Raymond Seah Blog


CALCULATING BETA FOR A PRIVATE FIRM

Posted in Financial, Investment by Raymond on the January 20th, 2010

Beta is a measure of systematic risk. Using regression techniques, one can
estimate beta for any public firm by regressing its stock returns on the returns
earned on a diversified portfolio of financial securities. For a private firm,
this is not possible; the beta must be obtained from another source. The steps
taken to calculate a private firm beta can be summarized as follows:
■ Estimate the beta for the industry that the firm is in.
■ Adjust the industry beta for time lag.

■ Adjust the industry beta for the size of the target firm.
■ Adjust the industry beta for the capital structure of the target firm.
Estimating the Industry Beta
Research indicates that firm betas are more variable than industry betas,
and therefore systematic risk of a firm may be better captured using an
industry proxy. Ibbotson Associates, a primary data source for industry
betas, notes:Because betas for individual companies can be unreliable, many
analysts seek to calculate industry or peer group average betas to
determine the systematic risk inherent in a given industry. In addition,
industry or peer group averages are commonly used when the
beta of a company or division cannot be determined. A beta is
either difficult to determine or unattainable for companies that lack
sufficient price history (i.e., non–publicly traded companies, divisions
of companies, and companies with short price histories). Typically,
this type of analysis involves the determination of companies
competing in a given industry and the calculation of some sort of
industry average beta.

Principle of managing for value:

Posted in Financial, Investment by Raymond on the January 20th, 2010

Principle 1. Owners maximize the value of what they own when a firm’s financial policies are properly aligned with the firm’s business strategies. This occurs when the value of expected after-tax cash flows from a firm’s assets is maximized and the firm’s after-tax financing costs are minimized.

Principle 2. All else equal, the greater the degree of competition in any served market, the shorter the length of the competitive advantage period the firm faces and the less likely that any strategic initiative will create firm value.

Principle 3. A firm should undertake a net new investment only when the expected rate of return exceeds the cost of capital required to finance it. This will occur when the present value of expected cash flows exceeds the present value of net new investments.

Principle 4. An acquisition should not be undertaken if the price paid exceeds the incremental value that the acquisition is designed to create. Any incremental value should reflect both the direct expected cash flows and any options embedded in the assets being acquired.

Principle 5. Given two firms in the same industry, one public and the other private, the public firm will always pay more for a target than a comparable private firm, all else equal.

Principle 6. If a division or line of business of a private firm is worth more to outsiders (external market) than it is internally, then the entity should be sold and the funds received should be deployed in a business line where the owner and/or the firm has a measurable competitive advantage, thus ensuring that the value of the firm is maximized.

Principle 7. A strategic buyer will always pay more for a target than a BAU buyer because the strategic buyer has more options than the BAU buyer does.

Income Approach to Valuation

Posted in General by Raymond on the January 19th, 2010

INCOME APPROACH METHODOLOGIES
The business valuation profession commonly uses three primary methods within the income approach to value privately held business interests. These include:
1. Discounted cash flow (DCF) method
2. Capitalized cash flow (CCF) method
3. Excess cash flow (ECF) method

DEFINING THE BENEFIT STREAM
Both single-period benefit streams (CCF) and multiperiod benefit streams (DCF) can be defined in a variety of ways, depending on what definition is most appropriate in a given circumstance. The most common definitions of future economic benefits are net income and net cash flow.
Net Income
Net income is the measure of an entity’s operating performance and typically is defined as revenue from operations less direct and indirect operating expenses. Its usefulness as a measure of economic benefit for valuation purposes lies in its familiarity through financial statements. It can be either before or after tax. The problem with using net income as the economic benefit is that it is more difficult to develop discount and cap rates relative to net income; cash flow rates of return are more readily available using traditional cost of capital techniques.

Net Cash Flow
In recent years, net cash flow has become the most often-used measure of future economic benefit, because it generally represents the cash that can be distributed to equity owners without threatening or interfering with future operations.

