PERCEIVED ENVIRONMENTAL UNCERTAINTY: DISCUSSIONS AND CONCLUSIONS

Posted by Kathryn Schwartz on January 30, 2014
Risk Analysis

The purpose of the models was to discover the influence of the perceived environmental uncertainty and perceived company performance on the extent of use of risk analysis techniques in automotive companies. Using the multivariate statistical tool PLS-PM, the study identified the key influences and their relative role on risk analysis in SIDs. Note that, two of the two paths in the research model were found to be significant. The discussion part begins with the extent of use of risk analysis techniques in SIDs. The most often used method is sensitivity analysis followed by probability analysis. An increase in the usage of risk analysis techniques is due to the availability of software packages containing risk analysis tools which assist in making SIDs (Pike, 1996; and Manoj, 2002). The use of multiple techniques is consistent with idea of Miller and Waller (2003) that multiple techniques are used to display management responsiveness to different aspects of the investment decisions.

Table 5: Results of t-Test for Equality of Means
table5Perceived Environmental Uncertainty-7

Perceived Environmental Uncertainty

Contingency theory has played an important role in capital budgeting literature for the past three decades. This study seeks to examine whether one among the contingency variables namely perceived environmental uncertainty influences the extent of use of risk analysis techniques in SIDs or not. Findings of this study support the view that perceived environmental uncertainty influences the extent of use of risk analysis techniques in SIDs. This finding is also in conformity with Ho and Pike’s (1998); Verbeeten (2006) findings. However, it is in quite contrast to Shimin Chin’s (1995) findings. Similarity and contrast in findings of the study are due to the items considered to measure the perceived environmental uncertainty and the operating environment and organisational climate. If a company operates its business in a predictable environment, then the DMs perceive the risk to be at lower level, and this leads to low level of the use of risk analysis techniques. On the other hand, if a company operates its business in an unpredictable environment, then the extent of use of risk analysis techniques is high, because it wants to reduce the level of risk in order to achieve the objective of an organisation. Factors that affect the investment decisions could be classified into two categories viz., quantitative and qualitative factors. The quantifiable factors affect the cash flow estimates, which in turn affect outcome of the projects, whereas qualitative factors affect decision makers’ confidence in incorporating uncertainties in estimation. Moreover, the use of risk analysis techniques and choice of techniques varies with the level of uncertainty associated with the project (Courteny, Kirkland and Viguerie, 1997). If a firm faces more environmental complexity, the activities of the firm should be decentralised. Therefore, project ideas are being identified at lower levels of a firm (Paolo Maccarrone, 1996). To conclude, in addition to the outcome of the project, it affects the internal structural changes of the firm (Jauch and Kraft (1986)), thereby affecting the performance of the firm.

Perceived Company Performance

Performance of a company is an important factor which motivates the DMs to conduct risk analysis. Understanding the present performance helps the DMs in making better decisions. If perceived performance is good, DMs tend to lay more emphasis on risk analysis, spend resources to do thorough analysis, and estimate the cash flows very accurately and objectively in order to maintain the present position. The path linking perceived company performance and the extent of use of risk analysis was found to be significant. This indicates that better the perceived performance of a company, higher is the level of use of risk analysis in SIDs. This is in conformity with Ho and Pike’s (1998) findings. If perceived company performance is low, it may result in the rejection of a good investment project, thereby affecting the potential growth, market share, and future performance.The perceived environmental uncertainty and perceived company performance affect the degree of rationality of a decision (Cyert and March, 1963). If they are ignored, then the resulting irrationality affects not only the particular projects, but also the company as a whole. Thus, in order to ensure wealth maximising decision making, it is necessary to adjust the analysis to account for the varying degrees of risk of a project, which increases the use of risk analysis techniques. The strategic investment process and its associated methods of financial analysis depend ultimately upon what influences the behaviour of DM in allocating resources among competing investment alternatives in a given context (Pike, 1988; Kannadhasan and Nandagopal, 2010). The DMs’ behaviour differs from one individual to another which has influence on the decision outcomes. Such differences in behaviour arise because of the DMs’ characteristics such as tenure, experience, gender, risk propensity, self-efficacy and so on, that are closely associated with many cognitive bases, values and perceptions (Kannadhasan and Nandagopal, 2008). This indicates that the extent of use of risk analysis techniques purely depends on how accurate and precise the DMs’ perceptions on the environment and company performance are.The author believes that the following are worthy of further investigation: (1) this study can be extended to make comparison among different industries (Inter-industry comparison). (2) This study can be extended to identify the other variables that could influence the extent of use of risk analysis in SIDs and how these variables could influence the extent of use of risk analysis of different types of investments.

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