Decisions Managerial Perspective

8/2/2019 Decisions Managerial Perspective

1/55


2/55


3/55


4/55


5/55


6/55


7/55


8/55


9/55


10/55


11/55


12/55


13/55


14/55


15/55


16/55


17/55


18/55


19/55


20/55


21/55


22/55


23/55


24/55


25/55


26/55


27/55


28/55


29/55

24 Afghanistan Institute of Banking and Finance (Author: Sohailuddin ALAVI)

Decisions: Managerial Perspective

TemplateForce Field Analysis [Template]

PLEASE WRITE YOUR GOAL [DECISION] HERE...

DRIVING FORCES RESTRAINING FORCES


30/55



ACTION PLAN

Conclusions ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________

Projected actions

1. Need to alter the decision Yes / No2. Need to capitalize [increase] on driving forces Yes / No3. Need to neutralize [eliminate] restraining forces Yes / No

1. Need to alter the decision [Please rewrite the decision below]

_____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________

2. Need to capitalize [increase] on driving forces [Please identify actions you wouldlike to take in this regard.

_____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________

_____________________________________________________________________

3. Need to neutralize [eliminate] restraining forces [Please identify actions youwould like to take in this regard.

_____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________


31/55



Ethical Decision Making Framework in the Work Place

Learning Objectives- To describe the organization from the perspective of a corporate citizenship.- To highlight the significance of ethics in managing organizations- To elaborate the dimensions of organizational responsibility

Ethics and the Decision-makingBusiness enterprises are integral part of a society. Cognizance of this reciprocalrelationship between an enterprise and the society makes it a better Corporate Citizen.

As a consequence of it, enterprise feels responsible of the impact of its transactions[behaviors] onto the society besides its proactive role in development of the society inbroader perspective.

Decisions in general and management decisions in particular are complex, for theirimplications are usually holistic and multiple and so are their underlying considerations.Therefore for decisions to be effective and sustainable [successful] these must yield awin-win outcome for every stakeholder. Thus management decisions especially anddecisions in general should essentially conform to the socio-moral context. Ethicalprinciples provide a required basis to attain the socio-moral conformity.

At this point it is necessary to develop a shared understanding of ethics: Putting it simply,ethics is a behavioral orientation [action or decision] that leads to fair, just, andequitable transactions in a transparent manner. However, more precisely, a behaviormust be morally and socially correct from two orientations, namely; in terms of itsconsequence [outcome] and also in terms of its subject matter and the underlyingconsiderations [rationales or principles] thereto. It is interesting to note that for manypeople conforming to a single orientation [consequence or subject matter] suffice for abehavior to be considered ethical. However, in the authors opinion a truly ethicalbehavior is one that conforms to both the orientations, simultaneously.

Ethical Management Decisions Framework To start with, in an effort to make management decisions conform to socio-moralstandards two separate approaches are generally followed by different people, namely;

- Ethical principles are considered yet another dimension of conducting and evaluatingmanagement decisions [business transactions] along with financial, economic,technological, and commercial dimensions.

- Ethical principles are considered as an overall basis for governing the conduct of management decisions [business transactions] in various dimensions be it economic,financial, technological, or commercial.

In the first approach ethical principles tend to be an independent dimension [set of norms] having no direct influence and/or linkage with other dimensions of a businesstransaction. Hence ethical conformity of management decisions is attained through aprocess of bargaining and compromise between several other dimensions as notedabove.


32/55



For instance, a managements decision to increase profits by charging above normal[market] price customer diffusion will be ethical as long as the increase in price is

well affordable for majority of the customers [Point to ponder: even a higher pricecould be well within the affordable limits of majority of the customers, however, thecompany compromises on maximizing their profits with view to minimize theconsequential effect on the customers in general].

Similarly, managements decision not to sell cigarettes to under aged customers iswell considered as ethical. [Point to ponder: the management is compromising itspotential sales revenue by not selling to the under aped customers, for it injurious tohuman body. Yet they still sell cigarettes to adults although it is equally injurious tothem as well].

While in the second approach ethical principles become basis for moral evaluation of different dimensions of a management decision [business transaction] be it economic,financial, technological, social or political. In short the latter approach looks atmanagement decision as ethical or unethical in totality either from the point of itssubject matter [rationales and principles] or the consequence [potential outcome], orboth simultaneously.

Referring to the first example above, the decisions subject matter and itsconsequence both are to be considered unethical under the latter approach, forincreasing prices for the sake of profiteering is absolute violation of ethical norms,irrespective of the fact whether or not customers could bear it. In this secondexample, once again the decision is to be considered unethical in totality, for despitenot selling cigarettes to under aged ones the product is equally injurious for adults.

Putting simply, being ethical is making decisions with a strong sense of responsibilitytowards the stakeholders in particular and the society in general. The grid belowpresents exemplary responsibilities.

Shareholders To do business in a manner that

increases shareholders wealth To conserve business resources To remain profitable Etc.

Customers Value for money Provide access to full information so to

make informed buying decisions Live the commitment Make safe and healthy products Respect values Etc.

Employees To pay just compensation To provide safe and healthy working

conditions To provide for career development and

growth opportunities to all without bias To uphold self esteem and

acknowledge efforts To ensure security

Future Generations Make this world a better place for the

next generations Conserve and protect natural

resources Etc.


