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School of Civil Engineering

UNIVERSITY OF QUEENSLAND

CIVL4520
Construction Management & Site Visits

Leadership & Management and Civil


Economics Overheads & Notes
2010
Action Centred Leadership
Definition
What is leadership? Is it being a national politician. chairman of ICI. a Hitler or a
Kennedy? Equally can a foreman have it according to his situation? Leadership is that
part of management concerned with getting results through people. There are other facets
of management such as technical and administrative abilities which are important but
successful managers are those who are aware that leadersh.ip is the key to effective
performance.
Need for Leadership
The need for effective leaders in management is probably greater than the number of
available 'born' leaders. In the past, worker expectations were low and management could
afford to hire and fire. Now stronger unions, the breakdown of class barriers and
increasing affluence have necessitated a different approach to get results through people.
There are three ways of considering leadership of which the functional approach is the
basis of Action Centred Leadership.

Approaches to Leadership
(a) Q u.Glities
Preoccupation with personality traits leads an emphasis upon leadership selection
rather than leadership development. Qualities will always be important e.g.
judgment and acceptability, but not a total answer because:
1. Many people have qualities such as ambition, drive and enthusiasm, but are not
effective leaders.
2. No-one can agree on 'the' list of qualities or how long it should be.
3. On the whole, basic personality traits cannot be changed. Can you develop a sense
of humour (by regularly reading Punch) or emotional stability?
Although this approach is problematic for training, it is important that the leader has
the qualities which reflect the needs and expectations of his group.

(bl Situational
'Authority flows from the one who knows' is the basis of the situational approach. But
is technical competence enough to ensure success with people'TToo often someone who
is outstanding technically is promoted to a manager with the loss of a trained
technologist but no gain in management expertise. .
1. In industrial and commercial practice technical ability is important but not the
sole answer. .
2. Leadership is defined by organisational structures and cannot be passed easily
around the group.
This approach does represent a breakthrough, as it implies that leadership comes from
knowledge and skills and these can be develop~d by training.

(c) Fu.nctilJnal
Between 1960 and 1967 Dr John Adair developed" and started to apply to training the
functional view of leadership. He distilled the responsibilities of a leader into the
three inter-related ~eas. These are to define and achieve the task, to build up and co-
ordinate a team, and to develop and satisfy the individual members.
1. Task Needs The difference between a group and a random crowd is that a group
has some common objective. If a work group does not achieve the required result, or
a meaningful result it will become frustrated. Organisations have a task: to make a
profit, to provide service, or just to survive. For anyone who manages others,
achieving results is the major criterion of success be it in production, selling or
'other fields. .

~ Joim Ad.oir.
2. Team Needs To achieve objectives the group must be held together. People need to
work in a co-ordinated fashion in the same direction. teamwork will ensure that
their output is greaterthan the sum of individual efforts. Conflict within the group
;;"" must be used effectively, arguments can lead to ideas or to tension or lack of co-
ordination.
:3. Individual Needs Within the working group individuals have sets of needs. They
\\:ant to know what are their responsibilities, what they can contribute. how well
they are performing. The leader must give them the opportunity to take on
responsibility, to show their potential and to give them recognition for good work.
Leadership Functions
The leader must aim to satisfy the three areas of need. of achieving the task. building the
team and developing individuals. The leader who concentrates only on the task by. for
example. going all out for production schedules while neglecting the training,
. encouragement and motivation of his group, may do very well in the short term.
Eventually, however, people will give him less than their full effort.
Similarly, the leader who concentrates only on creating team spirit while neglecting the
job or individuals will not get maximum involvement of his people. They may enjoy
working in a happy atmosphere but will lack the real sense of individual achievement
which comes with task success.
The model below demonstrates this inter-relationship. Consider blocking out a circle as
representing failure; it can be seen that this failure also affects the other two.

,.
~

~ -.
ACHIEVING
THE
TASK

BUILDING DEVELOPIXG
THE THE
TEAM INDIVIDUAL

.~John Matr.
- INTEGRITY

- ENTHUSIASM

- "DEMANDINGNESS"

- FAIRNESS

- WARMTH

- COURTESY

- THERE WILL ALWAYS BE OTHERS


~.:
':, ~~ '~'., -; :..':';~

Functions of a Leader
TASK FUNCTIONS
Defining the task.
Making a plan.
Alloea
.'.
ting work and rcsou
.
reese
Controlling quality and tempo of work..
Checking performance against the plan.
Adjusting the plan.
---_I

GROUP MAINTENANCE
FUNCfIONS INDIVIDUAL FUNCTIONS
Setting standards.
At tending to personal
problems.
Building team spirit. , Encouraging individuals.
-Encouraging, motivating, Giving status.
giving a sense of purpose.
Recognizing and using
Appoin ling su b-Ieaders. ind ividual abili ties.
Ensuring communication Training the individual.
within the group.
Training the group_
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PUUING THE THREADS TOGETHER

Leadership Characteristics
Quality Functional Value
Task A quality which appears in many
Initiative research lists. It means the aptitude for
initiating or beginning action; the
ability to get the group moving.

Perseverance The ability to endure; tenacity.


Obviously functional in many situations
where the group is inclined to give up
or is prey to frustration.

Team The capacity to integrate;. to see the


Integrity wood for the trees; to bind up pans
into a working whole; the attribute that
creates a group climate of t.rust.

Hum.our Invaluable for relieving tension in group


or individual, or, for that matter, in the
leader himself. Closely related to a sense
of proportion, a useful asset in anything
involving people!

Individual It expresses itself in action by showing


sensitive perception of what is fit or
Tact
considerate in dealing with others.

Compassion Individuals may develop personal


problems both at home and work. The
leader can show sympathetic awareness
of this distress together with a desire to
alleviate it.
McGREGOR'S MOTIVATION THEORY

THEORY X ASSUMPTIONS THEORY Y ASSUMPTIONS

1. People are naturally lazy; they prefer to do People are naturally active; they set goals and
nothing. enjoy striving.
2. People work mostly for money and status People seek many satisfactions in work: pride in
rewards. achievement; enjoyment of process; sense of
contribution; pleasure in association; stimulation
of new challenges, etc.
3. The main force keeping people productive in The main force keeping people productive in
:;..... their work is fear of being demoted or fired. their work is desire to achieve their personal
and social goals.
4. People remain children grown larger, they People normally mature beyond childhood; they
are naturally dependent on leaders. aspire to independence, self-fulfilment,
responsibility.
5. People expect and depend on direction from People close to the situation see and feel what
above; they do not want to think for is needed and are capable of self-direction.
.f• . ;

themselves.
6. People need to be told, shown, and trained People who understand and care about what
in proper methods of work. they are doing can devise and improve their
own methods of doing work.
7. People need supervisors who will watch People need a sense that they are respected as
them closely enough to be able to praise capable of assuming responsibility and self-
good work and reprimand errors. correction.
8. People have little concern beyond their People seek to give meaning to their lives by
immediate, material interests. identifying with nations, communities, churches,
unions, companies, causes.
9. People need specific instruction on what to People need ever-increasing understanding;
do and how to do it; larger policy issues are they need to grasp the meaning of the activities
none of their business. in which they are engaged; they have cognitive
hunger as extensive as the universe.
10. People appreciate being treated with People crave genuine respect"from their fellow
courtesy. men.
11. People are naturally compartmentalised; People are naturally integrated; when work and
. work demands are entirely different from play are too sharply separated both deteriorate;
leisure activities. "The only reason a wise man can give for
preferring leisure to work is the better quality of
the work he can do during leisure."
12. People naturally resist change; they prefer to People naturally tire of monotonous routine and
stay in the old ruts. enjoy new experiences; in some degree
everyone is creative.
13. Jobs are primary and must be done; people People are primary and seek self-realisation;
are selected, trained, and fitted to predefined jobs must be designed, modified and fitted to
jobs. people.
14. People are formed by heredity childhood and People constantly grow; it is never too late to
youth; as adults they remain static; old dogs learn; they enjoy learning and increasing their
don't learn new tricks. understanding and capability.
15. People need to be "inspired" (pep talk) or People need to be released and encouraged
pushed or driven. and assisted. .
7 Sian's Concepts of
Group Develop,ment

W. R. Bion.hypothesises that all groups of people. who


have to work together, go through a number of stages
when forming the group. The sequence of the stages is
not always the same and any particular group may
spend more or less time in anyone stage. The fact that a
group has passed through anyone stage does not mean
that it will not go back to a previous stage. The usual
order in which the stages are met is:

1. Confusion When the people concerned first get together there is an


initial period of confusion. Nobody is sure where they
stand in relation to the others or what is required. Fun-
damentally it is a situation involving individuals looking
for a structure or framework of authority in which to
function.

2. Dependence Once the individuals in the group recognise that they


have a common problem of authority a new stage is
reached and the group begins to show a group culture
for the first time. .
Fundamentally, in this stage, the group feels inade-
quate and seeks support and direction from authority on
which to depend. The authority which it seeks may be
embodied in a leader (personal), a set of rules or a pro-
cedure (structurelimpersonal), or a task or procedure
imposed by someone from outside (external). During
this stage the members of the group are still functioning
as individuals with little real acceptance of what others
are doing or saying except where this helps to establish
a clear authority.

3. Fight-fiight As the group develops it moves on from dependence to


a stage where it recognises other problems than that of
authority but is not ready to deal with them. Instead, it
either attacks or withdraws from the situation and sif.lce
both produce the same effect the resultant group cul-
ture is described as one of simultaneous fight and flight.

4. Pairing The last stage for the group before reaching maturity is
classified as pairing because the previous stages are
largely individualist. cultures and these begin to give
way to the situation where individuals begin to give
support to and show friendliness toward one another in
pairs. This generally leads fairly quickly to the formation
of 'a sub-group. The appearance of pairing is frequently
a signal that the group culture is about to crystallise.

From A Handbook of Management Training exercises. published in 1978 by the


BritISh Assoc:iauon at Commercal and Industnaf Educ:auon. 16 Park Crescent, London W1N 4AP. 143
7 Bionls Concepts of
Group Development

5. Maturity When a group has developed fully to the adult stage it is


able to produce ·effective work and also to handle its
emotional problems without threatening its stability. It
wiJI continue to show dependence. fight-flight and pair-
ing but in a more controlled manner than in the earlier
stages before the group attained a cohesive culture.

Further Reading. See references 6. 8, 16, 20, 22 and 30

From A Hanabook of Management Ttairong &leroses. published in 1978 by the


144 British ASSOCIalion of Cqrnmercial and IndustnaJ Education. 16 ParK Crescent. Lcndon W1N 4AP.
8 Barriers to Effective
Group Working

In cases where a group is not working together effec-


tively to achieve a group task. one or more of the fol-
lowing barriers may exist:

1. Lack of Agreement on 1. Objectives not explicit. Because group members'


Objectives objectives have not been discussed. there is no com-
mon agreement or understanding of the group's objec-
tives.
2. Differing objectives. Group members' objectives
may have been discussed. and differences noted. but no
accommodation made for them.
3. Hidden agendas. Individual members of the group
may have personal objectives which th~y have not dis-
closed to the group, and may not be aware of them-
selves.
4. Different levels of commitment. Group members
may agree on objectives. but there may be undisclosed
disagreement on the amount of effort and care to be
L .. invested in achieving the objectives.

2. Lack of Agreement on 1. Time. There may be no explicit understanding or


Constraints agreement on time constraints working on the group, or
members of .it.
2. Authority and resources. The group may not share a
common understanding of the authority and resources
available to it. .
3. Information. Group members may not all share the
same information. or know how information is shared
amongst the group.

3. Lack of Agreement on There may be no explicit agreement and understanding


Dec2sion Making Process about how the group makes its. decisions. Different
decision making processes may be used at different
times. They may include decision making by:
1. Authority. The most powerful person in the group
puts forward or supports an idea. and acts on the
assumption that the others agree.
2. Vocal minority. One or two vocal members of the
group press an idea. Less vocal members do not object.
3. Majority. The majority vote in favour.
4. Plurality. There is no majority view. 50 the view of the
largest minority is accepted.
5. Bypassing. An idea is dropped through failure to pick
. it up and discuss it.
6. Consensus. True consensus is only reached if each
member of the group has had the chance to offer opin-
ions and objections about an idea. and is then preparea
to subscribe to the majority opinion. A group may often
believe that decisions are made by consensus. whereas
they are in fact being made by authority, bypassing or
vocal minority.

From A Handbook of Management training e.'fefClses. puC!iStled In 1978 bv tne


Bnusl'l AssCClatlonct Commerclili and Industnal Educaucn. 16 Park Cres.cenl. Lcndon WIN 4AP 145
8 Barriers to Effective
Group Working

4. Ineffective Poor communication within a group may indiCate the


Communication existence of barriers 1, 2 and 3, above. Ineffective com-
munication is characterised by one or more of the fol-
lowing:
1. Poor listening. Group members do not attemot to
understand points made by others. They may not
receive points patiently and sympathetically.
2. Interruptions. Group members interrupt one another.
3. Lack of continuity of discussion. Ideas are not sup-
ported and built upon, but quite new and different
points are introduced.
4. Ambiguity. Vague or ambiguous words are used,
and due to poor listening and lack of examples, lead to a
breakdown in communication.

Further Reading. See references 6, 7, 8. 16, 22 and 30.

From A HanabDo/( of Managemenr Traming Exerases. published in 1978 bv the


146 Bntlsh Assoclauon oi Commerc:al and Indusrnal Edutauon. 16 Park Crescent. Loncon W1 N 4
\

;0; •
.'

TEAMWORK

EARLY STEPS TO TAKE·

1 Make sure assignment is clear

.2 Make new team members feel professionally comfortable

3 Be certain team organisation is clear

4 Locate team members in one place

5 Provide a proper team environment

6 Manage
TEAMWORK

ON-GOING STEPS TO TAKE

1 BARRIERS understand barriers to team development and


build a conducive work environment
2 PROJECT OBJECTIVES clear to all personnel

3 MANAGENfENT COMMITMENT continuously up-date and involve senior


managements - their support is vital

4 IMAGE BUILDING build a favourable project image

5 LEADERSHIP POSITIONS carefully defIned and staffed

6 EFFECTIVE PIANNING impacts work environment and team


effectiveness

7 INVOLVEMENT proper planning allows. involvement at all


levels

8 PROJECf STAFFING allow individual negotiation

9 TEAM STRUCfURE define team structure/operating concepts early

10 TEAM BUILDING SESSIONS conduct on regular basis

11 TEAM COMMITMENT change possible negative views

12 PROBLEM AVOIDANCE get to potential problems early


[mJ Un iversity
ttt of Surrey M·otivation
Department of
Civil Engineering

• What is Motivation?

Motivation is what makes a person do something. In another sense it is what makes him put
energy and effort into what he does. It varies in nature and intensity from individual to
individual, depending on the particular mixture of influences on him at any given moment.
These influences are related to the person's needs.

e Why is Motivation Important?

Motivation is vital in any job if an individual is to give of his best to it. Assuming that employees
are given ample opportunity for good performance (correct tools, work method etc) and have the
necessary skills, then effectiveness depends on their motivation. Getting people to the place
of 'Nork is of secondary importance. What matters is getting them to work willingly and with
eHort while they are there. .

• Signs of Motivation

Attitudes and behaviour at work reflect motivation· or lack of it. Indications of motivation
will be seen,for example.in:

o High performance/results achieved o Co-operation in overcoming problems

o Energy, enthusiasm and determination o Willingness to accept responsibility/


accommodate to change

Lack of motivation will be indicated by:

o Poor time-keeping/high absenteeism o Exaggeration of disputes/grievances


o Apathy and indifference a Un-cooperativeness/resistance to change

• Whose responsibility?

It is the job of the work group leader to motivate his team as far as possible. He is best placed
to create the environment in which people will give of their best to their work. Some faCtors
are largely outside his influence, ego pay, status, terms and conditions of employment. But
he can give responsibility, challenging work and opportunities for growth and development which
both research and practical experience in industry have shown to be the greatest motivating
factors.

• Is money important?

Yes, because it provides command over goods and services (and hence choice) and also as a
symbol of status and recognition. Nevertheless, motivation is only partly a matter of money.
But if money is the only satisfaction a man can get from his work, he will concentrate his
effort on getting more of it.

Based on a pUblication of the Industrial Society, with permission


W of Surrey
Department of
Th"e Needs Hierarchy
Civil Engineering
- .-
5 SELF-
REAllSATION
(FULFILMENT
MATURITY
WISDOMl I
4 SELF-
INDIVIDUAL NEEDS ESTEEM Growth
(EGOI
Per:sonal
development
-
3 SOCIAL Self· Accomplishment I
(GROUP
AFFINITY]
respect
I
Status
Belonging
2 SAFETY to group(s) Recognition
(EMOTIONAL
& PHYSICAL) Social
activities

Love
1 PHYSIO·
LOGICAL Security Friendship
(BASIC)

Protection
Food from danger Reference

Drink Maslow, A H (1954)


Motivation and Personalicy
Sleep Harper, New York
Sex

• The needs hierarchy is based on needs, not wants.


• It operates on an ascending scale. As one set of needs becomes fulfilled, the next
higher set comes into play. .

• We can revert to a lower level. For instance, a person operating at level 4 or 5 will
fall to level 2 if a feeling of insecurity takes over. Once the need is met. however, he
will return to his former needs area.
• Needs not being met are demonstrated in behaviour. To create an environment in which
motivation can take place. managers must therefore be able to recognise behaviour patterns
in individuals and work groups. This means developing the ability to 'read' people and
situations.

• To avoid apathy. which finally results when needs are unfulf!!led. managers must be able
to implemen~ the right action at the right time.

Based on a publication of the Industrial Sc:iciett...with-permissio"'n--~------


[mJ Univers ity
ttt.
'.
of Surrey
Satisfaction 1
Department of
Civil Engineering

Frederick Herzberg asked many people in different jobs and at different levels two questions:

• What factors lead you to experience extreme dissatisfaction with your·job?

• What factors lead you to experience extreme satisfaction with your job?

He collated the answers and displayed them in the form af the chart overleaf, which shows
the order and frequency in which the factors appeared.

• Dissatisfaction

Factors on the left·hand side of the chart show a greater potential for dissatisfaction than
for satisfaction.
Giving people more of them or improving them:

o does not create a motivational atmosphere

o creates only short-lived satisfaction, because they become accepted as the nor!".

In Herzberg's words: 'you just remove unhappiness, you don't make people happy'.

These factors match levels 1, 2 and 3 of Maslow's hierarchy and are connected with the
job context. Herzberg called them the 'Hygiene Factors'.

• Satisfaction

Factors on the right-hand side of the chart have little to do with money and status but
much to do with achievement and responsibilitY. They match levels 4 and 5 of Maslow's
hierarchy and are connected with the job content Herzberg called them the 'Motivators'.

• The work itself

The chart shows thatthe nature of the work itself has potential for both satisfaction and
dissatisfaction. The moral for managers is clear. They should pay particular attention to
the kinds of task they expect people to do. Where the tasks are boring and repetitive
they should strive to create a motivational atmosphere by paying attention to other
factars.

Herzberg's original research has since been confirmed by surveys in many countries, with
absolutely consistent results.

Reference Herzberg, F (1966) Work and the Nature af Man World Publishing Co

Based on a publication of the Indus~rial Society, with permission


MOTIVATION-HERTZBERG: satisfaction and dissatisfaction
FACTORS ON THE JOB THAT LED TO:
extreme dissatisfaction extreme satisfaction
(% frequency)

.50 40 30 20 10 0 10 20 30 40
r
-

,
ACHIEVEMENT
I I
1
I RECOGNITION I
I I

I WORK ITSELF I
I
I . RESPONSIBILITY

I
.I ADVANCEMENT ,
I GROJH

COMPANY P~LICY & ADMINISTRATIONl


I I
fUPERVISION 1
RELATIONSHIP WITH SUPERVISOR 1
. I
WORK CONDITIONS
II-----+.
:1

slLARY I
RELATIONSHIP WITH PEERS
I . I
pJRSON J 'E--l--I~
LIF....
I ~,...-.+U---,
I
RELATIONSHIP WITH SUBORDINATES I
I
STATUS r-D
t ~
SEqURITY,-~
E 2448 - CIVIL l\1ANAGEME~'T & ECO~OMICS
ClASS NOTES - STRESS

Definition and Stress Model Components

Stress is an adaptive response to an external situation that results in physical; psychological and/or
behavioral deviations for organisational participants.

Stressors specific events or situations or external happenings which are capable


of producing stress - the antecedents of stress·
Personal characteristics certain personal characteristics allow us to predict an individual's
response to stressful situations
Stress response an individual must be aware of the stressor for the stress response to
occur
for a given level of stress individuals respond in different ways and to
different degrees
Stress is something you do to yourself - it is your selected response

Distress and Eustress

Not all.stress is detrimental. It is necessary, often it is positive and it tones the body and the mind.
Positive stress is called eustress; negative or dysfunctional stress is called stress or distress.

Eustress producing situations are usually clear-cut and simple; can be turned off or on as required;
.involve non-dangerous danger and sometimes result from mastering stressful situations.

Defensive reaction to stress usually passes through three stages: alarm; resistance; exhaustion which
leads to distress.

Sources of Stressors

Organisational policies; structures; physical conditions; processes


Group no cohesiveness; no social support; conflict
Individual . role conflict behaviourial type
Extra-organisational family; relocation; community conditions

Personal Characteristics

Emotionalism "low emotionality" people peak at relatively high levels of stress. while
"high emotionality" people peak at low levels of stress
Rigidity flexible people tend to show greater stress than rigid people; rigid
people tend to select relatively stressor-free life styles
Locus of control "internals" experience greater stress when they do not control the
outcomes in stressful situations and "externals" experience greater stress
when they do control them
Self esteem the higher the self esteem, the higher the tolerance to stress
Introversion/extroversion introverts tend to be more susceptible
Age the importance of certain types of events changes as one grows older;
the same event can be more stressful or less stressful depending on age
Education the effects of education as a moderator are similar to those of age
Stress - Effects on Individuals

Physiological alarm, resistance. exhaustion; stress - illnesses - eg cardiovascular disease;


hypertension; ulcers; asthma; cancer; diabetes; gout; skin disorders; diarrhoea;
dyspepsia; frequent urination; insomnia and impotence.
Psychological some of the symptoms are anxiety; depression; alienation; anger; loss of
concentration; frustration; guilt and shame; irritability; moodiness and loneliness.
Boredom - both a cause and effect of stress; Burnout - adverse effects of
working under conditions of high pressure and infrequent success.
Behavioral alcohol and drugs; accidents; withdrawal

Stress - Effects on the Organisation

Absenteeism and turnover; Poor productivity; High accident rates; Poor work climate; Job ,
dissatisfaction; Decreased decision-making capability; Reduced communication; Poor cooperation and
coordination.

