Causes and Strategies for Aggressive Customers

Causes and Strategies for Aggressive Customers INTRODUCTION Tourism and hotel industry is growing among other world industries due to its significant impacts on the social and economic development of a region or country (Avelini, 2003, p. 130). The tourism industry worldwide generated US $ 944 billion sales in 2008. In year 2008, international tourists arrivals reached 922 million and World Tourism Organization (WTO) forecasts that approximately 1.6 billion new arrivals of international tourists are expected worldwide in 2020. The tourism industry has fourth rank after fuels, chemicals and automotive products among other categories. These facts and figures shows that tourism industry is key industry in worlds economy because it gives employment both directly and indirectly and thousands of families are relying on the income of tourism industry (WTO 2009 Publications). Clearly in the hotel industry, customer service is the backbone to customer satisfaction which is depends on the employees. In other words, in the tourism industry, hotels and other accommodation are one of the most important organizations for providing services. That is why Chebat and Kollias, (2000, p. 67) argued that, customer service employees are the key players in molding customer experiences as they finally manage the manners in which the service transaction delivered and employees provide tangible services in the form of delivering food, helping customer into their particular rooms and also give intangible services in the form of making visit again to the hotel. Others also argued that Sperdin and Peters (2009, p. 171), customers want professional services and satisfying experiences with full of good performance. Because hotel industry shows that there is higher frequency of interaction with customers if we comparewith other service industries (Hoffman Chung, 1999, p. 73). More over according to Chen and Yu (2009, p. 8), service employees with knowledgeable and caring characteristics are able to influence the perceptions and thinking of the customers. Customer service has verbal and non-verbal behaviors between service provider and the customers (Clive Muir, 2008, p. 241).Effective customer service is attained through using these four areas: the services provided by service sector, the customer service employees hired by service companies, the customers served by service companies and the service managers hired by service companies; customer service could fail if there is any lack in one of these four areas (Layman, 2001, p. 80). However, a unique but distressing feature during the service role is that service companies are expected to face aggressive behavior from customers. For this reason Baron,(1993, p. 142) identified three levels of aggression linked to service employees. In first level, withholding cooperation, spreading rumors and using offensive language behaviors are shown from customer side, in second level, intense arguments and verbal threats are shown. Lastly in third level, frequent displays of intense anger, physical fights and the use of weapons kinds of behaviors are shown from customers side. In this paper, we pay attention to the first and the second levels of aggression as they are very common in the service arena of the hospitality industry. In addition, aggressive behavior could arise during service encounters especially when things are going wrong (Smith Bolton, 2002, p. 5). When customers got angry, most of them behave aggressively, say something bad and try to hurt an individual (Bougie et al., 2003, p. 379). The study of organizational behavior and psychology give remarkable attention to the study of anger and it is also important for managers to know under what circumstances, customer got aggressive and is important for optimum resource allocation, staff development and training (Kennedy et al., 2010, p. 2). Several service companies realize that they always face the high level of stress due to customer aggression. In explaining what the service employees can do towards aggression, Lemmink and Mattson, (1998, p. 506) developed research about friendly employees behavior with customer satisfaction. Their study showed that personal warmth by customer service employees leave positive impacts on aggressive customers. So it is argued that, service employees have significant impacts on aggressive customers to mold their aggressive, anger, noisy behavior into normal behavior and make loyal with the particular service company. Then again, all the reviewed articles clearly show that the most important part of delivering superior services includes: how to deal with customers who are frustrated or angry and must know how to turn the situation. In spite of the growing trend of handling aggression, several tools can be used to resolve the situation in a way that will leave the customer satisfied: 1. Keep a positive attitude. 2. Encourage customers to vent their emotions. 3. Find out the facts. 4. Understand the customers feelings. 5. Suggest a way to solve the problem. 6. End on a positive note. Of course taking these proper steps, give motivation to managers and their employees to calm angry customers and turned their behavior into satisfied customers which encourage customers to continue doing business with the department and company (Levine Debra, 1992, p.27). In this regard, specific term emotional labor is used in service marketing and management literature, which is the interaction of employees and customers, it focuses on front line employee when they interact with public and it requires to produce an emotional state for another person (Pugliesi, 1999, p. 128,131).Hochschild, (1983, p. 7) defined emotional labor in her book The Managed Heart that â€Å"the management of feeling to create a publicly observable facial and bodily display, emotional labor is sold for a wage and therefore has exchange value† (p. 7). This definition illustrates that emotional labor is the act of showing emotions in front of customers as a part of job. According to Karatepe,(2011, p. 280)research regarding customer aggression and its detrimental impacts on employee outcomes in front line service jobs is sparse. For this reason Chu and Murrmann, (2006, p. 1181-82) argued, it has been seen that there is little empirical research concerning emotional labor in service marketing and management literatures. In summary in consumer behavior dealing with aggressive customers is important to effectively manage aggression but this is not an easy task which means that customer while behaving aggressively; customer service employees need to mold the behavior of such customers through using emotional labor. In this regards, critical identification of aggressive customers and in response appropriate mechanism to mold their behavior should be put in place .This study will fill the gap by making some contribution on the existing literature through empirical and theoretical examinations. 1.2 RESEARCH QUESTIONS After formulation the research problem, following research questions have been found: * What are drivers of aggressive behavior? * How to handle aggressive customers and how to mold their aggressive behavior from the side of customer service employees? 1.3 PURPOSE OF THE STUDY The purpose of this thesis is to explore the behavior and pattern of aggressive customers reaction in the Hotel industry in Sweden. To accomplish our purpose, we are going to study different features of consumer behavior and customer voice for the success of the industry. Detail analyses of the approaches and reactions taken by customer employees at the hotel industry will be explored.In this paper we want to make contribution on the existing service marketing management specifically emotional labor literature. Finally, the outcome of our research may bring important implications for business practices in the hospitality industry. 2. Theoretical Frame work 2.1 Understanding the Customer wants The key to customer service is doing the right thing at the right time. According to Barcal, (2004, p. 10) here are the most important customer wants and needs which create positive customer perceptions about the customer service employees and the company that leads to better customer relationships. These customer wants are described below which customers expect to be done according to their wants. Customers always want their problems to be solved. But sometimes, if service employees cannot solve the customer problems, they can create positive perceptions through addressing the other less customer wants. Customer expects that their wants, needs, expectations, feeling, and words should be acknowledged and understood. It means service employees should listen to the customer. When customers feel understood and acknowledged it gives good impression to customers which lead to good customer relationships. Customers also want availability of possible choices and options that helps the customers to make the decisions. But when they feel helpless or powerless, they could exhibited frustrated, angry, and aggressive (Barcal, 2004, p. 10-11). Customers also want â€Å"positive surprise†. It means that service employees must go beyond customers hopes and expectations, like offering discount or providing some extra benefits which are not available to them before. Positive surprises are most useful when dealing with angry or aggressive customers. Consistency, reliability, and predictability are also important customer wants. This explains that customers are expecting to be treated in a consistent way. After acting accordance to these wants, customers feel sense of security and confidence with service employees and with company as well. This kind of behavior leads to loyalty. Beside customer wants value against their time and money investment. When customers consider value, they also consider how they are treated by customer service employees. It is very hard for service employees to affect the value of prices of services or products but they can add value through helping the customer in other ways (Barcal, 2004, p. 11 ). Reasonable simplicity is also an important customer want. It implies that service employees should make things easier instead of provision of complicatedservices; otherwise customers will be frustrated and aggressive. Speed and prompt service is the important want of customers which are expected from service employees. Customers want their problems be solved quickly and efficiently, as well as how fast they are being served. Confidentiality is an important aspect of customer service. Customers want some degree of privacy when talking with service employees and they feel uncomfortable if there is other staff or other customers around them. At the end, customers want the sense that they are important. Listening to and acknowledging customers demonstrate that they are important. The importance can be given through specific phrases and techniques through which they feel important. (Barcal, 2004, p. 11-12). Based on the arguments present above, all these customer wants need to be acknowledged by service employees, fulfilling customer wants make organizations attractive, otherwise leads to frustration/dissatisfaction which in some cases leads to aggressive behavior of customers. 