33/55



Community [society] Equal employment opportunity Respect, protect and promote the

culture Participate in socioeconomicmobilization and empowerment

Protect and promote healthierenvironment

Etc.

Government [Regulators] Adhere and comply to government

policies and regulations

Demonstrate integrity towardsgovernment levies Work with the government towards

addressing socio-moral issues in thesociety

Etc.

Elements in Ethical Decision MakingInterestingly business decisions in particular and decisions in general are stronglyinfluenced by the personality orientations of key persons [stakeholders] and the businessenterprise itself. The flow chart below explains it all.

Ethical Issue Intensity: How significantlydoes a decision maker perceive the ethicalissue at work would determine his or herresponse - Higher the intensity, moreurgently he or she would tend to respond.The weight age attached to an ethical issuedirectly depends upon the individualspersonal maturity at a given point in career;Organizational factors; and spur of thesituation itself.

Personal Maturity: Personal maturity refersto individuals stage of moral development.It directly depends upon the individuals concept of morality and its significance; motivation; and, cognition (ability to respondeither rationally).

Moral development refers to an individuals awareness and value that he or she attachesto the moral obligations in general. A researcher named Lawrence Kohlberg* successfullyidentified several stages of moral development. These stages should be visualized on acontinuum and not as discrete segments.

Accordingly, an individuals moral outlook changes as his or her moral developmentmatures to a higher stage. It is interesting to note that generally moral maturitycoincides with age. However, other factors such as cultural background, education,socio-moral and socio-legal environments influences moral maturity.

Level One:Pre-conventional

Level Two:Conventional

Level Three:Post Conventional

Stage 1:Concern for physicalconsequences to self,especially to avoid punitive

Stage 3:Concern for othersapproval of ones behavior.

Stage 5:Concern for preventing (notviolating) others rights andsocial contract (obligation),

Ethical Issue Intensity

Concept andvalue of morality

PersonalMaturity Motivation

Cognition

Goals&Rewards

Organizat- Peer Pressure&

ion Factors Culture

Options

Ethical / UnethicalDecision Making


34/55



possibilities

Stage 2:

Concern for satisfaction of personal needs.

Stage 4:Concern for conforming tolegal boundaries /

standards

for conducting oneself in amorally correct manner.

Stage 6:Concern for confirming tothe ethical principles suchas justice; fairness; andequal human rights etc.

* Chapter 1. Framework for understanding organizational ethics, Business Ethics new challenges forbusiness schools and corporate leaders, Peterson & Ferrell

Organizational Factors: Organizational environment could be enabling or disabling for thedecision maker to operate from ethical orientation while making business decisions. Anenabling environment would provide incentives for being ethical while punishments forbeing unethical, such as, if th e focus in employees performance management is on theprocess more than on the achievement than it is likely that employees behavior wouldbe more ethical and vice versa. Similarly the cultural norms could be much supportive of ethical behaviors, such as dominant work values of fairness, justice and equality. Peerpressure i.e. influence of coworkers, seniors and emergent relationships also has asignificant bearing on the decision making process of an individual.

Generally, organizational factors ar e found dominant in altering (modifying) managersdecision making behavior on both sides. However, in exceptional situations individualshaving strong leadership qualities tend to act as catalyst in modifying the organizationalenvironment.

Discussion Questions1. What responsibility Corporate Citizenship entails upon organizations in carrying

out their routine transactions?2. Define ethics in the context of Corporate Citizenship role.3. Analyze [describe do not judge] general level of moral maturity in Pakist ans

world of work 4. What socio-moral dilemmas do we face as an economic society?


35/55



Decisions Analysis

Instructions: Identify positive and negative repercussions of following decisions. Suggest better alternate decision, within the given scenario.

a) To overcome increasing cost of operations [ declining profit margins] and/orto become more competitive in the market, tee management decided to lay-off 25% employees in tee clerical cadre and 10% in tee executive cadres Theprojected impact is savings of Rs 1.0 million and Rs 1.5 million, respectively.

b) A frozen food chain was facing problems in meeting the ever rising demandfor its diversified products range. It therefore decided to move onto Buy-and-Brand strategy by developing long term relationships with a few local vendorsfor the uninterrupted supply of products, which hitherto they were producingthemselves and developed market leadership through superior quality andstrong brand loyalty.

c) During an internal environmental audit of an industrial unit, it was revealedthat one of the plants was discharging excessive harmful waste into thenearby river. To fix the problem, plant had to be stopped for a week.However, due to peek season the company could not afford to shut down theplant for so long. So it decided to ignore the problem until the high season isover.


36/55



Ethical Dilemma Analysis

By dictionary definition the term dilemma means a choice between two undesirableoptions. Ethical dilemma would then mean a situation which entails upon the decisionmaker to choose between two undesirable options

In the following lines a few true instances are reproduced with some minor alterations for your analysis. You are asked to read through each situation carefully and analyze if there exist an ethical dilemma(s).

o You should visualize the consequences from various stakeholders perspectives o You should identify the possible violation of the principles o You should infer the stage of moral development of the decision maker in each

situation

1. In the process of negotiating a multimillion-rupee contract with a foreign counterpart,a key government agent charges personal consulting fee. In return he promises togive special assistance to him in successfully biding the contract. It is clear that notonly is such fee common practice, but that if bids were not routed through suchconsultants then the contract would certainly be awarded to one of the majorcompetitors.