FOUR CLASSES OF TECHNIQUES FOR MANAGING STRESS

Individual Proactive

Time Management Set of practices designed to help individuals identify and accomplish most
important goals (Premark principle); and to help individuals use available time efficiently.

Good Physical Health Regular exercise; diet; adequate rest.

Good Mental Health Self-acceptance; confidential rclationship; taking constructive action; interaction
with others; creative experiences; meaningful -work; and systematic problem solving

Organisation Proacth'e

Job-Person Fit Select persons to fit- the environment or change environment to fit person.

Job Redesign Examine a broad range of ways of changing jobs to reduce the potential for creating
undesirable stress.

Career Planning Understand that each major career stage is characterised by its own peculiar stressers
and provide counselling, guidance and understanding during these periods; - help individuals map out
realistic career goals and strategies.

Individual Reactive

Relaxation Response A learned consciously initiated set of behaviours substituted for a person's
conventional actions to break the sequcnce of the stress response <md thereby reduce the physiological
impact of stress. Works in three ways: distracts individual from stressor; control of automatic nervous
system; confidence of feeling in control of o\\'n response.

Escape "Of the 34 ways of dealing with danger, running away has its advantages"

Organisation- Reactive

Counselling Counselling by supervisors as a means of aiding employees in dealing with stress.


Problems for supervisors rather than external counsellors include increased pressure on employee; time
consuming activity; role conflict.

Employee Assistance Program Large firms with professional in-house counsellors to ail:Lemplo..yees~---­
with stress related Rroblems.-whO---O-ve-r-see---speei-fi-c-corn:ction programs.
HANDLING ANOTHER PERSON'S STRESS

A guide to the type of questions you need to ask using a problem


solving approach -

1. Who is placing demands/expectation"s on you?

2. What are these demands/expectations?

3. What kinds of pressure do you experience?

~. How do you feel about these pressures?

5. What do you believe the other person's motives/intentions are


towards you?

6. What specific things does that person say/do that lead you to
believe this?

7. What specific things do you feel like saying and doing as a


result?

8. How do you actually behave?

9. How would you l1ke to behave?

10. What options do you have?

11. What will be the consequences/outcome?

12. What are you going to do?

13. When are you going to do it?

1~. When will we review this/or how will you check you have done
and are doing it.
ora\:o~o
01 II E

P 'I Y $ n l. 0 G Y
--J' ...-
L - - - Perceived
Stressor

o F S T R[ S S
J
o. Hypothalamus

"-CTII
Parasympathetic (llormone) Sympathet::
Nervous System ~ervous
(less active during System
Blood-
the stress reaction) (motor
stream
signa Is g:
~ immed ia te ;::
4 to heart
/1 (\ ~drena 1
G-J l.....Ji 1ancls and other
~d d ~ 0Adrenalin organs,
(I ,) l)
~ (I (I & related
muscles et:.)
hormones

i) Blood
Stream

Stress hormones flow to all organs,


muscles,and cells of the body

The stress reaction mobilizes the entire


body for "fight" or "flight".

'-----y-------/ \.------V - - - - -../


Sympathetic Parasympathetic
r.:ervous System Nervous System
Emotional Arousal · Tranqu i l i ty
r: igh t-or-Fl j ght · Relaxation Response
Response . · Calmness, Deep Relaxation,
Fear, Anger, Anxiety, ~Ieditation, etc. '-0"

----------
Joy, etc.

TIlE'two branches of the central


nervous system I..ork in opposition,
alternatively raising and lowering
the hody's excitation level.
.... :_1 II. I I :nn._,. .. ~ ~

Scientific Management Model Human Relations Model Human Resources Model Soclo-Technlcal Model
(CIRCA 1900) (CiRCA 1950) (CIRCA 1960) (CIRCA 1970)

Assumptions Assumptions Assumptions Assumptions

1. Work is inherently distasteful 1. People want to feel useful and 1. Work is not inherently 1. Efficiency and effectiveness of
to most people. important. distasteful. People want to the productive system Is the
contribute to meaningful goals manager's primary goal.
2. What workers do is less 2. People desire to belong and to
which they have helped
important than what they earn be recognIsed as individuals. 2. It is operationally difficult and
establish.
for doing it. societally illogical for this to be
3. These needs are most
2. Most people can exercise far sought in ways which cause
3. Few want or can handle work important than money in
more creative, responsible widespread distress or
which requIres creal/v/ly, selr- motivatfng people to work.
self-direction and self-control damage to employees.
direction, or self-control.
than their present jobs
3. Human goals (ie. employees
demand.
needs) are not Inirinslcally
antllheUcal to organisational
goals, although the fit is not
perfect and trade orrs need to
be sought at times as part of
the optimising process.

Policies PolicIes Policies PolicIes

1. The manager's basic tasl< is to 1. The manager's basic task is to 1. The manager's basic task Is to 1. The manager's basic task Is to
closely supervise and control make each worker feel useful make use of his untapped Integrate organisational and
his subordinates. and important. human resources. human variables Into' an
efficient and effective
2. He must break tasks down into 2. He should keep his 2. Hem u s t c I' e a I e a n
productive system.
simple, . repetitive, easily subordinates informed and environment in which all
learned operations. A listen 10 their objections to his members may contribute to the 2. An approach which seeks to
"scientific· approach in doing plans. limits of their ability. maximise ,either set of
this is besV variables atithe expense of the
3. The manager should allow his 3. He must encourage full
other will', prove t6 be
3. He must establish detailed subordinates to exercise some participation on important
suboptimal ,for the overall
wor~ routines and procedures self-direction and self-conlrol matler, continually broadening
system, particularly in the long
and enforce these firmly but on routine matters. subordinate self-direction and
IeI'm.
fairly. control.
3. A system~ approach is
needed, with the selecllon of
strategIes in parllcular
situations based on a
conllngency' approach.
Sheet'

I
HUMAN RESOURCE MANAGEMENT
HRM

HRM HRM ORGANIZATIONAL


POLICIES OUTCOMES OUTCOMES

of Job Design * Strategic Integration * High M .. •• • . .

/ Congruence Job Performance


* Manaqement of
Change
* Adaptability
* Recruitment & * Hiqh
Selection - Problem Solving
- Responsiveness to
* Staff Appraisal * Quality Change
- Innovation" .
* Socialization
* Career 'planning" * Flexibility " . * HiQh
* Training and , - Cost Effectiveness

Development ,

* Commitment * Low
* Reword Systems - Stoff Turnover.
.,. . Absenteeism
( '* Communications .. .succession - Grievances.

Page 1
Exhibit 3.2 Types of Information Obtained through Job Analysis

Work Activities
Job-oriented activities (usually expressed in terms ot what is ac::omplished; sometimes inccating how.
wny and when a worker periorms the activity)
work activities processes
procedures used
activity records (films. etc.)
personal accountability/responsibility
Worker-oriented activities
human behaviours periormed in work (sensing. decision making, performing physicai actions.
communicating, etc.)
elementaJ .moIions (sue." as those used in methods analysis)
personal job demands (energy expenditure, etc.)

Machines. Tools. Equipment and Work Aids Used

Job-Related Tangibles and Intangibles


Materials processed
Products made
Knowledge dealt with or applied (such as law or chemistry)
Services rendered (sue.~ as laundering or repairing)

Work Periormanca
Work measurement (time taken)
Work standards
Error analysis
Other aspects

Job Context
Physical working conditions
Work schedule
Organisational context
Social context
Incantives (financial and non-lina.nciaJ)

Personnel Requirements
Job-related knowledge skills (eduction. training, work experience. etc.)
Personal attributes (aptitudes. physical characteristics. personality, interests, etc.)

Source: Adapted !rein E.J. McCormid<. :Job and Task Analysis: in M.D. Dunnene (ed.). Handbook oi indusuiaJ and
Organizational Psy:::hoJogy. CApyright © 1976 by Rand McNally College Publishing ~ , Po 65:i
INFORl\1ATION OBTAINED FROM A JOB k\fALYSIS

WORK ACTIVITIES

Deparrmenr and/or division where job is located


, .

Job group
• Primary function and summary of job
• Major duties and responsibilities
• Qualific=rtions needed, work experience needed
• Skills, area of speciality - relation to other jobs
• Product processes
• Added-value - rangibles and intangIoies

WORK EQUIPMEJ.'IT

• MaGhines and tools


• Computer aids and software applications
• Work aids used

QUALITY AND PERFORMANCE

• Performance measures
• Work standards
• Form of quality assurance, control
• Perfonnance appr.ris~

ORGANISATION

• Worldng times, schedule, availability


• Working conditions
• Organisation structure and form (including processes)
• Compensation and incentives (fmancial and non financial), career path. training
• Social context, family context

PERSONNEL REQUIREMENTS

• Social skills, managemenr skills


• Aptitude, personality, interests, etc
• Physic::a1 characteristics
FACTORS TF..AT r..=:D TO EXTREME DISSATISFACTION

0 comoany
. ~
Doiicv" and administration
~

-'....
'-'
suoervision
reiationship with super'lisor
-....
0
work conditions
salary
""'
'-' relationship with peers
0 re!.ationship with subordinates
0 Status
0 sec..Irity

FACTORS T'rlAT LED TO ETIREME SATISFACTION

0 achievement
0 recognition
0 work itself
0 responsibility
0 advanc:ment
0 growth

RESTRUCI11RING - COMMON TERMS

UPSIGLLING Acquire different skills of higher complexity

CROSS-SKILLING Acquire more diverse skills - reduces demarcation

MULTI-SKILLING Changes work organisation by using both up and cross


skilling - reduces demarcation

BROAD BANDING Developing career paths with fewer Steps


~ THE UNIVERSITY ]}EPARTh:lENT OF
~ OF QUEENSLAN,D Ci'va ENGINEERING

E2448 - CIVIL MANAGEMENT AND ECONOMICS


First Semester 1995 'j."

Characteristics of a Satisfying Job

A MEANINGFUL ACTIVITIES

.....
A, satisfying job provides opportunities to perform challenging and varied activities that
produce a whole product or service with social significance. This is the job content and it
contributes strongly to motivation and involvement. '

Task Identity
A job where the objective is to produce a defined output that is an, identifiable
product, a significant sub-product, or a service. For example, the job of assembling
a radio is more satisfying to most people than one where the job is to solder six
connections in the radio. Where the total product is too complex for an individual or
small group to assemble it all (for example, a car), then the production of a significant
sub-product (eg. the engine or chassis) is more satisfying than performing one small
work function that is not identifiable in the final output. Similarly, most people find it
more satisfying to provide a total service (such as maintaining all the machines in an
office) to' a defined group of customers, with whom they develop personal
relationships, than to provide one specialised service (such as typewriter
maintenance) to a wide range of anon'ymous customers. Task identity creates a
s~nse of pride and responsibility derived from producing somethir}g that is complete.

Variety
A job that is sufficiently complex and broad in the scope of activities, involved to
maintain attention, interest, involvement and effort. All living creatures heed a
stimulating variety of experiences if they are to function effectively. Narrowly defined,
routine, repetitive tasks create the kind of ·stimulus free· environment in which people
become bored and eventually'begin to hallucinate. On the other hand, a too high
level of novelty and variety may mean that the individual cannot concentrate or cope
and becomes confused and frustrated. Ideally, a task has elements of novel and
repetitive work, which can be used to vary attention level andworkpace. An
important aspect of variety is the length of the work cycle. Traditionally on assembly
work, metal stamping operations and so on, work cycles were created of less than
one minute. In situations where the same 'activity is repeated over 400 times a day,
the individual's only way of satisfying their need for variety is through mistakes,
accidents, machine breakdowns, arguments with the supervisor and extended visits
to the washroom.

Challenge
A job that presents opportunities to use valued knowledge abilities, skills and
creativity in order to achieve a realisable goal. This involves stretching oneself at
times so that one can gain a sense of accomplishment which enhances self-respect.
-2

Significance
A job that is worth doing because the product or service involved makes a significant
or useful contribution to the comm unity as a whole or some important social group.
The knowledge, skill and effort exerted -by the individual is therefore worthy of
respect.

8 A GOOD WORKING ENVIRONMENT

A satisfying job provides a safe, secure and comfortable environment and the
resources necessary to do the job properly. This is the job context. If the job context
is good , this creates satisfaction, but not necessarily higher motivation and
involvement. '

S~~ .
A job that does not threaten the employee's life or physical and' mental health. This
means that machinery is fitted with appropriate safety devices, a high standard of
hygiene is maintained, and the individual is 'not sUbjected to prolonged physical or
mental stress.

Comfort
A job where there is a reasonable degree of physical comfort while working,
convenience' in terms of physical layout, equipment, tools and the provision of
amenities, and aesthetically pleasing surroundings.

Resources
A job where the resources are available to do the job well, ie. where there is ready
~access to materials, equipment, information, advice and training.

Security
A job where the individual is not threatened with summary dismissal and has benefit
provisions to alleviate problems of redundancy, ill-health or other life problems.
Appropriate provisions 'are made for training and retraining to prevent. skill
obsolescence. There'is no-discrimination on the grounds of race" creed, sex, or
national origin.

C 'CONTROL

A satisfying job allows individuals and work groups sufficient independence to plan
and control their own work activities, to monitor their progress, and to influence higher
level decisions that affect their work. The degree of control contributes substantially
to increased motivation and involvement for most employees.

Autonomy ,
A job where the employee has sufficient independence and discretion to plan the
activities involved, to control the way in which the job is carried out, and to influence
outcomes such as productivity and quality. In particular, mechanical pacing of work
ieducesautonomy and should be eliminated in favour of the employee controlling
their own work rate. Autonomy means being free to exercise choice about how work
is to be done, when and at what speed.
·3·

Feedback
A job where there is direct, immediate unambiguous and llT'rthreatening infonnation
on performance relevant to the objectives of the job. This information ·must be in a
form that the employee can readily understand and use to monitor progress and to
direct or redirect effort in order to maintain or improve. results. This implies, of
course, that there are clearly defined specific work goalf)·against which achievement
can be judged.

Participation in decision making


A job where the employee can influence decisions made, above their level, which
influence their work activity. This influence can either be exercised through direct or
representative participation in higher level decision-making groups.

o REINFORCEMENT

A satisfying job provides a range of present rewards and future opportunities to


maintain commitment to the work. All of these facets contribute to satisfaction but
their effect on motivation is variable and depends strongly on the personal values of
particular employees.

Pay and benefits .


A job where there is adequate and equitable pay and benefits for the work involved,
and performance and effort are related to remuneration.

Recognition .
A job where significant people in the organisation acknowledge the contribution being
rt:Iade by the individual and their work group to the goals of the organisation.

Social support
A job that provides opportunities for the development of friendships and mutually
supportive relationships, particularly within the work group but also outside it.
Opportunities to· help others as well as to be helped by them.
. .

Personal development
A job that offers opportunities to continue to learn valued technical and social skills,
to acquire further knowledge and qualification, preferably both on' and off the job.

Desirable future
A job that makes provision for future advancement, promotion and self·fulfil~ent~
3 .Principles and Practices
of Organisation -,. . -.---:-:--.- .,.-,.--- --'-

Implicit in any organisation are the principle of con·


tinuity of existence, an aim and purpose, a plan and
people to achieve this purpose.
In designing an organisation it is more useful to start
with the structure and allocation of responsibilities and
authorities rather than with the people who may be
available to man the structure, In this way a firm basis
is established related to the aim and purpose of the
organisation and ensuring that responsibility for all
necessary aspects is allocated. This structure can then
be modified or departed from to suit the people avail-
able but at the same time arrangements can be made to
ensure that no necessary responsibilities are lost in the
process.
When designing an organisational structure or diag·
nosing organisational ills, the manager needs to bear in
mind a number of principles/practices:

Unity of Command This is really the principle of 'one man, one boss'. Neg·
lect of this principle can give rise- to confusion of
priorities, conflict, assignments not completed on time,
etc.

Span of Control Too wide a span of control. ie too many individuals


reporting to anyone manger, can cause insufficient
attention to be given by the manager to all aspects of
his sphere of responsibility. The actual number report-
ing directly to any particular manager can vary quite
widely, depending on the level, type of work, and the
manager's personal capacity.

Levels of Management The converse of span of control is the number of levels


of management. As span of control decreases the
number of levels tends to increase, causing difficulties
in upward and downward communication.

From A Handbook of Management Training Exercises. published in 1978 by the


136 British Association of Commercial and Industrial Education. 16 Park Ccescent. London WIN 4AP.
3 Principles an"Q-.J~~r~~~es .
of Organisation . --~-~ .. ~

One to One This type of organisation can work satisfactorily, par-


ticularly, if the role and responsibilities of the
Assistant/Deputy Manager are clearly defined and
understood. It can lead to the Assistant/Deputy Man-
ager coming between the Manager and his sub-
ordinates, or becoming just a message passer.

Manager

Assistant Manager

Grouping of Like Functions Grouping of ,like functions tends to lead to harmony,


and grouping of unlike functions can lead to excessive
stress on one at the expense of the other and/or conflict
of interest.. e.g. Production and Maintenance as
opposed to Administration and Maintenance.

Responsibility, Authority The responsibility and authority of each post in the


and Accountability organisation should be clearly defined and understood
by the incumbent. Authority should always correspond
to the responsibility and the individual must know to
whom he is accountable for carrying out his respon-
sibilities.
Clearly, it is important that the responsibilities of dif-
ferent parts of an organisation should not overlap,
causing duplication of effort and possibly friction. At
the same time, it is important to ensure that there are
no 'gaps' between responsibilities, causing important
areas to be neglected. .
Authority without responsibility and accountability
leads to decreasing effectiveness ('power corrupts').
Responsibility without authority is unsatisfactory and
inequitable..

Balance Lack of balance can occur when:


1. A general" service function is placed under one par-
ticular function.
2. The load on one function reporting to a manager is
out of line with the other functions reporting to him.
3. A major function is placed too far from the top man-
ager.
All these can lead to distortion and malfunctioning of
the organisation. They are likely to be caused by resort-
ing to expediency or by distorting the organisation too
far to suit the abilities, or lack of them, of particular
individuals.

From A Handbook of Management Training exercises. published in 1978 by !he


Briush Association 01 Commercial and Industrial Education. 16 Pl!r1: Crescent London W1N 4AP. 137
3 Principles and Practices
of. Organisation

The following types/classifications of organisational


structure. based on the work of L. 8. Urwicl<. published
in The Elements of Administration. may be helpful to
the manager designing or analysing an organisation.

Unitary People grouped by units. with a manager in charge of


the unit. eg:
Persons - centurion. Ministry of Pensions. payroll.
Things - ships. aircraft.
Area - sales area.
Functions are spread over the unit and responsibility
for the operation of the unit is vested in the manager.
This makes for effective local co-ordination but may
. make it difficult to ..keep rapidly developing technical
functions up to date.

Serial People grouped by product or activity, with a manager


in charge of the group. eg:
Product - process manufacture, lubricating
oil plant etc.
Production line - car body manufacture, etc.
Types of machine - typewriters, compressors, bull-
dozers.
Altows simplification and specialisation with' the
reduction of variety in job content making it possible to
man the organisation with a less highly capable grade
of labour. It may also lead to lack of job interest by not
using the 'whole man'. Where the activity takes place in
more than one location the local manager is apt to
regard the specialist as being someone else's problem.

Functional People grouped by function with a manager in charge


of the function, eg:
• All pilots report to the top pilot.
• All salesmen report to the top salesman, etc.
This makes for easy and rapid introduction of new
technical innovations but may cause difficulties in co-
ordination at the local level.

In practice, these types of organisational structure


tend to occur together. depending on the size of the
organisation, its geographical spread, its product!
service and the stage of its development.

Further reading. See references 7,11.13.17,18.23.29


and 34.

From A Handbook of Management Training &erci:res. pubfrshed in 1978 by the


138 British Association of Commercial and Industrial Education. 16 Park Crescent, London W1N 4AP.
FUNCTIONAL ORGANISATIONAL STRUcruRES

Advantages Disadvantages
• Pexmits centralised control of strategic results • Poses problems of functional coordination
• Very well-suited for structuring a single business • Can lead to interfunctiOrial rivalry, conflict and
empire building

• Structure is linked tightly to strategy by • May promote overspedalisation and narrow


designating key activities as functional units management viewpoints

• Promotes in-depth functional expertise • Hinders development of managers with cross-


functional experience because the ladder of
advancement is up tbe ranks within tbe same
functional area
• Well suited to developing a functional-based • Forces profit responsibl1ity to the top
distinctive competence
• Conducive to exploiting learning/experience curve • Functional specialists often attach more
effects associated with functional specialisation importance to what's best for the functional area
than to whatfs best for the whole business
• Enhances operating efficiency where tasks are • May lead to uneconomically small units or
routine and repetitive underutilisation of specialised facilities and
manpower
• Functional myopia often works against creative
entrepreneurship, adapting to change, and attemptS
to restructure the aetivity-cost chain.

DECENTRALISED LINE-QF-BUSlNESS TYPE OF ORGANISATION STRUCTURE

Advantages Disadvantages
• Offers a logical and workable means of • May lead to costly duplication of staff functions
decentralising responSIbility and delegating at corporate ·and business unit levels, thus raising
authority in diversified organisations administrative overhead coSts

• Puts responSIbility for business strategy in closer •. Poses a problem of what decisions to centralise
proximity to each business's unique environment (business managers need enough authority to·get
the job done, but not so much that corporate
management loses control of key business level
decisions).
• Allows each business unit to organise around,its • May lead to excessive division rivalry for
. own set of key activities and functional area corporate resources aDd attention .
requirements
• Frees CEO to handle corporate strategy issues • Business/division autonomy works against
achieving coordination of related activities in
different business units, thus blocking to some
extent the capture of strategic fit benefits
• Puts clear profit/loss accountability on shoulders • Corporate management becomes heavily
of business unit managers dependent on business unit managers
• .Corporate managers can lose touch with business
unit situations, end up surprised when problems
arise, and not know much about how to fix such
MATRIX ORGANISATION STRUcruRE
Advantages Disadvantages
• Permits more attention to each dimension of· • Very complex to manage
strategic priority

• Create checks and balances among competing • Hard to maintain "balance" between the two lines
viewpoints of authority
• Facilitates simultaneous pursuit of different types • So much shared authority can resUlt in a
of strategic initiative transactions logjam and disproportionate amounts
of time being spent on communications
• Promotes making trade-off decisions on the basis • It is hard to move quickly and decisively without
of "what's best for the organisation as a whole" getting clearance from many other people
• Encourages cooperation, consensus-building, • Promotes an organisational bureaucracy and
conflict resolution, and coordination of related hamstrings creative entrepreneurship
activities

ORGANISATIONAL DESIGN GUIDELINES

1· Wh.n .nvironmental uncertainty i. hi;h. a ~. organic

.or.
structure is be.t, wh.n environ.ental uncertainty 1. law. a
mechanistic structur. i. be.t.