2.2 Concept of aggressive behavior Customer aggressive behavior is relatively new area due to which its attraction is increasing from last decades areas, including social sociology (unethical behavior, lying and unethical decision making), organization behavior (e.g: dysfunctional employees behavior, fraud) and literature on criminology, taxation and insurance fraud have already been researching on aggressive behaviors for last many decades Fisk et al., (2010, p. 5) but research on customer aggressive behavior is mostly inspired by Lovelocks (1994) research work. As a result, it has been generally observed that aggression is common in businesses (fitness, 2000, p. 148). For this reason it is important to look at neighboring concepts linked to aggression that are developed and used by different scholars. Regarding aggressive customers, popular terms include â€Å"Jay customers† (Lovelock, 2001, p. 73), â€Å"deviant consumer behavior† (Moschis Cox, 1989, p. 732), â€Å"Aberrant consumer behavior† (Fullerton Punj, 1993, p. 570), â€Å"consumer misbehavior† (Fullerton Punj 1997a, p. 340), there are also less common terms including â€Å"problem customers† (Bitner el al., 1994, p.101), â€Å"dysfunctional customer behavior† (Harris Reynelds, 2003, p. 145) and â€Å"inappropriate behavior† (Strutton et al., 1994, p. 253). Of the popular terms, Christopher (1994), originated the term â€Å"Jay customers â€Å"and provided broad definition of the concept , Jay customers are defined as â€Å"ones who act in a thoughtless or abusive way, causing problems for the firm, its employees and other customers† (Lovelock, 2001, p. 73).These kind of customers  ´misbehave ´ bases for some kind of benefit and he also stated that these customers have following characteristics including labels thieves, breaking rules, the aggressive, criminals and dead beats (Lovelock, 1994, p.47). In viewing other important less common terms connected to aggression behavior of customers Harris Reynalds, (2003, p.145) defined dysfunctional customer behavior â€Å"Actions by customers who intentionally or unintentionally, overtly or conversely, act in a manner that, in some way, disrupts otherwise functional service encounters†. These norms are formed through customs, manners, rules and regulations, laws, and mores ´ (Moschis Cox, 1989, p. 732). In the service encounter context, norms are based on lodgers of role theory which states that humans behave dynamically but surely depending on their social identities and situations (Biddle, 1986, p. 68). In this context, customer behavior is considered to be deviant when it violates the accepted standards of exchange behavior (Fisk et al., 2009, p. 8). In addition , â€Å"Aberrant† also describing the customer behavior† behavior in the exchange setting which violates the generally accepted norms of conduct in such situations and which is therefore held in disrepute by marketers and most customers† Fullerton and Punj (1993, p. 570). Moreover they also stress that deviant behavior by consumers is the representation of overall customer behavior rather than signifying psychologically or physiologically type of behavior. But in later studies, Fullerton and Punj (1997a; 1997b; 1997c; 2004a) exchange the term ‘aberrant with ‘customer misbehavior. This term has been used widely within the customer misbehavior literature and various authors like Albers-Miller, 1999; Tonglet, 2002; and Freestone and Mitchell, 2004) have applied this term in their research works. One can easily understand that it is hard to provide a single comprehensive definition of the concept aggressive customers. However aggression can be looked as a situation in which customer behave out of rules and regulations, norms and customs of the company.Beside their action goes to the extent disturbing the routine day to day activity of the customer service employee at those particular moments. This could be because customers have been treated unfairly and unhappy with overall service of the company or unpleasant environment. 2.3 Causes of Aggressive Behavior Customers are playing significant role in organization. Due to the importance of customer, marketing and management researchers have keen to know the better understanding of the customer emotions especially the negative emotions which leads to customer aggression and created in customer employee interactions (Smith Bolton 2002, p.5). Furthermore, the interaction between employee and customer is routine work but when things go wrong with customer it shows negative emotions which normally leads to aggressive behavior. (Kennedy et al., 2010, p. 2). Several researchers have investigated the causes of aggressive customer behavior. There are various causes due to which aggressive behavior among customers is created. The traditional way of looking at aggression in service arena shows that customers misbehave up on service for example Deffenbacked et al.,(2001 p.718) described in such a way that aggressive behavior created due to the poor service provision from service employees and customers consider that they have been treated unfairly. At the general level, some other also looked at aggression from social psychology point of view, across service settings, customers experience fair or unfair situation of services for this reason experiences could be classified in to different categories of justices (i.e distributive, procedural and interactional justice)(Clemmer, E. C. 1993, p. 197). As a result Kennedy et al., (2010, p. 1) highlighted that customer is directly related to the perceived source of violation which includes (distributive, procedural and interactions justice). It means that anger on a company or organization is related to the violations of distributive justice but anger on an employee is related to the violations of both procedural (response time) and interactional justice. Secondly, they pinpointed that attributes of sins of omission (things could and should have been done by the employee) and low levels of interactional justice (treatment received) fully mediate anger that targets the employee. From another point of view Kennedy et al., (2010, p. 2) stated that , aggression also occur when required behavior violates an acceptable standard of behavior in the particular manner where the customer does not feel valued, respected or not treated with dignity during interaction with employees. In support of this idea,Mc Call-Kennedy and Spark (2003, p. 255) exploratory work showed that customer compare how they have been treated and how they should be treated during service failure and recovery attempts. Moreover when customer believe that they should be treated in acceptable standard but the service provide could not manage to do it , then at the end customers show negative emotions in term of aggressive behavior. Fullerton Punj (1993, p. 571) model suggests that there are two main important factors on which aggressive behavior is based on and can be seen in line with cause of aggression * Customer traits * Customer disposition Both of these characteristics include psychological, demographic and social/group influences due to which aggressive behavior occurs where psychological characteristics represent traits of personality, attitudes and moral development traits (Katz, 1988, p. 177). Fullerton Punj(1993, p. 571), also identifies wide range of demographic factors that affect aggressive behavior; these factors include age, sex, education and economic status. In contrast, a social influence contains a variety of group-level issues such as socialization, norm formation, and peer pressure (Moshcis Cox 1989, p. 732). However, this model also describes that there are also contextual factors due to which aggressive behavior occurs, these factors include the physical environment, the types of products/services offered and as well as the public image of the firm and most importantly, Fullerton and Punj (1993) said that aggressive behavior is more dependent on the interaction characteristics between customer service employees and customers. Therefore, at this stage it can be conclude that customer aggression emanates from provision of poor services; customer experiences of unfair situation in service setups and at the time the customer feel not valued, respected or treated properly. Customers would express their aggression in different ways. However, the most common type of aggression in service arena is supposed to be through verbal. 2.4 Verbal aggression As argued by Hutton R (2003, p. 2), verbal aggression is anger expressed vocally. It is a common behavior as it is rather easy expression of anger only words and sounds are involved. By looking at how problematic verbal aggression is, one should make a distinction between verbal aggression to oneself and to others. â€Å"Cursing at oneself, for example, is a possible reaction to ones own behavior when this behavior is considered negative and attributed to oneself†. While for an outsider this verbal aggression may still be interpreted as unfriendly and as an indication that the verbally aggressive person is easily irritated or bad tempered. (Smith, D et al 2004, p. 537). Customer verbal aggression, which refers to customers verbal communications of anger that violate employees social norms (Grandey et al., 2004 and Boyd, 2002; Grandey et al., 2007; Harris and Reynolds, 2003 cited in Karatape et al 2008 pp 713-714 ) such as swearing, yelling, threats, condescending remarks, and sarcasm. Hence, it would be reasonable to think that these types of aggression are followed by possible consequences which affect the employees and the organization as well as the customer. In this paper, we sought to emphasis on behaviors this type of aggressive behavior thatoccurs frequently, instead of extreme or rare situations. 