2. During a luncheon meeting, a representative of a major competitor for one of thekey product lines suggested to her counterpart that the two companies should get on

an informal agreement to set the jointly. The manager knows that the recent pricecompetition has all but eliminated the premium profits for both of the companies.The new suggested price agreement would possibly help raise the profits to newheights by both of them.

3. A business firm sees an opportunity to hire a well known research scientist from amajor competitor. The scientist had been involved in the development of a newproduct. When it will be introduced to the market later this year it will adverselyaffect the market share and profits. By hiring this scientist the firm can reduce itsreaction time to the competitors product by almost 2 years.

4. In preparing a biannual report on the environment impact, the company analyst

came across data, which show that the agricultural products manufacturing plant hadbeen discharging high quantities of a toxic pesticide into the local river. The analystinvestigated and found out that the discharge was due to a piece of malfunctioningequipment. The plan manager agreed to repair the equipment at a later datebecause it will cause a six to eight day shutdown of the plan, as currently it isoperating at maximum capacity and cannot afford to bear any production loss due tohigh season. The analyst is aware that reporting this data will lead to stiff fine by theenvironment agency and increased opposition from the community upon thecompany.


37/55



5. Board of director of a large public sector organization is considering strategies tocontrol rising costs. Currently the organization employs about 25000 employees invarious cadres Managerial 20%; Officers 30%; Workers 50% . The payments by

cadre are Managerial 50%; Officer 20%; and Workers 30% . The organization plansto reduce its head count by 20% to 25%. The proposed criterion for reducing thehead count is proportionate to the cadre wise percentage.


38/55



Problem Management Frameworks

Learning Objectives- To discuss the significance of problems management- To highlight the orientations in managing problems- To elaborate problem management process

Scope and Manifestations: Problems are opportunities in disguise. Problems are challenging situations that may drag [impede] progress towards the

goals, if not managed.

Allah [ Almighty ] informs us of the [should be] response to problems in His Quran-e-Hakeem sent upon His last messenger [Muhammad SAW]: Oh. Believers; in difficulty is the ease and surely in difficulty is the ease Oh. Believers; no difficulty you face but as a consequence of your own mistakes Oh. Believers; in times of difficulty you must adhere [resort] to Sabar [positive

outlook] and maintain Salat [pray to your Lord]

Maxim:Problems turn into opportunities if tackled positively. Secondly, source of manyproblems is inward [internal to an organization or oneself] that needs to becorrected to fix the problem. Put it simply, one generally cannot change the outersituation, but can discipline [alter] oneself to deal with the prevailing conditionsrealistically [pragmatically] and successfully.

Example:Problem : A firm losing customers to newly entered competitors in their market Unrealistic Response Realistic Response New competitors have eroded ouropportunities. They should not have beenallowed to enter in the market, in the firstplace.

New competitors have increased theexpectations of our customers, yet we didnot improve upon our product quality andservice standards to respond to ourcustomers raised expectat ions.

We must kill the competitors at any costto regain our customers [market share].

We should improve our product quality andservice standard to regain our competitiveedge over the competitors to regain ourcustomers [market share]

Target is difficult to impossible. Target is well under self control and canbe accomplished with no difficulty.


39/55



Problems Management Maturity Model:

This model is an attempt to provide aconsistent basis for evaluatingeffectiveness of different problemmanagement attitudes from the point of view of their resulting impact in theimmediate environment.

a. A scenario where problems keep onbuilding up reflects the ignorant attitudetowards problems management. Put itdifferently, problems are denied either atthe subconscious level by the process of psychological distortion and selectivity, or

at the conscious level by practicingrationalization, or excuse finding [blamingothers]. It is typically [All is well] or [Ithappens everywhere ] attitude.

b. Another scenario in problems management is that although problems arerecognized and deliberated upon but are not resolved until these become extremelyurgent and inevitable. In simple words, this is delaying solutions [decision making] untilno options are left out but to salvage the situation. It is typically a [I will take care]attitude.

c. A culture where problems are recognized but not managed in a manner thatappropriately modify their dysfunctional [loss bearing] impact and/or eliminate the rootcauses underlying the problems. In other words, problems are looked at from thesurface only and solutions are accordingly identified and implemented, withoutrecognizing the need for root cause analysis. It is typically [I kno w it] attitude.

d. Proactive approach is the ultimate in problems management. It aims to eliminatedysfunctional effect of problems by either preventing these from occurring or redressingthese in a manner that optimizes gains. Put it differently, proactive problemsmanagement suggests anticipating and reacting to the problems as neutral situations,which can either pose a threat or a subtle [hidden] opportunity depending on how it isapproached. It is typically [If I am OK, everything else is OK] atti tude.

Each stage in problems management portrays an improvement over its preceding stage.The arrow identifies progression from one stage to the next. Organizations as well asmanagers can identify their positions on the grid and can determine future movementstowards the ultimate destination stage four.

