Cash Flow Estimation and Risk AnalysisCHAPTER 11© 2020 Cenga.docx

Cash Flow Estimation and Risk Analysis
CHAPTER 11
© 2020 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Topics
Estimating cash flows:
Relevant cash flows
Working capital treatment
Risk analysis:
Sensitivity analysis
Scenario analysis
Simulation analysis
Real options
classroom use.
The Big Picture:
Project Risk Analysis

classroom use.
Proposed Project Data (1 of 2)
$200,000 cost + $10,000 shipping + $30,000 installation.
Economic life = 4 years.
Salvage value = $25,000.
MACRS 3-year class.
classroom use.
Proposed Project Data (2 of 2)
Annual unit sales = 1,000.
Unit sales price = $200.
Unit costs = $100.
Net working capital:
NWCt = 12%(Salest+1)
Tax rate = 25%.
Project cost of capital = 10%.
classroom use.
Incremental Cash Flow for a Project
Project’s incremental cash flow is:
Corporate cash flow with the project
Minus
Corporate cash flow without the project.

classroom use.
Treatment of Financing Costs
Should you subtract interest expense or dividends when
calculating CF?
NO.
We discount project cash flows with a cost of capital that is the
rate of return required by all investors (not just debtholders or
stockholders), and so we should discount the total amount of
cash flow available to all investors.
They are part of the costs of capital. If we subtracted them
from cash flows, we would be double counting capital costs.
classroom use.
Sunk Costs
Suppose $100,000 had been spent last year to improve the
production line site. Should this cost be included in the
analysis?
NO. This is a sunk cost. Focus on incremental investment and
operating cash flows.
classroom use.

Incremental Costs
Suppose the plant space could be leased out for $25,000 a year.
Would this affect the analysis?
Yes. Accepting the project means we will not receive the
$25,000. This is an opportunity cost and it should be charged to
the project.
A.T. opportunity cost = $25,000 (1 – T) = $15,000 annual cost.
classroom use.
Externalities
If the new product line would decrease sales of the firm’s other
products by $50,000 per year, would this affect the analysis?
Yes. The effects on the other projects’ CFs are “externalities.”
Net CF loss per year on other lines would be a cost to this
project.
Externalities will be positive if new projects are complements to
existing assets, negative if substitutes.
classroom use.
What is an asset’s depreciable
basis?Basis=Cost+Shipping+Installation$240,000

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Annual Depreciation ExpenseBasis =$240,000YearDepr.
RateDepr. =
Basis (Rate)Remaining
book valueYear 10.3333$79,992$160,008Year
20.4445$106,680$53,328Year 30.1481$35,544$17,784Year
40.0741$17,784$0
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Annual Sales and CostsYear 1Year 2Year 3Year
4Units1,0001,0001,0001,000Unit
price$200$206$212.18$218.55Unit
cost$100$103$106.09$109.27Sales$200,000$206,000$212,180$
218,545Costs$100,000$103,000$106,090$109,273
classroom use.
Why is it important to include inflation when estimating cash
flows?
Nominal r > real r. The cost of capital, r, includes a premium
for inflation.
Nominal CF > real CF. This is because nominal cash flows
incorporate inflation.
If you discount real CF with the higher nominal r, then your
NPV estimate is too low.

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Inflation (Continued)
Nominal CF should be discounted with nominal r, and real CF
should be discounted with real r.
It is more realistic to find the nominal CF (i.e., increase cash
flow estimates with inflation) than it is to reduce the nominal r
to a real r.
classroom use.
Net Operating Profit After
Taxes (NOPAT): Years 1 and 2Year 1Year
2Sales$200,000$206,000Costs$100,000$103,000Depreciation
$79,992$106,680EBIT$20,008-$3,680Taxes (25%)$5,002-
$920NOPAT$15,006-$2,760
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Net Operating Profit After
Taxes (NOPAT): Years 3 and 4Year 3Year
4Sales$212,180.0$218,545.4 −Costs$106,090.0$109,272.7
−Depreciation $35,544.0$17,784.0EBIT$70,546.0$91,488.7