2.5 Consequences of Aggression Customer dissatisfaction response following a service failure accompanied by s specific emotion like anger , disappointment, regret and worry influences consumer behavioral intension such as complaining, switching, spreading negative word of mouth and doing nothing (Mattila ,S and Ro ,H 2007 p. 90). Earlier research done focusing on the aggressive component of the relationship between customer and service employees have also identified that the extreme stress of aggression by customers results in service worker burnout from the side of service employees (ZureYagil, 2005, p. 83).This frequent hostility from customers creates non conducive working environment that customer service employees may want to avoid whenever possible (Grandey et al., 2004, p. 6). Moreover Yagil (2008, p. 146-147) supported this view by stating that regular contact to negative behavior customers results can be viewed from three different points i.e: negative emotional reaction, negative attitude towards work and physical harm on the employees. In explaining the consequences of aggressive customers up on the service setting understanding conceptual distinctions that has been provided by this scholar are very important: These concepts are also described below Emotional reaction customers having threatening and rude behavior affect mood of the employees and reaction of intimidation, feeling of anger and depression. Beside some others also feel high degree of stress due to customer aggression on the service providers. Work related attitudes and behaviors: employees lower job satisfaction accompanied by decreased organization commitment is potential consequence of customer aggression Physical harm: aggressive customer in some situation may goes to the extent of causing physical harm to employees. This happens to be the less frequent consequence of aggression in the in most service rendering organization. In general.by the same token customers aggression affects the organization due to the prevailing customer misbehavior in effect such behavior decreases employees commitment, loyalty and performance level towards their work. 2.6 Customer Service Employees 2.6.1 Myth of Good Customer Service for Customer Service Employees â€Å"The Customer is always right† Its a great slogan provided by H. Gordon Selfridge. But according to Barcal), 2004, p. 8), it is wrong and misleading. He said that customer is not always right because customers always demands unreasonable requests and expectations. It is very important for the customer service employees that they do not perform their day today activities under this assumption. Instead customer service employees should consider following two phrases. The customer always deserves to be treated as if he or she is important and his or her opinions need, and wants are important to listen. Of course, customer deserves to receive maximum effort from customer service employees who are serving him or her. Service companies not only need to focus on what they are providing to the customers but also how to provide products or services effectively which is the realistic excellent customer service (Barcal, 2004, p. 9). 2.6.2 Importance of Customer Service employees â€Å"People are your most important asset,† is wrong. The right people are your most important asset. (Jim Collins, 2001, p. 171).This is to show the importance of having diligent, motivated and service oriented employees in organization. According to LiverlockWirtz (2007, p.311), the most important demanding jobs are the front line positions in service firms. Employees are expected to be fast and efficient to do operational tasks, as well as become courteous and helpful in dealing with customers. In this context, the front line employees are the key input to deliver service excellence and become source competitive advantage especially in the hotel industry. 2.6.3 Relationship between Service Employees Behavior and Customer Satisfaction Many studies have tried to examine the relationship of service attitudes of employees with customer satisfaction in hotel industry. Trumble (2004, p.1) argued that according to norms of culture, smiling is a â€Å"mask exchanged out of politeness†. Researchers found different effects of smiles in business studies. According to Kattara et al., (1999, p. 321) human interaction is salient factor for determining customer satisfaction. When the customers are satisfied, they may be forgiving other problems. Hospitality industry majorly depends on the customers responses and the positive customer experiences. In hotel sector, superior services are dependent on employees and employees are the foundation of competitive advantage. They stated that actions of customer service employees are the foundation of service quality and customer satisfaction in hotel sector. Because customer service employees increase hotel image, actual and perceived service quality. They also found that hotel managers should focus on employee development through allocating resources. Chun Min Chu (2007, p. 1083) determined four factors of customer service employees behavior in his study with perspective to customer service employees behavior and customer satisfaction in hospitality industry: Friendliness Empathic feeling Enthusiastic service Problem solving He concluded that service companies must give more attention to front line employees with proper training and emotional support which is necessary for them to cope with the increasing demands of customer service 2.6.4 Service personnel; source of competitive advantage According to LiverlockWirtz (2007, p.311) from a customer ´s perspective, the encounter with service staff is the most important aspect of the service industry. From a firm ´s perspective, the service levels and how the service delivered is important source for creating competitive advantage through front line service personnel. Service employees are important with respect to customer and firm perspective because front line staff is: Is a core part of the product:Service employees are the most visible element of the service during delivering service and significantly responsible for quality of service. Is the service firm: From the customers perspective, a front line employee is the service firm. Is the brand:The service which provided by front line employees are the core part of the brand. 2.6.5 Characteristics of customer service employees According to LiverlockWirtz (2007, p.313) following are the important characteristics of customer service employees; 2.6.5.1 Boundary Spanning In every service company, customer service employees are boundary spanning. It means that they link the inside of the service organization to the outside world. In boundary spanning, customer contact employees focus on operational and marketing goals. Service employees perform triple roles, creating service quality, improving productivity, and making sales. This multiplicity of roles in service jobs creates role conflicts among service employees which must be identified by management of the organization to improve their performance. Sources of Conflict Service employees have three main causes in role stress: person/role, organization/client, and inter-client conflicts which can affect their performance towards customer satisfaction. Person/Role Conflict Service employees have conflicts between their job requirements and their own personality, self-perception, and beliefs. For example, service job require smiling with customers even with rude customers and they must show friendly behavior with rude customers. These factors create personal conflicts between service employees and management. Organization/Client Conflict Service employees face the dilemma in many cases when they should follow the company ´s rules or follow to satisfy the customer demands. This conflict is called two bosses dilemma. This dilemma arises due to exceptions in customer demands a sit violates the organizational rules. So in this case customer service employees faces conflicting customer needs and requests, as well as organizational rules, procedures and requirements. Inter client conflict This conflict is stressful and unpleasant because it is difficult to satisfy both sides; customer and organization. When service employees trying to satisfy the both sides during service delivery process, inter client conflict creates. 2.8 Emotional labor Emotional labor means that service organization are expecting to show emotions in front of customers. Customer service employees are expected to be cheerful and sincere with customers. Emotional labor occurs when there is a discrepancy between front line staff, way of behavior and the emotions that management requires them to show in front of customers. The main aspect in emotional labor is that services firms must know about the ongoing emotional stress among their employees and train employees how to deal with such stress and to cope with pressure arise from customers(Pugliesi, 1999, p. 126). More overemotional labor is the controlling of service employees behavior to show the suitable emotions (Chu, 2002. p. 1). Emotional labor is only used for workplaces but also uses every aspect of persons life. But we will discuss emotional labor according to service industry context. Emotional labor is relatively new term described byGuy, M. E. and Newman, (2004, p.289) that, â€Å"Emotional labor applies to both mens and womens work, but is the ‘softer emotions, those required in relational tasks, such as caring and nurturing, that disappear most often from job description, performance evaluations, and salary calculations†. It means that a person changes behaviors (emotions, verbal cues, body language) according to the suitable situation. According to Hochschild 1983, there are two types of emotional acting: * Surface acting * Deep acting * Surface Acting In surface acting people do acting and show emotions without feeling and realizing that emotion. This type of emotional labor is mostly used in workplace. Surface emotional labor involves changing the negative emotions such as anger, sadness, aggression into happier emotions such as happiness, care, excitement etc. * Deep acting While in deep acting, there are two different emotional actions are involved. In first emotional action, person show actual emotions what they feel. The second emotional action is true method acting, in which person use past emotional experiences to encourage real emotion which is not felt before (Hochschil