USE OF HISTORICAL INFORMATION
Once the benefit stream has been defined and adjustments have been made, the analyst will want to analyze historical financial information since it often serves as the foundation from which estimates of future projected benefits are made.
The historical period under analysis usually encompasses an operating cycle of the entity’s industry, often a five-year period. Beyond five years, data can become “stale.” There are five commonly used methodologies by which to estimate future economic benefits from historical data:
1. The current earnings method
2. The simple average method
3. The weighted average method
4. The trend line-static method
5. The formal projection method

The first four methods are most often used in the CCF method of the income approach or as the starting point for the DCF method. The fifth method is the basis for the DCF method.

THE CAPITALIZED CASH FLOW METHOD

The capitalized cash flow method (CCF) is an abbreviated version of the discounted cash flow method where both growth (g) and the discount rate (k) are assumed to remain constant into perpetuity. The CCF is also the dividend discount model, also known as the “Gordon Growth Model.”

THE DISCOUNTED CASH FLOW METHOD

The discounted cash flow (DCF) method is similar to the capitalized cash flow method. Although the model might appear more complicated, its theoretical precept is the same:
The value of any operating asset/investment is equal to the present value of its expected future economic benefit stream.

Ratios to measure performance of a company

Posted in Financial, Investment by Raymond on the January 19th, 2010

Liquidity Ratios
Liquidity ratios measure a company’s ability to meet short-term obligations with short-term assets. These ratios also help identify an excess or shortfall of current assets necessary to meet operating expenses.
Current Ratio
Current Assets

________________
Current Liabilities
The current ratio is the most commonly used liquidity ratio. Normally, the current
ratio of the subject company is compared to industry averages to gain insight
into the company’s ability to cover its current obligations with its current asset base.
Quick (Acid-Test) Ratio
Cash + Cash Equivalents + Short-term Investments + Accounts Receivable _________________________________________________________________
Current Liabilities
The quick ratio is a more conservative ratio in that it measures the company’s
ability to meet current obligations with only those assets that can be readily liquidated.
As with the current ratio, industry norms generally serve as the base for drawing
analytical conclusions.

Activity Ratios
Activity ratios, also known as efficiency ratios, provide an indication as to how efficiently
the company is using its assets. More efficient asset utilization indicates
strong management and generally results in higher value to equity owners of the
business. Additionally, activity ratios describe the relationship between the company’s
level of operations and the assets needed to sustain the activity.
Accounts Receivable Turnover
Annual Sales

__________________________
Average Accounts Receivable
Accounts receivable turnover measures the efficiency with which the company
manages the collection side of the cash cycle.
Days Outstanding in Accounts Receivables
365 _____________
A/R Turnover
The average number of days outstanding of credit sales measures the effectiveness
of the company’s credit extension and collection policies.
Inventory Turnover
Cost of Goods Sold

__________________
Average Inventory
Inventory turnover measures the efficiency with which the company manages
the investment / inventory side of the cash cycle. A higher number of turnovers indicates
the company is converting inventory into accounts receivable at a faster pace,
thereby shortening the cash cycle and increasing the cash flow available for shareholder
returns.
Sales to Net Working Capital
Sales

__________________________
Average Net Working Capital
Sales to net working capital measures the ability of company management to
drive sales with minimal net current asset employment. A higher measure indicates
efficient management of the company’s net working capital without sacrificing sales
volume to obtain it.
Total Asset Turnover
Sales

__________________
Average Total Assets
Total asset turnover measures the ability of company management to efficiently utilize the total asset base of the company to drive sales volume.
Fixed Asset Turnover
Sales

___________________
Average Fixed Assets
Sales to fixed assets measures the ability of company management to generate sales volume from the company’s fixed asset base.

Leverage Ratios
Leverage ratios, which are for the most part balance sheet ratios, assist the analyst in determining the solvency of a company. They provide an indication of a company’s ability to sustain itself in the face of economic downturns.