−Taxes (25%)$17,636.5$22,872.2NOPAT$52,909.5$68,616.5
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Operating Cash Flows =
NOPAT + DepreciationNOPAT+ Depr. =Op. CF Year
1$15,006.0$79,992.0$94,998.0Year 2-
$2,760.0$106,680.0$103,920.0Year
3$52,909.5$35,544.0$88,453.5Year
4$68,616.5$17,784.0$86,400.5
classroom use.
Cash Flows Due to Investments in Net
Working Capital (NWC) SalesNWC
(% of sales)CF Due to
Investment
in NWCYear 0$24,000-$24,000Year 1$200,000$24,720-
$720Year 2$206,000$25,462-$742Year 3$212,180$26,225-
$763Year 4$218,545$0$26,225
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After-Tax Salvage Cash Flow at t = 4(1) Salvage

value$25,000(2) Book value$0(3) Gain or loss: (1) −
(2)$25,000(4)Tax on gain or loss$6,250(5) After-tax salvage
CF: (1) − (4)$18,750
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What if you terminate a project
before the asset is fully depreciated?
Basis = Original basis – Accum. deprec.
Taxes are based on difference between sales price and tax
basis.Cash flow
from sale=Sale
proceeds–Taxes
paid
classroom use.
Example: If Sold After 3
Years for $25 ($ thousands)
Original basis = $240.
After 3 years, basis = $17.8 remaining.
Sales price = $25.
Gain or loss = $25 – $17.8 = $7.2.
Tax on sale = 0.25($7.2) = $1.80.
Cash flow = Sales price – taxes
Cash flow = $25 – $1.80 = $23.2.

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Example: If Sold After 3
Years for $10 ($ thousands)
Original basis = $240.
After 3 years, basis = $17.8 remaining.
Sales price = $10.
Gain or loss = $10 – $17.8 = -$7.8.
Tax on sale = 0.25(-$7.8) = -$1.95.
Cash flow = sales price – taxes paid on sale
Cash flow = $10 – (-$1.95) = $11.95.
Sale at a loss provides a tax credit, so cash flow is larger than
sales price!
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Project Cash Flows for
Year 0 through Year 2 Year 0 Year 1 Year 2 Initial
CF−$240,000Op. CF$94,998$103,920NOWC
CF−$24,000−$720−$742Salvage CFProject
CF−$264,000$94,278$103,178
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Net Cash Flows for

Year 3 and Year 4 Year 3 Year 4 Initial CFOp.
CF$88,453.5$86,400.5NOWC CF-$763.0$26,225.0Salvage
CF$18,750.0Project CF$87,690.5$131,375.5
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Project Net CFs Time Line
Enter CFs in CFLO register and I/YR = 10.
NPV= $62,593.
IRR= 20.1%.
classroom use.
What is the project’s MIRR?
classroom use.
Calculator

Solution
Enter positive CFs in CFLO. Enter I/YR = 10. Solve for NPV =
326,592.77.
Now use TVM keys: PV = -326,592.77,
N = 4, I/YR = 10; PMT = 0; Solve for FV = 478,164.47. (This is
TV of inflows)
Use TVM keys: N = 4; FV = 478,164.47;
PV = -264,000; PMT= 0; Solve for I/YR = 16.0%.
MIRR = 16.0%.
classroom use.
Profitability Index (PI)
PI = PV of future CF / Initial CF
PI = $326,592.77/$264,000
PI = 1.24.

classroom use.
What is the project’s payback?
($ thousands)
Cumulative:
−264 −170 −67 21 152
Payback = 2 + $67/$88 = 2.8 years.
classroom use.
What is the project’s discounted
payback? ($ thousands)
Payback = 3 + $27/$90 = 3.3 years.

classroom use.
What does “risk” mean in
capital budgeting?
Uncertainty about a project’s future profitability.
Measured by σNPV, σIRR, beta.
Will taking on the project increase the firm’s and stockholders’
risk?
classroom use.
Is risk analysis based on historical data or subjective judgment?
Can sometimes use historical data, but generally cannot.
So risk analysis in capital budgeting is usually based on
subjective judgments.

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What three types of risk are relevant in
capital budgeting?
Stand-alone risk
Corporate risk
Market (or beta) risk
classroom use.
Stand-Alone Risk
The project’s risk if it were the firm’s only asset and there were
no shareholders.
Ignores both firm and shareholder diversification.
Measured by the σ or CV of NPV, IRR, or MIRR.

