

0 1 2 3 4 5

(500,000) 118,000 118,000 118,000 118,000 118,000


Step 2 Compute for IRR. You can compute for IRR in many ways.

1. Solving manually. To solve for the discount factor, first denote the right side of the following equation as y (k,n).

CF0 = n Σ CFt t=1 (1+k)t

Thus, given the values in the example, you have:

P500,000 = P118,000 y (k,n)

Computing for y (k,n), you get: P500,000 = y (k,n)

118,000

4.2373 = y (k,n)

Next, search the Present Value of an Annuity Table for the value 4.2373 given n=5. Since the value 4.23729 is not in the table, you need to interpolate to get a more accurate figure. To interpolate, get the two present value factors nearest 4.2373.

K Present Value Factors 5% 4.3295 4.3295

Approximate rate 4.2373 6% 4.2124

Difference 0.1171 0.0922

Approximate rate = 5% + 0.0922 (1%) = 5.7874% 0.1171

Thus, the IRR in Mr. de la Cruz’ case is 5.7874%. Manual computations become more complicated if the cash inflows are not

uniform. 2. To eliminate the need for trial and error procedures, many finance managers use

computer programs and spreadsheets to facilitate computations.

Excel uses the following syntax in computing for IRR:

=IRR(values, guess)

Values refer to a group of cells that contain numbers for which you want to calculate the internal rate of return. Values must contain at least one positive value and one negative value to calculate the internal rate of return. Be sure to enter your payment and income values in the sequence you want.


Guess is any number that you think is close to the result of IRR. In most cases you do not need to provide guess for the IRR calculation. If guess is omitted, it is assumed to be 0.1 (10 percent).

Microsoft Excel uses an iterative technique for calculating IRR. Starting with guess, IRR cycles through the calculation until the result is accurate within 0.00001 percent. If the IRR function can't find a result that works after 20 tries, the #NUM! error value is returned.

If the IRR function gives the #NUM! error value, or if the result is not close to what you expected, try again with a different value for guess.

Using Excel to get the IRR for our example:

Step 1 Type in values in a column as shown below.

A B C D 1 -500000 2 118000 3 118000 4 118000 5 118000 6 118000 7 8

Step 2 Type =IRR( in any row next to your column of values in the spreadsheet and then with the cursor range the column of values. Type ) to end function.

A B C D 1 -500000 2 118000 3 118000 =IRR(A1:A6) 4 118000 5 118000 6 118000 7 8

Step 3 Press the Enter key to get the IRR value

A B C D 1 -500000 2 118000 3 118000 5.78% 4 118000 5 118000 6 118000 7 8



Just like the NPV, the IRR is used in capital budgeting, the process by which firms determine whether an investment or project proposal is worth undertaking. The usefulness of the IRR measurement lies in its ability to represent any investment opportunity's return and to compare it with other possible investments. The IRR is a true indication of a project’s annual return on investment only when the project does not generate interim cash flows or when does interim cash flows can be invested at the actual IRR.20

20 http://www.valuebasedmanagement.net/methods_irr.html


There will be instances when clients will come to you and ask whether it is better to buy or make a component which is used in their products or operations. Just because your client has been manufacturing the item does not mean that the practice has to continue. New processes and suppliers may make it more economical to buy rather than to make

MAKE OR BUY DECISION

MAKE OR BUY DECISION

There are a lot of considerations that go into make or buy decisions. These include among others: cost, availability of skilled manpower, tools, facilities, and equipment. HOW TO DECIDE MAKE OR BUY PROBLEMS Step 1 Determine the lowest effective cost of buying the component. Include incidental

expenses like transportation cost, delivery charges, etc. Step 2 Calculate the total cost of making the component. The total cost should include direct

costs (like raw materials, labor, and direct overhead) and indirect costs (like salary of supervisors and maintenance).

Step 3 Determine the existing fixed costs. (These are the costs your client will be incurring

whether the component is manufactured or not.) Step 4 Compute for the difference between the results in Steps 1 and 3. The difference will

give you an indication which of the two options is better. Step 5 Identify the qualitative factors that will affect the decision to make or buy a

component. These may include: expertise in making the component, quality, and plant capacity.