Leverage ratios also measure the exposure of the creditors relative to the shareholders of a given company. Consequently, they provide valuable insight into the relative risk of the company’s stock as an investment.
Total Debt to Total Assets
Total Debt

___________
Total Assets
This ratio measures the total amount of assets funded by all sources of debt
capital.
Total Equity to Total Assets
Total Equity

____________
Total Assets
This ratio measures the total amount of assets funded by all sources of equity
capital. It can also be computed as one minus the total debt to total assets ratio.
Long-term Debt to Equity
Long Term Debt

______________
Total Equity
This ratio expresses the relationship between long-term, interest-bearing debt
and equity. Since interest-bearing debt is a claim on future cash flow that would otherwise
be available for distribution to shareholders, this ratio measures the risk that
future dividends or distributions will or will not occur.
Total Debt to Equity
Total Debt

___________
Total Equity
This ratio measures the degree to which the company has balanced the funding
of its operations and asset base between debt and equity sources. In attempting to
lower the cost of capital, a company generally may increase its debt burden and
hence its risk.

Profitability Ratios
Profitability ratios measure the ability of a company to generate returns for its shareholders. Profitability ratios also measure financial performance and management strength.
Gross Profit Margin
Gross Profit

___________
Net Sales
This ratio measures the ability of the company to generate an acceptable
markup on its product in the face of competition. It is most useful when compared
to a similarly computed ratio for comparable companies or to an industry standard.
Operating Profit Margin
Operating Profit

_______________
Net Sales
This ratio measures the ability of the company to generate profits to cover and
to exceed the cost of operations. It is also most useful when compared to comparable
companies or to an industry standard.

Rate of Return Ratios
Since the capital structure of most companies includes both debt capital and equity capital, it is important to measure the return to each of the capital providers.

Return on Equity
Net Income

__________________________________
Average Common Stockholder’s Equity
This ratio measures the after-tax return on investment to the equity capital
providers of the company.
Return on Investment
Net Income + Interest (1 - Tax Rate)

___________________________________________
Average (Stockholder’s Equity + Long-term Debt)
This ratio measures the return to all capital providers of the company. Interest
(net of tax) is added back since it also involves a return to debt capital providers.
Return on Total Assets
Net Income + Interest (1 - Tax Rate)

________________________________
Average Total Assets
This ratio measures the return on the assets employed in the business. In effect,
it measures management’s performance in the utilization of the company’s asset base.

Growth Ratios
Growth ratios measure a company’s percentage increase or decrease for a particular
line item on the financial statements. These ratios can be calculated as a
straight annual average or as a compounded annual growth rate (CAGR) measuring
growth on a compounded basis over a specific time period. Although it is possible
to calculate growth rates on every line item on the financial statements,
growth rates typically are calculated on such key financial statement items as sales,
gross margin, operating income, and EBITDA are calculated through use of the
following formulas.

Average Annual Sales Growth
{Sum of all Periods[(Current Year Sales / Prior Year Sales) - 1] /
# of Periods Analyzed} x 100
Compound Annual Sales Growth
{[(Current Year Sales / Base Year Sales)(1 / # of Periods Analyzed)] - 1} x 100
Average and compounded annual growth measures for gross margin, operating
income and EBITDA are computed in the same manner.
Note: Analysts often spread five years of financial statements. When calculating
growth rates on financial statements spread over five years, the analyst should be
careful to obtain growth rates over the four growth periods analyzed. In other
words, periods =number of years - 1.

INDUSTRY RESEARCH AND ANALYSIS of COMPANY

Posted in General by Raymond on the January 19th, 2010

The industry analysis can provide a picture of where the industry is going and how the subject company fits in. Look at historical and projected growth in the industry, the number and respective market shares of competitors, if available, and prospects for consolidation. These questions can help in the preparation of an industry analysis:
• What are the prospects for growth?
• What are the industry’s dominant economic traits?
• What competitive forces are at work in the industry and how strong are they?
• What are the drivers of change in the industry and what effect will they have?
• Which companies are in the strongest/weakest competitive positions?
• What key factors will determine competitive success or failure?
• How attractive is the industry in terms of its prospects for above-average profitability?
• How large is the industry?
• Is the industry dominated by a few large companies?
• Are there many public companies in this industry?
• How much merger and acquisition activity is occurring?
• What are the barriers to entry?
• Is it a regulated industry?
• Who are the customers? Is that base growing?