Is Torture a Necessary Evil Essay

14th September 2013 Torture is a necessary evil. After reading this article and evaluating both sides of the argument, my opinion remains the same. I disagree that torture is necessary; it is a barbaric breach of human rights. After looking at statistics, only 8% of Guantanamo detainees were Al Qaeda fighters, this is a shockingly low percentage in proportion to the 517 Guantanamo that were detained. British laws have deemed torture illegal and yet at least 6 detainees alleged that British forces were involved in the torture. Torturing cannot go on; the pros do not outweigh the cons of torture. In exceptional circumstances, lives may be saved, but at what cost? Where does it end, as stated in the article, will family members become torture victims? As the initial suspect may not have value for their own life, they turn to his/her loved ones? If a suspect has been detained, regardless of what their crime may be, they still have the right to remain silent. Any forced extraction of information goes against the fundamental human rights , and even if information is gained, what assurance do we have that it will be correct information? In the heat of the moment, it may seem that the information is true, to end the pain that the victim is in, yet it may all be fiction. These are clearly not risks worth taking, and in my opinion, anyone who is willing to submit a fellow human being to that amount of pain and discomfort, does not fill me with confidence in the fact that they are in a position of power. In recent news, countries like the UK or the USA are undecided whether to involve themselves in the business of Syria; they claim that involvement, in the sense of morals, is the right thing to do. Yet there is still a debate on whether torture should be legal, does one not contradict the other? It seems extremely hypocritical that on one hand, the armed forces have a sense of human rights in one way, yet on the other hand, claims that torture is necessary, which completely abolishes human rights in another way. In conclusion, regardless of the arguments in favour of torture, I still disagree that torture is a necessary evil; it dehumanises victims, stripping them of their human rights, regardless of whether they may be Al Qaeda fighters, they still ha ve the basic human right to remain silent during questioning, any way of obtaining information by forced means is morally wrong.

When To Do Financial Analysis Finance Essay - Free Essay Example

Sample details Pages: 23 Words: 6750 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Financial appraisal methods are seen to be those methods that are used to assess the feasibility of future projects, which is by assessing the value of its net cash flows that may result from its implementation. That is a financial appraisal method is done to see the investment results that may come up from the view of the organisation that is undertaking such an investment. Generally financial analysis are done in order to determine if it is will be profitable for that organisation which is about to undertake such a project. (Anon, 2010). 1.1 WHEN TO DO FINANCIAL ANALYSIS According to the African Development Foundation Training Module book (2009) a financial analysis is a standalone report that provides financial information about the financial viability and sustainability of a proposed project. Basically financial analyses are useful if the output of a proposed project could be sold in the market or could be valued at market prices. For privately owned organisations, financial analysis are carried out only on project they are interested in undertaking and also financial analysis on potential investment will be determined by the firms balance sheet and the impact it may have on it. For government and international agencies that sell output such as railway, electricity, telecommunication etc. They will undertake financial analysis on each project they are undertaking, to assess the impact of such projected projects on their budgets. For example, telecommunications operators which offer lower tariffs will need to examine the impact of such decis ions on their budget. These bodies regularly undertake financial analysis most especially when the financial analysis has some meaning and in most cases when the output of such investment can be sold. Don’t waste time! Our writers will create an original "When To Do Financial Analysis Finance Essay" essay for you Create order 1.2 WHY DO A FINANCIAL ANALYSIS One thing is almost certain about a financial (or any other) plan: it will not turn out to be 100% accurate. Thats because nobody can exactly predict the future, regardless of what process, information, tools, or models are used. Therefore you need to analyse your financial data to see whether you are on track, forecast your future expected results, and adapt your plans as a consequence of your analysis (Maquet, 2007) 1.2.1 Valuing project profit and cost in a financial analysis Financial benefits of any project are seen to be those revenues received from implementing a project, in this case if the project was about producing some goods and services for sale, the revenues received from such yearly sales will be the benefits derived from that project Financial costs can be said to be those financial cost of expenditures suffered by an executing agency or firm as a result of undertaken a project. These are cost sustained from the expenditures made to establish and operate a project. These may include the cost of acquiring a lands, equipment, vehicles as well as on-going operating costs for labour, fuel and utilities such as electricity. For a financial analysis, all of those receipt and expenditures will be valued as it will appear in the financial balance sheet of the project and also will be measured in the current market price. Since goods and services obtained for be at current market prices and output received from such implementation will be a current market prices, the financial costs and benefits of the project will be measured in these current market prices. Here markets prices generally refer to the prices in the local economy and may also include taxes, tariffs and commissions. 1.1.2 Real or Nominal Prices It is important to determine whether the inputs to be obtained and the outputs to be sold by the proposing firm or agency are valued at current market prices that is if at constant (real) or normal. Most importantly, it is necessary to ensure that the analyses are carried out in constant sets of price to ensure that the total value of the project calculated is a real figure. The use of constant prices may not be appropriate in most cases reason been when Drawing up project financing plans. In most cases, expenditures are normally estimated in nominal terms so as to ensure that these intended sources of finance will be enough to cover for all the projected costs. Where the investment is privately operated and will pay company tax. Due to the rate of inflation, depreciation allowances and the cost of holding stocks, financial analysis will need to be done in both nominal and real terms. 1.1.3 Internal Transport and Handling Costs It should be clear where inputs and outputs are to be priced in any project appraisal. Because net incremental benefit is of interest to the agent, project outputs should be valued at the current market priced at the project gate, meaning transportation price would be deducted from the general price received in the market place. Also the project inputs should be valued at their current market cost at the project gate and these prices will include transport and handling cost of getting them there. 1.1.4 Local and Foreign Costs There are instances where project appraisals divides costs, and every now and then benefits between locally incurred cost as well as foreign exchange costs and benefits. This typically arises when policy makers want to judge the impact of the project on balance payments or sometimes if foreign financing agents such as multinational banks wish to use the distribution of items appropriate for aid grants and loans. To single the cash flow into local and foreign prices and to also predict the future price of a project inputs and output, it will be important to make projections about future exchange rates. When local inflation is anticipated to be higher than the average for major trading partners, devaluation of the local currency could be projected, meaning increasing both the costs of imported inputs and the local currency value of exported outputs. If local inflation is anticipated to be lower than that of the countrys major trading partners, it is likely that the local currency will raise the value of over the life of the project. If appreciation is good, this will lower imported input prices as well as lower the local currency sales from exported outputs and can also reduce the international competition. This research aims at investigating the various financial appraisal methods used in the UK. It also investigates how beneficial it is for using such financial appraisal methods. The objectives of this research include Comparing and contrasting the financial appraisal methods used in the UK. The advantages and disadvantages of the financial appraisal methods used in the UK. Discussing the advantages of having a common approach to the financial appraisal techniques to organisations. 2.0 LITERATURE REVIEW To determine the financial feasibility of a project, a financial appraisal has to be made on it. For infrastructure for developments such as the construction of highways, power projects, etc, economic appraisal becomes a vital factor and financial appraisal takes the back seat. A project must be able to have a satisfactory return on income so as to cover for the opportunity cost forgone of capital generated. (Singh, 2012). 