Here is an example. Mr. Capistrano, owner of Dress Me Dolls, manufactures and sells dolls locally. At present, his company buys the hair pieces, clothes, and accessories that dress up the dolls his company produces. His production supervisor thinks that they can cut costs by producing the accessories currently being purchased at P 40.00 per doll. Other pertinent information are as follows: Cost to buy accessories P40.00/doll Total unit cost to make accessories 32.00/doll

Direct Costs Unit Cost Indirect Costs Unit Cost Material 15.00 Additional fixed cost 2.00 Labor 5.00 Variable manufacturing cost 2.00 Additional overhead 8.00

Total 28.00 Total 4.00 Given the above, should Mr. Capistrano agree to make the accessories in-house instead of purchasing them? If Mr. Capistrano’s firm has the available capacity, technology, and equipment and his people have the expertise and know-how, then the company stands to benefit manufacturing the accessories in-house. Otherwise, there is more to consider aside from the eight pesos per unit savings that can be realized. It is likewise important to take into account other factors such as: who will come up with the designs, who will make the molds,


the cost of molds, availability of funds, interest charges in case funds have to be borrowed, etc. APPLICATIONS AND LIMITATIONS In many instances, a make or buy decision is seldom clear-cut and easy. A number of factors must be weighed and balanced against each other. The make or buy decision tool is very useful in explaining to your client the cost effectiveness of making an item in-house or sourcing (either buying or subcontracting) it from outside. In general, the more complicated and technical a component is, the more likely it is that the decision will be to purchase. This is especially true where technology is changing rapidly and a small entrepreneur has difficulty keeping up with the latest developments. So, when using this tool, be sure you consider all relevant factors such as cost of money, availability of funds, availability of capacity, technology requirement, skill of workforce, quality, complexity of the process, etc. Failure to consider such factors may lead to the wrong decision.


A peso today is worth more than a peso in the future. This is because inflation erodes the buying power of the future money, while money available today can be invested and grow. Net Present Value (NPV) is a basic tool in analyzing the profitability of an investment or project. Simply

defined, NPV is the difference between the present value of cash inflows and the present value of cash outflows.

NET PRESENTVALUE

NET PRESENTVALUE

The mathematical formula for computing NPV is:

NPV = CF0 + CF1 + CF2 + CF3 + …. + CFn (1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n

where CFn refers to cash flow in period n, n is the number of periods, and r is the required rate of return, and 1 is the discount factor at period n. (1 + r)n The general rule is: if NPV ≥ 0 Accept (because the project meets the required rate of return) if NPV ≤ 0 Reject (because the project fails to meet required rate of return) Another way of to express the acceptance criterion is to say that a project will be accepted if the present value is positive, i.e., the cash inflows exceeds the present value of cash outflows. If by chance, the NPV is exactly zero, a decision maker would be indifferent between accepting and rejecting the project. HOW TO COMPUTE FOR NPV For illustrative purposes let’s use the following example. Your client is considering buying a piece of equipment having a five-year life. It is going to cost your client P200,000 to acquire the machine. If he buys the equipment this year, he will realize additional profits of P60,000 per year for the next five years. Assume further that your client is presently short of cash and will have to get a loan at 20% per annum interest to purchase the equipment.


Step 1 Prepare a diagram of relevant expected cash inflows and outflows. Although a sketch is not actually essential, it serves to clarify things. Indicate outflows in parenthesis. Position the outflow at time zero, the date of acquisition.

0 1 2 3 4 5

(200,000) 60,000 60,000 60,000 60,000 60,000 Step 2 Compute for NPV. You can compute for NPV in many ways.

1. By long hand. NPV = - 200,000 + 60,000 + 60,000 + 60,000 + 60,000 + 60,000 (1.20) (1.20)2 (1.20)3 (1.20)4 (1.20)5 = - 200,000 + 50,000 + 41,666 + 34,722 + 28,935 + 24,113 = - 20,564 2. By using the Present Value Table found in many finance books you no longer

have to go through the tedious process of computing for discount factors. How do you locate the discount factor for a particular period given the many rows and columns of numbers in the table? The discount factor for a particular period and a given a rate is the number found at the intersection of the specified period (row) and rate (column). The discount factor is multiplied by the future inflows.