Industry Structure Analysis—The Porter Model Michael Porter of Harvard Business School developed an analytical approach known as The Porter Model by which to analyze and assess company risk associated with industry structure. Porter divides industry structure into five forces:
1. Rivalry between current incumbents
2. Threat of new entrants

3. Bargaining power of customers
4. Bargaining power of suppliers
5. The threat of substitute products
This model, used thoughtfully in a valuation analysis, can provide valuable information regarding the relative risk of the future profitability for the subject company.

Industry Conduct—The McKinsey 7-S Model
Industry conduct and its impact on a given company also can be analyzed and assessed using models such as McKinsey and Company’s 7-S framework, which analyze competitors using seven categories:
1. Strategy
2. Structure
3. Systems
4. Skills
5. Staff
6. Style
7. Superordinate goals

S.W.O.T. Analysis
Most often employed by strategic business consultants in the framework of organizational strategic planning, S.W.O.T. Analysis (Strengths, Weaknesses, Opportunities, and Threats) provides a framework for the identification of issues that are critical to the business being analyzed. The issues identified are those that must be addressed by
the business within a one- to four-year time period. This analysis contains both an internal and external dimension.

MACROENVIRONMENTAL ANALYSIS
Further removed from the subject company than industry forces but still affecting it significantly are five macroenvironmental sources of risk:
1. Technological risk
2. Sociocultural risk
3. Demographic risk
4. Political risk
5. Global risk

STANDARDS OF VALUE

Posted in Financial, Investment by Raymond on the January 19th, 2010

Before analysts can attempt to value a business, they must fully understand the standard of value that applies.

There are five main standards of value:
1. Fair market value (FMV)
2. Investment value
3. Intrinsic value
4. Fair value (state rights)
5. Fair value (financial reporting)

1. Fair market value (FMV)

Fair market value for tax purposes also assumes a hypothetical willing buyer and a hypothetical willing seller. This is in contrast to investment value, which identifies a particular buyer or seller and the attributes that buyer or seller brings to a transaction. Fair market value also assumes an arm’s-length deal and that the buyer and seller are able and willing.

2) INVESTMENT VALUE
The International Glossary defines investment value as “The value to a particular investor based on individual investment requirements and expectations.” Investment value is the value to a particular investor, which reflects the particular and specific attributes of that investor. The best example would be an auction setting for a company
in which there are five different bidders attempting to purchase the company. More than likely each of the bidders will offer a different price because the prices are based on the individual outlook and synergies that each bidder brings to the transaction. Investment value may also reflect more of the risk of a particular investor than the market consensus of the risk of the investment.

3) INTRINSIC VALUE
Intrinsic value is based on fundamental analyses of companies, particularly publiclytraded companies.

4) FAIR VALUE (STATE RIGHTS)
The common definition of fair value is that from the Uniform Business Corporation Act, which defines it as “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action.”

5)FAIR VALUE (FINANCIAL REPORTING)
Fair value has been the standard of value for financial reporting for many years. Fair value for financial reporting purposes often has been equated with fair market value. However, in certain situations, e.g., purchase of a business, fair value for a company or a segment of a company would include synergies within a transaction,
if present. As such, in those situations, the purchase price may have more aspects of investment value than fair market value.

Accepted Business Valuation Approaches and Methods

Posted in Financial, Investment by Raymond on the January 19th, 2010

The industry recognizes an “income approach,” a “market approach” (sales comparison approach),
and an “asset-based approach” (somewhat similar to real estate’s “cost” approach).

Income approach. Within the income approach, the business appraisal profession recognizes the discounted future economic income method and the capitalization of future economic income method. The two methods within the income approach require different rates at which to discount or capitalize the income stream.

In most cases, estimating the future benefits of owning an operating business are typically complex matters to assess and quantify: As such the business appraiser needs a broad understanding of relevant economic and industry factors, capital market conditions, business management, and accounting.

While the valuation procedures are similar, in most cases, estimating the future benefits of owning an operating business is more difficult than estimating the future benefits of owning an apartment building, an office building, or a similar income-producing real estate property. Because it may be comprised of both tangible and intangible assets and liabilities, the risks of owning an operating business are typically more complex to assess and quantify than are the risks of owning operating real estate, and the resulting cash flows tend to be more volatile.
Hence, the development of appropriate discount and capitalization rates is more difficult in the context of the business valuation. The business appraiser needs a broad understanding of relevant economic and industry factors, capital market conditions, business management, and accounting.