2 When technological complexity is hi;h, such a. in . . .ll-batch.


continuous-process, and intensive technologie., a .ar. organic
.tructure i. best, when technological compl.xity is law, a. in
long-linked • •ass-prcduction, and .ome .ediatin; technologie••
a mare mechani.tic .tructure is be.t.

3 Or;.ni ••tion. t.nd to adopt more mechanistic .tructure. a.


th.y incr••••. in .1ze, how.Y~t organisations of any .iz. aay
find the .dvant.;_ of organic or eechanistic .truct:.ur_
d_irable. d~dinQ on tn. influence of cthtIr crU:ical
4ac:tc:ra of . .v:lran.-nt and cant•• t.

4 Stabilit:y at:r.t:.Qi_ .Ul be -.ar. aucc_aful ..,." tlUPpar1:ed by'


-.chaniatic a~ure•• Growth str.ta;i_ trill tt. IlOl"'•
• ucc•••4ul when supported by organic st.ructur_.

~ "-ch.ni.tic structur•• will app••l lIOI"'e to persona praferr1n;


rout:1ne t ••k. and Gr••ter d1rac:tion 1n thetr werk, organic
structur•• will app••l _ . to persans d.siring .utgne-y .and
;r.ater variety in thai r worlc.

6 Oraani ••tion. f.cing .cr. unc~tain external envircneents .il1


"ltquire ;r.ater internal differentiation A800Q subsyst. . . than
will organi.atian. f.c:inQ _ e c:~t.in extern.l envircn-nt••

7 The gr••t r the n.-d for and difficult.y of achillYint:!


int.;r.t.ian .-ong h1Qhly dHf~enti.tltd .uD.yst.... tn. _ e
an crgan1. .t1an '. -enani_ for cre.t1nQ later.l relations
lIUat: ahi4~ t:oward task forc_. t ..... and tINt . .t:rix. and .....y
frc. rul_. pracedur_. and hierarc:hical rftllfTal.
s:J!~!60l
0
........c
0
u I
'"0
....IUC I
IU
..... jOJ1UOO AlUeno
0
>
ca
C
0
';:J
u
c
:=
u.. 5u!Jm:Je~nuew

t
.!.ce
...o
Q.

t _lOJlUO:J
__ _ _ _ _J
peluapo-weJ60Jd !
.:':':) """.' ::-"',;--)

each Iimc lhere is a contlicl belween a project manlier and a functional rangc, while tbe funclional manager's arc long range. Bccau1e of Ihis, it is
manlBcr (Ih.t Is broughl 10 higher management for resolution), It Is resolved often possible to resolve a problem so fhatthe sh!>rt-range goal or the project
in favor of one or Ihc olher, we have a solution through dominancc. BOlh can be met while con,lributing to reaching the long-range functional goal. It is
groups will quickly perceivc ihat bringing a problem to higher managemenl is much morc difficult to achieve integrated Solulions when both disputants arc
a wasted effort, and the dominant party will prevail. The matrix is Ihen no concerned wilh short-range goals. Higher management can playa vilal role in
longer at mabix, and we are back 10 Ihe hierarchical pyramid. When two helping to achieve the desired collaboration because of a broader viewpoinl
disputanls bring a conflici 10 a manager for resolulion, Ihe manager should and perspeclive. Since Ihe upper manager is nol as likely to be emolionally
always ask if it is really cui and dry and musl be decided wholly in favor of involved. and since personal goals arc best served when bolh managers suc-
one party or Ihe other. ceed. lhe executive is more likely to see the possibility of an integrated
The second basis of resolulion is compromise Ihrough bargaining. There is solulion.
no decisive viclory or defeal in a compromise Solulion. Each party gives up To summarize the preceding discussion, when a manager is asked 10 sellie a
part of what was wanled in order 10 oblain or relain a share o( the com- conflict. one should first seek an integrated solulion (i.e., see if there is some
promise. Compromise agreemenls usunlly reflect Ihe relalive power or bar- way for bOlh of the disputants to win). Failing Ihis. a compromise solulion
gaining position of Ihe Iwo disputants: This means is preferable to domination that minimizes Ihe ill feelings and mainrains a balance of powcr should be
because it diminishes Ihe billerness by dividing Ihe fruslralion in some propor- sough I. Only as It last resort should Ihe manager accepl one dispulant's posi-
lion belween those who are at odds. However. because each party has had to tion while rejecting the other: Even when this last solution is inandatory ,the
give up somelhing that was wanted. frustration will still be present and will wise execulive will lind some way to ease Ihe frustralion of Ihe loser by
aggravate future differences. In facl. each participant may resolve 10 granting some other desire.
s,trenglhc:n his or her bargaining position before Ihe nexl dispule.
Resolution of a conflict Ihrough inlegralion (achieved by collaboralion) is
greatly preferred 10 dominance or compromise. A conflict is inlegrated when 3.10 Informal Organlzatlo,ns
both parties gain and the aclions that are laken result in a better silualion for
bOlh of Ihe disputants. Neilher party dominales Ihe olher. and Ihere is no
Every member o( an organizalion musl recognize Ihal there is not just one
yielding by eilher in Ihe way of a compromise. The conflici ilself is made 10
organizalional slruclure. There are alleastjoltr tliffumt orgmliZtlliolwl Slmc-
work for those who arc in dispule to yield a result for bOlh Ihat is beller Ihan
/IIres wilhin the group. The first is the jormul orgtm;Zdtio", based on Ihe
what existed prior 10 Ihe dispute.
relationships among jobs or positions. which we have been discussing up 10
Obviously, not all disputes can be integrated. Somc disagreements do not
Ihis point. This is Ihe official structure established by managemenllo lJrovide
lend themselves 10 this kind of resolulion. In addilion, It takcs a sp,ecial type
for delegalion of aUlhorily and responsibililY. It also provides Ihe mechanism
of manager who even thinks of Ihis type of resolution. If eilher party to the
for the official channels of communication and resource allocation. TIle sec-
dispute ill determined to dominate thc olher or if there Is no mutual trust.
ond structure is the social organization. based on friendship relalionships.
integration and collaboration arc not possible. Roy (17) In discussing integra-
The third is the power structure. based on conlrol of things Ihat are considered
tion. says:
of value to others. Finally. the fourth grouping is the status or prt!lligl!
~'Mistmsl bel~een those in connict o{ten is too deep to pennit eilher dbputllnt to
stmcture. based on respect and recognition.
lower his ,uard to make inteSlalion possible. And. above aU. the desire to dominale: The social organ/zarioll arises spontaneously from the social interactions
is so very strong in all of us as to put integration beyond OUI reach. We: lack the: and shared values of people placed in close physical proximity. It fulfills Ihe
wisdom and the: strenBlh to sacrifice the will 10 win. Ihe desire fOI victory. (or the basic human needs to associate wilh other people, feel thatthey belong. and
largcr but Icss personal gains of inteBration. have a sense of importance. The slruclllre of Ihe social organization is deter-
mined by the (eelings or senliments that members of a group have (or each
Resolution of conflicls lhrough integration may sound like a utopian. unob- ,, other. Friendliness and camaraderie nrc complex s~ntimcnt5 aboul Ihe like or
tainable goal mainly because we sec it in operation so setdom. The matrix
adapts extremely well 10 inlegration because of the different goals of the two ,
I dislike that one person feels toward another. It is predominately il sense of
shared values and beliefs that leads a person 10 seek Issocialion or Ivoid
Icts of mmnagers. As already Slated, Ihe project manager's Boals are short I
f
association wilh another person. The sociltl organizlllion is like the f~rm.1
ORGANIZATION .. 17

organization in that it allempls 10 regulalc behavior. The customs and codes of shared values and develop enforcement melhods called sanelion!. The sanc-
behavior of lhe social organizalion arc based on shared values and beliefs; Ihe tions used may be (I) mild razzing, (2) Ihe "sil~nltrealmenl," (3) oSlracism.
rules and regulations of the formal organi2;ation arc based on the need for (4) whhhoiding informalion. or (5) refusing help whh work assignments.
efficiency. The social organization may work in suppOrt of the 'formal organi- Sanctions of the social group arc usually social in nature, while Ihe sanclions
zalion or at cross purposes to it. It also maintains its own communications of the formal organization lend to bc economic. Both can be very cffeclive.
network, commonly known as the "grapevinc" or "rumor mill." The accepled and enforced norms of behavior of the social group and Ihe
Anolher strong influence on the behavior of people in the organization is formal organization may reenforce each olher or "they may be in connict.
theinfonnal structure based on power rela/iunshlps. Power is a mode of When they arc in connicl, the norms of the social group usually prevail. The
influence that is based on the abilify of an individual to induce others' to social group generally determines Ihe workers' alliludes toward Ihe adminis-
produce a desired result by giving or wilhholding sornelhi"g of value. It is an tralion. acceplable working habits, and moral codes.
interpersonal concepl ond always refers 10 a relalionship between or among The social slOiclure wilhin a formal orgllnization will consist of interlacing
people. It is importanl ro realize rhal Ihere are sourccs of powcr other Ihan social units or groups. Each group will consisl of four to eight people. The
those conferred by the formal organization. Thus the power structure is a members of Ihe group wiJI cnl lunch logelher, lake coffee breaks together, and
complex web of relationships composed of officially delegaled authority and sec each other socially outside of Ihe work environment. Some pcople will
power derived from Olher sources. Like Ihe fonnal and social organizalions. belong 10 only one social group (called a clique if you arc nol a member);
Ihc power slructure regulates behavior. However, unlike the other two, power olhers belong to two or more groups. These laller people form links from one
is generally wielded for Ihe beneol of Ihe individual holder instead of for Ihe group 10 anOlher and make possible Ihe informal communicalions network
benefit of the group. The power struclure docs not maintain its own communi- Iha~ is known aslhe grapevine.
calion network; it relies on the formal and grapevine channels for its com- The ill informed believe Ihal the grapevine or rumor mill is not well de-
municalions. fined. thnl il is circuilous, and thaI the information conveyed is false, dis-
The fourth and final structure Ihat inlluences behavior within Ihe organiza- torted, and not seleclive. However, allihe research indicates that it operales
lion is the SWillS or prestige siructure. Posilions within this structure are held quickly (in facI, more rapidly Ihan official channels), selecrively. and along
on the basis of technical skills, abililies, acomplishmenis, anti experience. well-defined paths (or links). The information conveyed has a high degree of
The preslige slruclure has particular relevance to lechnical organizalions be- accurncy. nnd (unlike official channels) Ihe syslem does not nOliceably dislort
cause ofthe strong de~ire among engineers and scienlists for peer recognition Ihe message in Ihe transmission process. Dislortion in Ihe system is minimizcd
and acccptance. A person holds a high posilion in the preslige struclure by by excluding from Ihe network persons who are known to dislort mCSS3j;es.
virtue of outstanding technkal skill, ability. or accomplishmenl. Preeminence: The existence of the social organization should not be ignored by Ihe
in one's field carrics with it Ihe ability to influence the behavior of others. manager. In general. managers take one of three alliludes loward the social
Such people Brc looked up to and considered examples 10 follow. Their advice organizalion struclure.
is sought in lechnical mailers and in relation to career decisions Bnd olher
personal mailers that can impact behavior within Ihe formlll organization. I. An enlity of whispers and evil inlentions Ihat spreads ruinors, challenges
Rccognilion and acceptance by expcrts in Ihe same field of endeavor arc often authority, destroys morale" and is a thorn in the side of munagemcIII.
more importani to engineers and scienlists than approval and recognition by 2. A posillve intluence that helps keep people infonned, provides lnfonnal
managemenl. feedback. and develops espril de corps.
3. A mixed blessing thaI the manager cannol conlrol but that can be innu-
enced and must be treated with caution and respect.
a.11 The Social OrganIzation
The social organizalion will nor go away jusI because Ihe manager wishes it
The reasons why a person has feelings of warmth. friendship, and closeness to. It therefore benefils the managcr to study and understand the social Slruc-
toward one pcrson and not loward another arc subtle and complex. Research lure that permeates the formal organization and try to tum it 10 Bood usc. The
shows lhat if is based predomin~ntly on perceived sharing of values and grapevine is rhe quickesl and mosl reliable means 10 get information rapidly
beliefs. Social groups develop codes of behavior and customs based on thest' disserilimllcd throughout an organization. II is also an excellent mCllns of
"
·~I ":!

floating "Irial balloons" of conlemplult:d new pollclcs 10 oblain reactions poshions are absolutely essenliollo Ihe perfonnance of the organization, and
prior to committing 10 them. Finally. h provides a .afely valve for relieving olhers arc of peripheral importance. The holders of some jobs can be made
lensions and frustrations created by the fonnal organizalion and brings sources angry wilh little repercussion, while olhers are in a posilion 10 exact retribu-
of irritalion to Ihe aUention of the manager. Since the grapevine also carries lion. ImpOrlanl papers can be expedited. delayed, or lost at the whim or •
infonnation that is unavailable· through official channels, the wise manager clerk or junior executive. The drafters can slow up completion of an important
will stay finnly lied into the network. drawing. Anyone whose job is important to gelling the task done holds poten-
tial'power over the person who needs the task completed.
Indiv/dllaJ sO/lrces of power derive from (I) expertise, (2) personal charac-
3.12 The Power Structure teristics. (3) interest. lind (4) tenure. An engineer. scientist. or technician has
expert knowledge about a particular area because of intensive study and
Structure in the fonnal organization is based on the relationships between jobs , experience. (f this knowledge or skill is greatly needed. it gives the holder a
and the delegation of authority and responsibility. Structure in the social pOlencial source of power. The degree of power possessed is a function of how
organization is based on friendship choices. Structure in the power organiza- readily that expertise can be replaced. All other things being equal. a person
tion is based on values controlled by various members of the organization. who is difficult to replace will have more power than one who is easily
That is, a person conlrols things considered valuable by others and is able 1.0 replaced. Power deriving from expertise is also conditioned by the importance
influence their behavior in exchange for these things. of the job. An expert on metallurgy who is difficult to replace slill has lillie
There are numerous sources of power within a technical organization; power if the organization can easily get along for a while without'such exper-
among them are organizational, personal, and group sources. The organiza- tise.
tional sources derive from (1) delegated authority, (2) location. and (3) job Another personal source of power may derive from certain personal charac-
importance. Delegated authority (i.e.• Ihut conferred by the fonnol organiza-. teristics usually referred to as personality. Some people are so charming.
tion) provides both positive and negative sunctions that can be used to influ- willy. and physically allractive that others seek their approbation. approval.
encc behavior. Among the positive sanctions are promotion. commendation, guidance. counsel, and friendsip. To the extent that such a persOn is able and,
and salary increases. The negative sanctions include demotion, reduclion in willing to grant or withhold these gestures. he or she has power over those
pay, reprimand. and layoff. The ability to apply or withhold these sanctions who value or desire them. We sometimes refer to such allractiveness as
derives. from administrative authority. charismatic qualities.
A second organizaiional source of power derives from the location of the Often certain tasks in an organization are essential. but distasteful. to per-
positions within the formal structure. If the nature of the job locates it strot~gi­ form to a manager. In such a situation. a subordinate can gain il certain degree
cally in the flow of vital information or in the relationships between or among of power over a supervisor by being willing to do the "dirty work." The
organizational components. the person may have greater power than that threat of having to do such tasks is often sufficient reason for a manager to
allocated by the administration. People who are placed in information- give in on certain points that arc important to the subordinale.
processing positions possess power because others become dcpendent on them Finally. tenure in the job can also be a personal source of power. the new
for accurate and timely information. This dependence on people who possess supervisor will usually rdy on the most senior slaff mer;,bers for guidance and
and process infonnation by those who need the infonnation provides the basis advice while learning ihe ropes. This dependence gives s~nior siaff members a
for a power relationship. Executive assistants and even secretaries usually degree of influence and, hence. power. Likewise. if it is known that 'the
posses. much more power than is apparent because of their ready access to an manager's tenure in the job is of limited duration. senior staff members will
executive. Although their official duties may seem clerical and menial. their often have greater power than the manager. This is readily observed in mili-
easy access to the executive, preparation of his or her schedules, and represen- lary R&D groups where it is common for the chief executive to be a military
tation of his or her views improve their ability to render things of value to officer and the deputy a civilian. Everyone knows thatlhe officer will soon be
others. A kind word to the executive. a favorable appointment time, or a linle moving on to the next assignment. but Ihe civilian deputy will remain. In such
"inside infonnation" can be very valuable to a penon. The ability to provide cases, it is not unusulIl for the deputy to have more power than the superior.
these and many other favors sometimes gives secretaries and assistants signif- This source or power can also be seen in the relationship between I master
Icant power. sergeanl or chief pellyo'fftcer Ind I new young lieutenlnt.
Anolhor IOurc:O or orSllnlZlltlonul ptlwcr Is Ihe Irnponance ur Ihe Job. Sumo Tho NrC',,/, SIIII/ ...·.\· oj /m"'I'r llerlvo hum Ihe IIblhty lu r\lllll ellllltlulIl '11"
_ .• ~.--, ...'c.;\l,; .... ~~.-.J·i ..... IIU~

power that is not available 10 the individual who siands alone may be available ----------References - - - - - - - - - - -
10 !he group that stands togelher. A group of engineers or suPervisors who I. "Apol1o Program Management," Staff Study of the Commillce on Science Ind
band togelher may be able 10 exercise great power over a superior. Allhough Astronautics, U.S. House of Representatives, U.S. Government Prinling Office,
each member of a coalition may be readily replaceable, often the entire group Wilshinglon, D.C., July 1969.
is not. In a classroom siluation, if one or a few students refuse 10 do their 2. Argenti, John, "The Pyramid, The Ladder, and Ihe Malrix." M"n(/g~lI1~nt D~ci·
homework, the professor can fafl them. If all of the studenls decide not 10 sl(/n. 2 (3), Autumn 1968.
cooperale, ·there is nol much the professor can do. ]. Auerboch. huc I.., "Rel1\ot.h:1 Ihe Pyrolllitl De(llre II Crulllble~." lillI/Weith,,!.
No. 29. 1972.
4. Carlisle. Howard M.• "Arc Funclional Organiulions Becoming Obsolele."
3.13 The Emergent OrganIzatIon MQlwgemenl Revielll, 53 (I), January 1969.
S. Foyol. Henri, Genertll ulld IlItlmlritli MtIT/i/gemelll. Iranslalcd from· lhe French
The preceding seclions have shown Ihal there are at least four differenl or- by C. Slone. Pilman Publishing, New York. 1949.
6. Galbraith, Jay R., "Matrix Organization Designs." BuilntlS l1ori:o·tU. /4 (I).
ganiialional relationships or struclures Ihal modify, direct and, 10 some dt:-
February 1971 .
. gree, control Ihe behavior of people in the technical group. These are Ihe 7. Gulick. LUlher. "NOles on lhe Theory of Organizalion." P'Jp~rs Oil tit/! Sdtna
formal, social, power, and preslige struclures. Each of these struclures over- ofAdmit/is/rUlion. L. Gulick and L. F. Urich. Edilors, IIIMilUlc of Public Admin·
laps, reinforces, or connicts with the olhers. The emergent behavior of lhe istration. Ncw York, 1937.
individuals is the result of Ihe complex. dynamic interaction of these four 8. HillIe. J. D., The MilituryStclff. JrdcIJ., SlOdpole Co .• Harrisburg. PI., 1961.
struclures. 9. Ignizio, J. P.• and R. E. Shannon. "Organizalion SIru~tufl:S in Ihe 1980·~."
Ideally, of course, we would like to see a situation in which the manager Illdustrial EII!(;'lur/ng. J (91, Seplcmb<:r 1971.
holds a high position in all four stnll:lur~s. Occasionally, we find jus I such a 10. Killion. William P.• "Projeci Managcmenl liS all Orgllnizalional Concept," Tilt
siluation. Wemher von Braun was such :I manager. He was renowned for his Ohice, 7.1 (4), April 1971.
own personal engineering accomplishments and was helc.l in gn:ul professional II. Kingdon. D. R.• M,ltr/.( OI'gl/l,i~,'t;'l1/: .\I'II/"ging /tuoml/llioll Tt:,·llI/ul"git·r.
esteem. He was also Direclor of lhl: George C. Marshall Space Flighl Cl:nh:r Tavislock, London. 1973.
and thus held formal aUlhority. He was a charismatic leader who inspired his 12. KOIIlIll. D .• anti C. O'l)onndl, Prilll'iI"t:J U/IIf"",,gtll/t'lIt. McG,·"w·llIlI, New
York. 1964.
subordinates to great commitment and enJhusiasm. Finally, he was a close
13. Ludwig. Slcven. "The Move 10 Matrix Managcmcnl." MII//ugtlll/m/ Rt:vit'n'. 59
personal friend and colleague of many of his subordinate managers, who were
(6). June 1970.
wilh him at Peenemunde and Fort Bliss before coming to Huntsville, 14. Mee. John F.• "Manix Organizalions," BlIsillt'u Jlorholls, 7 (2). Summer
Alabama. The von Braun team spirit was very real and paid off in greal 1964.
engineering and scientific accomplishments. IS. Melcalf, 11. C., and L. Urwick, Editors. D.wlIIlI/il.' A,I",illislrllliulI-Tlle Cui·
Most of us arc not so blessed in personality and abilities. However, every luted PI/PUS 01 Mary Pl/rku Follett. Harper & Bros .• New York. 1940.
manager must be cognizant of the interplay of these four structural relation- 16. Mooney. James D.• lind Alan C. Reiley. O",vl/rd IlIIltWry, Harper oft Row, New
ships. The manager can, to some extent, influence at least three of them. York', 19]1.
Certainly the formal organization is under direct control and can be deliber- 17. Roy. R. 1-1 •• The Atlmi//islral/ve Process, Johns lIopkins Press. Ballimore, 1958.
ately designed. The manner in which this is done will also influence both Ihe 18. Shannon, Robert E., "Apollo/Saturn Program Managemenl." Source Book of
power slruChlre and the social structure. Salum Benetils. UARI Report, The Universily of Alabama in Hunl5\1i11e. Re-
Physical proximity and enforced working together encourage, but do nol search Inslitule. December 1970.
19. Shannon. Roben E.• "Malrix Management SIruclures," 1III/IIstriai E//gineering,
guarantee, the formal ion of friendships. If Ihe manager wishes 10 encourage
4 (3) March 1972.
collaboralion, placing Ihe individuals in close physical proximity will help.
20. "Teamwork Through Connicl," Bl/slMJJ Wed, March :W. 1971.
Likewise, a careful study of the sources of power and the power relationships 21. Walkcr. Anhur II., Dnd Jay W. Lor~o;:h, "Orgunizillionlil Choio;:c und Produci VI.
a. they develop will allow the manager 10 take cOlYectlve action before the Funclion, .. Han·ard B,ulne$S Revlelll. 26 (6), Novcmber·December 1968.
power iJlnlchlre distorts or upsels the fonnal slruchlrc. Section 3.8 describes 22. Weber, Malt, TIle Theory o{Social and Ecoflomic O'Kon/tullonJ, 2nd cd., A. M.
the kind of steps Ihal can be laken. Henderson and T. Panons, translaton, Free Press. Glencoe, III .• 1951.
The Communication Process

I SENDER I
MEMORY C

!
0 l. Sclect~" informa tion~
M
M 2. Estimates receiver's knowledge of subject.
U 0'
ENCODER N 3. Selects means of communica ti on.
I

~
C
A
.
4. Organizes message - logical sequence.