In our example, the present values of cash inflows are as follows:

Expected Inflows and Outflows

Discount Factor at 20% Present Value

(200,000) (200,000) 60,000 0.8333 49,998 60,000 0.6944 41,663 60,000 0.5787 34,722 60,000 0.4823 28,938 60,000 0.4019 24,114

To get the NPV, simply sum up the present values (last column). In our example

the NPV is – 20,564. 3. By using the Present Value of An Annuity table. If the periodic cash inflows are

identical and expected to be received in equal intervals, you need not compute individually the present value of each year’s inflow. The Annuity Table provides a shortcut to reduce calculations.

Be sure you are using the right table. If you are computing for the present value of a series of equal amounts, get the discount factor from the Present Value Annuity Table. In our example, with n = 5 and r = 20%, the discount factor is 2.9906. Hence, the present value of cash inflows of P60,000 for the next five


years equals P179,436 (i.e., 60,000 x 2.9906). Subtract from this, the P200,000 cost of the machine will give you a negative NPV of P20,564.

4. Use a financial calculator. If you have a financial calculator you need not

compute the NPV manually.

5. Use the NPV function of Excel software.

Excel uses the following syntax in computing for NPV:

NPV(Rate,Value1,Value2, ...)

where Rate is the rate of discount over the length of one period; and Value1, Value2, ... represent cash outflows and cash inflows Keep in mind that when using Excel’s NPV function:

• Value1, Value2, ... must be equally spaced in time and occur at the end of each period.

• NPV uses the order of Value1, Value2, ... to interpret the order of cash flows. Thus, it is imperative that you enter your cash flow values in the correct sequence.

• The timing of the first cash outflow is critical when using Excel’s NPV. If the initial cost of the investment is paid out at the end of the first period, include it as Value 1.

However, if the initial cost of investment is paid at the beginning of the first period, don’t assign it as Value 1. Instead, deduct it from the result of the NPV function. Thus, in our example your NPV function is:

NPV = (20%, 60000, 60000, 60000, 60000, 60000) – 200000

= P 20,564


Although the NPV is considered a better technique over IRR, it does not account for flexibility and uncertainty after the project decision21 nor does it take into consideration intangible benefits.22

21 http://www.valuebasedmanagement.net/methods_npv.html 22 http://www.12manage.com/methods_npv.html


PAYBACK PERIOD

PAYBACK PERIOD

The payback period is perhaps the simplest method of comparing one or more investment projects. It focuses on recovering the cost of investments. By definition, the payback period is the number of years it will take to recover the original total cash investments on a project.

Under the payback method of analysis, projects or purchases with shorter payback periods are preferred over those with longer paybacks. The idea behind this is that projects with shorter paybacks are more liquid, and thus less risky — they allow early recovery of investment and so money can be reinvested elsewhere. Moreover, with any project there are a lot of variables that grow increasingly uncertain as it extends out into the future. With a shorter payback period, there's less of a chance that market conditions, interest rates, the economy, or other factors that can affect a project will drastically change. HOW TO COMPUTE FOR PAYBACK PERIOD If the annual net cash flows are equal, simply divide the initial investment by the annual net cash flow to get the payback period. However, if the annual net cash flows are not equal, the task of calculation is not as straightforward. Step 1 Determine the total initial investment. Step 2 Prepare a three-column table. The first column is the year column. Start with the

year when the investment began to generate net cash inflow. The second column shows the net cash inflow, the difference between cash receipts

and disbursements. The last column shows the cumulative total. This is derived by adding together all

cash inflows of the present and previous years. Step 3 From the last column determine the approximate number of years it takes to recover

the original investment. The difference between the original investment and the cumulative total can then be extrapolated. In extrapolating, divide the difference by the cash inflow of that year which coincides with the number of year to recover the investment and multiply by 12 to get the number of months.