Market Approach. As for the market or sales comparison approach, the real estate appraiser will seek data on
sales of comparable properties, and the business appraiser will seek data on transactions of comparable businesses. The business appraiser will interpret the transaction data for guidance in determining applicable valuation  parameters—such as capitalization rates for earnings or cash flow—and ratios of the entity’s market
value to asset value measures, such as book value or adjusted book value.
There is a tendency for the market for businesses to change more rapidly than the market for real estate. After all, a business can be thought of as a collection of tangible and intangible assets, each with its own price volatility and risks of ownership. Effects of these risks can be observed in the volatility of stock prices every day.

Asset-Based Approach. The asset-based approach provides an indication of the value of the business enterprise by developing a fair market value balance sheet. All of the assets of the business are identified and listed on the balance sheet (note: this balance sheet is not the cost-based balance sheet that is prepared in accordance with generally accepted accounting principles), and all of the business’s liabilities are brought to current value as of the valuation date.8 The difference between the fair market value of the assets and the current value of the liabilities is
an indication of the business enterprise equity value under the asset-based approach.

Summary of Business Valuation Principles

Posted in Project Management, Investment by Raymond on the January 19th, 2010

Summary of Business Valuation Principles
Several basic principles are fundamental to the business valuation discipline:
1. From a financial point of view, the value of a business or business interest is
the sum of the expected future benefits to its owner, each discounted back to
a present value at an appropriate discount rate.
2. The market for capital usually determines the appropriate discount rate. The
discount rate is the expected rate of return that would be required to attract
capital to the investment, which takes into account the rate of return available
from other investments of comparable risk.
3. Projecting future benefits and determining an appropriate discount rate is difficult,
especially when trying to bring two participants to either a transaction
or a dispute to an agreement. There are accepted methods of estimating value
by using current or historical—rather than projected—financial data.
However, valuation methods that use current or historical financial data
require adjustments to the historical data, if appropriate, to reflect the impact
of future expectations. In addition, consideration should be given to expected
growth rates, industry trends, and other microeconomic factors. Values estimated
from such procedures should be reconcilable with estimates of value
from a discounted future economic income method.
4. When relying on specific comparative market transactions for guidance in
estimating the value of a subject business or interest, investors’ specific expectations
regarding future returns and risk that are incorporated into capitalization
rates, multipliers, and other valuation parameters are not known. This
makes it imperative that financial variables utilized in the valuation be defined
on a consistent basis between the guideline and subject companies and that
measurements for estimating variables be taken as of the same point in time
or over the same time period relative to the valuation date for the guideline
companies and the subject company.
5. Shareholders have no direct claim on a corporation’s assets because a corporate
or partnership entity intervenes between the assets and the shareholder or
partner. Therefore, the value of a share of stock or a partnership interest can
be more than or less than a proportionate share of the underlying net asset
value and sometimes bears little relationship to the underlying net asset value.
6. Lack of control and lack of marketability are distinct concepts, yet they are
related. Both controlling and minority ownership interests may suffer somewhat
from lack of marketability, defined as the ability to convert the asset to
cash very quickly, at minimal costs, with a high degree of certainty of realizing
the anticipated amount of proceeds. The impact of both minority and marketability
factors are influenced by internal and external facts and circumstances
as of the valuation date.
7. Noncontrolling owners lack control over various decisions affecting the business
enterprise, depending on the degree of control. Minority ownership interests
may be worth considerably less than a pro rata portion of the business
value if it were valued as a single, 100 percent ownership interest.

8. The market pays a premium for liquidity as compared with an illiquid asset,
or, conversely, demands a discount for lack of liquidity as compared with a liquid
asset. Business interests that lack ready marketability generally are worth
less than otherwise comparable business interests that are readily marketable.
9. The sum of the values of individual fractional interests in a business is not necessarily,
or even usually, equal to the value of a 100 percent ownership interest
in the business.