T 5. CommunIcates (voice, writing, bodily


TRANSMITT~R 0 actions, etc).
R

C
H I MEANS
I
A HEARING, VlSION, TOUCH,
N TASTE, SMELL fEEDBACK
N
E
L

Distance
Size of group
Prejudice
Values
Emotions
Experience
Ina tten tiveness
Delivery errors
Wrong words
Attitudes ./

RECEIVER

RECEIVER R Receives and interprets message.


(SENSES) E

~
C a. If the ideas relate with past knowledge and
I experience he will understand.
DECODER p
I b. If the ideas do not relate with past

~
MEMORY
E
N
T
knowledge and experience he may learn
by rote bu t he will nol understand.
OVERCOMING THE BARRIERS TO INTERPERSONAL COtv.Th1UNICATION

Use Feedback. Two-way rather than on'-way communication allows us to semch for verbal
and nonverbal cues from our receiver. The more complex the information we are trying to
communicate, the more essential it is that we encourage our receivers to ask questions and
to indicate areas of confusion. We can then adjust our speech pattern to the situation,
speaking slower, allowing pauses, asking for questions from the receivers, and generally
adjusting our approach to the receiver's preference and ·needs.

As receivers, we. can improve communication by providing feedback through similar


techniques of acknowledging, questioning, and restating the sender's message as we interpret
it. At the same time, through careful and sensitive observation, we may discover hidden
meanings behind many communications. For exainple, is the worker who claims inability to
handle a simple assignment really complaining about lack of training, lack of attention, or
lack of pay?

Use Face-to-Face Communication. Accurate feedback is nearly always achieved more


efficiently through face-to..:face communication than through memos or letters. Furthermore,
people are accustomed to expressing themselves more fully and with fewer reservations when
talking rather than writing. The expression "speak freely" is familiar to us, while the
injunction to "write freely" seems at odds with the actual practice of writing.

Be Sensitive to the Receiver's World. Individuals differ in their values, needs, attitudes and
expectations. Empathy with those differences will improve our understanding of others and
make it easier to communicate with them. For example, we would not usually greet a
superior with the phrase "what's happening?" - even if we do not mean to show disrespect
- because we are aware that from the superior's view such a greeting could seem
disrespectfuL

Be Aware of Symbolic Meanings. As previously mentioned, different words acquire


different meanings for different people. Remaining sensitive to these various meanings can
minimise communication problems. If, for example, we are replacing an unpopular sales
quota system with a new system in which reaching sales objectives is only one measure of
productivity, we might do well to avoid the word "quota" entirely because of its negative
association with the old system.

Use Direct, Simple Language. The more accurately our choice of words and phrases is
tailored.to the level of the receiver, the more effective our communication is likely to be.

Use a Correct Amount of Redundancy. If a message is important or complicated, it is


probably necessary to repeat it in several different ways in order to ensure that the receiver
will understand it. . Unnecessary redundancy or the overuse of cliches should, however be
avoided, because they simply serVe to dull the receiver's attention.

USee Marshall B. Rosenberg. "Words Can .Be Windows or Walls", in Walter R. Nord, ed., Concepts and
Controversy in Organisational Behaviour, 2nd ed. (pacific Palisades, Calif.:Good-year Publishing. 1976). pp.
485-490; Robert Rosenthal.· "The Pygmalion Effect Lives. " Psychology Today, September 1973. pp. 56-60 ff:
Robert Rosenthal. "Teacher Expectations and Pupil Learning." in Robert D. Strom. ed., Teachers and the
Learning Process (Englewood Cliffs. N.J.: Prentice-Hall. 1971)..
12Sayies and Strauss, Human Behaviour in Organisations. pp. 246-256.
Table 18-1 Categories of Defensive and Supportive Communication Behaviours.

Defensive Behaviour Supportive Behaviour

l. Evaluation l. Description
2. Control 2. Problem orientation
3. Strategy 3. Spontaneity
4. Neutrality 4. Empathy
5. Superiority 5. Equality
6. Certainty 6. Provisionalism

Source: Jack R. Gibb. "Defensive Communication". Journal of Communication, Vol. 11, No.
13 (September 1961).p. 143-148.

Moving from Defensive to Supportive Communication. One important approach to


overcoming communication barriers was described by Jack R. Gibb. 13 Gibb suggests that the
type of behaviour or attitudes which people manifest will affect the way they communicate.
Certain types of behaviour will cause individuals to react defensively and inhibit
communication, while other types will cause people to feel they are supported, thereby
facilitating communication. The two categories of behaviour identified by Gibb are listed in
'70 Table 18-1 on this page. Behaviour characterised by any of the qualities in the left column .
results in defensiveness by the receiver; those of the right column are seen as supportive and
hence act to reduce defensiveness. We will deal here with each of the six pairs of
behaviours.

Evaluation-Description. If the sparker's manner, expression, tone or choice of phrase is


interpreted as an attempt to makejudgments about or evaluate the listener, then he or she will .
be on guard and prepared to defend himself or herself. This reaction is not without a basis
in reality, since a high proportion of cOIilIIlunication is, in fact, evaluative. As managers, we
will often fmd it very difficult not to pass judgement on our subordinates automatically.
Conscious effort is sometimes needed to avoid this defense-provoking behaviour. Carl Rogers
suggests an instructive way in which we can test the quality of our understanding.

The next time you get into an argument...just stop the discussion for a moment and
for an experiment institute this rule "Each person can speak up for himself only after
he has fIrst restated the ideas and feelings of the previous speaker accurately and to
that speaker's satisfaction".

This technique inhibits the tendency that most of us have to formulate our reply mentally
while the other person is speaking, instead of concentrating on trying to listen accurately to
the message.

Control-Problem orientation. Statements, orders, or seemingly simple observations which


are meant· to control other persons by influencing their actions or beliefs carry the strong
implication that the speaker has the better judgement, and therefore the listeners are, in some
manner or other, inferior. This creates resistance. Methods of communicating.an attempt to
control may range from a threat-backed command to a simple disapproving frown. Since both
imply that the receiver is not capable of making a wise decision without direction, both create
defensiveness, even if the control is accepted. On the other hand, when the sender makes it
clear that he or she is trying to join with the receiver in defining and solving a problem
through cooperation and mutual agreement, a supportive climate is created, and an
improvement in communication is almost inevitable.

Strategy-Spontaneity. If we think someone is "playing games" with us, rather than acting
spontaneously, our usual reaction is defensive rather than supportive. Deceit and
superficiality can "tum us off" to anyone from a potential date to a candidate for governor..
Managers who have been superficially involved in sensitivity of management training
frequently attempt to "act" spontaneously; the result is often a feeling of being manipulated
on the part of the listener and results in defensive communication. Communication that
appears to be genuine and honest, on the other hand, often creates a genuine and honest
response.

Neutrality-Empathy. Communication that demonstrates empathy for the listener will


produce highly favourable reactions. Conversely, a cold, clinical attitude will be seen as
indifference by the listener and will lead to stiff, formal; less meaningful communication.

Superiority-Equality. As readers know from their own experience, individuals who act
superior do not usually get open, honest, and friendly responses from the people around them.
People rightfully want to protect their egos, and individuals who lecture them instead of
talking to them will receive cold, formal replies. Those individuals who act as equals, on the
other hand, and who indicate they trust and respect the listener, will usually receive honest,
less defensive replies. Managers who want two-way communication with their subordinates
must work hard to keep their rank from getting in the way.

Certainty-ProvisionaIism. When we try to impress others that we know all the answers and
that nothing will shake u·s from our convictions, we are likely to get into arguments with
people defending their own viewpoints. If on the other hand, we indicate thatwe are willing
to listen to other perspectives and consider other information, a supportive atmosphere is
engendered and open communication is. encouraged. People usually are willing to be flexible
in the positions they take when they see that we are willing to be flexible in our point of
view.

14Rogers and Roethlisberger. "Barriers and Gateways to Communication". p. 48.


I
NON:' DEFENSIVE COMMUNiCATION SKILLS

ACTIVE LISTENING SKILLS EXAMPLES

REFLECTING "Itls hopeless" .


"Sounds like youlTe ang:ry"
''You feel annoyed"

.PARAPHRASING "If I undeTstand you· correctly "


"I hear you saying •.•. ,"
"Sounds like youlTe saying"
"So yoti'Te saying that •.. "

FOCUSSING "I know all these matters concern you


greatly, but I was wondering if theTe is
one of these in particular which is most
on rour mind now that maybe we can do
something about."

1ST PERSON SKILLS

STATING "In this situation, my needs are "


"I feel •.. , when you do this (specific
thing)"

CHECKING "I'm not sure if I've been able to


~xpress myself as cleaTlY or as accuTately
as I'd like to; maybe if you could tell
me what are the main points that· I 've
succeeded in conveying to you",

GOAL-INVITING "Is there some way which would allow both


of us to get what we want?"

"Is there some way that we haven't yet


looked at, whereby both can be satisfied,"

/2 ..
- 2 '.

ASSERTION SKILLS

ACCEPTING "I can understand why you might think


that"

"You seem to feel very strongly that


I ".

INSISTING ("Broken Record"). "Yes, I understand


that you don'f,want to speak to me, but
it's important to me that we speak .••
Yes, I understand that, but I still want
to talkithe issue through •••. Yes,
you've made that clear, but I still want
to talk ..•... ".

ENQUIRING "In what specific way did I put you


down?"
"In what ways have I ., •• ?"
'''I'/hat could I do, specifically, that
would' help you •.•• ?"

"How did that affect you?"


Two'Causes
of Variation

/ ---- Traceable directly to the system. They are


purely random and are built into the
system. People working in the system have
little or no influence over these causes.

Traceable directly to a particular event or


specific individual. They are the causes
over which the people working in the
system usually have influence and can
change.

~
NIES
...,..., MANAGEMENT
raM
........ EDUCATION
.......
-~~ ,,, PROGRAM
4.3.4
'Crunch Issue'
eAt least 85% of the problems
IIIIIIIIIIIIIIII"~. result from common causes
ie Improvement requires a change
to the system

-Less than 15% of the problems


result from special causes
ie Improvement requires a change
by an individual
Therefore, the major·
opportunity for performance
improvement lies in improving
the system .

Management's Responsibility
The system cannot be changed without management
actlon and support at all levels in the organisation

NIES

~
~.., MANAGEMENT
TOM
~.., EDUCATION 4.3.7
. . . . PROGRAM -----"
Continuous Improvement
Pertormance Enhancement

~ II· I Technology 'Jump' I


...
~- ~ ...
IiI
@
~
=::
§r
I
.---i-------r-- --1------1- New Target --_·1
~.
•••••••••••••••••••••••,

II I I 1
System I I
If
---
!
~. ..~
1 I Improvement ! Planned !
•••••••••••••••••••••• •••••••••••••••••••••• ••••••••••••••••••••••i
~ ~

1 1 1 1 Perfonnance 1
1 1 Reduced 1 1 1
~ ~ ~ ~ i

I 1_____ '- -i

IL"'~l lnlm"I"' 'I' ' 'lUli' ' ' IU' 'I' ' ' I' 'li i i i ' 'l ui"uU' 'I ' ' ' "I1 I UI ' 'IlUul ",I ",I", , l lnl l , , ..~umn ' '"I1 1 lIfO' ' ' IU'D1mltl IDml ' .
[ffii)@

NIES

~~t~
...,..., MANAGEMENT
EDUCATION
raM
4.2.12
....... PROGRAM --'
Contlnuousln cremental
Improvement Cyc'le - PDCA .

Plan Collect and analyse data to develop aPlan for what needs to be
accomplished in agiven time frame .
Do Do the necessary actions defined in the Plan .

Check Chec~ by collecting data, that the actions result in achievement


of the Plan or otherwise

Act Act by standardising the changes which are known to achieve the
Plan (using Quality Assurance).
Then review the results for further opportunities. for improvement
'-----"'

Use the PDCA cycle to achieve process


stability and improve processes capability
NIES

~..., MANAGEMENT TOM


...,..., EDUCATION 4.2.3
.~. . PROGRAM
Brainslormirig---~
~.
--
,/ ~

What is it?
Brainstorming is atechnique which
:.'

attempts to create an environment in


which team members' ideas are able to
build and bounce on each other to form
a synergy

-
" /
The secret of
successful
/' ., brainstorming is to
~ listen to others

NIES

. Tools am Techniques
CT3.1
· Guidelines for Conducting
a Brainstorming Session
PRELIMINARIES
1. Make sure everyone is clear on the topic

2. Clarify the procedure and the rules of brainstorming


3. Give people a minute or two to think and (if -,-
desired) jot down their own ideas

IDEA GENERATION

4. Encourage everyone to contribute - the more ideas


the better

5; Consider seeking contributions in turn, only one


idea per tum -

6. Encourage everyone to state their ideas briefly and


clearly - do not elaborate

~ 7. Write down all ideas on a white board or flip chart

- 8. Allow short questions for clarification only

NIES

Tools and Tecluiquas


CT3.7
Guidelines (continued)

9. Disallow open or implied judgement of ideas


(body language, face pulling, noises etc.)

10. Build on the ideas generated by others

IDEA EVALUATION

11. Seek explanation of ideas

12. Combine similar ideas

- 13. Number the ideas

14. Conduct multivoting session to select best ideas;


reduce the list; vote again - repeat as required

15. Document the resultant shortlisted ideas

NIES

. TooisarriT~
CT3.8
Guidelines (continued)

9. Disallow open or implied judgement of ideas


(body language, face pulling, noises etc.)

10. Build on the ideas generated by others

IDEA EVALUATION

11. Seek explanation of ideas


12. Combine similar ideas

- 13. Number the ideas

14. Conduct multivoting session to select best ideas;


reduce the list; vote again - repeat as required

15. Document the resultant shortlisted ideas

NIES

- TooIsan3T~
CT3.8
EFFECTI\~ PROBLEM SOLVING ~\~ DECISION ~~KING

Dealing with problems is an intrinsic part of a manager or administrator's


role and effectiveness in this area influences the manager's overall
effectiveness.

"THE MOST IMPORTANT FUNCTION OF A MANAGER IS TO USE mE BEST AVAILABLE


INFORMATION TO MAKE AN APPROPRIATE DECISION."

If this is true, it would appear that one of the areas in managerial


development that is most neglected is training. in whatever form, in the
sill of objective decision-making.

Today's managers operate in an area of rapid technological change where


information is communicated quickly .and widely .. Decisions, once made, can
be implemented with unprecedented speed. In such an environment managers
no longer can afford to base decisions on the time-honoured precedents of
intuition, "gut feelings" and unrelated experience - all of which lead to
impUlsive rather than rational or objective decision making.

So~ how does a manager get out of using old decision making modes and
into using a more rational approach? An answer lies in using a staged,
structured approach which pre-empts any of the insidious traps of
decision making and which, in due course, becomes second nature.

This paper will outline means of collectin~ and utilizing the be~t available
information, to solve the difficult problems that you face, to make the
best possible decisions, and to build into your plans safeguards that
assure their success.

This paper should be considered in conjunction with the following related


papers -

The Problem Solving Process Simplified


Problem Solving Tools
Decision Making and Creative Thinking for Problem Solving
Decisions, Decisions
Common pitfalls to be avoided in Problem Analysis and Decision Makin~
Problem Analysis, Decision Analysis and Potential Problem Analysis

PROBLEM SOLVING

Problem solVing and decision making really are just two steps in the whole
Problem SolVing or Information Processing cycle.

../:..
- 2 -

Figure 1

PROBLEM 30LVING PRClCESS

• ACTION
CAUSE

EFFECTS
STRATEGIC
/
/.
-' PLANNING

ACTION

\ ul'.:.CTS
\

~nen faced with a difficult situation, we often do not differentiate and


identify what part of the Froblem Z;olving Process - is involved.

Different 6i tuations require different mental processes, or a particular


thinking skill to get out and organize the critical and relevant infor~ation.

When your concern with a situation requires you to find out why it happened,
you apply a process of PRGBL::!·1 ANALY.3IS, which requires defining the si tuatic::.
and an analysis of possible causes and effects e.g. -
Excessive complaints about a program
Abnorma.lly high costs
Increases in grievances, turnover or accidents
A decrease in productivity

'..l hen your concern requires you. to decide among alternatives the process of
D:i::CISION ANALY~.s is applied. This includes generating possible alternative:::
consistent with an overall strategic plan, and rationally determining the bef"
course of action e.g. -
Selecting the best qualified candidate for a vacant position
Selecting a contractor among several bidders
- 3 -

~nen your concern requires that you t~ink about wha~ could go wrong, the
p::-ocess used is PC~:TIAL :?ROBmI ANALY':I'::, ·..rhich ai::s at preventing or
minimizing anticipated difficulties e.g. -
making an important presentation
~sessing the impact of a planned reorganization
implementing new program legislation
integrating a new prograr. into an ongoin; function.

A:Ll managers (in fact, all people) have had years 0:: experience in engagir.g
in problem solving a.."ld have normally developed a c::aracteristic style•
.t.lthough some variations in style can lead to similar levels of effectiveness,
other variations can lead to the missing out of important stages to the
detri~ent of the final solution.

The major steps are -


Recognition that a problem exists
FrelicinarJ definition of the problem
• Analysis of the problem
• Redefinition of the problem
Finding Caus e
Development of Alternatives
Selection of Alternative
Flanning Implementation
Potential Problem Analysis
!oplementation
Revi ew of resul ts.

FECcm:ITION ~AT A ::R0:3L3·: :::cr.3TS

A problem can be defined as an unacceptable deviation f~om what should be.


Defined in that way, four steps are involved in reco£TIition of a problem -
Knowing what is (monitoring current perforcance)
3elieving what should be (standards and values)
Identifying the gap (comparison)
Having a felt need to act (deviation is unacceptable)

Knowing what is can be accomplished in one of two w~s. Information can be


nresented either in an ad hoc way (crisis, negative feedback, reported problem
etc) or as part of an ongoll;; :lIonitorin; system of work perfor:lanc e (Hanagement
Information System). Alternatively a manager can seek out information on
existiilg problems via surveys, interviews, planning and goal setting se:linars,
. team building sessions etc~

- 4 -

A situation does not become a problem until the characteristics of the


5ituation are compared to standards, beliefs or values about what ought
to be and a significant discrepancy found. The standards may be explicit
(e.g. previously agreed on objectives, perforI:lSD.ce cn teria or plans) or ma;r
be implicit (beliefs and values about what should be, such as -what cons:ti tutes
acceptable performance technically or how important is it if some subordinates
are unhappy with things.)

There are normally differing opinions about both what is and (particularly)
what ought to be. 30me managers are reluctant to bring into the open the·
differing views on these matters because they are fearful that the resulting
conflict will be unresolved and therefore the situation will be worse. However,
an effective manager accepts that different people often have differing views
of reality and adopts a dialetical approach whereby the conflict is handled
in a creative way. The resultant concensus represe!lts a higher level of
insi~ht into the situation than most or all of the parties origina.l1y possessed
individually •

However, the substant~ve problem can only be worked on if the parties with the
'Cower to act experience a felt need to act, that is,. they are prepared to
coamri. t time and resourc es to closing the gap. ;teasons why a manager chooses no t
to act include -

a genuine belief that the situation will be self correcting or is not


sufficiently s eriqus to warrant the time a.."l.d energy necessary to correct
it (rational non-action)

a fear that the problem 'cannot be solved or that the solution of it


would involve changes or admissions that are detrimental to current
satisfaction or self esteem. (ego - defensive response).

An entirely different approach to the recognition of problems can be used by


a manager who wishes to seek out latent· problemS and finds an unwilling:less or
inabi l i ty in others to volunteer information on what problems exist. This
approach involves soliciting suggestions on possible il!lprovements that could
be made and then analysing these suggestions to see what problems the solutions
are addressing bv il:!Plication.

PreliminarY Definition of the Problem

Many organizational problems are characterized by confusion and ambiguity.


Establishing a preliminary definition of what exactly is the problem is an
important early step. This involves two aspects -

A statement derived from the process described above as to what is the


current performance or situation and what is the desired performance or
situation
- 5 -

An identification of the indicators 'Which will establish in the future


....hether the problem has been eliminated.

This stage represents a statement of change objectives and should desirably


conform to the normal standards for objectives (i.e. time based, quantified etC.)

Problem Analysis

This stage involves a collection and examination of the detailed facts and
opinions about the problem situation as defined. DistinguishiDg between facts
and opinions is important. The more that opinions can be converted to facts
by checking out or at least be 6ubstantiated by more thanone source, the more
secure will be the data base and the conclusions drawn therefrom.

To help clarify the si tuation, particularl:y as regards defining the boundaries


of the problem, a sequen~ial ques~ioning technique :ay be useful. Jne such techni~~e

is provided belo..... in thefortl of the It!slIs :Iot Table".


IS IS NOT DISTINCTION

WHAT is the i-IHAT isn I t the ~~T is distinctive about


problem? problem? the problem?

'''HERE is the i-1HE..=tE ian' t the WnAT is different about


problem? problem? the problem place?

','iHEN did the i'JHEH didn't the iiaAT is different about


problem occur? problem occur? the period in which ~~e
problem occurred?

'IO \oJHOM or \.1lAT \'!HO or WHAT could WHAT is different about


is the problem have been expected the person or object with
attached? to have the problem the problem?
but hasn't?

HOW OFTEN does the HG~ OFTEN does the \iHAT is distinctive about
problem occur? problem not occur? the frequency of its
occurence?