2.1 Introduction to financial appraisal methods and techniques Several authors have come with several categorisations of financial appraisal methods. According to Singh (2012) there are two methods of financial appraisal namely the non-discounting methods and the discounting methods. To him the non-discounting financial appraisal method comprises of the payback period and the accounting rate of returns while the discounting financial appraisal method is made up of the discounted cash flow or the net present value, cost benefit analysis, discounted payback period method and the internal rate of returns. Also Iman et al. (2008) also categorises financial appraisal methods also into two types, namely the sophisticated and the unsophisticated method. To them the sophisticated model is made up of the discounted cash flow model, dividend discounted flow model, and the economic value added (EVA) and the price/cash flow. The unsophisticated method is made up of the dividend yield, the price per earnings ratio,PE scaled by earning growth, price t o book value multiple, price to sales multiple, enterprise value to sales multiple and the enterprise value to book value multiple. Janakadisa (2008) categorises financial appraisal methods also into two groups, namely the traditional method which is made up of the payback model and the accounting rate of returns model which both of them do not take into account the time value of money into consideration and secondly the discounted cash flow method comprising of the net present value and the internal rate of return which takes into account the time value of money. 2.1.1 Common financial appraisal techniques used There are different kinds of financial appraisal methods and most generally, they are used for the purpose of knowing whether an investment generates value for shareholders or not. (Viswanathan, 2011) 2.1.1.2 Pay Back Period According to Singh (2012), the payback period of financial appraising is the simplest method to be used among all the other models. It is that period of time used to recover the initial cash outlay on a project, meaning the shorter the payback period the more attractive a project is. Ahamad and Chauhan (2011) also classifies the payback period as the simplest and most widely used financial appraisal method for apprising capital budgeting. To them this technique is built on the principle that every capital expenditure pays itself back within a certain period out of the additional earning generated from the capital assets. In spite of all this, the payback period method has been widely criticised. According to Baker and Powell (2005), the payback period basically ignores the timing of the cash flows within the payback period and failure to consider the time value of money understates the true payback period. This means that the payback period avoids the basic rule of finance i. e. a pound today is worth more than a pound a year later, because we turn to calculate the years where the total investment is recovered. In the true sense, it is only the principal which is covered; the portion of interest still needs to be covered. Ahamad and Chauhan (2011) also criticises the payback period with the same notion as not taking into account the time value of money and also not considering the magnitude and timing of cash flows. 2.1.1.3 Discounted cash flows According to Estate master (2011), the discounted cash flow method is one of the most widely used financial appraisal model in the world today. It is used in assessing investments, businesses, projects or any other sort of on-going task and investments that may generate income. Obviously this method of appraisal tells the investor how much the investment is worth in the present day terms. Swathern (2011) also explains the discounted cash flow model as a valuation method used to value an investment opportunity. This means that the discounted cash flow tells an investor how a company is worth today based on the all the cash that the company could make available to investors in the future. According to Vinish (2010) the discounted cash flow model is a simple tool to understand and apply as well as, it could be used by both equity shareholders because discounted cash flow on the basis can be used to compare two companies and take decisions on whether to invest in them or not, also t hey can be used by debt holders to take decisions regarding their companies. Also according to Jun (2008)one of the advantages of using the discounted cash flow model is that it entails the investor to think about the stock of his or her business and then analyse its cash flow rather than its earnings growth. In contrast to this advantages Vinish (2010) also suggested that since the discounted cash flow model is a dependent tool, which relies heavily on inputs used for the purpose of valuation, a slight change in these inputs can result in a huge change in the value of the company. Also Stearns (2008) also emphasized that the discounted cash flow model depends heavily on the assumptions for beta and market risk premium and therefore terminal value may be misleading due to incorrect estimations of either cash flows or terminal multiples. It is obvious that anyone using the discounted cash flow model should also use other methods of valuation along, in order to take right decisi ons concerning the investment in the company. 2.1.1.4 Net present value According to Singh (2012), this technique shows the summation of present values of all cash flows linked with a particular project. With this approach, future cash flows are discounted at a certain hurdle rate to arrive at their present value, meaning that a higher NPV shows a good proposal in case the initial investments are similar. This technique takes into consideration the time value of money and as a result of that earnings in past years would have value higher than those earnings earned in the future years. This technique again takes into consideration the inflows and outflows for the entire project including the terminal/salvage value. According to Singh (2012), Even though this technique turns to be very realistic, it turns to give a misleading depiction especially when two projects for comparison involve a widely different initial investment, this however means that a project with a higher initial investment will no normally show high net present value even thoug h return on income may be lower. Anon (2011) also suggested that this model thoroughly undervalues all investment projects. This is due to the strong hidden assumptions made that no decisions would be taken in the future after the investment decision has been made therefore this turn technique ignores the managerial flexibility that has been made. Managers are often known to undertake negative NPV projects in many cases because they are armed with the options of expansion, delay, abandonment and contracting (shrink) the project which has value. The NPV method has been successfully accepted and widely used by all mid-size and large size companies as a primary capital budgeting technique. Survey by Graham and Harvey (2001) shows that 75% of the CFO ¶s taken from a large random sample always or almost always use NPV as the preferred capital budgeting technique. They mainly attribute this to the CEO characteristics, the size of the firm and leverage. Another factor can be the availability of huge computing power and sophistication. 2.1.1.5 Discounted payback period According to Anon (2011), the discounted payback period that period of time required for an initial cash investment in a project to equal the discounted value of the discounted value of the expected cash inflows. This model is similar to that of the payback period model in that it looks at the length of time it takes a project to payback. The only difference between the two is the discounting of the cash flow in the discounted payback period, while cash flows are not discounted in the traditional payback period. Similar to this according to Manish (2012), a discounted payback period is actually the amount of years it would take to recover an initial investment in terms of the present value of that cash flow. Unlike the traditional payback period this model takes into account the time value of money which is an essential factor in making investment decisions. Similarly to this, according to Anon (2012), a discounted payback period also takes into account the time value of money a s well as the riskiness of a projects cash flow, through the cost of capital. In contract to this Pradhan (2012) addressed the key disadvantage of using the discounted payback model is that, it ignores all the flows that occur after the cut-off date, thus biasing this criterion towards short term projects and as a result, may discard projects with have positive net present values. Similarly to that Anon (2011) also criticises the model for ignoring cash flows beyond the discounted payback period. 2.1.1.6 Internal Rate of Return (IRR) According to Ozyasar (2012), an internal rate of return is basically the percentage return an investor expects to gather by investing in a particular project. According to Kumar 2010), an internal rate of return is a very good method of capital budgeting because it gives equal attention to cash flows which are not earlier or late and also there is no need of calculating cost of capital. Also Nayab (2010) talks about the simplicity of using this model and according to him since the model uses one single discount rate in evaluating every investment, making calculation and comparisons turn to be easy. In contrast to this, Victor (2012) talks about the poor assumptions that this model makes about discount rate or the cost of capital. Since markets conditions change from year to year so will this discount rate as well as the cost of capital will and financial analyst have no ways of exactly predicting this future rate. In support to this poor assumptions Nayab (2010) also talks about the unrealistic assumptions this model make s, that is when using this model one assumption has to be created, that is if we invest money on this model, after receiving profit we can easily reinvest our investment profit on the same model and also this model is not good for comparing two projects. In short this assumption is full of assumptions making it difficult to predict. 