If the calculated payback period is less than some acceptable payback period, the

investment is deemed acceptable; if not, it is rejected.


For example, investing in a P1M machine, with an estimated life of five years, is projected to yield the following results: Year 1 2 3 4 5 Revenue

1,200,000

1,000,000

900,000

750,000

700,000

Cash Expenses 600,000 500,000 475,000 450,000 400,000 Net Cash Flow 600,000 500,000 425,000 300,000 300,000 Depreciation 200,000 200,000 200,000 200,000 200,000 Income before taxes 400,000 300,000 225,000 100,000 100,000 Following Step 2, the three-column table for our example will be consolidated as follows:

Year Annual Net Cash Inflow Cumulative Total 1 600,000 600,000 2 500,000 1,100,000 3 425,000 1,525,000 4 300,000 1,825,000 5 300,000 2,125,000

From the above table, the cost of the P1M machine is recovered from the cash inflows of the first two years. More specifically, Payback Period = 1 year + [(1,000,000 – 600,000)/500,000] x 12 = 1 year + (0.8 x 12) = 1 year and 9 months APPLICATIONS AND LIMITATIONS The method is easy to compute and understand. It is the simplest way of looking at one or more project ideas. But its simplicity carries weaknesses with it. For one, it fails to take into consideration the income generated after the payback period. For instance, two machines costing P60,000 each and generating the P30,000 for the first three years will have the same payback period. However, it can happen that one machine is no longer useful after the third year, while the other machine is still expected to generate additional income for the next two years. The additional income after the third year is disregarded in the analysis. Thus, the payback period can be very deceptive as a yardstick of profitability. This method fails to consider too, the time value of money (that is, the timing of cash inflows) during the payback period; it only considers the recovery period as a whole. Nonetheless, the payback method continues to be in use because of its easy calculation and the fact that it provides some insight on the risk and liquidity of a project. The payback period is not a reliable criterion for investment decisions, but to some extent, it is a useful supplement to other, more sophisticated methods like net present value and the internal rate of return.

195

REFERENCES Department of Trade and Industry. BSMED. Glossary of Key Terms and Concepts for Micro, Small, and

Medium Enterprises, July 2005. Department of Trade and Industry. SME Development Plan 2004-2010. Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH. Review of Existing Policies

Affecting Micro, Small, and Medium Enterprises (MSMEs) in the Philippines. December 2004. Kotler, Philip and Armstrong, Gary. Principles of Marketing. 7th Edition. Prentice-Hall, 1996. Technonet Asia. Industrial Extension Manual for Small and Medium Industries in Developing Countries.

Singapore. 1985. Internet references: http://calbears.findarticles.com/p/articles/mi_m1154/is_6_87/ai_54695720 http://chiron.valdosta.edu/whuitt/papers/prbsmbti.html http://en.wikipedia.org/wiki/Just_in_time http://en.wikipedia.org/wiki/Cost-benefit_analysis http://hadm.sph.sc.edu/COURSES/ECON/irr/irr.html http://home.ubalt.edu/ntsbarsh/Business-stat/otherapplets/Inventory.htm http://management.about.com/cs/money/a/CostBenefit.htm http://personal.ashland.edu/~rjacobs/m503jit.html http://syque.com/quality_tools/toolbook/Decision/do.htm http://web2.concordia.ca/Quality/tools http://www.12manage.com/methods_npv.html http://www.asq.org/lern-about-quality/new-management-planning-tools/overview/relations-diagram.html http://www.betterproductdesign.net/tools/productio/value.htm http://www.ciras.iastate.edu/publications/management/SimplifiedSystematicPlantLayout(1999Fall).pdf http://www.computerworld.com/managementtopics/roi/story0,10801,78524,00.html http://www.deming.eng.clemson.edu/pub/tutorials/qctools/scatm.htm http://www.ee.uwa.edu.au/~croft/eom446/leccl.html http://www.euforic.org/gb/stake1.htm http://www.interventions.org/pertcpm.html http://www.investopedia.com/terms/n/npv.asp http://www.jiscinfonet.ac.uk/InfoKits/infokit-related-files/stakeholder-analysis-template http://www.kulzick.com/Stakehr1.htm http://www.lachsr.org/documents/policytoolkitforstrengtheninghealthsecgorreformpartii-EN.pdf http://www.marketingteacher.com/Lessons/lesson_swot.htm http://www.mindtools.com/dectree.html http://www.mindtools.com/pages/article/newPPM_07.htm http://www.mindtools.com/pages/article/newPPM_08.htm http://www.mindtools.com/pages/article/newTED_08.htm http://www.mindtools.com/pages/article/newTMC_10.htm http://www.mindtools.com/stress/pp/StakeholderManagement.htm http://www.netmba.com/finance/financial/ratios/ http://www.netmba.com/finance/statements/common-size/ http://www.netmba.com/operations/project/pert/ http:www.psychwww.commtsite/dectree.html