HOyJ BIG is the \·iHAT isn't happening WHAT is distinctive about


problem and is its .about the size of the the size or change in size
size changing? problem? of the problem?
- 6 -

Other aspects that need addressing in the problem analysis stage include -

• Seriousness
Urgency -
Expected effects if not- addressed (self-correcting?)
Constrain ts on addressing the problem
Quill ty and relevance of data on hand
Addi tionaJ. data needed (be sure it is essential, as it is not
practical to collect all the information about everything)
• Power to act (do the people working on the problem have the power to do
anything about it. If' not, who else should be involved?)

Redefinition of Problem

Out of the preceding analysis, it is normally useful to check whether the


nature of the problem is still perceived in the same way as it was when the
preliminary problem definition was made. If not, t.~e problem should be
redefined. With a complex problem, it is also useful at this stage to break
the problem up into its component sub-problems, so that the next step (finding
cause) is easier.

\ -
Findinl! Cause

One of the most common deficiencies in problem solving is to jump from


what is the problem to what is the solution. The dangers here are that the
attempt to eliminate symptoms without understanding their cause may not be
successful because the action is too superficiaJ. or that even if t.~e

symptoms are eliminated, new symptoms ma:::r appear because the cause still
exists.

In focusing on causes rather than effects, it is icportant to appreciate


that many causes are themselves the effect of another cause. This is
referred to as the Cause/Effect Chain and how far down the chain you go is
a matter for judgement as to whether the cause you have arrived at is
sufficiently fundamental for action to be effective.

Another point to bear in mind is that some effects or symptoms may be


over-determined~ that is, they have more than one cause. If this is the case,
then eliminating one cause may not lead to the elilllination of the problem.
For example, if I don't communicate with certain co-workers very well, it
might be for two or three reasons. If you eliminate one of the reasons, I
still won't communicate very well·with my co-workers.
- 7-

Three techrl.iques, at least, are available for USe in finding cause. They
are -

A.. V"".t.RBAL CLUSTERING

In a complex problem situation, there are norma.l.ly many different symptoms


yhich vary in terms of location, time, seriousness etc. Finding cause
can be difficult until some pattern is seen in t.~e symptoms. Verbal
clustering is a yay whereby, using impressions and opinions, some
pattern to the symptoms can be provisionally identified before seeking
cause.

The steps are -

1. Detercining some broad categories to which the data can be assigned.


2. Grouping the various symptoms into clusters wi t.~in the various categories.
3. Giving a name to each cluster which reflects t.~eir common characteristic.

One then seeks to establish the possible causes of each named cluster in
whatever way appears appropriate.

Eo FORCE FI::::LD ANALYSIS

Force Field Analysis is a very simple and yet powerfUl tool for
systematical.ly analysing a problem or planning a change strategy.

It is a technique that -

1. leads to all the facts of a situation to be considered at the


same time;

2. can be used by an individual but is most valuable 'rJhen used


vi th a group of people who are involved with a particular
problem or change situation.

'!he method views situation as being somewhat in a state of equilibriUl:l


at any Given moment (i.e. the forces acting to change t.~e condition are
equa.l1y poised by the forces acting to keep it the same).

In force field analysis the aim is to concentrate on reducing the


forces resisting change, rather than increasing the forces promoting
change•. ~':hen you are successful in doing this, the cur:-eIl.t level of forces
for change are supplied to ensure it takes place.
- 8 -

The /1ethod

1. You start by defining the si tuation or problem which you wish


to change.

2. List all. the factors which support the proposed change - called
the driving forces.

3. Rate each of these forces in terms of their strength or importance,


e.g., from 1 to 10.

4. Repeat steps two and three for the forces which will oppose the
change or oake it difficult to achieve (called the restraining forces).

5. Take each of the most important restraining forces in turn and discuss
how it can be reduced.

Introducin~ a Staff Annraisa1


Svstem into this Organization

Driving Forces (+) (-) Restraining Forces


T
"- ./
H
Personnel Hanager supports E Branch Heads cautious
it.
p
Will tie remuneration to R ";Jill expose current pay
performance. , E
.s
/ anomalies.
/
Should improve supervisor/ E Requires considerable forms
worker communication. N design and testing.
T
Should assist staff development. Last improvement scheme in the
S organization failed.
I /'

\-li11 assist promotion decisions. ; T , Personnel Section short of staff


U to implement the system.
A
etc. T ~esistance to more paperwork.
I
o ./ etc.
r N

c. "Fishbone ll

"Fishbone ll is a technique which helps to identify the "realll cause or


source of a problem situation. Invariably, a multitude of possible
causes will be suggested immediately the symptoms of a problem become
visible. The issue is not so much one of bei~ able to speculate on
possible causes, but rather, one of weeding out from these possible
causes those that appear least probable. If this stage can be achieved,
a manager is then able to investi~ate further to establish which,if' any t
of these probable causes, is the "real" cause.
- 9 -

"Fishbone" is a three step process:

(i) Identification of Possible Causes

Various techniques, involving creative thinking approaches, can


be used to develop a "fishbone". Starting with the most visible
effect the question hat could cause this to happen?" is asked.
tn....

Each answer is then subjected to the same question until all ideas
are exhausted. At this point, a cause/effect relationship of
possib~e causes will have been established as in the example shown
below -

Problem "Eigh error rate in outgoing correspondence


from Section X"

Insuffici ent Aged


Staff Equipment

Excessive Poor \-JorkLng


Workloads ~vironment

Foor High Noise


Procedures Level

High
Rate Error -:-_... -:-_ _..1.- _

Poor Staff Poor Hanagemen t:


Selection Policies

Staff Low Staff


Lacks Inadequate !-lorue Poor Career
Skills Training Structures

Too Low a Level Honotonus


Staff ~loyed Jobs

(ii) Auditing Possible Causes

Firstly, if a cause is in fact operating, it could reasonably be


expected to produce effects other than those that are generated in
the "fishbone"; as the "fishbone" identifies only those cause/effects
that are relevant to the prob~em under examination. Each possible
cause is subjected to the question "If this is in fact the real cause,
what else- could be expected to happen?lI. If the other 'happenings'
do not occur, this possible cause wou~d be given low priority for
further investigation.
- 10 -

The second part of the audi t is carried out :y testing the


remaining possible causes against the questions -

"Does this cause explain:

(.,) The specific effect?·


(2) What is effected?
<:3) When the effect occurs?
(4) Where the effect occurs?
(5) How much, hO'lil often and in what sequence the effect occurs?1!

(iii) Verification

The final stage is to take aJ.l causes that have survived t."le
auditing process and verify them in some way.

Some possible means of doing this are -

(a) Seeking out additional information relevant to the problem.


(b) Comparison with a similar situation ....here the effect is
not apparent.
(e) A pilot study. where action is taken to remove the cause.
to test if the effects disappear.

After identifying problem causes administrators can :;.ow move onto the
Decision Making phase.

DECI.sIOU l-lAKING

One definition of a decision is "A choice between alter:atives aimed at


achieving a goal wi thin specific boundariesl! an~ mS3' be represented thus -

FAST "PRESENT

PBJBLEH DECI3ION PLAh'NING


focus focus focus

Decision makers sometimes fa1.l into a trap in which they formulate a


course of action whilst gathering information. If this occurs early in
the information gathering process the information gatheringm8Y become
very selective and the result is another trap i.e. choosing a course of
action and then seeing only the favourable aspect:;; of 1±at course whilst
seeing only the negative aspects of other options available.

It is particularly easy to fall into this trap when the objectives to


be achieved by the decision are not clear or, in some cases, not even known.
To avoid this pitfall a structured approach can be used. A proven and useful
structure is -
-....
- 11 -

DECISION MAKING FROC""':.SS

• Make a DECISION S'!AmInlT

Focus upon and LIST OBJECTIV""'x.5

• REVIDI objectives

• Generate a LIST OF COURSES OF ACTION (ALTERNATIVES)

• EVALUATE ALTERNATIVES against objectives

.. Make a PROVISIONAL DECISION

Anticipate ADVERSE CONSEQUENCES


CHOOSE

Determine POTENTIAL PROBLEMS of provisional choice

1. The Decision Statement

This statement should clearly defille what is to be achieved by the


decision (i.e. the outcome) and ·clearly determine operational boundaries
for later consideration of alternatives. For example, if I gave a
decision statement of "to' buy a house" it 'Would be quite meaningless
compared 'With "to buy a house to accOlllIllodate the ':own Clerk in the
Brisbane area. with a maximum pric-e---of"·-S-5f),-OOO.-- . __ . ---.. .--,.------------.-.,--.----

2. List Objectives

Before attempting to determine what course of action may be taken it is


necessary to clarify 'What your objectives are in caking the decision.
This approach reduces the bias 'Which may be introduced by choosing a
favoured course of action, and th.en listing objectives to meet the
pre-determined solution.

Objectives may' be headed under -

(a) Results desired e.g. four bedrooms


large garden
(b) Resource constraints e.g. under 550,000 available in 30 days
(c) Possible consequences e.g. above 1974 flood level, low maintenance

3. Reviewing Objectives

There are three stages involved in this step.


- 12 -

(a) Classitring into MUSTS and WARTS

MUSTS are those measurable ob jectives which you determine are


essential ori teria in making the decision. ~ course of action
which does not meet the MUSTS is automaticall;y discarded. MUSTS
are chosen carefu1..ly as they become a key area in decision
making because they represent constrai.nts to subsequent choices.

WANTS are those objectives which are considered desirable to


achieve but if some of the 'wANTS are not met, the contemplated
course of action is not necessarily discarded.

(b) Audi tinS;

Having listed HU:3TS and iUJ1TS, go through the list again and ensure
that the list is an exhaustive as possible and that the ::ANTS reflect
the MUS~S where possible, e.g. if you have only S50, OCO to buy a
house, a MUST would be "The house IllUSt not cost over 150,000".
HCN ever , a WANT further down the list may' be "As i:he~p as possible".

(0) Weighting

The next stage is to· weight the '-'iANTS; that is give them a value
through which it is possible to determine ~~eir ~elative icpartance.
The most conveIi.i.en t and easily manageable application of values is
the ''I-10'' scale. By giving a value of "10" to the cost i~rtant

of the ;';A!lTS and scoring the others in tercs of relative icporta::.ce,


a numerical ranking is achieved.

There is no need to weight the r·lUST£ as they are absolute - they are
either present in the aJ.ternative courses of action or absent;

4. Generate Courses of Action

Having established what you are tr'ling to achieve in t~e decision ?rocess
by clarifying objectives, it is now appropriate to view the alter::.ative
courses of action available by which you can meet the objectives. ':'::.is
is the step where creative, divergent thinking is called for and a
ride range of al ternative courses should be initiated.

5. Evaluate Alternatives
Alternatives are now listed in a matrix as outlined in Appendi: 1.

(a) Establish if the NUSTS are met. If any are absent in that
course of action then it is discarded.

(b) Using a I-10 scaJ.e. relatively evaluate each alternative aga.i.n.st


WANTS one at a time. The relative ability of the alternative
to meet t~e i-JAJ:T determined the weighting each alte:-native gai::s.
- 13 -

Cd) Add the total column.

6. Provisional Decision
~ -
The final totals in the column ....ill give an indication of the finaJ.
:-
decision. If one course of action stands alone, then this course may
be the only one further evaluated. Ho....ever, if two or llIOre courses
are close together the subsequent process will apply to both.

7. Adverse Conseouences
It should be noted that the provisional decision is not the end of the
process. The next step is to determine if you can live liith or abide
by the decision. In this step ....e shift from a positive to a negative
frame of mind. A method of doing this is to list aJ.l. the adverse
consequences that are likely to eventuate if that course of action is
implemented. Then establish their likelihood and seriousness. If there
are no adverse consequences ....hich militate completely against the
decision then proceed.

8. Choose

If there is one outstanding course of action and there are no serious


adverse consequences, then the choice is simple. However, if there are
two or more courses of action which are close together then the adverse
consequences are used to determine ....hich course will have the least
negative flow-ons.

9. Determine the Potential Problems


Analysing potential problems of the chosen course of action is an
integral part of decision making. The steps involved in this process
are-
• Identifying specific FOTIll'!IAL PROBLEHS.

Look at the SERIOUSNESS of that potential problem and the


PROBABILITY of its occurrence •

• Plan PREVENTATIVE ACTION that could be taken to avert the


potential problem.

Plan CONTINGENT AC'!ION on the assumption that "the worst


rill happen.

For example - a school fete is planned.

Potential problem Rain

Probabili ty 3 Cat that time of year)


Seriousness 10

Preventative action Hire extra tents (decision to erect


taken on morning of fete).
- 14 -

Contingent action Arrange for 20 adults to erect the


ten 1:s i f raiD. i lIlIJIin en t.
Arrange 30 children to ac t as
eecorts with umbrellas from car
park to tents.

It would be naive to suggest that each time a person's telephone rang


requiring a decision, he or she would ask the caller to wait while he or
she went through a decision making matrix. A person is normally called
upon to make three types of decision -

an immediate decision to maintain activity until a more


permanent corrective action can be initiated to solve
the problem.

ADAPTIVE - a decision where the problem sourc e is outside the


decision makers control. Th.ese decisions would be
used to minimize the ad.verse effect of the problem.

CORRECTIVE - a decision aimed at permanent solution toa problem is


undertaken in a methodical, rational p:"ocess. It is with
this type of decision making t.1.at the above f01"I:lal process
can be used most effectively.
E 2448 - CIVIL MANAGEMENT & ECONOl\UCS
CIASS:NQTES - CONFUcr

Substantive conflicts - disagreements over goals, resources, rewards, policies, procedures and
assignments

Emotional conflicts -result from feelings of frustration, anger, dislike, fear, mistrust,
resentment and personality clash

Positive consequences of conflict

• better ideas
• new approaches
• cause persistenc problems to be dealt with.
• clarify views
• tension - stimulating interest and creativity
• opportunity to test capabilities

Common types of personal conflicts

• approach-approach - two equally attractive alternatives


• avoidance-avoidance - two equally unattractive alternatives
• approach-avoidance - pushed towards a goal by desire and simultaneously pushed
away by undesirable aspects

Frustration - aggression, withdrawal, fixation and compromise

Interpersonal conflict - Johari Window model

Structural sources of· conflict

• role ambiguities
• resource scarcities
• task interdependencies
• competing objectives
• structural differentiation
• unresolved prior conflicts

Styles of Interpersonal Conflict Management

• avoiding

• accommodation or soothing

• competing

• cornpromise

• collaboration
202 Management for e:ngJne~rs

Table 7.6: Critical functiofl.$ in tM innouation process


Critical Function Personal Charaet~nstics Orgaruzational Actir:itles
Idea Generating Expert in one or two fieids. Gen~rates new ideas and
Enjoys conceptualization; tests their feasibility.
comfortable with Good at problem solving.
abstr:ic:lons. Sees new and different
EnJoys dOUlg innovative V;'3ys of doing things.
work. Searches for the
Usually is an individual breakthroughs.
contributor.
Often will work alone.
Entrepreneuring or Strong application interests. Sells new ideas to others in
Championing Possesses a wide range of the organization.
interests. Gets resources.
Less pro~nsity to Aggressive in championing
contribute to the basic his or her "cause."
knowlerige of a field. Takes risk
Energetic and determined:
puts self on the line.
Project Leading Focus for decision making, Provides the team
, inIorma:.ion, and leadership a'nd motivation.
questions. Plans and or5anizes the
Sensitive to the needs of project.
others. Insures that administrative
Recognizes how to use the requirements are met
organizational structure Provides necessary
to get things done. coordination among team
Interested in a broad range members.
of disciplines and in ,how Sees that the project moves
they fit together (e.g., forward effectively.
marketing, finance). Balances the project goals
",iUl organizational needs.
Gatekeeping Possesses a high level of Keeps informed of related
technicai competence. developments that occur
Is approachable and •outside the organization
personable. through journals, .
Enjoys the face-to-face conferences, colleagues,
contac: of helping others. other companies.
Passes information on to
others; finds it, easy -to
talk to colleagues.
Serves as an information
resource for others in the
organization (Le.,
authority on who to see
or on what has been
done).
Pro\;des informal
coordination among
-- -- .. - ... _._- -------------::-:----------
Sponsoring or Coaching Possesses experience in
Helps develop people's
personnel.

developing new ideas. talents.


Is a good listener and Provides encouragement,
helper. guidance, and acts as a
Can be relatively objective. sounding board for Ule
Often is a more senior project leader and others.
person who knows the Provides access to a power
organizational ropes. base within the
organization - a senior
person.
Buffers the project team
from unnecessary
organizational constraints.
Heips the project teClIll to
get what it needs from
the other parts of the
organiz:ltion.
Pro\'ldes legitimacy Clnd
organiz.."ttional confidence
in the projecl
6 Tannenbaum and
Schmidt Continuum

Use of authority
by the manager

Area of freedom
for subordinates

1 2 3 4 5 6 7
Manager Manager Manager Manager Manager Manager Manager
makes 'sells' presents presents tent- presents defines limits; permits sub-
decision and decision ideas and ative decision problem. gets asks group to ordinates to
announces it invites subject to suggestions. . make decision function
questions change makes witt'lin limits
oecision defined by
superior

1. Manager makes decision Having reviewed the 'courses of action' in the light of
and announces it the aim or objective and the prevailing factors. the man-
ager selects one course and tefts his subordinates his
decision. How they will react may have come into his
calculations. but they have no direct share in the deci-
sion making process.

2. Manager makes decision Here the manager makes .the decision, announces it and
and ' sells' it goes on to give the reasons for· it. and to state the
advantages that accrue from it to the subordinates.
Implicitly he is recognising their importance in imple-
menting the decision. .

3. Manager presents ideas The manager presents some of the background thinking
and invites questions behind the decision - for example. the factors and the
courses open. He asks for questions so that the sub-
ordinates can truly enter into the decision, explore it and
"".i. accept it. The discussion allows all concerned to
become clearer about the implications of the decision.

4. Manager presents a The proposed decision is offered for discussion and


tentative decision sub- review. Having heard the comments and questions from
ject to change those who will be affected by it. the manager reserves
for himself the final decision.

From A Handbook. of Managemenr Tratning Exercises. published in 1978 by :ne


British Assooauon 01 C"mmeroal ancllr:duslnal Education. 16 Parle Crescent. Lonoen W1N 4AP 141
6 Tannenbaum and
Schmidt Continuum
,

5. Manager presents The manager identifies the problem or the optional


problem, gets sugges- courses of action which lead towards the goal, and·
tions, then decides comes before the subordinates without his mind being
weighted towards anyone solution or plan. The func~
tion of the group becomes one of increasing the man-
ager's repertoire of possible solutions to the problem.
The purpose is to capitalise on the knowledge and
experience· of those who are in the 'firing line'. From the
expanded list of alternatives developed by the manager
and his subordinates, the manager then selects the sol-
ution that he regards as most promising.

6. Manager defines limits, At this point the manager hands over the decision to the
asks group to decide group (which may be held to include himself), having
spelt out the choice which must be made and the boun-
daries or limits which the decision must respect, includ-
ing the financial restrictions.

7. Manager permits group This represents an extreme degree of group freedom


to decide within pre- only occasionally encountered in formal organisations,
scribed limits as, for instance, in many research groups. Here the team
of managers or engineers undertakes the identification
and diagnosis of the problem, develops alternative pro-
cedures for solving it, and decides on one or more of
these alternative solutions. The only limits directly
imposed on the group by the organisation are those
specified by the superior of the team's boss. If the boss
participates in the decision making process, he attempts
to do so with no more authority than any other member
of the group. He commits himself in advance to assist in
implementing whatev~r decision the group makes.