2.1.1.7 Accounting rate of returns According to Abeysinghe (2010) the accounting rate of return uses accounting information to measure the profitability of an investment. To him it is one of the simple tools to use and understand and also it can be calculated from the accounting data unlike other the models such as the NVP and the IRR and no adjustments are needed to arrive at cash flows of a project. Similar to that Paramasivan and Subramanian (2012) defines this model as the average rate of return or profit taken for considering a project evaluation and also supports the view that this model is easy in calculating and in understanding and also it is based on accounting information rather than that of cash inflows. In contrast to that Ayoub (2012) claim that this model ignores cash flows while calculating the profitability of investments. Ayoub (2012) defines cash flows as the inflow of cash into or out of a business transaction over a period of time. And this factor is of great importance when determining the r ate of returns of a project, business liquidity and also assessing the risks involved in financial transactions of a developing project so since the concept of cash flow is not considered, the profitability assessment may not be accurate. Similarly to that Pietersz (2012) also states that this model does not take into account the time value of money and is also not adjusted for non-cash items, meaning selecting any method for investments based on it is faulty. However this model is similar to that of the payback period particularly in its flaws, as it also does not take into account the time value of money. 2.1.1.8 Price per earnings ratio Jenkins (2012) explains the PE ratio as measuring the relationships between stock price and its earnings, or profit per share. To him the P/E ratio gives a clue to what the market is willing to pay for a companys earnings, meaning the higher the P/E ratio the more the market for the companys earnings and vice versa. Similarly to that Wilson (2012) talks about how the P/E ratio measures how highly valued a companys earnings are in the market that is by telling you how much an investor is prepared to pay for every  £1 of those earnings and secondly the number of years the investor will have to wait to get back his investment through current earnings. But in spite all this according to Warren Buffet in a sentence I his 2000 annual report for his holding company Berkshire Hathaway. Warren Buffett wrote Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. 2.2 Financial appraisal methods used in the UK Knowing the Financial appraisal methods used in the UK is very important because the methods used can have a great effect on the level and nature of capital investment and the international competitiveness on the UK. Drury and Tayles (1997) examined the financial appraisal used in the UK, through the use of questionnaire. A distinctive feature of this survey was that the sample included responses from a wide range of organizations of different size. Even though previous studies suggested that payback was the most widely used method a different picture emerged from this survey when the replies were analysed by size. As in how often or always a particular technique was used, DCF technique was used far more extensively by the larger organizations whereas a small number of the smaller organizations often or always used either net present value (NPV) or internal rate of return (IRR) discounting method. The reason why NPV and the IRR were lesser used by this smaller organisation s could be due to the fact NPV and IRR are more sophisticated and it is a more rather complicated way of evaluating potential investment because choosing the right discount rate to use to calculate NPV is difficult, that is this discount rate needs to take into account the riskiness of an investment project which should at least match your cost of capital. Bu the most important thing you can talk about this discounted rates is that it takes into account the time value of money that is the fact that money you expect sooner is worth more to you than money you expect further in the future. Dimon and Marsh (1994) expressed concerns on how most UK companies were using excessive high discount rate to appraise investment and as a result were in danger of underinvesting. They further suggested that with the use of conservative cash flow, combined with incorrect treatment of inflation and excessive discount rates, many UK organisations were rejecting profitability investment, and ther efore suggested that discounted cash flow procedures should be abandoned or given little weight in the long term investment decision but recommend that this discounted cash flows used by divisions in an organisation should be established by their corporate headquarters. In disagreement with Dimon and Marsh (1994), these DCF procedures should not be totally ignored or downgraded in importance just because they might be used incorrectly. Instead, decision makers should identify the potential problems associated with this procedures and carefully ensure that the financial appraisal is performed correctly. In support to this notion that discounted cash flows to be used in divisions in the organisations, should be established by their corporate headquarters, this process will reduce the tendency for divisional managers to overstate risk (and therefore discount rates) by focusing narrowly on a projects total risk, Corporate management will then have to adopt a portfolio approach and recognize that project risk is lower because risk is spread across many projects. On the other hand corporate headquarters can also adjust their discount rates from nominal to real rates and then train divisions to apply these rates to cash flows expressed in real terms. Then again this assumption is not really recommendable because all cash flows are unlikely to increase at the general rate of inflation. In these situations real cash flows are derived by bending current cash flows by the specific rate of inflation and then deflating them using the general inflation rate. Here again this approach is more confusing rather than simply expressing cash flows in nominal terms and using a nominal discount rate. 2.3 Financial appraisal methods used in the UK public sector According to HM Treasury (2003) The UK Government is committed to the continuing improvement in the delivery of the public services. A major part of this commitment is to ensuring that public funds are spent on activities that provide the greatest benefits to society at large and that they are spent in the most efficient way as possible also. For this implementations to work properly, discount rates are used to convert all costs and benefits to present values, so that they can be compared and calculating the present value of the differences between the streams of costs on projects and the benefits derived, offers the net present value (NPV) of an option. This therefore offers the NPV as a primary measure for determining whether government action can be justified or not, because this measure (NPV) takes into full account the risks which would be encountered by that style of procurement and the difference between the present value of a stream of costs and a stream of benefits even though the NPV undervalues all investment projects. This is due to the strong hidden assumptions made that no decisions would be taken in the future after the investment decision has been made. 2.4 Financial appraisal methods used in some UK sectors Various financial appraisal techniques are been used by different financial analyst sometimes depending on the size and nature of the organisation 2.4.1 Financial appraisal methods used in some UK manufacturing industries Investment in manufacturing is important in order to speed up the UK economic recovery, quality of life and national economic standing. Wilkes, Samuels, and Greenfield (1996) examined the financial appraisal methods used in the UK between 1989-1994 as to how they were frequently used by managers.Questionares were sent to managing directors of 500 largest manufacturing companies in the UK. The study found that nearly six out of ten firms used three or four methods, with the most popular three methods being the payback, yield and the NPV. Although these three methods were widely used, payback was most considered by most firms because it showed a small but unmistakable increase in usage for them. Inspite of all that, the length of the payback period is a concern because the shorter the required payback period, the more likely its bias against longer-term investments. Demirakos, Strong, and Walker (2004) developed a positive approach for the valuation practices of financial analysts, this was done by studying the valuation methodologies contained in 104 analysts reports from international investment banks for 26 large U.K.-listed companies drawn from the beverages, electronics, and Pharmaceuticals sectors. From their report they discovered that analysts normally choose either a PE model or a DCF valuation model as their dominant valuation model, with the PE model being the most generally used form of valuation. Some of the good thing that was said about this model was its simplicity, this is because this PE model yielded a good first approximation for industries that had a fairly uniform and stable growth, also it was simple to use by industries that had costs of capital, accounting methods and capital structures that were comparable across companies and also easy for industries that had transitory earnings items that could be identified and excluded from their analysis, via versa. 2.4.2 Financial appraisal methods used in the UK retail sector Cowton and Pilz (2006) reports a survey of the capital budgeting practices of UK retailers, concentrating particular in the financial techniques used to appraise proposed investment projects. Even though no previous surveys had concentrated on retailing, there were where disaggregated results had been reported, there has been a suggestion that the retail sector had lagged behind other sectors in its use of relatively sophisticated appraisal techniques that take into account the time value of money. The findings of their survey suggested that the retailing sector is was now similar to the other sectors, with both the sophisticated discounted cash flow techniques and the naive payback being popularly used by analyst which in the case did not take the time value of money into consideration. 