REFLECTIONS OF AN ENTREPRENEUR

Posted in Quotes by Raymond on the August 1st, 2009

REFLECTIONS OF AN ENTREPRENEUR
Quotes from Richard Branson (1986:13-18)
• “The biggest risk any of us can take is to invest money in a business that
we don’t know. Very few of the businesses that Virgin has set up have
been in completely new fields.”
• “I have not depended on others to do surveys or market research, or to
develop grand strategies. I have taken the view that the risk to the company
is best reduced by my own involvement in the nitty-gritty of the
new business.”
• ” . . . There is always another deal. Deals are like London buses—there’s
always another one coming along.”
• ” . . . Reduce the scale o f . . . risk through joint ventures . . . [and] have a
way out of a high risk venture.”
• ” . . . As businesses grow, watch out for management losing touch with
the basics—normally the customer.”
• “[Our] ‘keep it small’ rule enables . . . more than usual numbers of managers
the challenge and excitement of running their own businesses.”
• ” . . . Pursue a ‘buy, don’t make’ strategy.”
• “Having evaluated an investment… and having decided to make an investment,
don’t pussyfoot around. Go for it!”

General Approaches to Resolving Conflict

Posted in General by Raymond on the July 13th, 2009


Most approaches to conflict resolution involve applying the art of negotiation. Although detailed and formal guidelines for the intricacies of negotiation are best found elsewhere (Shell, 1999; Shister, 1997), general negotiation principles and necessary conditions will be presented. The goal is to establish a foundation for specific conflict resolution approaches for project managers, which will be presented later in this chapter.

Shister (1997) defines negotiation as “the process by which at least two people (or sides) seek to make something happen.” As this sweeping definition suggests, negotiation is frequently present for the project manager during his or her workday. Negotiation takes place on the macro scale, such as when discussions are taking place with key vendors or customers, and on the micro level, such as when the project manager negotiates with a functional manager for project resources. In both the macro and the micro levels, certain standard conditions and approaches need to be present for successful negotiation.

Many writers on the subject of negotiation believe that the starting point for any successful negotiation (or conflict resolution) is the project manager’s ability to have an awareness of his or her own negotiating style. The following section will describe five general approaches to resolving conflict followed by a detailed presentation of specific techniques that the project manager can use to manage situations involving conflict. The five general approaches to conflict management that will be discussed are competing, avoiding, accommodating, collaborating, and compromising (Table 6.4).

Table 6.4: Classic Approaches to Resolving Conflict

Approach

Core Essence

Positive Application

Negative Application

Competing

Win-lose

Use when hard nosed negotiation style is needed

Can create long-term bitterness among team members and stakeholders

Avoiding

Let it be

Use when conflict is insignificant and “avoiding” it helps it go away quietly

When an important issue is swept under the rug and resolution does not occur; progress is halted

Accommodating

Let the other win

Allow the other person to “win” to curry favor for future important issues

Being viewed by team members as too passive and not able to fight the good fight

Collaborating

Integrate points of view to create a win-win setting

Use where both positions in conflict have merit

Where one of the two integrated positions is faulty, and the overall solution therefore suffers

Compromising

“Give in” for short-term goals

Use when immediate action is required

Where one gives in too quickly and is perceived as lacking backbone

Competing

This style was previously discussed in some detail. The key to this approach is that it is grounded in the combination of being both aggressive (which is commonly viewed in the workplace as positive) and uncooperative (which is viewed as negative). This approach is often driven by a hunger for power where individual concerns and goals are pursued at the expense of others. As previously stated, this approach can be useful in specific situations in which unpopular actions must be taken in a fast-paced environment on tasks when one is certain that their position is correct. Although competing is effective under these types of conditions, it must be used judiciously and not used as a primary tool. When competing is overly used or applied in the wrong setting, the result can be certain negative consequences, such as stalemating the conflict, alienating the other parties, not hearing the views of the other party, and losing sight of the overall goals and objectives of the project.

Competing should be applied with caution. The following is a situation in which competing worked well for one project manager:

A project manager on a construction project was presented with a dilemma that needed immediate resolution. The housing project was located in a hurricane- and flood-prone area. The weather report issued a forecast for a “Category Four” hurricane, and it appeared that the hurricane was headed directly for this particular area on the West Coast of Florida. Another hurricane was farther out in the Atlantic, but this storm could hit this area as well.