Realistic Problems Management Framework This framework suggests a step-by-step approach to manage problems. Generally thesteps need to be followed in the given sequence. However, sometimes the process maybegin from later steps, especially when a particular problem becomes too obvious and soits solution. See figure below:

Problems arerecognized, but

solutions aredelayed

Problemsare redressed at

front end, causesremain

Problems

keep on buildingup for a big bang

Problems

are convertedinto opportunities


40/55



Realistic Problems Management Framework

Exemplification:Stages Description Example

Accept the Problem Problem Recognition Newly entering competitorsare changing the waybusiness is done

Take Responsibility Interpreting problem from adoable orientation: What canbe done to face the problem

Competitors are offeringsuperior product quality atthe same price

Define Problem Zero in focus on the coreissue

Companys sales turnover[revenue] is shrinking as weare facing problems inretaining customers loyaltiesby not being able to provide

relatively equal value formoney as many competitorsare offering.

Ascertain Impact Defining qualitative andquantitative consequences of the problem in focus

In last six months, averagemonthly sales turnover[revenue] is reduced to50%; and in the sameperiod, about 40%customers are lost to thecompetitors, while averageaddition of new customersshrunk to one third.

a. Acceptthat there

is ab. Accept the

responsibility toresolve the

c. Ascertain theim act

d. Analyze theroblem

e. Appraisealternate

g. Assessimprovements

c. Ascertain nextaction

f. Implement the

solution


41/55



Analyze the Problem Attempting to unravel thecauses and root causes of the problem in focus

Customer satisfaction levelhas come down as we areunable to offer delighting

product quality; keep ourprices competitive; and,maintain relations with loyalcustomers, etc.

Appraise Alternates Identifying different solutionsto remedy the problem infocus

- Develop better customerfocus

- Add innovative featuresto the products andreduce cost throughvalue engineering

- Invest in customerrelations

Implement solution Arranging [mobilize]resources to implementsolution(s)

- Develop action plan- Assign responsibilities- Provide budgets- Identify key performance

indicators [KPIs] Assess improvements To monitor progress along

the defined KPIs: Collect,analyze, compare data.

- Change in customerattitude and turnover

- Reduction in customerdrop outs

- Increase in sales Ascertain next action To determine / anticipate

new problems, as and whenwarranted.

- Competitors will launch anext generationtechnology

- Competitors are likely toswitch to buy and brandstrategy to reduce prices

- Customers are becomingmore demanding.

Discussion Questions1. Discuss the function of problem management in an organizational context2. Evaluate the adequacy of Realistic-Problems-Management-Framework.3. Comment how organizations generally respond to problems in the prevailing

environment.4. How can managers improve upon their problem management skills?


42/55



Conflict Management and Negotiation

Learning Objectives- To discuss the pros and cons of conflict in a work setting- To make a comparative analysis of various conflict management techniques- To elaborate negotiation process

Meaning and Manifestations of ConflictsConflict is a situation where two persons or group of persons may differ in theirrespective point of view. The difference can manifest in many forms. Disagreements andlack of shared perception [understanding] are two extremes on conflict continuum, whilea lot many possible variations of conflict can be visualized in between. A disagreementsituation can lead to either dead-lock or pragmatic improvement at work. Similarly, lack

of shared perception can either results in chaos [NEWS] at the work place or encouragesout of box thinking [innovation]. It all depends how conflicts are taken and tackled. Apositive attitude and systematic approach can make the difference. Therefore it is true tosay that conflicts are neither right nor wrong.

Conflict can be visualized in terms of goal [end] or in terms of strategy [means to an end]or both. For instance, two sales persons may disagree on the sales strategy but mightagree on the sales targets. Alternatively, the two sales persons may agree on thestrategy but do not think alike as far as a particular sales target.

Another way of looking at conflict is in terms of positions [demands] vs. interests[needs]. Position is a means that a person determines to satisfy interest. For instance, acandidate of either gender can perform a particular job equally well. However, theemployer may insist for either male or female employee. Note that here, the position is[specific ender] while the interest is [performing job well]. Conflict may occur both of theinterest as well as of the position. Such conflicts usually develop between two partieswhen they transact. For instance, seller would like to secure maximum price while thebuyer would definitely want to pay minimum price conflict of positions. More so, sellermight be looking for a long term relationship and is therefore flexible on position [willingto give discounts if the buyer commits to always buys from him only] but the buyer islooking for good quality and is therefore flexible on position [willing to pay premiumprice if the product is of best quality] conflict of interests.

Conflicts may also manifest at interpersonal [group] level inside and outside the work situation. The usual outcome is breaking of relationships; mal performance on the job;rivalry; emergence of politics; and biased decisions. All this can have seriousrepercussions onto the organizational productivity. The basis of interpersonal conflicts isusually the same as indicated above. Moreover, assumptions [especially negativeassumptions] play an important role in causing interpersonal conflicts.

What causes Conflicts?Organization dynamics are complex and so are the employees personalities. Thusanswer to what causes conflicts cannot be simple. There can be multiple factors, each


43/55



becoming the cause at different points in time. However, we can identify a few majorfactors in this regard based on our empirical analysis of the past conflict situations.