From A Handbook. of Managemenr Traintng Exercises. published in. 1978 by the


142 British Association of CommerCIal and Industrial Educanon. 16 Parle Crescent London W1N d.AP.
9.57
In trod uction when the boss seeks subordinates' opinions on
relevant matters as a regular practice,. wiulst
A perennial issue for all managers is iiow can retaining the right to nW:e the aetitaL. '__
I get my work group to be efficient and dedsion,including a decision opposite to what
effective r A perennial issue for employees some or all of the subordinates recommend.
on the oL'ler hand, is ""How can I have a job
that gives me a real sense of satisfaction r A Participative Leadership Style involves
shared decision making, whereby the decision
For too long there has been a widespread is made by the group (boss and subordinates
belief amongst managers and employees that together) on the basis of reaching an agreement
these two aims are incompatible - that what which all identify with. This is also referred to
bosses want and what subordinates want are as a consensus approach.
naturally so different that the best that can
ever be hoped for is a hard fought Finally on some matters, power may vest fully
compromise, followed by an uneasy truce. with the subordinates, who are free to make
particular decisions Unilaterally without
Another aspect to the dilemma is the issue of recourse to the boss at all This is
power. The manger is responsible for the conventionally referred. to as Delegation.
operation of his or her work area and for the
behaviour of the people in it. With that The various issues that need to be considered
Tesponstbility comes power - the power to in order to determine the appropriate approach
decide operating policy and to give. to decision making is addressed in the
instructions to the staff. But how much power? following sections.
The more power the manager has, the more·
powerless are the staff. Is that true? Is it Expanding Your Information Base
desirable? Is it inevitable?
Decisions which are about your own duties
Power to Make Decisions and so don1t impact on other people working
in the area are not the main focus of this
The different ways in which power to make paper. Should you wish· to consult some of
decisions can be distnbuted in a work group your subordinates on such matters, then this is
can be portrayed in the model below- more in the nature of collegiate consultation
rather than consultative management. because
In the situation where the power is totally with you are not acting as a manager when you ask
the boss, decisions are made without for other's ideas about your own work.
discussion with staff and, if the matters affect
the staff (as distinct from being nothing to do Some managers don't think to ask a
with them) then the style can be referred to as subordinate for their opinion on something
Autocratic. A variation of this style is where they are personally responstble for doing,
the boss takes into account, when making because they feel they are supposed to have all
decisions affecting staff, his or her view of the answers or at least to know more than
their interests (without feeling the need to their subordinates.
check out if that view is accurate). This is
referred to as a Benevolent Autocratic style. This is an unrealistic view of the situation and
can have undesirable results in that it leads to
A Consultative Leadership Style is present the manager being isolated from other input

Location of Power

Leadership Styie: Autoe:ratic Consultative Participative Delegated

Figure 1. Location of Power

DPI Stllf{ Drodopmt:nt Group


As a manager or supervisor you should seek to Each of these responses can be disastrous for
be non-defensive, behaving in a natural and the work output for the group and so does not
spontaneous way with the people who work in represent the ideal outcome that dedding
your area of responsibility.You should feel free things by yourself appeared to offer YQu. With
to seek subordinates' input to your decisions,if rising levels of education, and increased levels
such input would be of help. of social consciousness about speaking up and
being heard, together with a general loss of
With respect to decisions about matters which respect for authority, it is dear that the
subordinates do have some knowledge about authoritarian management styles of the fifties
and. which will impact on them is some way,it and sixties are well and truly out of date, even
,..
;
is desirable that you involve your staff in that though some managers still persist in using
~., ..
decision making, using either a Consultative or them.
Participative approach. The reason is that no
matter how knowledgeable you are on the To put all this in a more positive light, there is
,
.... particular matter, there are views and widespread experience in Australia and
infonnation in other peoples' minds which can elsewhere which demonstrates that when
potentially improve the quality of the decision. employees have an opportunity to influence
matters at work which affect them, there is a
Your subordinates will.have a point of view to greater level of motivation, commitment to the
contribute, additional to your own, just task and quality and quantity of output than
because they are individuals different from under hierarchical, authoritarian styles of
you. But more importantly, people at other management.
levels in the organisation access information
and people different to yourself and so the Slructural Efficiency Considerations
information base upon which the decision is
made is broader and more representative when As a result of landmark decisions at the federal
subordinates are consulted. industrial relations level, followed up by
equivalent agreements between the unionS, the
In order that consulting them is wor.th the time Queensland Government and the Queensland
and effort, it is important to create an open State Industrial Commission, wage increases
atmosphere and ensure that you are willing to are now determined by the degree of micro-
hear points of view which are different from economic reform agreed to or achieved by
your own and which may even be "wrong", employers and erriployees. .
given your set of assumptions and values.
Asking others for t.neirinput when you have a The structural efficiency principle is about the
strong . opinion which is not open to reduction of impediments at· the work place
amendment is wasting both your time and level to improved productivity. "These
theirs. It is also very foolish, because a person impediments include out of date and
who listens with a closed mind is cutting excessively complicated awards, inefficient
themselves off from an opportunity to learn work practices, demarcation between. different
and grow. groups of workers, poor career pathways and
demotivating jobs.
Human Issues Involved in Consultation
Central to the process of identifying and
Whether you involve your staff or not in removing blocks to efficient organisational
decisions such as work planning, policy and functioning are formal consultative processes
procedure detennination will have an effect for management and union representatives to
upon their motivation and commitment. If co-operate in the reform of work place
you decide matters without consultation or arrangements.
participation, then you are using an
authoritarian style which seeks to retain power Each Public Service Department has its own
with yourself. If you have all the power, then Joint Consultative Committee aCC) and the
they, by definition, are powerless, at least ina effect of these <quite apart from the micro-
fonnal way. Staff who are given no formal economic reform intended) will be to
power to influence matters which affect them, institutionalise management/union
typically respond by exercising informal consultative practices on a range of
power. They can argue and resist organisational issues from policy to the design
implementing your decisions, they can ignore of individual jobs.
your decisions and do what they think is right
or they can reduce the amount of energy and This will accelerate the cultural change which
commibnent that they put into the job. was taking place already, namely, away from

2 DPI Staff CXPelopment Croup


the notion of 'managerial prerogative" and lead to one being seen as ·soft- and SO
toward the notion that employees have a right compromise one's career prospects.
to be involved in the detennination of matters
which affuct them at work. So consultative A third and separate reaSOn for an
management is no longer an option, to be authoritarian style can be that there is a big
adopted by the enlightened supervisor or difference between the knowledge and skill
manager, but like non-discrimination, freedom level of the manager arid that of his or her
of infonnation and smoke free work areas, staff. So many times a manager will say,
becomes part of the new work ethos which when complaining about a heavy workload "I
managers need to accept and support, as part have to do everything myself because it is
of their obligations as managers. quicker than trying to explairi it to one of my
stafr. This attitude can be caused by the
Reasons For Using An Authoritarian Style manager. being ignorant of his or her
responsibilities to develop the staff but it can
Despite the fact that participative management also be subtly linked to the first reason given
and delegation have been recommended by the above for authoritarian styles - "When I don't
majority of management development courses coach my staff and pass on my knowledge, I
for the last twenty five years, authoritarian stay the expert and can't be challenged.
management is alive and well and still
practised by many senior and middle level A manager should have as a goal the
managers. So the question arises :- what are development of the knowledge, skills and
the factors thatcause managers to retain power attitudes of his or her staff so that they can
and control when there are potential benefits function withotlt constant reference to the
from using a consultative or participative manager. So if there is a big gap in
approach? There are three main reasons. knowledge, the manager should be actively
working towards a situation that doesn't
By far the most common reason is insecurity require everything being decided. by the
and defensiveness on the part of the manager. manager.
H I do not have confidente in my own worth
and sufficient self-acceptance such that I feel Mistakes When Using Non-Authoritarian
comfortable with the fact that I don't know Styles
everything or that I'm not always right, then I
will seek to exercise control over my There are three main mistakes that can be
environment to ensure that things don't get out made when using consultative, partidpative or
of hand. One way. of controlling my anxiety delegated styles of decision making and each
and maintainingstai:us vis-a-vis my staff is to is briefly discussed below.
say to them "I'm the boss - I win decide things
around here !" A mistake that some managers make is to
appear to share the decision making power
H the world is seen by someone as a with their staff when, in fact, they have
dangerous threatening place, then that person already made up-their mind as to what should
is very often in favour of ·strong" (i.e. be done. Pseud<xonsuitation is, of course,
authoritarian) leadership styles. This is also pure manipulation and has a worse effect on
true of countries. Russia, for example, has a the motivation of staff than if they weren't
long record of belief in authoritarian consulted in the first place. Nevertheless, it is
leadership, going back to Czarist days. Russia quite common amongst managers seeking to
has, for the same period, also had a national appear democratic whose values are much
sense of inferiority and vulnerability, so similar more aligned with authoritarian modes of
dynamics can operate at the community or operating. If you are determined that a certain
national level as operate within the mind of course of action will be taken, tell your sta£(
the individual manager. what is to happen, rather than involve them in
a charade. If you have a strong view on a
A second reason for managing in this way is matter but are open to persuasion, then declare
having been socialised by the work culture that you view upfront rather then seek to conceal it.
one is part of into seeing authoritarian
management styles as normal and proper. If A second mistake can be seeking the
all your bosses were authoritarian, there is a involvement of staff who don't have the
very good chance that you wilJ be too when knowledge or experience in a particular
you are appointed to take charge of others. In matter to make a responsible contribution.
fa~ where the whole organisation has an Such staff may, neverthel~, appreciate being
authoritarian culture, to manage otherwise can present during discussions, even though they

DPI StAff l:>m!lopmml Group 3


have little to contnoute. In general, staff be an appropriate Serond step.
should be provided with the knowledge or
skill necessary to participate in the planning or Some managers are worried about giving
deciding of matters which affect them, so that authority to staff because of previous
they can progressively mak.e a positive irresponsible behaviour on the part of some of
contnbution. them. However, irreSponsible behaviour (Le.
"bucking" the system or failing to do what was
Finally a mistake some managers make is to agreed) is often the result of a sense of
delegate some class of matters to their staff but powerlessness that staff working under an
not have a system to monitor the authoritarian management regime typically
accomplishment of that work. In other words, develop. If power sharing is talked through
they fail to establish a Management with the parties involved and they actually
Information System. Tne manager remains want to take the responsibility for certain
responsible for all work done by staff under matters, then, providing the manager ensures
his or her control and so, although delegation that the staff have the knowledge and skills to
of some authority is normally most desirable, handle the matters appropriately, the results
having a system to track progress is quite are normally very satisfactory.
essential.

Deciding Between Consultation, Participation Conclusion


and Delegation
As already indicated, consultative management
This is an important issue for the manager but arrangements are part of an inevitable social
is not one for which universal guidelines can change which is taking place within Australia·
be given. and many other countries. Of course there are
problems with sharing power or giving
Discussing the appropriate mode for the authority entirely to subordinates but handling
handling of various classes of work with the problems is an inlTinsic part of the manager's
staff concerned would seem a sensible starting job. The benefits of employee involvement
point. Deciding upon some trial arrangements greatly outweigh the difficulties' associated
which are subject to monitoring and review in with it. Authoritarian management styles are
the light of the results obtained would seem to part of an age whose time has gone.

.. .. .
..

4 DPI 5tJ:lff Det~IOpmt'7l1 Group


DECISIONS, DECISIONS

This paper is designed to present in a simple format key points on how to make decisions and
how to make then happen.

Nothing demotivates people more than the frustrations of not being asked or involved in the
decisions that affect them, and over a period of time it makes them antagonistic to any new
plans. The energy wasted in repairing the damage of not consulting people in decisions that
affect them could better be spent at an earlier stage.

The stages in making decisions and implementing them are:

1. FACT GATHERING

• Be crystal clear on:

What are you deciding about?


Which decisions are yours?
What are you hoping to achieve?
When is the decision needed by?

• Collect only essential facts.

• Know where to fmd the facts internally and externally.

2. . CONSULTING PEOPLE

• Consultation means "to seek infonnation or advice from and to take


into consideration the feelings and interests of others".

• Identify those who will be affected by the decision.

• Consult them before. deciding.

• Treat them and their suggestions with respect.

3. MAKING THE DECISION

• Make decisions that you should be making. Don't take decisions


which your subordinate should be taking.

• Where the answer is not crystal clear, consider the following points:

(a) Remind yourself of the objective;


. (b) Reassess the priorities;
(c) Consider the options;
(d) Indulge in some lateral thinking (i.e are there any other
options not yet considered or suggested?);
(e) Put the pros/cons against each option;
(f) Choose which option best meets the objective and
priorities of the situation.

• Determine when you have to decide by.

• Make the decision and be committed to it.

4. COMMUNICATING THE DECISION

• Be prepared to persuade people of the "rightness" of your decision (i.e.


why you made that one).

• Brief all those affected collectively and allow them to ask questions to
make sure everybody understands what you've said.

• Confirm in Writing.

• If it can be implemented over a period of time, fix dates by when


certain key stages of that decision will have been implemented.

5. FOLLOW UP

• Monitor progress so that you can smooth over any problem areas.
DECISION MAKING PROCESS

Decision Statement • What are you trying to decide?


• What are your trying to get done?

Establish Objectives • Set our your criteria for choice, or


• Set out objectives for the decision
• Derived from two major areas
(a) Results expected
(b) Resources available

Classify Objectives • Determine your MUSTS & WANTS


• MUSTS - set limits which cannot be
violated
screen out impossible
alternatives

• WANTS - express relative desirability


concerned with relative
advantage

Weighing WANTS • Established through relative importance


• Most important WANT weighed 10

Develop Alternatives • Alternatives often given as "self package"


• Be as creative as possible
• Clearly and accurately described

Evaluate Alternatives • MUSTS - GOINO GO only


• WANTS - I - 10 scale
best receives 10 and others given relative
weight

Tentative Choice • This is indicated by numeric score

Adverse Consequences ·

. Independent consideration of tentative choice(s)
"What could go wrong"
• Weigh "probability" and "seriousness"

Control Effects • How can you prevent above consequences?


• How do you evaluate?

Make the choice


F:: ..) :~ .. "
;~~

. :.: .: ;.: : : .: :~:t?'~1,t~.:; ; : :; :; .• ·:,:::·::I.:.::::..:.;.,'.. ....•.. ::::\:.:~i~;J~~~~.;::.:.· . · :"'.:, EN~~qif~s~~:::.: :':': 1:.:' . ~~~~~~f.~;'::.:::!. : :. :::::::t::::/::.:·:p~~~i.~~~~N.T . DEEP
ECO~.Oqy

DOMINANT Progress as Infinite economic growth Trade-offi, as in Ecology versus Suslainability as necessary Co-developing Humans and Nature: Eco-topic anll growlli Constrained
IMPERATIVE and prosperity Economic Growth constraint for Green GrolVth Redefine secur/ly Harmony with Nature

HUMAN NATURE Very strong Anthropocentric Sirong Anthropocentric Modified Anthropocentric Ecocentric Diocentric
RELATIONSHIP

DOMINANT THREATS Hunger, Poverty, Disease, Nahlral Healill Impacts of Pollution, Resource degradalion, Poverty, Ecological uncertainty, global Ecosystem Collapse, Unnalural
Disasters Endangered Species Population Growth change disasters

MAIN THEMES Open access, free goods, Exploitation Remedial, Defensive, Legallse Global efficiency Economise Generative restructuring Ecologise Back to Nature, Blospecles Equalily,
of ['!fin/Ie Nalural resources ecology, as Economic Externality Ecology Interdependence social systems, sophisticated simple symbiosis
symbiosis

PREVALENT PROPERTY Privatisation of all property Privatisation dominant, Some Public Global Commons Law, for Global Commons & Local Common Private, plus common property set
REGIMES Parks set aside Conservntion of oceans, atmosphere, & Private property regimes, for aside for preservation
climate, biodiversity Intra-Inter generational equity &
stewardship

WHO PAYS Property owners, public at large Taxpayers, public at large Polluter pays, public at large, the Pollution prevention pays, income Avoid costs by foregoing development
especially the poor poor indexation, environmental taxes

RESPONSIBILITY FOR Fragmentntion, Development Towards Integration across multiple Private/public Institutional Largely decentralised but integrated
DEVELOP- decentralised, management centralised levels of government, fed, state, Innovations & Redelinition of roles design and management
MENT AND local
MANAGEMENT

ENVIRONMENTAL Industrial agriculture, High Inputs of End of the Pipe, Business as usual Impact assessment and Risk Uncertainty (resilience) Stability management, Reducell scale
MANAGEMENT energy, Biocide, and water PLUS a treatment plant clean up. management, Pollution Reduction, management, Industrial ecology, of market economy including trade,
TECHNOLOGIES AND Monoculture, Mechanised production, Command and control, Market Energy efficiency, Renewable Eco-technologies, Renewable Low technology, Simple material
STRATEGIES Fossil energy, Pollution dispersal, regulation, some Prohibition or limits, resource Conservation strategies, energy, waste resource recycling, needs, Non-dominating science,
IInrcBulntcd Waslc dlsposnl, IIlgh Rcpnir, sct nslllcs. Focus 11Il Rcst"nllinn ccnlnBY, I'"pulllllon through put sCllle rcduct!llll. Agl"ll- IlllligclIlllIS Icchllolt1llicill s}'SlcmS,
population growth, Free markets protection of Human UealUl, Land stabilisation and Technology forestry, Low Input agriculture, INTIUNSIC values, population
Doctoring, Environmental Impact enhanced carrying capacity, some Extractive forest reserves, reduction
Statements structural adjustment population Stabilisation and
enhanced capacity as resource-
management

ANALYTICAL Neoclassical closed economic Neoclassical plus environmental Neoclassical plus, inclusion of Ecological economics, Biophysical Grass roots bioregional planning,
MODELLING AND systems, reversible equilibria, impact lL5sessment after design, natural capital, true Hickslan economic open system dynamics, multiple cultural systems, conservation
PLANNING Production limited by man-made optimum pollution levels, equation of Income maximisation in UN system Socio technical and ecosystem and cultural and biodiversity autonomy
METHODOLOGIES factors, Natural faclors not accounted willingness to pay, and compensation of National accounts, Increased process design, Integration of social,
for. Net present value maximisation, principles . freer trade, Ecosystem and social economic and ecological criterion
cost benefit analysis of tangible goods health monitoring, Linkages for Technology, Trade and capital
and services between population poverty and flow regulation based on
environment community goals and management,
Land tenure and Income
redistribution, Geophysiology

FUNDAMENTAL FLAWS Creative but mechanistic, no Defined by Frontier econol\lles, In Down ploys social fnctors. subtly MIlY generllte fulse security, Dolined In rcactlon 10 Ii-outler

-.
awnrcness of rellmlee on cellillgicill rellctlun lu Decp cculogy, hIcks vision mechunistic, lIucsn't hllulllc I\lllguilullc of chllngc rcquircs new ccoollluics, urglluic hill nul crcillive,
bolollce of abunlluuce uncertllinty consciousness hull' to rcduce Ihe POjlUlllliull'!
Discrete Cash Flow Examples Illustrating Basic Time Value of Money Formulas
.:.;...,-a:..r..u:.:.lll:'~d\'t<._.~:::1 lea JEuwt:wuw;.... _ .. -- . Discrete Cash Flow Examples Illustrating Basic Time Value of Money Formulas
.;-l..,,,=, ••,.w~ ....... ~~_~. l' .vr_
-~
Factor by Which to Functional Example Problems (all using an interest rate of; = 10% compounded annually)
To Find: Given: Multiply "Given" Factor Name Symbol
In Borrowing- Cash Flow
For single cash flows: Lending Terminology: Diagram Solution
F P (1 +i)N Single payment (F/P,i%,N)
compound amount A firm borrows $1,000 P=$I,OOO F = P(F/P, 10%, 8)
for 8 years. How
much must it repay t
0
N=8
I
= $1,000(2.1436)
= $2,143.60
in a lump sum at the F=? t
end of the eighth
year?

I
p 1
F Single payment (P/F,i%,N)
(1 + i)N present worth A firm desires to have
$2,143.60 eight years from F = $2,143.60
P = F(P/F, 10%, 8)
= $2,143.60(0.4665)
now. What amount
should be deposited
0
I
t = $1,000.00
N=8
now to provide for it? t
For uniform series
(annuities):
I P=?

(1 + i)f'I -1
F A Uniform series
compound amount
(F/A,i%,N)
I If eight annual deposits
of $187.45 each are .
placed in an account,
how much money
F=? tI
F = A(FlA, 10%, 8)
= $187.45(11.4359)
= $2,143.60
has accumulated
immediately after the ~
P A
(1 + i)N_1
Uniform series (P/A,i%,N)
II last deposit? A =$187.45

+
i(1 i)N present worth I How much should be
deposited in a fund
A =$187.45 P = A(P/A, 10%, 8)
now to provide for
eight end-of-year
~
I
= $187.45(5.3349)
= $1,000.00
withdrawals of t
$187.45 each? p=?
i e
A F
+ i)N -1
Sinking fund (A/F,i%,N)
I
.
(1 What uniform annual A = F(A/F, 10%,8)
i~:I~~,~: :~J
amount should be = $2,143.60(0.0874)
deposited each year in I = $187.45
order to accumulate
$2,143.60 at the time
A=?
+ i)N of the eighth annual
A P
(1
i(1
+ i)N - 1
Capital recovery (A/P,i%,N)
I deposit?

What is the size of 8 = P(A/P, 10%,8)


~
A
equal annual = $1,000(0.18745)
payments to repay = $187.45
a loan of $l,OOO?
A=?
The first payment
is due 1 year after
receiving the loan.
THE ACCOUNTT..NG PROCESS - SUMMARY

Step What is Done Accounting Records and


Reports

1 Recording Collecting Journals


Capturing
Classifying

2 Processing Classifying Ledgers


Computing General Ledgers
Summarising

3 Reporting Summarising Income Statement


Presenting Balance Sheet

Five Basic Accounting Classifications

Assets - what a business owns or monies due to it, eg cash, equipment, accounts receivable

Liabilities - what a business owes, eg bank overdraft, creditors' accounts, loans


'"
Equity - the initial investment made by the owners to start the busines$, plus any profits or
capital reinvested in the business .

Expenses - the costs, either paid for or incurred and payable, of selling your product or
service and being in business eg purchase of goods, wages, rent, telephone.

Revenue - income earned from business operations: selling products, providing services, and
interest and dividends from investments; such income can either be earned and received or
earned and receivable.

These classifications are also sub~categorised into accounts.

Assets Equity Expenses

Land and buildings (varies according to business Purchases


Plant and equipment structure) Advertising
Motor vehicles Issued shares Bank. charges
Office equipment . Retained earnings . Depreciation
Cash at bank Electricity
Trade debtors Insurance
Stock on hand Interest paid
Work in progress Revenue Leasing charges
Investments Motor vehicle expenses
Sales Printing and stationery
Liabilities Interest received Rates
Rent
Bank overdraft Salaries and wages
Trade creditors Telephone
Loans
Accumulated depreciation

When i:ecording, the bookkeeper makes two entries for each item - one a debit (dr) and the
other a credit (cr). This is called double-entry bookkeeping and the fundamental rule to
remember is: For every debit there is a corresponding credit.

Debit entries record - increases in assets and expenses; reduction of liability and equity
Cre.dit entries record - iricreases in liabilities, equity and revenue; reduction of assets
A ACCOUNTING AND ITS RELATIONSHIP TO ENGINEERING ECONOMY

To illustrate th.e workil1gs of accounts il1 reflecting the decisions and actions
of a firm, suppose that al1 individllal decides to undertake an investment op-
portul1ity and t11e following sequel1ce of events occurs over a period of 1 year:
1. Organize XYZ firl11 al1d h1vest $3/000 cas11 as capital.
2. Purchase eqllipme11t for a total cost of $2/000 by payil1g casl1.
3. Botrow $1/500. t11rollg11 a 110te to t11e bal1k.
4. Manufacture year's supply of iI1ve11tory t11rough the following:
a. Pay $1/200 casl1 for labor.
b. Incur $400 accounts payable for material. .
c. Recognize the partial loss in value (depreciation) of the equipment
alTIOU11ting to $500.
5. Sell '(J:t1credit all goods produced for year, 1/000 units at $3 each. Recognize
t11at t11e accoll11ti11g cost of t11ese goods is $2/100/ resulting il1 an increase in
equity (throllgl1 profits) of $900.
6. Collect $2/200 of accounts receivable.
7. Pay $300 of accounts payable a11d $1/000 of bank note.
n
o
(J)
~

>
()
n
o
TABLE A-I Accounting Effects of Transactioils: XYZ Finn
-------------------~-------------------------------~
~
I-t

Tra " sa cI ;em Z


C)

Bal1111CeS at
Aceol/Ilt 1 2 3 4 5 6 7 End of Year

Cash +$3,000 -$2,000 +$1,500 -$1,200 +$2,200 -$1,300 +$2,200


Accounts +$3,000 - 2,220 + 800 ~
~
Assets receivable In
G>
Inventory + 2,100 - 2,100 0 0

Equipment· + 2,000 - 500 +1,500


equals
+ 400 - 300 + 100
{ Accounts
.~

Liabilities payable ,. ..
...t-f::-
Bank note + 1,500 - 1,000 + 500 a(J]
0
plus
Owners' equity {Equity + 3,000 + 900 +3,900

~
\
As of Occ. 31, 19xx

Assets Liabilities alld 01vllcrs' Equity

Casl1 $2,200 Bank note $ 500


ACCOUl1tS receivable 800 Accounts payable 100
Eqllipn1el1t 1,500 Equity 3,900
Total $4,500 Total $4,500

XYZ Finn IIlCOlllC Stl1tell1C1lt


for Ycar Ending Dec. 31, 19xx

Cash FloIU

.Operatin.g revenues (Sales) $3,000 $ 2,200


Operath1g costs (Il1vel1tory depleted)
Labor $1,200 -1,200
Material 400 300
Depreciatio11 ···!300 o
$2,100
Net income (profits) $ 900 $ 700

FIGURE A-I Balance Sl1eet a11d I11C0111e State111eI1t Resltltil1g froIn Transactions
S110Wl1 ill Table A-I
(a'.) Smith Engineering Services was organised on 1 July 1984, offering compu ting and.
reference services to engineering students. The follow·ing is the list of accoun ts on
31 July 1 9 8 4 . · .