2.4.3 Financial appraisal methods used in the UK housing sector Treanor (2004) in his paper takes a general look at the appraisal process, and the assumptions it required. From his paper, in the private rented sector, the most commonly used method of judging the viability of a housing project was the yield which is simply the rental income expressed as a percentage of the capital investment required. The yield was most commonly used in considering the feasibility of commercial premises within a development, such as shops or doctors surgeries. Although this method turn to be a very rough measure, it can be applied across a wide range of property sectors including residential lettings, offices, shops, factories or almost any type of investment. Also other British associations use the net yield as a rough measure of viability, that is it is calculated as the net rent income in the first year and expressed as a percentage of the finance required. Although slightly better than the yield, the net yield is only based on one years performance, an d ignores longer term fluctuations in operating costs. Also there are a number of feasibility criteria that uses discounted cash flow in which a discount factor takes account of the costs of carrying debt. Then again this will depend on the judgment of interest rates over the year period, for this reason the discount factor is considered because, discount factors reflect the market view of average interest rates for the housing sector over the period of investment, plus a margin for risk. In this case there is no clear distinction as to which financial appraisal works better in the housing sector 2.4.4 Financial appraisal methods used in the UK IT service Milis, Snoeck and Haesen (2009) looked at the investment appraisal techniques for calculating the business value of IS services in the UK.From their report it was noted that that the feasibility study of capital investments in todays companies and organizations were mainly based on financial cost-benefit analysis, conducted using traditional capital investment-appraisal techniques (CIAT). From their research it was realised that the most commonly used appraisals for ICT were the payback period (PP) and the Accounting Rate of Return/Return on Investment (ARR/ROI). Techniques such as the Internal Rate of Return (IRR) and Net Present Value (NPV) which are perceived as being more difficult were used to a lesser extent. Fig 1 The use of capital investment appraisal techniques ICT investments 1990s ICT investments 2000s techniques BallantineStray 1998, UK (%) Richardson, CSI survey 2004 Richardson, CSI survey 2008 PP 60 ROI 43 55 39 IRR 54 28 17 NVP 49 25 21 Source: Adapted from Ballantine Stray, 1998 and, Richardson, 2004 2008 Fig 1 shows a decline use of the payback period considered as a CIAT for the appraisal of IT projects. This can be due to the fact that projects are judged on the period needed to compensate the initial investmen,t that is projects with fast payback are favoured. As a result, companies using the PP technique will tend to accept too many short-lived projects and reject too many long-lived ones. In a services environment this means that the selection of services that deliver quick results are favoured. The gains generated by reuse are ignored if they are realized after the initial investment is compensated. As such, one of the fundamentals of service architecture and the reuse of services is not fully acco unted for. Furthermore, the inability to incorporate risk into the appraisal and the ignorance of the time value of money make this technique inappropriate for the evaluation of IT projects. PP may be an adequate rule of thumb, but, considering the shortcomings, major investment decisions should not be based solely on the results of PP calculations. The Accounting Rate of Return (ARR)/Return on Investment (ROI) which shows the ratio between the annual gains and the amount of money investment turn to be more satisfactory than the PP because the total lifecycle of the investment is taken into account. Nevertheless, as with the PP, the time value of money is not taken into consideration. Also Risk can be entered into the appraisal to a certain extent by adjusting the hurdle by which the IS services are judged, but this is not useful when dealing with mutually exclusive projects (selecting between similar services offered by two different developers for example). The Internal R ate of Return (IRR) corresponds to the rate for which the present value of the investments money in-flows are equal to the present value of the money out-flows. Unlike the previously mentioned techniques, Internal Rate of Return (IRR) takes the time value of money into consideration by introducing a discount factor. This is a major improvement and makes this technique more useful. But then again, the results of IRR are a percentage making it difficult to compare services that differ substantially in size and outcome. The Net Present Value (NPV) technique calculates the present value of the investments money flows, using a discount rate. In contrast to IRR, different rates can be used to reflect the risk-levels of mutual exclusive investments. Therefore I consider the NPV model as a suitable approach for appraising ICT 2.5 Advantages of having a common financial appraisal technique to the organisation. According to Ajitayadav (2010) In any project analysis, the cost and benefits of that project that received in future period are discounted or deflated by some factor in order to reflect their lower value to the individual or society than the current available income. The factor used to discount future cost and benefit is what is known as the discounted rate and its usually expressed as a percentage. 3.0 Methodology As research methodology is a plan and structures an aim or a problem on which research is relaying, so those different methods are applied to get answers of desired questions. Methodology is seen as the theory of how your research should be undertaken, including the theoretical and philosophical assumptions upon which the research is based on and the implications of these method or methods adopted.(Saunder et al 2007) Research methodology is the overall process guiding an entire project. The main aim of this research is to investigate the various financial appraisal methods used in the UK.I will therefore compare and contrast the various financial appraisal used in the UK.I will find out the advantages and disadvantages of this financial appraisal methods used and will find out the advantages of having a common approach to organisations. 3.1 Research Process The research process that will be applied in this research will be the research onion in order to ensure that I get all the needed data necessary to accomplish my objectives. This is because in conducting a research is like peeling the back of onion layers, in order to come to the core issue of how to collect the necessary data needed to answer your research question and objective, important layers should be first peeled away. With this said process, I will be able to create an outline on what measures are the most appropriate to be applied in my study. The diagram below is an adaptable from Saunders et al (2007) of the research process onion, which carefully introduces the theories of every step of methodology. There are 5 steps in the research onion namely the philosophies, approaches, strategies, choices and the time horizon. My research process will be conducted according to these stages. The first layers raises questions of the research philosophies to adopt, the second con siders the subject of research approach that flows from the research philosophy, the third layer examines the research strategy applicable for the reserach, the fourth layer is the data collection methods to be used and the fifth layer is the time horizon the researcher applies to his research https://htmlimg2.scribdassets.com/9sg7dqfxj418o2dc/images/1-ef12b198f6.jpg Fig 2 Source: Mark Saunders, Philip Lewis and Adrian Thorrnhill 2006 3.2 Research philosophies All researches are based on assumptions about how the world is perceived and how we can best come to understand it and these assumptions are established on research philosophies. These assumptions will support the research strategy and the methods choosen as a part of that strategy. According to Saunders,et al(2007), research philosophy is overarching term relating to the development of knowledge and the nature of that knowledge in relation to research For the purpose of my research the research philosophy adopted will be interpretivism 3.2.1 Interpretivism This is an epistemology that supports that it is necessary for the researcher to understand the differences between humans in our role as social actors. This emphasises the difference between conducting research among people rather than objects such as machines. The term social actor is different here in the sense that, here we interpret our roles in accordance with the meaning we give to these roles. In addition we interpret the social roles in accordance with our own set of meanings. The heritage of this strand of interpretivism comes from two intellectual traditions namely phenomenology and symbolic interaction. Phenomenology refers to the way in which we as humans beings make sense of the world where as the symbolic interactionism is seen as are a continual process of interpreting the social world around us, as a result of also interpreting the actions of others with whom we interact and with this interpretation leading to adjustment of our own meaning and actions. (Saund ers Et al, 2007). 3.3 Research approach A research approach refers to the approach or the methodology that has been adopted to conduct the research. It basically involves the selection of research questions, the conceptual framework that has to be adopted, the selection of appropriate research method such as primary research, secondary research etc. (Blurtit.com) .Research can be distinguished as belonging one or two models,such as a deductive approach or an inductive approach. Deductive approach is one in which the theory and hypothesis (or hypotheses) are formulated, and then a research strategy is planned to test these hypothesis. With The inductive approach, data is gathered and then the theory is developed as an outcome of the analysis (Saunders et al 2007) My research will be carried out through the inductive approach in which I will collect data from various resources (review literature) and then develop a theory as a result of the data analysis because to induce something I believe is to draw a conclusion f rom one or more particular or pieces of evidence. 