1. Personality make-up [motivation, cognition, values, needs, ego, etc.]

2.

Perspective [assumptions, knowledge, locus, context, etc.]3. Organization [goals and objectives, competition, culture, processes, practices, etc.]4. Situation [circumstances, scarcity, urgency, diverse demands and expectations, etc]

Managing Conflicts All conflicts cannot be resolved. Hence conflicts should be managed advantageously. Itfollows that management is not always resolution. To aid a suggestive conflictmanagement grid [CMG] is presented to provide a basis for managing different conflicts:

The CMG analyzes various conflictmanifestations on three dimensions,namely; the basis of conflict;possibility of resolution; and, risksinvolved. As a general rule, conflictsthat fall in the resolvable regionshould always be managed throughnegotiation. On the contrary,conflicts, which fall in theirresolvable category, need to beevaluated of their possible risk factors and their basis. Low risk conflicts in this category should bediffused, for the cost of resolutioncould be much higher than thebenefits.Position based conflicts in this category need to be dealt with through a bargainingprocess, while trade off or compromise would be a more appropriate strategy tomanage interest based conflicts in this category.

Compromise should be understood as an act of succumbing to the disadvantagedsituation by way of foregoing ones position (demands), however, legitimate these maybe. Compromised agreements tend to fire back as soon as the situation of thesuppressed person is improved upon. Customers may agree to pay high prices for lowquality service or even inefficiencies of the vendor, if the vendor enjoys a monopoly in

the market, for instance.

Trade Off is rather a rational approach to optimize gains in different directions whenthe resources are scares. For instance, a working mother may rationally decide to puther professional career on hibernation only to be a successful mother. A manager maychoose a less effective decision only to increase its acceptance by the employees. Acustomer may decide to buy a low quality product only to save his scare money.

Bargain can be viewed as a process of finding a mid-position that will be acceptable toboth the parties. The seller and buyer, for instance, will continue to move theirrespective positions (quote) towards each other until both come to an agreement. The

Negotiate

Negotiate

Bargain

Diffuse

Negotiate

Negotiate

Trade Off / Compromise

Diffuse

Can beresolved

Can not beresolved

H i g h

R i s k

I n t e r e s t

P o s

i t i o n

H i g h

R i s k

L o w

R i s k

L o w

R i s k

Can be resolved Can not be resolved


44/55



point of agreement is usually the mid-position. For example, a seller wants to sell hisproduct for Rs.1000/- while the buyer wants to buy it for Rs.500/- only. Through asuccessful bargain the seller and the buyer are likely to close the deal around Rs.750/-.

With a view to optimize gains, experienced sellers and buyers begin with superficiallyhigher and lower quotes, respectively. It is evident that, a bargain turns out to be a purecompromise for either party, because both of them eventually forego their respectivepositions. As in the above example, to achieve an agreement the seller had to comedone from Rs.1000/- to Rs.750/- while the buyer had to raise his offer from Rs.500/- toRs.750/-. So no one is a winner in absolute terms.

Negotiations : Having discussed the so-called misnomers of negotiations, let us nowlook at the correct meaning of Negotiations. In order to understand negotiation, perhapswe need to differentiate between the Position and Interest.

A position is an objective set to achieve a goal, while the interest is the goal in itself.Price of a product/service is typically a position, while the utility of the product/service isthe interest. For instance, a customer wants to buy an automobile for commuting to hisor her work in a decent manner and is willing to spend let us say about Rs.500,000/-only in this regard. Here the position is Rs.500,000/- and the interest is commutingfacility. Similarly, from the vendors point of view the position would be his quote, wh ichmay or may not match with the buyers expected price. However, the vendors interestmay be to sell more cars in a month or so.

Principles of Negotiation

First Principle: It is interesting to note in the above example that the respective positionsof the buyer and seller are contradictory to each other. But the interests are not. Hence,it is much likely for both the parties to maximize their gains by moving away from theirrespective positions to their respective interests: a virtual paradigm shift

ALWAYS FOCUS ON YOUR INTERESTS AND OF YOUR OPPONENTS, TOO

Second Principle: Having identified the respective interests, it is important to look positions that are complimentary to the interest. For example, while putting a newproject it is essential to ensure that the pilot initiative turned successful. If one spendsmore than the allocated monies in one direction, it is likely that either the resources forother expenditures would fall short or the investor might have to put in more investment.

In either of the case, the likely hood of success is reduced. In the first scenario, it ispossible that the investors may not be able to make other rather critical expendituresand hence the project may never come into operations. In the second scenario, byputting in more than planned investment it is very much likely that the break even forthe project would move upwards and hence lower feasibility. Hence in the aboveexample containing the cost within budget is a complimentary (also critical) position.Change in this position can jeopardize the future. Similarly, from the sellers point of view, a project failure can adversely affect his sales potentials in the future. Here, thesellers quote is not complimentary to his own interest of securing additional s ales fromthis client


45/55



IDENTIFY COMPLIMENTARY POSITIONS AND OF YOUR OPPONENTS, TOO

Third Principle: Now it is time to negotiate by securing your interests in rather

progressive manner. However, you may not be able to secure your interestindependently. You need to allow (enable) your opponent achieve his or her intereststoo. A recommended process is to first prioritize interests then begin to give what youropponent values (needs) the most in return take what you value (need) the most. As inthe above example, for the buyer getting the required services/products within thebudget is most important from the point of view of a successful project while for theseller it is more valuable to secure a long term sales contract.