The buyer ordered hurricane shutters, but they had yet to be installed. The shutters would be economical but would require significant time to install. The buyer was unavailable for consultation. The project manager made a decision to install expensive, roll-up shutters for ease of use, since materials for this model were available.

Several team members indicated that these shutters were not part of the specification on the signed contract and would result in a significant increase in costs, approximately 10 times as much as the initial price. They urged the project manager to stick to the original specification. A heated exchange occurred between the project manager and three of the team members. Nevertheless, the project manager, concerned about the impending storms, decided on the more expensive approach, since he believed that he needed to implement an immediate solution, and materials were available for the more costly approach. He used the style of competing as a way to resolve the conflict; quick, decisive action was required because of the impending weather disaster.

Before using this approach to conflict resolution, it is wise to:

Avoiding

The individual using this approach, as noted earlier, may be lacking in the qualities of assertiveness and cooperation. The positive applications of this method would be in situations when the issue at hand is trivial, when there is little chance of winning, when more information or data are needed before the issue can be resolved, or when emotionally heated interactions or some form of “cooling off” period is warranted.

Avoiding can be harmful when it results in unnecessary delays for the project, when it results in hindered communication because of severed lines of communication, and when the “avoiding” person runs the risk of being perceived by others as dysfunctional.

Below is a vignette that illustrates how avoidance served the goals of one project manager:

A project manager had recently received her new assignment: a project to develop an e-commerce application for her company. She was pleased to have been selected for this highly visible initiative. She was also pleased about the opportunity to have access to many talented people from a variety of units in the company, as well as the use of leading-edge technology.

As her project team was formed, she began to be concerned when two team members from a key functional unit expressed concern during the kickoff meeting that excessive overtime may be required. They had young families and valued time outside the office.

Although she realized that in the long-term this issue might become significant, she decided to use avoidance as a means of resolving the conflict. She allowed the two members to vent their concerns and sidestepped the situation, moving on as quickly as possible to other topics during the kickoff meeting. She consciously postponed discussion of this issue, as the project was in its initiation phase. Having expressed their emotional concerns, these two members later became active participants in the project.

When considering the application of this approach to conflict:

  • Determine whether the issue is crucial or trivial to the project.
  • Assess the risk of possible project delay.
  • Consider the effect on personal reputations and the perception of others.

Accommodating

The accommodating team member or project manager is “high” on the value of cooperation but is “low” on the quality of assertiveness. Frequently, the focus for the accommodating person is on meeting the needs of the other person, occasionally at the expense of his or her own appropriate agenda.

The accommodating approach to conflict management can be helpful in demonstrating the quality of open-mindedness, particularly during the early, formative stages of the project. The preservation of harmony is another reason for using accommodation, as well as the need to avoid pointless competition over insignificant points.

When the project manager employs accommodation, he or she needs to do so judiciously. When used to an extreme, accommodation can severely undercut one’s standing in the eyes of other team members and important parties-of-interest. The individual using accommodation may be viewed as weak and ineffectual, and such a person runs the risk of creating anger from fellow team members who believe that their positions were not pursued forcefully.

The following vignette is an example of how accommodation can be applied in a focused manner:

Two team members, located in Kuala Lumpur, expressed their concerns about a geographically dispersed, virtual team. They felt that their agenda items were not being properly discussed and given the attention they deserved during conference calls. Typically, the project manager prepared the agenda and distributed it for comment. These two team members did not see their items reflected in three of the agendas used to date. They worried that their ideas were not being heard.

The project manager consciously omitted these agenda items because he did not feel they were necessary. Their issues were not technical ones and were more process-oriented. The project manager believed that their issues did not require discussion by the entire team.

However, because these two team members began to complain privately, through e-mail messages to other team members, the project manager recognized that possible conflicts on larger issues might occur later in the project. He decided to admit openly during the next team meeting that he had been wrong in omitting these agenda items. He realized the issue was really important to the team members in Kuala Lumpur, and he wanted their support in the future, though the issue was not high on his list. He was concerned about smoothing and preserving a relationship with these two team members and felt he needed to show support for their views.