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Probability Density
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Corporate Risk
Reflects the project’s effect on corporate earnings stability.
Considers firm’s other assets (diversification within firm).
Depends on project’s σ, and its correlation, ρ, with returns on
firm’s other assets.
Measured by the project’s corporate beta.
classroom use.

Project X is negatively correlated to firm’s other assets, so has
big diversification benefits
classroom use.
Market Risk
Reflects the project’s effect on a well-diversified stock
portfolio.
Takes account of stockholders’ other assets.
Depends on project’s σ and correlation with the stock market.
Measured by the project’s market beta.
classroom use.
How is each type of risk used?

(1 of 2)
Market risk is theoretically best in most situations.
However, creditors, customers, suppliers, and employees are
more affected by corporate risk.
Therefore, corporate risk is also relevant.
classroom use.
How is each type of risk used?
(2 of 2)
Stand-alone risk is easiest to measure, more intuitive.
Core projects are highly correlated with other assets, so stand-
alone risk generally reflects corporate risk.
If the project is highly correlated with the economy, stand-alone
risk also reflects market risk.
classroom use.

What is sensitivity analysis?
Shows how changes in a variable such as unit sales affect NPV
or IRR.
Each variable is fixed except one. Change this one variable to
see the effect on NPV or IRR.
Answers “what if” questions, e.g. “What if sales decline by
30%?”
classroom use.
Sensitivity Analysis: NPV for Input
Deviations from Base CaseDev.
From Base NPV: Unit Cost Dev. NPV: Unit Sales Dev.NPV:
Salvage Dev.-30%$136,927-$9,363$58,751-
15%$99,760$26,615$60,672 0%$62,593$62,593$62,593
15%$25,426$98,571$64,51430%-$11,742$134,548$66,435

classroom use.
Sensitivity Graph: NPV for Input
Deviations from Base Case
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Results of Sensitivity Analysis
Steeper sensitivity lines show greater risk. Small changes result
in large declines in NPV.
The cost line per unit line is steepest.
Unit sales line is also steep, but not as steep as the cost per unit
line.
Salvage line is flat.
Managers should focus on costs and sales demand.

classroom use.
What are the weaknesses of
sensitivity analysis?
Does not reflect diversification.
Says nothing about the likelihood of change in a variable, i.e. a
steep sales line is not a problem if sales won’t fall.
Ignores relationships among variables.
classroom use.
Why is sensitivity analysis useful?
Gives some idea of stand-alone risk.
Identifies dangerous variables.
Gives some breakeven information.

classroom use.
What is scenario analysis?
Examines several possible situations, usually worst case, most
likely case, and best case.
Provides a range of possible outcomes.
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Best scenario: 1,200 units @ $240
Worst scenario: 800 units @ $160ScenarioProb.Unit SalesUnit
PriceNPVBest Case25%1,200$240$227,595Base
Case50%1,000$200$62,593Worst Case 25%800$160-
$63,399Expected NPV =$72,345Standard Deviation
=103,343Coefficient of Var. = Std Dev / Exp. NPV =1.43
classroom use.

Are there any problems with
scenario analysis?
Only considers a few possible out-comes.
Assumes that inputs are perfectly correlated—all “bad” values
occur together and all “good” values occur together.
Focuses on stand-alone risk, although subjective adjustments
can be made.
classroom use.
What is a simulation analysis?
(1 of 2)
A computerized version of scenario analysis that uses
continuous probability distributions.
Computer selects values for each variable based on given
probability distributions.

classroom use.
What is a simulation analysis?
(2 of 2)
NPV and IRR are calculated.
Process is repeated many times (1,000 or more).
End result: Probability distribution of NPV and IRR based on
sample of simulated values.
Generally shown graphically.
classroom use.
Simulation Example Assumptions
Normal distribution for unit sales:
Mean = 1,000
Standard deviation = 200
Normal distribution for unit price:
Mean = $200
Standard deviation = $30

classroom use.
Simulation Process
Pick a random variable for unit sales and sale price.
Substitute these values in the spreadsheet and calculate NPV.
Repeat the process many times, saving the input variables (units
and price) and the output (NPV).
classroom use.
Simulation Results for 2,000 trials.
(See Ch11 Mini Case.xlsx, worksheet Monte Carlo Simulation
for a simulation with 100
iterations.)PriceUnitsNPVMean$199$999$60,641Std
deviation29211$100,354Maximum$255$1,486$325,070Minimu
m$119$463-$142,758Median$64,974