GIVE WHAT HE VALUES MOST, IN RETURN TAKE WHAT YOU VALUE MOST

Fourth Principle: Wrongly, however, we believe that negotiation is more of an art whichonly few can excel. Negotiation is a skill that entails right focus and standardized process.Thus anyone who wants to learn negotiation skills must practice the negotiationprinciples. The more one practices it, the better he or she would be at negotiating.

PRACTICE HAS NO SUBSTITUTE

Notwithstanding the above, other factors also impede the negotiation efficacy. Some of the important ones that are likely to impede the process efficacy are:

- Rigidity when either or both the parties continue to focus on their respectivepositions rather than interests.

- Status Incongruence when the two parties have significantly different power

base.- Lack of Empowerment when either or both the parties do not have authority tonegotiate.

- Urgency when either or both the parties aim at getting an immediatesettlement at any cost.

- Lack of Assertiveness when either or both the parties fail to assert its point of view.

- Lack of Preparation when either or both the parties fail to prepare thoroughlyprior to coming to the negotiation table.

- Geographical Proximity when the parties are unable to meet face to face due togeographical distance.

- Time Delays when the parties fail to keep constant touch with each other, atshorter intervals

Discussion Questions1. How do you evaluate conflicts in a work place and the way these are usually

dealt with? Discuss in the context of your personal experience?2. Analyze the role of work organizations [management] in encouraging conflicts

and the rationale thereof.3. How organization structures [job design, communication, culture] can help

manage conflicts positively?4. Discuss the innate superiority of negotiation process in contrast wit otter

techniques.


46/55



Negotiations

Self Practice Drill IBy doing this drill you should be able to identify opportunities for applying negotiationprocess in your routing work scenarios.

Instruction: Identify transactions in which you can apply negotiation process to increaseyour advantages.

Scenario / Transaction How can negotiation process improve your advantages? __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________

__________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________ __________________ ____________________________________________


47/55



Self Practice Drill II

By doing this drill you should be able to learn to focus on interests and positions of yours

and of your opponents Instruction: Refer to a few transactions above and identify interests and positions forboth the parties concerned. Then prepare a priority list:

PossibleScenario/Transaction

OWN OPPONENTS Interest Position Interest Position


48/55



Self Practice Drill II (Continued)

Priority List: Enlist interests of both the parties in ascending order. Most important being

first and least important being the lastOWN INTERESTS OPPONENTS INTERESTS


49/55



Financial Decision Making

Learning Objectives- To discuss the role of financial decisions in managing financial value- To explain the concepts and rationales underlying financial decisions

Scope A typical business enterprise must be profitable. However, two views undying the profitrationale exist. Stockholders perspective considers profit as the sole purpose of anybusiness activity. It further contemplates that profit is the reward for risk stockholdersundertake in any business venture. This follows that an enterprise must earn a targetprofit rather independently of other stake holders interests. Put it differently, it assumesthe relationship between various stakeholders and stockholders as competitive and profit

results through a typical bargaining process between them. The second view is thestake holders perspective. In this context the profit making rationale is to enable theenterprise continues its activity into the future in a befitting manner and to be able toprovide fair rewards [value] to all the stakeholders. Contrary to the former perspective,here the relationship between various stakeholders becomes interdependent andcooperative for creating a win-win situation for everyone.

Profit FunctionBusiness is a process [cycle] of assets conversion. Ideally this process is expected toincrease the value of initial investment. Put it simply, the conversion creates profit forthe firm. Assets conversion process can be visualized as follows.

Figure 8.1 Simplistic View of Typical Asset Conversion Process [Cycle]

Diligent management of financial resources refers to efficient mobilization and judiciousallocation of financial resources in different directions [assets] to increase the chances of earning due profit. It further includes anticipating, assessing and mitigating risk [unforeseen] factors. [Risk is defined as contingencies that might occur at a future dateand cause decline in principle investment, profit margin or both]. Relationship betweenrisk and return [profit margin] is directly proportionate [Note: as per Islamic businessprinciples risk is an essential element in a business transaction, however, demandingadditional reward for the risk is not legitimate for it make the transaction similar togambling]. In short, financial decision making is central to successful asset conversionprocess and organizations profitability..

InitialInvestment

Acquisitionof

Re-Sale InvestmentRecovered

Cash100,000

Goods100,000

Sold @25% marku

Cash125,000


50/55



Types of Financial Decisions1. Investment [Capital Assets] Decisions It aims to allocate / deploy financial

resources among various investment options [sort term and long term assets] to

attain a viable rate of return on assets commensurate with the inherent risk.2. Funding [Leverage] Decisions It aims to optimize return on equity whilekeeping the financial risk within bearable limits.