Accounts payable $ 165


·Accounts receivable 70
Accumulated depreciation: building 150
Accumulated depreciation: library and
computing equipment 100
Advertising expense 125
Arthur Smith, capital 120000
Arthur Smith, drawings 600
.... ·Building 90000 .
Bank. 2554
Depreciation expense: building 150
Depredation expense: library and computing
equip:nent 100
'··Land 49400
':'Library and computing equipment 6000
Long term loans payable 27000
Salaries expense 2100
'. Services revenue 3753
Telephone expense 25
Electricity expense '44

Prej)are (i) . a balance sheet at 31 July


(ii) an income statement for the month ended 31 Jul.y.
INCOME STATEMENT

for month ending 31 July

INCOME

Services Revenue 3,753

EXPENDITURE

Depreciation expense Buiiding 150


Library & Computer 100

Advertising Ex!-'ense 125

,salaries Expense 2,100

Telephone 25

~lecll icity

2,544

Excess of income over expenditure $1,209

8ALA.NCE SHEET

as at 31 July

ASSETS $ UABIUTIES $

Accounts Receivable 70 Long term loan payable 27,000

Land 49,400 Account Payable 165

Building 90,000
Less Accumulated
Depreciation 150 89,850 Owner Equity

library & Computer Arthur Smith Capital 120,000


.quipment 6,000 'less Drawings 600
/:ruu . . . Increase in Equity
Less' Depreciation 100 5,900 from excess income
over expenditure 1,209 120,609
Bank 2,554

$147.n4 $147,n4
LECfURE3

SELECTED FINANCIAL RATIOS

Benchmarks

• comparison of a ratio with the same ratio of the same firm in a previous period

• comparison of a ratio with the same ratio for other firms in the same industry or
with industry averages .

Measures of profitability

1 Net profit ratio: Net profit divided by net sales.

2 Return on total assets: Net profit divided by total assets.

3 Return on shareholders' equity: Net profit divided by shareholders' equity.

4 Earnings per share: Net profit divided by the number of issued ordinary shares.

5 Payout ratio: Dividends to ordinary shareholders divided by the earnings available


to. ordinary shareholders (net profit minus preference dividends)

Measure of resource use

1 Total asset turnover: Total sales divided by total assets.

2 Rate of inventories turnover: Cost of goods sold divided by average inventories


held.

3 Turnover of book debts: Accounts receivable divided by average daily credit sales.

Measures of financial condition

1 Current (or working capital) ratio: Current assets divided by current liabilities.

2 Quick assets (or liquid) ratio: Assets which can be turned into cash almost
immediately divided by liabilities which have to be paid almost immediately.

3 Debt-equity ratio (or leverage): Liabilities divided by owners' equity.

SAMSON, 1989
HOW TO READ AN
ANNUAL REPORT
Julian Stock, Deputy Chairman of our Victoria Branch For the record, the following more imponant sections in an
has produced this guide for". Don-accountant annual report are compulsory..
shareholders on what to look for in an annual report
and what questions 'to ask companies. We reeommend • Balance sheet
members retain the guide as a separate paper by simply • Profit and loss statement
removing it from the middle of this newsletter and re- • Cash flow statement
stapling it as 2. single document. • Various notes to the financial statements
.• Directors' report
. he annual report season is upon us. As a • Directors' statement

T shareholder what do you do with your annual


repons? Throw them away? 'That should be the
last thlng that you do. As a part owner, it is in
your own interest to fuJ.d out more about your

e
Auditors' report
Details of directors

Examples of voluntary disclosure are as follows:


company, and how it is peIforming.
• Chainnan.'s statement and review of operations. This
Informed and inquisitive shareholders are the greatest part of the report, and
is the upbeat, ·everything's OK-
. guarantee that the companies which they own will flourish. .invariably includes .photographs of' fierc=..looking
senior executives, and smiling junior staff. It is nearly
So - when an annual report arrives in the mail, where do always written by public relations .people (as.opposed
you start, what do you look for? .to the compulsory bits· which· are' ·written by
accountants). .- .
What you Should not do, is to start by looking at the pretty
pictures and the words which go with them. This is the • Financial summary, highlights and key pexformance
brainwashing section of the annual report. You need a
indicators.
clear, unbiased and unadulterated miDd if you are going to
read an annnal report intelligently.
STEPl
ContentS of an annual report
You should start at the most boring part - look fust at the
The contents of an ann~ report may be divided into two
auditors' report Do not warty too much aboUt. the ·Scope"
section - it is only the audit opinion that is really
".-.-.
n::lTT<:'
important It should be unqualified. If it is not, you should
conataet the cO,mpany secretaIy and ask for an explanation.
• that pan which is compulsory, and which discloses
(see STEP 9) On the assumption that it is unciualified., you
infoIIDation required by law, acCounting standards,
can be satisfied that the financial statements are, more than
and stock exchange listing regulations; and
likely, prepared in accordance with law and accounting
standards. That should give you some ~mfort.
• that part which contains inform:ation which is
disclosed voluntarily.
STEP 2

Tne annual report:, itse~ makes no distinction between Next - look at an even more boring bit - the statement by
these two categories. However,·it is usually pretty easy for directors. Ensure that the directors have. accepted
a shareholder to guess which is the compulsory part, and responsibility for the financial statements,· that they have
which the voluntary. The boring, turgidly written sections certified that they are ·uue and fair-, and that the company
are sure to be compulsory, and the more lively bits, ·will be a able to pay it debts as and when they fall due".
voluntary. Unless you are a masochist, I suggest that you do not worry
too much about the rest of the directors' statement

7
Now - where do you go from here?
SubtIaCt -total current liabilities" :from "total current
Berore you start looking at the financial statements in assets-. If the number is positive it means that the
detail, there are a few factors which you should bear in company should have no difficulty in meeting its liabilities
mind. They may sound like platimdes, but they are still as they fall due. If it is negative it may mean that company
important and are often overlooked.: will experience -liquidity problems" in the near future.
• What you are about to look at represents the result of (And never forget who caused those problems • the
past actions by people. . directors. management and staff did).
• Financial statements may appear to be just a jumble of
incompreheDSlble numbers, but they do reflect the Note - when . looking at nulnbers in futancial statements
performance of the company's directors, management you should COnt:D7r yourself only with the columns
and staff. Never lose sight of this. h~a.ded It cOnsolidated". Do not worry about the other
• Numbers just don't happen - people make them happen. columns - although they may be important, they are of
Thus, real live human beings can always .be held interest mainly to accountants and financUz1 analysts.
accountable for the numbers.
• The financial statements ao not disclose anywhere, Having established that your company is not in danger of
what is probably the company's most important asset bankruptcy, you can now take a closer look at the various
(or in some cases, liability). And that, of course, is the items in the balance sheet The first thing to do is to "eye
qwility of the people working for the company. People ball~ the consolidated column, and :find ant whether there
are, if you like, "offhalaDO": sheet" items. are any big variances between this yeats numbers and
• Good management is the key to any company's success th~ of last year. This is the most fundamental form of
- what you :find in the financial statements are the financial analysis.
results of that management.
There is no rule which defines whether a variance qualifies
Numbers in financial statements represent one of two as "big". Probably any movement in excess of 20%
things - justifies investigation, but you have to be fleXlble. When
1. a physical state or condition at a particular point in you identify a significant change, find out what has caused
time (usually the last day of the. financial year) - the it.
balance sheet; or
2. the results of transactions (nearly aht,-ays reflecting the You do this by going to the appropriate note which
physical movement of tangIole objects) made during the analyses the particular balance sheet item. You will be able
financial year - the profit and loss statement, and the to find which cif the components of the item caused the
statement of cash flows. . variance. You should then :find out:
• whether the consequences of the change are signilicant,
Thus, the key to understanding financial statements is to and
remember that they are nearly always the result of human • what caused them.
actions to physical objects.
In fact, unless you are an experienced financial analyst,
Never fall into the trap of regarding the numbers in you may have difficulty in determining the consequences of
financial statements as somethiIig inaniInate and remote a variance. However, much a.nalysis·isjust common sense.
from life. They are not So, what happens next? For example, if cash increases significantly you should find
out why. Cash is a non-income producing asset, and you
STEP 3 should know why the· compan.y1s directors have not
invested it in income producing assets.
BALANCE SHEET
Finding out what caused a large change is usually not so
The first thing to do is make sure that your company is difficult Probably it was the result of one of three factors
solvent That is, that the company's total assets exceed its (or a combination of them).
total liabilities, and that it has more current assets than .1. The company has acquired or disposed of a major asset
ClllTent liabilities. 2. The company has made a material change to its
operating practices.
Look at the line entitled "net assets". This represents what 3. The company has changed its accounting policies.
the shareholders own. The number, of course, should be
positive. If it is negative, you have a real problem. It At this stage do not do any research - just not~ your query
means that, to all intents and purposes, the company is and finish the exercise of comparing this year's balance
bankrupt. sheet with last year's.

8
STEP 4 Property, plant and equipment - in the old tenninology
these were "fixed assets". They normally, though not
It is now time to have a brief look at the individual always, represent the single largest asset on the balance
components of a balance sheet, and assess them in terms of sheet. Remember, the only reason that a company owns
their "value" to the company. property, piant and equipment is to generate revenues or
reduce expenses. If an asset is doing neither, it should be
Always remember, however. that the number disclosed as solei.
net assets of the company does not mean that that is what
the company is worth. Most items on the balance sheet are Pay particular attention to how property plant and
re:::orded at cost, which often has no bearing whatsoever to equipment is valued. 'It can either be at cost or at an
market value. "independent" or "directors'" valuation. If it is all at cost
the balance sheet is probably ultra conservative and may
Cash- should be kept as low as possible, as it is not really understate the "true" value,of this asset category. But, of
an income producing asset. course, just because property is carried at an independent
or directors' valuation, does not necessarily mean that this
Rei:eivables - trade debtors are a necessary evil (unless the is its current market value. All it does mean is that
company sells everything for cash). HOwever, the lower directors have made some attempt to assign a more
they are the better. The company should always be striving realistic value to it than cost
to reduce them.. Watch particularly for an item termed
"other debtors" or a similar name. Receivables from Remember, a balance sheet will never show the true worth
employees often fall within this heading. It can also be the of a company - that can only be determined if the coIripany
repository of unusuaI transactions which the comPany may is solei.
not want exposed to the public gaze. Ask questions about
it if it is large. Intangibles - these can arise from two sources:
1. from the purchase of goodwill, and
Inventories - once again, the iower they are the better - but 2. from the valuation (or sometimes purchase) of
not so low that the company nms out of things to sell! "intang:toles" such at brand names, tnlde marks,
Note in particular any "provision for obsolescence" or patents, mastheads.
inventory which is recorded at "net realisable value".
Large nuinbers here (which mean that these inventories are Goodwill arises from the purchase·of a controlling interest
. carried at less than cost) may indicate that management in a company. It is simply the difference between the price
has sloppy inventory control procedures. paid for the company and the fair Value of the net assets
acquired. It represents what the business was worth to the
Prepayments - these should be small. If they are not, they purchaser, over and above the value of the physical assets.
are worth questioning. Prepayments always become
e.-q>enses in the following year (if they are in the current On the other hand, the value of brand names is sometimes
assets part of the balance sheet). If used improperly they assessed and booked on the basis of their future earning
can be used to defer the evil day when expense is charged capacity. There is nothing necessarily wrong with this,
to P+L. Normally, however, they are quite legitiniate; although the practice has been described by some
commentators as one Qf .the finest examples of "creative
Investments - these represent the cost of acquiring a non- accounting". If the number is large, query the justification
controlling interest in a company or business. Income for including this item on the balance sheet. It should raise
flowing to the company from these assets will be in the persistent questioning if it represents a very high
form of dividends or profit distributions. proportion of the company's net assets.

Note - subsidiary aJmpanies which are controlled by the .Creditors and borrowings - unfortunately, under current
reporting holding company (now knuwn as the " chief roles, these two liabilities are added together for balance
entity"), are "consolidated" into the reporting company1s sheet presentation purposes. They should not be, because
results. That is, the subsidiary companies' assets, they are different Creditors do not attract interest
/iahill:ties, LnaJme and expenses are simply added to the expense, while borrowings do. You always have to ·go to
chief e:ntityls results. Most subsidiary companies are now . the notes to separate the two - and it is important that you
known as "controlled ortiiies". The chief entity p1Jl.s the do isolate borrowings.
controlled entities equal the "economic entityl'
(previously known as the group). To find out the total borrowings number you will have to
add several line items in the notes. Terms such as loans,
overcl.rafts, bills of exchange, promissory notes, lease

9
liabilities (both secured and unsecured) all constitute Examples of.reserves arising out of cash inflows include:
borrowings. Make sure that you look in both the current share premium reserve (the premium a shareholder often
and non--current pan of the balance sheet You will need has to pay when subscribing for a new issue of shares - it is
the number for borrowings when you calculate the the difference between the par value and the price actually
company's gearing ratio (dis-..'"USSed later). paid for the share); capital profits (the realised profit on the
sale of assets); ge~eral reserve (simply a transfer of
Although it may seem srrnnge at .fitst sight, it is often an profitS).
advantage to a company to have its creditors as high as
possible. It means that the company is financing its The most common revaluation reserves are: asset
activities using interest free funds. If you reduce your revaluation reserves, and exchange ilucruation reserve
creditors you will probably have to increase your (gains and losses from translating the financial statements
borrowings (which will IDf:3Il increased. interest expense). of foreign subsidiaries into Australian dollars).
It is good financial management to negotiate credit terms
with your suppliers which maximise interest free Retained profits - these are exactly what the name
financing. suggests - profits which have accumu1aIed over the years.
and which have not been paid out as dividends. If the
Provisions - these are allowances for future expenses for number happens to be negative. the line item is retitled
which the company expects to become liable. Normal "accumulated losses".
provisions would include ·long service leave. taxation.
dividends. restructuring costs. Question anything that Outside equity interests - this is the part of shareholders'
looks unusual or particularly large. equity which belongs to someone else; ie the part which
does not belong to the shareholders of the reporting
The above is a brief summary of some of the more company. In fact., these interests .rep~ the minority
important assets and liabilities of a company. Assets less ownership of subsidiary companies ("controlled entities")
lli3bilities equal net assetS. These are owned by the which are not own~ 100% by the reporting company.
company's shareholders. You really do not have to understand the esoterics of the
calculation - only remember. that if you are a shareholder
The last part of the balance sheet reflects shareholder of the reporting company. you do not own this bit of the
ownerShip. and defines how that ownership has arisen. balance sheet The amount that you do own is totalled on
This falls llIlder the heading of shareholders' equity. the line entitled "shareholders' equity attnllutable to
Shareholders' equity always equals net assets - if it doesn't. members of the chief entity" (ie the reporting company).
the balance sheet won't balance.
STEPS
Issued capital - this represents the nominal, or "par",
value of contn"butions made by shareholders in subscnlling PROFIT AND LOSS
fat shares in the company. Shares may have been. issued to
shareholders for cash or. for example. under a dividend You must now leave the balance sheet and tum ·to the
reinvestment plan or bonus share plan. This line item :financial statement which possib.ly is the most important: of
simply shows the nun:iber of shares issued multiplied by all. but which rates the least disclosure. 1his is, of course,
their nominal or par value (often 50 cents). the profit and loss statement The law requires the
disclosure of compaIatively few elements of the. company's
Reserves - these can arise in a number of ways and it may profit and loss.
be important to. find out more about them. There are
essentially two types of reserves: The profit after tax "attnbutable to members of the chief
1. those that have arisen as a result of cash flowing into entity" only assumes meaning when compared with such .
the company. and things as: the company's issued capital (for earnings per
2. those which have arisen out of asset revaluations of one share calculations), the profits in preceding years, the
sort or another. profits of competitors. and the profit target Set by the
directors (which they are always reluctant to disclose to
One category is not necessarily "worth" more than another, shareholders).
though if an. or a majority. of the resexves are of a· non-
cash nature, you may '''-'all! to question the "quality" of However, it is useful to survey briefly those components of
those reserves. This would be the case, for example, if the the P+L which are disclosed. and which may be of
company had accumulated some large operating .losses. signi:£icance.
and shareholders' funds are positive only because of some
large asset revaluation reserves.

10
Abnormal and 'extraordinary items - abnormal items are has ac..-umulated to an amoWlt equal to the original COst of
simply items of revenue or expense which arc significantly tile asset, the asset is said to re'"written off". Depreciation
larger (or occasionally smaller) than usual. Extraordinary and amonisation are termed •non-<:ash charges" because
items. on th,e other hand, are large non-recurring items no current cash payments are involved.. TIris becomes
which result from transactions which do not form pan of significant when you consider the company's C3Sh flow
the company's normal activities. statement

When a company comments on comparative profit trends, Remuneration of auditors '" compared with tile company's
it normally eliminates abnormal and extraordinary items. tora.! expense, this item is hardly significant However,
Probably this is reasonable. But never forget that abnormal shareholders should compare the amount paid for audit
and extraordinary items affect the company's profit '. and work, with the amount paid for other services provided by
that belongs to you, the shareholder. It is of no comfort at the audit fum • such as IIl2Jlagemem and taxation
all for a shareholder to be told that, for example, the loss consultancy and share registry work. If non-audit services
was abnormal. A loss is a loss no matter how it is represent a large proportion of the total remuneration
desCIibed. reo:ived by the audit finn. you are entitled to question
whether the auditors can be completely ·independent"" and
Sales revenue,· normally a large and on its own a immune to pressure from the company's management
completely meaningless number. As with profit after tax,
sales revenue needs to be assessed in the context of other Remuneration of directors and exeart:ives • this. is a
things such as last years revenue or budget revenue. favourite question asked by shareholders at AGMs.
Disclosure of directors remuneration is of little use
Proceeds from the sale of Don-current :assets- in itse.l( however. in detemrining the overall health of th~
not very important However. if it is a laIge number it organisation. Examine the numbers closely if you want to
means that the directors are selling off a sigriificant part of feel particularly indignant and/or envious.
the company. If the reason is not explained 'in the
narrative part of the annual report, or if the explanation is Income taJ: e:xpense - this is possibly the most complex
uno:;atisfnetory, question the company. area of accounting in any major company. Do not even try
. to understand it Assume that the auditors have checked it
E:xchange gains and losses - large gains or large losses and that it is correct..
may mean 'that the directors are paying inadequate
attention to the company's treasury operations. It IruIy alSo However, what you should ask is the level of the unused
mean that they are deliberately specu.laring. Remember, it , tax paid "pool" out of which dividend :franking credits can
is just as' important to query a large gain as it is to query a be passed omo shareholders. This information is rarely
large loss. (A gain this year can easily turn into a loss next published in annual reports - it should be. It gives you an
year). It may mean that the directors have an inadequate indication of how long dividends will be fully franked, and
risk management policy - or, worse still, none at all. If in at what rate they will be franked.
doubt ask about it
The protitand loss statement also inCOIpOrates an analysis
Interest e.::pense - in the 1980s many companies collapsed of retained profits. and dividends' appropriated out of those
under the weight of interest expense, so this item must retained profits. In fact, the "operating profit after income
always come under close scrutiny. The absolute number tax attnbutable to members of the chief entity" (the year's
itself is not important. What is important is the "bottom line-, and thus the line you are most interested in)
relationship ofinterest expense to the Company's profits. Is is ,usually buried somewhere about the middle of the P+L.
the Company generating enough net income to cover the You have to search for it.
payment of interest, and then have plenty left over to pay
the shareholders a divideDd?You should pay particular .Dividends - the absolute value of dividends is not very
attention to this number (see interest cover ratio in STEP 'important What is important is their relationship to the
.:..
8) during periods when interest rates are increasing. number of issued shares (dividend per share), the profit for
the year (dividend cover), and cash flow for the year.
Bad and doubtful debts - a low number, of course, is
desirable. A high number is' probably the result of poor , STEP 6
credit control and should be queried..
CASH FLOW
Depreciation md amortisation - these are normally pretty
large numbers. They simply represent the diminution in One part of the annual report which seldom rates a
value of an asset over time. When depreciation of an asset mention in the :financial press is the' statement of cash

11
:iows. This is unfonunate, be::ause it is a most important STEP 7
:;uiremenL
NOTES TO THE FINANCIAL STATEMENTS
:n the :fin.a.l analysis a company's prosperity depends upon
:I3 ability to generate cash. In fact you can almost forget Before looking at general issues relating to the company's
:ill about the accounting complexities asso::iated with the performance and financial stability, you should assess the
jalance sheet and P+L, and just concentrate on the cash imponance of some of the notes to the financial
:ioW statement Conceptually, it is a very easy statement to statements.
:md::rstand.. It simply summarises cash which has flowed
::oro the organisation during the reporting. period, and that Accounting policies - these probably are incomprehensible
.mich has flowed out No accounting knowledge or to anyone other than experienced financial accountants.
5:Dancial analysis expertise is required - we all know what However, you should read them. and flag any indication
::zl1is. . that an accounting policy has changed from the previous
Year. If there is no indication of what the consequence of
::he statement is divided into three main sections. tms change has been on the current year's results, ask the.
company secretary.
- Net cash provided by op::rating activities - as the title
5U~oesIS this section summarises the cash generated Contingent liabilities - these represent commitments
from the conduct of the business.. It is closely related to which will only become liabilities upon the happening of
the profit of the company, though, of course, it is not some future event Guarantees are the most common
the same because the profit contrins a number of items contingencies. Look c3re:fuIly for any mention of a liability
which do not involve cash flows (eg depreciation, whiCh might arise out of an unfavourable decision in a
amortisation, provisions). It also takes account of cash pending court case. Shareholders should be given a clear
used or generated when working capital increases or indication of the risks involved..
decreases. It should always be a healthy positive
number. If it is negative, the company is in real trouble Controlled entities - this note detl.ils all the companies
and may be approaching banlauptcy - if it is not and businesses which have been consolidated into the
already there. reporting company's results. You should run your eye
down the column entitled "contn"bution to net profit", and
- Net cash from investing activities - this number is highlight any company whose contn"bution was a
usually negative - ie it reflects an outflow of funds to significant loss. The obvious question to ask the directors
acquire property, plant and equipment or other is why, and what are they doing about it? .
_ businesses. If the number is positive it means that the
company must have sold a large number of its non- Segment reporting - this provides a general indication of
current assets. A quick look at this line will probably· where the cOmpany has derived its income and where its
tell you whether the company is in expansion or assets are located.. This information is provided by type of
contraction mode. The directors' policy in this area business and geographic location.· If any of the segments
should be spelled out in the naIl'3:tive sections of the show a negative result, or comparatively. low return on
annual report If it is not, ask. the company sec:retaIy assets, you should ask the company for an explanation.
for an explanation. Wny, and what is being done about it? .