Probability of NPV > 0 3.8%
Coefficient of variation 1.65
classroom use.
Interpreting the Results
Inputs are consistent with specified distributions.
Units: Mean = 1,252; St. Dev. = 199.
Price: Mean = $200; St. Dev. = $30.
Mean NPV = $88,808. Low probability of negative NPV (100%
– 87% = 13%).
classroom use.
Histogram of Results

classroom use.
What are the advantages of simulation analysis?
Reflects the probability distributions of each input.
Shows range of NPVs, the expected NPV, σNPV, and CVNPV.
Gives an intuitive graph of the risk situation.
classroom use.
What are the disadvantages of simulation?
(1 of 2)
Difficult to specify probability distributions and correlations.
If inputs are bad, output will be bad:
“Garbage in, garbage out.”

classroom use.
What are the disadvantages of simulation?
(2 of 2)
Sensitivity, scenario, and simulation analyses do not provide a
decision rule. They do not indicate whether a project’s
expected return is sufficient to compensate for its risk.
Sensitivity, scenario, and simulation analyses all ignore
diversification. Thus they measure only stand-alone risk, which
may not be the most relevant risk in capital budgeting.
classroom use.
If the firm’s …

Working Through
Conflict
Now in its eighth edition, Working Through Conflict provides
an introduction to conflict and
conflict management that is firmly grounded in current theory,
research, and practice,
covering a range of conflict settings (interpersonal, group, and
organizational). The text
includes an abundance of real life case studies that encompass a
spectrum of theoretical
perspectives. Its emphasis on application makes it highly
accessible to students, while
expanding their comprehension of conflict theory and practical
skills. This new edition
features a wealth of up-to-date research and case examples,
suggested readings and video
resources, and integrated questions for review and discussion.
Joseph P. Folger is Professor of Adult & Organizational
Development at Temple University.
He is co-founder and current president of the Institute for the
Study of Conflict
Transformation.

Marshall Scott Poole is the David L. Swanson Professor of
Communication, Senior Research
Scientist at the National Center for Supercomputing
Applications, and Director of I-CHASS:
The Institute for Computing in the Humanities, Arts, and Social
Sciences at the University of
Illinois, Urbana-Champaign.
Randall K. Stutman is Managing Partner of CRA, Inc. He is the
author of Communication in
Legal Advocacy (with Richard D. Rieke, 2008).
2
Working Through
Conflict
Strategies for Relationships, Groups, and Organizations
Eighth Edition
Joseph P. Folger Marshall Scott Poole Randall K.
Stutman

3
Eighth edition published 2018
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All rights reserved. No part of this book may be reprinted or
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Trademark notice: Product or corporate names may be
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First edition published by Pearson Education, Inc. 2001
Seventh edition published by Routledge 2016
Library of Congress Cataloging-in-Publication Data
Names: Folger, Joseph P., 1951– author. | Poole, Marshall
Scott, 1951– | Stutman, Randall K.,
1957–
Title: Working through conflict : strategies for relationships,
groups, and organizations /
Joseph P. Folger, Marshall Scott Poole, Randall K. Stutman.
Description: 8th edition. | New York, NY : Routledge, 2018.

Identifiers: LCCN 2017029114 | ISBN 9781138238954
(hardback) | ISBN 9781138233928 (pbk.)
Subjects: LCSH: Social conflict. | Conflict (Psychology) |
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To our parents:
Ed and Virginia
Ed and Helen
Bernie and Marge
6
Contents
List of Cases
Preface
Acknowledgments
Introduction
Case I.1A The Women’s Hotline Case
Case I.1B The Women’s Hotline Case