http://calbears.findarticles.com/p/articles/mi_m1154/is_6_87/ai_54695720

http://chiron.valdosta.edu/whuitt/papers/prbsmbti.html

http://en.wikipedia.org/wiki/Just_in_time

http://hadm.sph.sc.edu/COURSES/ECON/irr/irr.html

http://home.ubalt.edu/ntsbarsh/Business-stat/other

http://personal.ashland.edu/%7Erjacobs/m503jit.html

http://syque.com/quality_tools/toolbook/Decision/do.htm

http://www.asq.org/lern-about-quality/new-management-planning

http://www.betterproductdesign.net/tools/productio/value.htm

http://www.ciras.iastate.edu/publications/management/SimplifiedSystematicPlantLayout(1999Fall).pdf

http://www.computerworld.com/managementtopics/roi/story0,10801,78524,00.html

http://www.deming.eng.clemson.edu/pub/tutorials/qctools/scatm.htm

http://www.ee.uwa.edu.au/%7Ecroft/eom446/leccl.html

http://www.euforic.org/gb/stake1.htm

http://www.investopedia.com/terms/n/npv.asp

http://www.jiscinfonet.ac.uk/InfoKits/infokit-related-files/stakeholder-analysis-template

http://www.kulzick.com/Stakehr1.htm

http://www.lachsr.org/documents/policytoolkitforstrengtheninghealthsecgorreformpartii-EN.pdf

http://www.marketingteacher.com/Lessons/lesson_swot.htm

http://www.mindtools.com/dectree.html

http://www.mindtools.com/pages/article/newPPM_07.htm

http://www.mindtools.com/pages/article/newPPM_08.htm

http://www.mindtools.com/pages/article/newTMC_10.htm

http://www.netmba.com/finance/statements/common-size/

196 http://www.quickmba.com/sterategy/swot/ http://www.quickmba.com/strategy/value-chain http://www.scu.edu.au/schools/gcm/ar/arp/stake.html http://www.skymark.com/resources/tools/control_charts.asp http://www.sytsma.com/tqmtools/ctlchtprinciples.html http://www.sytsma.com/tqmtools/runchart.html http://www.sytsma.com/tqmtools/pareto.html http://www.sytsma.com/tqmtools/samp&ctrlchts.html http://www.toolkit.cch.com/text/P06_6530.asp http://www.toolkit.cch.com/text/P06_6550.asp http://www.unhabitat.org/cdrom/governance/html/st.htm http://www.valuebasedmanagement.net/methods_irr.html http://www.valuebasedmanagement.net/methods_npv.html .

http://www.quickmba.com/sterategy/swot/

http://www.scu.edu.au/schools/gcm/ar/arp/stake.html

http://www.skymark.com/resources/tools/control_charts.asp

http://www.sytsma.com/tqmtools/

http://www.sytsma.com/tqmtools/pareto.html

http://www.sytsma.com/tqmtools/samp&ctrlchts.html

http://www.toolkit.cch.com/text/P06_6530.asp

http://www.toolkit.cch.com/text/P06_6550.asp

http://www.valuebasedmanagement.net/methods_npv.html

Date post:	27-Apr-2015
Category:	Documents
Upload:	kleomarlo
View:	455 times
Download:	6 times