_ Net cash from financing activities - unfortunately this Related party transactions - providing all transactions
Section requires a bit of anal:ysis. It shows cash flowing are at armIs length, disclosures under this heading should
out for the payment of dividends and the repayment of have little direct impact on the profitability of the reporting
borrowings, and cash flowing in from the proceeds of company. However, too many transactions with, say, a
share issues and new borrowings. director or major shareholder of the company may prompt
questions relating to conflict of interest For example, is
'W'bat should really concern a shareholder most. is how the the director's first and predominate interest the company·of
.mectors have financed the company's activities Have net which he is a director, or is it to himself? Are transactions
:xrrrowings gone up, or have they gone down? If they have with a major shareholder mainly for the benefit of that
d=:reased it may have been the result of surplus cash shareholder, or for the benefit of the company?
E=nerated by the business, or it may have been the result of
zing the proceeds of a share issue. The answer lies in this Details of sbareholding - :find out whether anyone
;z:::tion of the cash flow statement The directors' policy on shareholder holds such a large sbareholding that he, in
fuIancing the company is important - you have to consider effect, controls the company. In itself, there is nothing
!Lin detail when you look at the company's gearing. wrong with this. But if there are many significant

12
tranSactions berween that major shareholder and the EPS is of most use in analysing the growth (or lack of it) of
company. the remaining shareholders should query profits earned on share capital issued to shareholders. It
whether these tr.msaaions are, in fact., in the best interests tells you whether the company's directors have been able to
ofthe company. and are, in fact, on an ann's length basis. maintain or increase the return on the capital subscribed bv
shareholders. It is the amount of profit which attaches t~
Directors' qualifiC2tions - not very much of significanex each ordinary share.
can be learnt from this disclosure. If the directors seem a
little old, an appropriate question would be - when is some Naturally enough shareholders like to see this increasinero
new blood going to be introduced? Also you should Steadily over the yean;. EPS is a much more meaningful
calculate the number of non-executive directors on the .way to look at a company's progress than just looking at
board, as compared with executive directors. There is no . the change in the dollar'profit number reponed .eaCh year.
right or wrong mix - although shareholders are entitled to It is great to see profits double- but this is of little
know the board's policy on the matter. That is a question comfort to shareholders ~ say, over the same period the
you should direct to the chairman. numbers of shares on issue have increased threefold. It
means that there are three times the number of shares, to
Having considered some of the individual elements of an share in only twiex the number of profits. ' Shareholder are,
annual report, you now have to decide what those elements in fact, worse off - and, in this example, earnings per share
mean collectively. To do this you must look at the would show a decline.
relativity of some of the elements - these are normally
known as mtios. A comparison ofEPS statistics over a periOd of time will
tell you very quickly whether profits have kept p30=. with
STEP 8 shares on issue. A decline in EPS may be the result of one
of two factors or a combination of them both; ie a fall in
RATIOS profits and/or an increase in shares.on issue. If you do not
like the look of the trend, ask what the directors
.
are dainer0
Ratios fall into two broad categories: about it
L those relating to the company's profit perl'ormance; and
2. those relating to the financial worth and stability of the Dividends per share (DPS) This is Closely related to
company. earning per share - a company cannot pay dividends unless
it has had earnings. Like EPS this number is usually
Ratios are an essential tool when analysing a company's reported in exnts per share, and is calculated by dividing
financial S".atements. By looking at various Iatios you are the ordinary dividend by the number of ordinary shares on
issue.
• able to compare the company with its competitors;
• compare trends in pelformance over time; and A decline in DPS could arise from either a decline in the
• make comparisons against appropriate benchma.r:ks. absolute dollar value of dividends paid, or an increase in
ordinary shares on issue - or, of course, a combination of
There are literally hundreds of ratios that can be both. Shareholders like to see a steady growth in this
calculated, and that may be of use in' analysing certain number - but not, of course. at the expense of the
parts of the business. You need only. be concerned with a company's future earning potential. If a company pays out
few.. all its profits by way of dividends. it has nothing left to
reinvest in the business. Abalanced approach is the safest
Earnings per share (EPS) This is one of the most
important measures ofa companis profitability. It is Dividend cnver This is sometimes des...'"I1"bed as the
calculated by dividing the "operating profit .after income dividend payout ratio. It tells you the extent to which
tax attributable to members of the chief entity" by the earnings per share exceed dividends per share - the
number of ordinary shares on issue. (There are various . reciprocal. of which is the amount of earnings retained in
nuances to the calculation, but in most cases this formula· the business. It can be expressed either, as the number of
will give you a reasonable result). It is usually expressed. times eai'nings per share exceed dividends per share (eg 2
in terms of exnts per share. Nowadays accounting times}, or as a percentage of EPS (eg 50%). If a
standards require companies to disclose this ratio, so you shareholder notes that an increasing proportion of profits is
do not have to calculate it yourself. Two numberS are being used to pay dividends, it may prompt a question io
reported - "basic· EPS and "diluted" EPS.Don't worry the board on how the company intends to :finance its future
about the subtle differences between the two - use the investment activities.
"basic" number as at the end of the financial year.

13
Interest cover This ratio was of particular importance J. If the .first two guidelines are followed, finan~..nz
during the exc::sses of the 1980s when some companies decisions are based largely on economics. If the rerur;;
were financing most of their investment activities with on an asset to be acquired is expeaed to be higher than
debt, and interest rates rose sharply. Inter-...sI expense the interest rate on borrowings, then it would be to
bealme such a burden that it abSorbed all of the company's shareholders' benefit if the company borrowed -
profits - leaving nothing over for the shareholders. (In providing, of course, that the company has taken steps
faCt, frequently profits did not even cover the interest bill, to lock in the interest :rate payable on the borrowings.
and the company's bankers. as well as its shareholders.
suffered). Shareholders should always find out the directors' petie:'
on financing the company. Remember, there are
You calculate this ratio by dividing the company's profit essentially three wtI'fS to :finance new investments:
(less interest expense) by interest expense. This formula is 1. our of retained profits (which may mean lower, or
not completely accurate, but it will give you an answer static, dividend payouts);
which is close enough. The answer you get reflects the 2. by issuing new shares (via a rights issue in whic.h all
number of times interest is covered. by profits out of which shareholders can participate, or an issue to selected
interest can be paid. As a shareholder you should become institutions only); and
a Iittle une3SY if this :ratio faIls below 2 - the dividend 3. by borrowing.
JYcrYout rate may be under threat. If interest cover shows a Of course. a combination of all three could be. and usually
declining trend over a number of years· you should be is. employed.
asking why.
STEP 9
Retnm on assets This is expressed as a percentage - pro:fit
before interest and tax. over total assets. If the result is When you have .finished, and have a list of queries, the
less, say. than the return oli bank deposits. then the time has arrived to find out what caUsed the variances. It is
company's directors are not managing the company's assets now time to read the directors' report, thechainnan's.
to the best advantage. You should think about changing statement, and the review of operations (and look at the
directors.. pretty pictures). You may also have to read note 1, which
in most companies' financial statements,. covers accounting
Debt to equity/gearing This important ratio reveals the policies
extent to which the company is :financed by its
shareholders (through the use of equity). and the extent to Your reading will now have a pw:pose - you will be
which it is financed by outside borrowUiis (debt). looking for answers to your questions. Remember. the .
company will always descnbe its performance in terms
The ratio is sometimes expressed as a percentage - ie debt . most favour.ilile to itself: Do not be fooled.
as a percentage of equity (eg 50%); .or sometimes as a
straight ratio (eg 0.5 : 1.0). The trend in the financial .If; after you have completed your reading, you still have
community seems to be more towards disclosure as a unanswered queries, then· put them direct to the company .
percentage. In m.ak:iIig the calcnlation you work out the· secretary or to the c::ompany's investor relations department
value of net debt (borrowings less cash on hand) as a (uit has one).
percentage of equity.
Remember. you own the company, and the company
There is .no "correct" gearing ratio. just as there is no secretary is an employee. He is paid to answer questions -
"correct- way to finance a company. However. all questions. whether they are intelligent or not so
shareholders should·feel more comfortable if the company's intelligent If you have a nUlIlb:r of questions it is
directors adopt financing guidelines along .the following probably better to write - in other cases a phone call. is
lines. quite in order.

1. Non-current assets are :financed by non-QII'I'ent debt or Yau now should' have some knowledge of what to look for
equity (or a combination of the two). Shareholders in an annual report. Your knowledge may be incomplete,
should become very worried if the directors are but at least you now know what questions to ask. Although
financing non-current assets with current debt. . a little knowledge may be a dangerous thing, no knowledge
2. Interest on the debt is well covered by profits - ie that. at all may be disastrous.
after paying the interest bill, there is plenty of profit left
over which can be used either to pay dividends or And never forget the golden rule - you own the company.
reinveSt in the business. and you have the right to ask as many questions as you
like. Happy hunting!

14
CHOICE OF FINft..aNCING ARRANGE:MENTS

SOURCES OF FUNDS

• SURPLUS CASH FLOWS

• EQUITY FUNDS

• DEBT FUNDS

DEBT FUNDING HAS BEEN INCREASINGLY USED

TYPES OF DEBT

• CORPORATE DEBT

• PROJECT DEBT

TYPES OF "PROJECT FINANCING"

• NON-RECOURSE TO SPONSORS

• RECOURSE TO SPONSORS

• COMPLETION GUARANTEE

• GUARANTEE BEYOND COMPLETION


CIVIL ENGINEERING ECONOMICS

Asse~ Purchasing

1. The management of the Sylvania Construction Company is considering


the purchase of a piece of equipment which costs $50,000. The
expected useful life of the equipment is three years.

The financial manager has suggested the alternative of leasing the


equipment from the Easi-Lease Company, which has offered a non-
cancellable lease with annual payments of $20,000 due at the-end of
each of the next three years.

For tax purposes the depreciation on the equipment is:

Year 1 $15,000
Year 2 $10,500
Year 3 $ 7,350

The equipment is expected to have a trade-in value of $10,000 in


three years' time. The company tax rate is SO cents in the dollar
and is payable in the year of income.

The cost of debt is 8 per cent/annum. The required rate of return


is 10 per cent per annum.

Which course of action would you recommend:

(a) equity financing;


(b) debt financing;
(c) leasing?
E 2448 - CIVIL MANAGEMENT & ECONOMICS
CLASS NOTES - ASSET PURCHASING

.Assume you are part of the private business sector, paying tax and having expense deductions against
any taxable income. Three basic ways of funding a purchase are equity financing; debt financing and
leasing. The cash flow will depend on whiCh of these funding options are chosen. For a given set of
variables we are interested in the least expensive alternative.

. Basic Method

1 Calculate cash flow before tax (CFBT)

2 Calculate expenses (including tax deductible items)

3 Calculate cash flow after tax (CFAT)

4 Calculate and compare net present value of each alternative

Note: Only the differences in expected future outcomes amongst alternatives are relevant to their
comparison and should be considered in the decision process. Sunk costs should be ignored.'

Sample Solution

(a) Equity Financing

C.FB.T

Income

r 10,000

Lo,ooo
E\:penditure

EXPENSESIDEDUCfIONS

Income

15,000 10,500 7,350 Depreciation

J \/7,150 BookAdjust.
Expenditure

Book Value Difference

Book Value =50,000 - (15,000 + 10,500 + 7,350) = 17,150


Trade In = 10,000

Loss Adjustment = 7,150


C.F.A.T (Tax Rate 50%)

Income

7,500 5,250

50,000
Expenditure

NET PRESENT VALUE = -(50,000 - 7,500 x 0.9091 - 5,250 x 0.8264 - 17,250 x 0.7513 )

= -$25,883

(b) Debt Financing

Capital Recovery Factor = . i (l + it ]


[ (1 + on - 1

Annual Repayment : CRF (8%, ~ X S50,OOO

=$19,402
Yearly Interest
YEAR INTEREST REDEMPTION RESIDUAL
1 4,000 15,402 34,598
2 2,768 16,634 17,964
3 1,438 17,964 0

C.F.B.T

Income

----!-1-9,-40-2--!-1-9,-40-2---1 ~~:~~~
Expenditure

EXPENSESIDEDU CIIONS

Income

4,000 2,768 1,438 Interest


15,000 10,500 7,350 Depreciation
7,150 Book Adjustment
\ \11

Expenditure
C.F~A....T (Tax Rate 50%)

Income

t 9,500 6,634

19,402 , 19,402 19,402


Expenditure

NET PRESENT VALUE = -(9,902 x 0.9091 + 12,764 x 0.8264 + 1,433 x 0.7513)


= -20,628

C.FA.T (Tax Rate 50%)

Income
~
10,000 I 10,000
~ 20,000 20,000
E"{penditure

UNIFORM SERIES PRESENT P =A (1 + it -1


WORTH FACTOR
i (1 + ON
10,·
NET PRESE1.~l VALUE =-(10,000 x UNIFORM SERIES (~, 3)
=-(10,000 X 2.487)
= -$24,870
"';,._~." •.:' ,,'0_.;"';: ~ , .. ~ ;, . !:.

",CCUIlACY iJO"/,
CONTINCENCY 30'/,
ENGINEERING Yz", t. 4-'/,

-.--- ._- i

ACCURACY ! 20 'I.
CONTINGENCY 20 'I.
ENGINEERING 5 'I. I. ltr/.

ACCUR ACY :! 15'/,


+ 30 cONmiGENCY 15 %
ENGINEERING 10'1. t. 'ZO'I.

DEFINITIVE ESllH"'T~
+20 ACCURACY "!:e'l.
CONJINCENCYS'I. - 101-
ENGINEERING 40'1, to 65'/.
z

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!10 0/. ENGI~EOEAING_4Iq cOMPTI¥~D 6,0
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DEFINITIVE CONTRACTORS-- ....


- 20 -'~I""
HAGNITUDE t ST/HATE ESTIMATE ESTIMATES
, ,/"UOY UTHATt
.../ /~.A.UTIHATE

-30 'f~-t--~

SUGGESTED GUIDELINES FOR


G ROUP CAPITAL EXPEND I TURE MANU/,L
The Risks

Many of the subject matters noted as pre-requisites to a financing are also those areas on
which lenders will focus in determining their view of the risks involved. This is not
surprising for, in a project financing, the object is to have the lender accept as much risk as
possible for as little added cost as possible. What are these risks?

• Reserves and production risk: Lender confidence that there are sufficient reserves
which. are capable of production at planned rates in order to meet the contract
obligations is essential. The quality of the exploration and testing work in the
preconstruction phase will be critical in satisfying lenders on these aspects.

• , Completion risk: Lenders face a risk that the project will not be completed at all or
will not be completed on time. It is therefore fairly common for lenders to require
SDonsors to guarantee that the project will be completed to a certain standard, after
which the sponsors' obligations· to the lenders cease. There are,' however, project
:fmancings where these guarantees have not been available and lenders have accepted

" ••. in a project imancing, the object is to have the lender accept as much risk as
possible for as little added cost as ·possible."

,
the completion risks. The factors they will consider in this regard are:

Is the technologv tried and tested, or is it new and perhaps risky?

Does the time schedule cater for all reasonable contingencies?

Concerning !!1fl!1-power and other resource availability, has the planning for
the various inputs been carried out adequately and are there any weak spots?
Are industrial problems likely? .

How good are the proiect managers. and are they experienced in the tasks to
be completed?

• Cost over-run: Allied to the completion risk is the risk as to whether there will be
sufficient funds available to meet any cost over-runs. In fact, lenders frequently
require project sponsors to arrange in advance an amount of money in excess of what
the sponsor says is required. This is particularly so when no completion guarantees
are given. for in this way the lender can be reasonably assured that at least funds will
be available for completion.

The role of the em!ineering profession is critical here in that their cost estimates from
the basis of the dialogue with the lenders. Unfortunately. lenders have many examples
to call on where costs have over-run estimates by margins of 50 percent to ·100
percent, or even more, and this hardens their attitude in the negotiations over project
:fmancing.
• Economic risk: DCY'..s the project have a sound return and will the cash flows be
sufficient to service the debt and ensure its repayment? Included in this risk is an
assessment of whether the project is an inherently "low cost" operation, which will
stand the vaf!aries and cycles of the real world, or whether it relies on historically
high nrices to sustain it.

• Other finance risks: Aspects such as the foreign currencv risks inherent in the
purchase of imported" "equipment, the drawdown and repayment of borrowed -foreign
money and of revenues and costs in the operating phase are all important It is
increasingly difficult in Australia to achieve a proper balance on exchange risk and

. "It is increasingly difficult in Australia to achieve a proper balance on exchange risk-••"

this factor is of concern to both sponsor and l~nder.

• Marketing risk: The lenders will be concerned to know whether there are contracts
for the sale of the output from the project, what the term of the contracts "is, and how
strong those contracts are. In the current economic climate, for example, lenders will.
pay particular attention to the protection afforded by the pricing formula and
escalation clauses, and force majeure provisions.

• Political risk: Governments have a record of changing the rules after the game has
started. Lenders should examine this possibility and perhaps seek separate
undertakings from governments. While these are rarely binding, they do provide some
comfort to lenders. Further, they also benefit the sponsors.

• Force majeure risks: Finally, lenders will assess the risks of factors which are
beyond the control of the"·sponsors and which could interfere with the project Such
factors include natural disasters. labour disDutation and technological advances.

Having assessed all of these risks, lenders will come to an overall view as to whether they
are prepared to lend to the project without recourse to the project sponsors or shareholders,
or whether they will want some added comfort. As already noted above in the section on
completion risk, lenders will frequently seek a completion guarantee, which implies that if the
project construction fails to be completed the guarantor must repay the debt to the lenders.
LECTURE NO. 6 RISK AND UNCERTA~NTY

A large electricity generation authority has just acquired a


recently constructed small hydroelectric plant. It seems
probably to the engineers of the authority that the spillway
capacity of 15,000 cu m/sec provided by the dam at the plant
was inadequate since, if a flow occurred that exceeded the
capacity of the spillway, the stream was likely to cut a
channel around the power plant. Rough estimates of the
necessary repairs if this should occur were:

Flood Flow in cu m/sec. Cost of Reoairs ($)

<15,000
15,000 17,000
°
50,000
17,000 19,000 150,000
19,000 21,000 300,000
21,000 23,000 350,000
>23,000 375,000

In order to determine what, if any, increase in spillway


capacity was justified the engineers also estimated the costs
of increasing the spillway capacity by various amounts. They
also estimated from the available records of stream flow the
probabilities of floods of various magnitudes, as follows:

Flood Flow Probabil i ty Cost of Enlarging


of a greater flood Spillway Capacity
occurring in any to provide for
one year this flood ($)

15,000 0.10 o
17,000 0.05 24,000
19,000 0.02 ·34,000
21,000 0.01 46,000
23,000 0.005 62,000·
25,000 0.002 81,000
27,000 0.001 104,000
31,000 0.0005 130,000

If investment charges ·are assumed as lOX p~~. and the economic


life of the spillway is 50 years (project life » 50 years),
what spillway capacity would you recommend?
EXAMPLE NO.6 - RISK AND UNCERTALVTY SOLUTION OUTLINE

A MINIMUM COST APPROACH

1 Probable long term average annual damage if nothing done

SAMPLE TABLE CALCULATIONS:

• Probability of flood flow between 15000 and 17000 ell mlsec.

= 0.10 - 0.05 = 0.05

• Probable average flood damage this flow

= $50,000 x 0.05 = $2,500

CALCULATING PROBABLE AVERAGE ANNUAL DAMAGE (EXPECTED VALUE)

Flow Prob Damage Prob Annual


Damage this Flow.
15 - 17,000 .05 50,000 2,500
17 - 19,000 .03 150,000 4,500
19 - 21,000 .01 300,000 3,000
21 - 23,000 .005 350,000 1,750
23 - 25,000 .003 375,000 1,125
25 - 27,000 .001 375,000 375·
27 - 31,000 .0005 375,000 187.5
> 31,000 .0005 375,000 187.5
13,625

E:'{pected long term average annual damage if nothing done 13,625

2 Expected Long term Total Average Cost (Construction andDamage)

SAMPLE TABLE CALCULATIONS:

• Expected average annual costs of a 17,000 eu m/sec spillway (say)

= 24,000 x CRF (10, 50)


= 24,000 x 0.100859
= 2,420
• Average annual avoided damage for a 21,000 ell m/see spillway (say)

= 2,500 + 4,500 + 3,000


= 10,000

CALCULATING AVERAGE LONG TERM EXPECfED COST FOR EACH SIZE SPILLWAY

Spillway Annual Cost Aver Annual Aver Annual Total Expected


Construction Avoided Damage Aver Annual
Damage Cost
13,625 13,625
15,000
17,000
0
2,420
°
2,500 11,125 13,545
19,000 3,430 7,000 6,625 10,055
21,000 4,640 10,000 3,625 8,265
23,000 6,250 11,750 1,875 8,125
25,000 8,170 12,875 750 8,920
27,000 10,500 13,250 375 10,875
31,000 13,120 13,437.5 187.5 13,307.5

Lowest expected average annual cost would come from construction of


23,000 Cll m/sec spillway.

B BENEFIT/COST APPROACH - MUTUALLY EXCLUSIVE CASE

.Spillway Increment Construction Cost Saving in Damage AB/AC


Increment Increment
(A Cost) (A Benefit)
15 - 17,000 2,420 2,500 1.03
17 - 19,000 1,010 4,500 4.45
19 - 21,000 1,210 3,000 2.48
21 - 23,000 1,610 1,750 1.09
23 - 25,000 1,920 1,125 0.59
23 - 27,000 4,250 1,500 0.35
23 - :31,000 6,870 1,687.5 0.25

Recommended capacity remains at 23,000 Cll m/sec