3.4 Research Design 3.4.1 Purpose of the research For the purpose of this research an exploratory study would be carried out as a valuable means of finding out the various financial appraisal methods used in the UK, its advantages and disadvantages and find out the importance of having a common approach to organisations. The main advantages of this of this approach is its flexibility and adaptability to changes, that is when using exploratory research, I will be able to change direction as and when a new data comes in or any insight that may occur to me, Adams and Schvaneveldt (1991) reinforce this point by arguing that the flexibility characteristic of the exploratory research does not mean absence of direction to the enquiry. What it does mean is that the focus is initially broad and becomes progressively narrower as the research progresses 3.4.2 Research strategy Archival research makes use of administrative records and documents as the principal source of data. Archival research strategy allows the research allows research questions to be answered, be it exploratory, descriptive or explanatory. Using archival research strategy therefore necessitates that you establish what data are available and designing your research to make the most out of it. 3.4.3 Research Choice (Method) The way in which a researcher chooses to combine the qualitative and quantitative techniques and procedures for a research can be said to be a research choice. Research choice is categoried into two types namely mono and multiple method.Mono type method is that type in which we use a single data collection technique and corresponding analysis procedure, whereas multiple method is that method in which more than one type of data collection technique and procedure are used. In business research, mostly multiple methods are used for the combination of quantitative and qualitative techniques and procedures as well as for primary and secondary data.Saunders et al (2007) For the purpose of my research qualitative method will be used, as my data is qualitative so will I analysis it by using qualitative procedure. 3.4.4 Time horizon There are generally two time horizons for the research strategy. We have the cross sectional, in which the study of a particular phenomenon (or phenomena) is conducted at a particular period. And the other is longitudinal studies which is, as stated by Saunders et al (2009), a series of snap shots and also said to be a diary that involves repeated observation of the same item over a long period of time often many decades. For the purpose of my research project and in accordance to specific time period, I will consider cross sectional studies in which I will take a snapshot of investigating the financial appraisal methods used in the UK

Purchasing a Home During a Financial Crisis - 825 Words

During this financial crisis various economic models on interest and inflation rates would be see buy a home as highly irrational, even for consumers who are wealthy. Despite its irrationality many people are still in purchasing or thinking of purchasing a home, and in order for economist to understand this economic action they must take into account the sociological aspects behind it as well. This is due to the idea of purchasing a house being more complex than the economic surface that is seen. There are many other more deeply embedded (and reliable) explanations as to why, especially in a time of total financial crisis, would anyone even explore the thought of purchasing a home. In the field of economical sociology there is a theory†¦show more content†¦This type of cognition is a more intimate type that looks at the environment of the individual and their own experiences in which they base their decision-making. In order to fully understand and interpret the decision-mak ing of an individual purchasing a home, we must take into account the alternative meanings that purchasing a home has. If there were someone who has lived in all other places except an actual house (apartment, hotels or the street), the idea of buy a home would represent a feeling of success and deliverance. Furthermore, associating the purchasing of a home with these two distinct strong feelings becomes so deeply embedded into the individual’s psyche that a borderline catastrophic decline in the real estate market would not come close to thwarting their decision to buy a home. This theory could successfully explain why professional athletes who came from modest backgrounds, purchases a home for either their mother (athletes from these modest backgrounds typically grew up in single-parent households) or family with their first big paycheck. This is done so often because buying a home is not only a great way to show mom you appreciate her, but it is also a representation of â €Å"making it† to the individual who grew up with â€Å"nothing†. Cognitive sociology is often described as the â€Å"middle-ground† of cognitive theory, it explores and implies the previous types of cognition and putsShow MoreRelatedThe Global Financial Crisis 0f 20081181 Words   |  5 Pages The Global Financial Crisis of 2008-2008: The Role of Greed, Fear, and Oligarchs The global financial crisis of 2008-2009 is considered to be worst financial crisis since the Great Depression of the 1930s. Large financial institutions collapsed, banks received bailouts by the government, and stock markets plummeted as well. In result, people were being denied loans. 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What is a housing bubble? A housing bubble is defined as â€Å"a temporary condition caused by unjustified speculation in the housing market that leads to a rapid increase in real estate prices† (businessdictionary.com 2014). When the bubble bursts, the result is a quick decline in home prices (businessdictionaryRead MoreLending Money For A Home1151 Words   |  5 PagesBefore 2007 borrowing money for a home used to be extremely easy because loans were very easy to obtain from banks regardless of debt. Housing prices continued to increase because money was quickly accessible from banks. Too much money was too readily available. Every part of this financial lending fiasco culminated to a jarring decline from 2007-2008. At that time America suffered a financial crisis that some economists parallel to the Great Depression. Banks were unable to loan, the Stock MarketRead MoreHow to Solve the Foreclosure Crisis1218 Words   |  5 PagesHow to Solve the Foreclosure Crisis The foreclosure crisis in our country has implemented a domino effect that may take years before we note any positive changes. As the country begins to heal, an effective process and/or program must be implemented that will reduce or eliminate foreclosures. It is important to remember that purchasing and maintaining a home is a part of the â€Å"American Dream,† and when working class families cannot seem to manage without loss of pride and dignity, then the dreamRead MoreU.s. Government s Trade Defense Measure1194 Words   |  5 Pagestrade policy stances to respond the financial crisis in different stages. The reason to explain why the U.S. changed its stance to less protectionism after 2010 is trade defense measure could help the U.S. enterprises to survive during financial crisis, to avoid massive unemployment in labor market. The cost of implementing such policy is to sacrifice the benefits of household sectors. Over a period of time, household sector will gradually los e the purchasing power due the price rises up. ThereforeRead MoreWhy Buyers Should Not Consider Purchasing A Home1005 Words   |  5 PagesAfter increasing my own financial awareness and witnessing the financial journeys of others during the past recession, I find that boomerang buyers should not consider purchasing a home as their sole financial investment. Mortgages with ballooning payments mixed with hopes of future refinancing are a dangerous combination. These factors precipitated the last housing bubble and the eventual recession period. In order to learn from past behavior, home buyers should ensure that they habitually saveRead MoreSolving the Foreclosure Crisis- Decrease Interest Rates, Create Jobs, Financial Education and Stimulus Programs1098 Words   |  5 Pageseconomy. The foreclosure of homes has decreased the state of the economy, and rendered millions of Americans homeless. There are four key solutions that will stop foreclosures in the United States and able mill ions of American to keep their homes. The first solution is having banks lower their interest rates for all citizens who are in financial need of an interest rate deduction. The second solution is creating jobs that are able to sustain through an economic crisis. The third solution is for statesRead MoreThe Success Of The Great Recession1375 Words   |  6 Pages2010 is often regarded as the greatest economic crisis since the Great Depression which took place during the 1930s. The causes of both crises can be said to be similar as both lie in the actions of the federal government. While the crash of the stock market in 1929 is said to be one of the major causes and sometimes even the main cause of the Great Depression, there are also other circumstances that led to this economic crisis. Bank failures during the 1930s also added to decline in the economy.Read MoreRenting A House On The World Of Home Ownership843 Words   |  4 PagesBuying a home is unlike any other purchase in a c onsumer’s life. The investment is a major decision, both for an individual’s future and their finances, and gathering the courage to make it is challenging under any circumstances--much less after an extreme financial crisis. But there are many viable solutions to the challenges that â€Å"boomerang buyers† are facing today, including (but not limited to) the option of renting-to-own. These strategies enable people who were once â€Å"foreclosure victims† to