3. Liquidity [Working capital] Decisions It aims to conserve liquid resources whileminimizing liquidity risk.

Investment [Capital Assets] DecisionsThere is always more than one option forinvesting money. It is therefore imperativethat different options are evaluated prior tochoosing most appropriate option in a givenscenario. Besides many or fewer businessoptions, do-nothing option [purchasing bank deposits] always exist. Most interestingcharacteristic of do-nothing option is that itdoes not pose risk in general, whereas otherinvestment options pose both systemic andnon-systemic [internal and external] riskscontingencies. Investment decisions aregenerally contingent upon relative risk andreturn prospects of different investmentoptions: As rule of thumb, differentinvestment options could be plotted on a graph, which has risk and return orientationsalong [X] and [Y] axis, respectively. A diagonal line [security market line] on the graphrepresents all the investment options that are in equilibrium of risk and return. Put itdifferently, returns are just adequate in relation to the corresponding risks. These arethe investment options that are considered normal investments opportunities. However,some investment options lie above the line, while others fall below the line. Investmentsthat are above the line are the ones that offer super normal [higher] returns inproportion to their respective risk factors. Investments below the line represent subnormal [low] returns in proportion to their respective risk factors.

Methods in Investment Decision Analysis- Accounting Rate of Return Analysis [ARR]- Pay Back Period Analysis- Discounted Cash-flow [Net present value] Analysis- Risk Based Returns Analysis

Accounting Rate of Return Analysis is the simplest method of comparing two or moreinvestment options to ascertain best investment option vis--vis return on investment[asset]. For instance, an initial cash outlay [investment] of Rs100,000.00 has a projectedcash inflow of Rs124,000 in the first option, and Rs120,000.00 in the second option. Thisfollows that return on investment in option one is [24%], which is higher by [4%] ascompared to [20%] return on investment in option two. Thus in simple terms, optionone is a better choice.

R e t u r n

Risk

SML


51/55



Pay Back Period analysis is a step forward over the Accounting Rate of Returns Analysis.It argues to adjust the ARR in accordance with the relative pay-back periods prior tocomparing two or more investment options. For instance, referring to the above example

let us assume that the pay-back period in the first investment is estimated to be oneyear, while the pay-back period in the second option is estimated to be 9 months. Inorder to adjust the ARR in accordance with relative pay-back periods it would besomething like this: ARR in option one is [24%] in 12 months. Adjusted ARR for 09months will be (24/12) X 9 = 18%. Alternatively ARR in option two is [20%] in 09months. Adjusted ARR for one year will be (20/09) X 12 = 26.67%. Option two isrelatively more lucrative. Thus we have basis to say that Pay-back period analysis is amore realistic approach as compared to ARR.

Discounted Cash-flow Analysis is based on the assumption that money value changesover time. Put it differently, a rupee received today is more valuable than a rupee will bereceived tomorrow [in future]. Generally it is thought that it is inflation that changes thevalue. However, in reality the basis of this assumption is the opportunity to reinvestmoney into a profitable enterprise. In simple words, a rupee received today will beavailable for reinvestment into another profitable enterprise and earn additional return.However, this option will not be available for a rupee will be received in the future.

Although this assumption does not hold ground as it is generally accepted that moneyhas no productivity of its own but how it is utilized. Secondly loss may also occur in theevent of reinvestment, which shall reduce its value instead of increasing it. Thus we cansay that the assumption is arbitrary and not realistic, yet it is widely used as a basis forevaluating different investment options.

Continuing with our above example, let us assume that there also exists a [Do-nothingOption] besides the two investment options cited above. It offers guaranteed 16% yearlyreturns on investment. In our analysis, we shall determine the discounted value [presentvalue] of our investments by the rate of return of do-nothing option, which is 16% inthis case:

1. If 124,000 were equal to 116%. So what will be the value at 100% [124,000 X100 / 115 = 106,896]. Initial investment was 100,000, PV of future investment is106,896. Hence net present value [net addition] of initial investment is +6,896.00

2. If 120,000 were equal to 112%. [16% p.a. / 12 X 9]. So what will be the value at100% [120,000 X 100 / 112 = 107,142]. Initial investment was 100,000, PV of

future investment is 107,142. Hence net present value [net addition] of initialinvestment is + 7,142.00

Interpretation: option one offers additional return of 6,896.00 and option two offersadditional return of 7,142.00 as compared to do-nothing option. Thus we have basis tosay that option two is relatively more lucrative. The underlying reason for this is thatalthough it provides comparatively lesser nominal return but in less period, which makesit better in overall terms. Te unique characteristic of DCF analysis is that it provides astandard benchmark for evaluating different options, which makes it a superior approachas compared to comparative assessments used in the former approaches.


52/55



Risk based returns analysis [also referred to as sensitivity analysis] advocates adjustingthe rates of return by their respective probabilities prior to conducting investmentanalysis such as ARR, PBP, or DCF. For instance, the probability of earning return of

15% on do-nothing option is 100% [1], probability of earning return of 24% on firstoption is 75% [0.75] and earning return of 20% on second option is 90% [0.9].Therefore, the risk adjusted rates of return would be as follows:

1. Do noting option: 15% X 1 = 15%2. Investment option one: 24% X 0.75 = 18%3. Investment option two: 20% X 0.90 = 18%

Having decided the most lucrative investment opportunity and where to invest, logicallysecond question that arises is how to fund the investment so as to be able to optimizethe returns for the shareholders. Put it differently, choosing the best investment optionpromises most lucrative overall return on investment [return on assets]. Shareholdersprofit [return on equity] can be further improved upon by intelligent funding [leverage]decisions. The next section deals with this aspect in detail.