When considering the conflict resolution approach of accommodation, it is wise to consider the following questions:

  • Is accommodation too much a part of my character, something that I use too often?
  • Will my team react negatively to the use of accommodation?
  • What are the long-term implications for my perception in the organization if I use accommodation?
  • Can I preserve the integrity of my position and the standing of the project if I use accommodation?

Collaborating

The collaborator is the team member who emphasizes both assertiveness and cooperation and is willing to consider the merits of the other person’s position. This approach is based on an attempt to combine the best of both positions into an integrated resolution in which synthesis and the ability to move forward are crucial. Positive applications of collaboration would include situations in which both positions are, to some degree, important and viable. Collaboration works particularly well in those instances when insights from different perspectives exist, such as on projects that are culturally diverse.

The negative aspect of collaboration involves those circumstances when the integrated solution (i.e., the collaboration) results in a work product that is faulty because some of the integrated points were incorrect.

Other pitfalls to collaboration involve those settings in which the desire to integrate different points of view equally causes a team member to lose focus on his or her own key points and agendas.

The following example represents a project situation in which collaboration was appropriately used to resolve a conflict:

A veteran project manager was a member of a volunteer association of project management professionals. He had been asked to lead a project of fellow volunteers to develop an approach to managing enterprises by projects. This effort, he believed, had a number of different goals, and paramount in his mind was the need to develop an organizational standard for enterprise project management. He formed a core team of eight people, representing different geographical areas and different areas of expertise.

During discussions with the core team, however, he learned that a couple of the team members did not share his view that project management maturity at the organizational level also needed to be part of this effort. These team members believed that attention to organizational quality issues was crucial. The project manager did not want this debate to result in interpersonal hostilities later during the project and wanted to combine insights from team members with different perspectives. He wanted to work toward a mutual, beneficial solution that would meet the overall project goals for the volunteer association and also meet his individual goals and those of the team members.

He decided to schedule a face-to-face meeting with the purpose of focusing on the team goals for the project. He set up the meeting as a way to draft a “scope” statement for the project that would then be presented to the entire membership of the organization, rather than preparing such a statement on his own. Through his efforts at collaborating, he demonstrated that he was open-minded and willing to consider the desires of others. His approach was one of forging an integrative solution by which all parties’ concerns were considered equally important. He managed to achieve an outcome that everyone believed was a “win-win” solution.

Consider the following questions when using the collaborative approach:

Compromising

The compromising approach involves a stance of moderately high assertion combined with adequate cooperation. Compromise sounds similar to collaboration but differs in that it is more short-term oriented, used productively in situations when temporary agreements need to be achieved quickly. As with using collaboration and accommodation, the use of compromise runs the risk of the person being perceived as too willing to give in to the other side, too willing to give up on one’s original position.

Compromise was effectively applied in the following situation:

A project manager on a software usability project saw that her two key development people on the project had a technical conflict. One technical lead wanted to use a different system interface on a small and noncritical part of the project. Both people were strongly committed to mutually exclusive positions. This conflict began to spread to other areas of the project, even ones that seemed rather trivial to the project manager and other members of the team.

The project manager decided to bring these two team members together and began to work with them on a compromise position. However, before the first compromise meeting, she consulted with other technical “gurus” in the company to obtain their ideas on alternative methods that could be used. She had a different approach in mind as she began the meeting, an approach that was not as “high-tech” as one of her team members wanted but had greater sophistication than the other team member believed was necessary.

She suggested this solution during the meeting, one to which, she believed, they could all agree quickly. She pointed out that the issue, though important, was not critical in terms of the overall goals and objectives of the project, and they needed to reach an agreement and move on to other aspects of the project.

She urged them to compromise to end this conflict. She complimented both team members on their attention to detail and encouraged them to continue to debate issues in the future but stressed the need to come to closure on this issue so as to address more complex issues later. The project manager realized that her proposed solution would not completely satisfy either team member but worked to satisfy the concerns of both team members.

Use compromise when the following conditions are present:

  • A short-term action needs to be taken quickly, and the compromise may not be of great significance.
  • The need exists to demonstrate a posture of flexibility and openness, possibly to create a positive impression with the “other side.”

Extracted from “People Skills for Project Managers”

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