Funding [Leverage] Decisions An investment can be funded either through equity [stock holders money]; through debt[creditors money]; or through a combination of both. In case of 100% funding throughequity, the enterprises chances of continuity are strengthened as with 100% equity itcan very well sustain potential losses. In other words, it instills capacity to take on higherrisk. However, the return on equity would be capped directly with the return on asset.Hence the opportunity to earn even higher return on equity is blocked. On the other side,100% funding could be made through debts. Theoretically in doing so the return on[zero] equity would be infinite. However, enterprises ability to take on risk would betotally constrained as there would be no equity available to absorb potential losses. It isinteresting to note that in such situations even the creditors decline to lend but at muchhigher rates, reducing the return on equity sometimes even below the normal levels.Thus one has basis to say that a combination of equity and debt funding is a morepractical proposition. Yet deciding the right combination is another challenge that needsto be amicably dealt. In the following text a brief discussion on the process of finding theright combination is given.

The underlying rationale of determiningright combination of debt and equity is tomaximize return on equity without exposing

to the risk beyond bearable limits. [At thispoint, it should be remembered that returnon asset is taken as constant for thisanalysis]. As a generalization, successivesubstitution of equity by debts tends toincrease the return on equity, and vice versa.However, simultaneously, risk inherent inthe enterprise increases as equity isreplaced with debt. Increase in return onequity is attributed towards the fact thatdebts are less expensive funds compared to

All Equity All Debts

Normal

Increment

Incremental

PotentialBankrupt

E uilibriu


53/55



equity, primarily because of the two reasons. Firstly, creditors do not explicitlyundertake risk hence accept low price for their monies. Secondly, interest paid on debtsis a deductible expense, thus it reduces tax liability by effectively reducing taxable

income the effect is generally referred to as [Tax Shield]. On the other side, as anenterprise increases its debts its fixed cash out lay also increases in the form of interestexpense and repayment of principal amounts, which is not the case for equities asdividend payments are subject to profit and availability of funds and equity funds are notsubject to redemption in principle. This causes extra burden on the enterprise liquidityposition and may lead to bankruptcy. As the bankruptcy risk becomes more significantthe creditors either decline to lend or charge excessive rate of interest, which reversesthe incremental return on equity.

Liquidity [Working capital] DecisionsGross working capital generally referred to as Current-assets cash, raw materials,goods in process, ready to sell inventories, debtors, and prepaid expenses, etc are thecore elements of asset conversion cycle. Thus it can rightly be considered as fuel for thebusiness. Moreover, these assets also provide direct source of meeting financialobligations arising out of day to day operational activities and also as long term debtsbecome due. Since reasonable amount of investment is tied up in working assets, theobvious concern of management would be to minimize the investment withouthampering efficiency and effectiveness of asset conversion cycle and the ability to meetfinancial obligations amicably.

Ability to meet financial obligations is equally dependent on the quantity and quality of current assets. Quantity of current assets is a relative concept: At any point in time,current assets should be adequate to pay-off current liabilities. In other words, currentassets to current liabilities ratio should always be more than [1] i.e. CA > CL. Quality of assets is reflected in the stability of their cash convertibility, generally referred to asBusiness Risk. In other words, it is the potential loss of value [grey area] of an asset, asalso referred to as shrinkage margin: Higher the potential loss, lower is the quality of asset and vice versa. As a general rule, shrinkage margin is expected to be higher whenthe business is liquidated as compared to a going concern entity. It is the quantity andquality of current assets that determine liquidity in the business at any point in time.

To provide protection to creditors, especially the current creditors, in the business it isimperative that the quantitative and qualitative gap between current assets and currentliabilities, which is called as Net Working Capital, is funded through equi ty [owners money]. Put it differently, net working capital should be equal to or more than thepotential shrinkage margin of total current assets, at any point in time.

Example:Current assets Book value Shrinkage margin Net Realizable ValueCash 100 0% 100Debtors (receivablesfrom customers onaccount of creditsales)

100 10% [100 10] 90

Raw materials; 100 20% [100 20] 80


54/55



goods in process,goods ready forsale.

Prepaid expenses:advance rent, etc. 100 30% [100 30] 70

Totals 400 [10 + 20 + 30] 60 340

Gross Working Capital [Current Assets]400

Total Current Liabilities340Net Working Capital [equity funds]60

Comment: In the above example, all values are exemplary. Please note that by thepresence of equity funds equal to potential shrinkage in current assets the creditors

money is secured, as the business would still be able to pay them off even if thepotential shrinkage is materialized. However, if equity funds were less than 60, then itwas likely that creditors would bear some loss in case the potential shrinkage ismaterialized.

Discussion Questions:1. Discuss significance of financial decision making from the perspective of business

managers.2. Discuss pros and cons of various approaches of investment decision making3. Discuss function of financial leverage for managing ROE4. Discuss function of gross and net working capital in managing liquidity in

business.


55/55


Documents

Decisions Managerial Perspective