I.1 Conflict Defined
I.2 Arenas for Conflict
I.3 Communication Media and Conflict Interaction
I.4 Productive and Destructive Conflict Interaction
I.5 Judgments About Conflict Outcomes
I.6 Plan of the Book
I.7 Summary and Review
I.8 Activities
Chapter 1 Communication and Conflict
1.1 A Model of Effective Conflict Management
1.1.1 Moving Through Differentiation and Integration
1.1.2 Taking the Middle Path: Moving Toward Integration
1.1.3 Recognizing Destructive Cycles
1.1.4 Tacking Against the Wind
1.2 Properties of Conflict Interaction
1.2.1 Property 1: Conflict Is Constituted and Sustained by
Moves and
Countermoves During Interaction
1.2.2 Property 2: Patterns of Behavior in Conflicts Tend to
Perpetuate
Themselves
1.2.3 Property 3: Conflict Interaction Is Influenced by and in

Turn Affects
Relationships
Exhibit 1.1 Confrontation Episodes Theory
1.2.4 Property 4: Conflict Interaction Is Influenced by Context
Case 1.1 The Columnist’s Brown Bag
1.3 Summary and Review
1.4 Activities
1.5 Conclusion
Chapter 2 The Inner Experience of Conflict
7
kindle:embed:0006?mime=image/jpg
kindle:embed:0006?mime=image/jpg
Case 2.1 The Parking Lot Scuffle
2.1 The Psychodynamic Perspective
Exhibit 2.1 Collusion and Intractable Conflict
Case 2.2 Psychodynamic Theory and the Parking Lot Scuffle
2.2 Emotion and Conflict
Exhibit 2.2 Verbal Aggressiveness

Case 2.3 Emotion in the Parking Lot Scuffle
2.3 Social Cognition and Conflict
2.3.1 Social Knowledge About Conflict and Conflict Interaction
2.3.2 Social Cognitive Processes and Conflict
Case 2.4 Social Knowledge About Conflict and the Parking Lot
Scuffle
Case 2.5 Expectancy Violations and the Parking Lot Scuffle
Case 2.6 The Role of Attributions in the Parking Lot Scuffle
2.4 The Interaction of Psychodynamics, Emotion, and Social
Cognition in
Conflict
2.6 Activities
2.7 Conclusion
Chapter 3 Conflict Interaction
3.1 Stages of Conflict
3.1.1 Rummel’s Five-Stage Model
3.1.2 Pondy’s Model
3.1.3 Stage Models of Negotiation
3.1.4 Insights of Stage Models of Conflict

Case 3.1 Stage Models and the Parking Lot Scuffle
3.2 Interdependence
Case 3.2 Interdependence and the Parking Lot Scuffle
3.3 Reciprocity and Compensation
Exhibit 3.1 Can Conflict Competence Be Assessed?
Case 3.3 Reciprocity and Compensation in the Parking Lot
Scuffle
Exhibit 3.2 The Tit-For-Tat Strategy
3.4 Framing Issues in Conflict Interaction
Case 3.4 Issue Framing and the Parking Lot Scuffle
3.5 Social Identity and Intergroup Conflict
Case 3.5 Intergroup Conflict Dynamics and the Parking Lot
Scuffle
Exhibit 3.3 Counteracting the Negative Impacts of Social
Identity and
Intergroup Conflict
3.7 Activities
3.8 Conclusion
Chapter 4 Conflict Styles and Strategic Conflict Interaction
4.1 Origins of Conflict Styles
Case 4.1 Conflict Styles in the Parking Lot Scuffle
8

4.2 What Is a Conflict Style?
4.3 An Expanded View of Conflict Styles
4.3.1 Competing
4.3.2 Avoiding
4.3.3 Accommodating
4.3.4 Compromising
4.3.5 Collaborating
4.4 Determining the Styles of Others
4.5 Pairings of Conflict Styles
4.6 Shifting Styles During Conflict Episodes
Case 4.2 College Roommates
4.7 Selecting Conflict Styles
Exhibit 4.1 A Procedure for Selecting Conflict Styles
4.8 Cultural, Gender, and Racial Influences on Conflict Styles
4.8.1 Cultural Influences
4.8.2 Gender Influences
4.8.3 Racial and Ethnic Influences
4.9 Styles and Tactics in Practice

Case 4.3 The Would-Be Borrower
4.11 Activities
4.12 Conclusion
Chapter 5 Power: The Architecture of Conflict
5.1 Power and the Emergence of Conflict
Case 5.1A A Raid on the Student Activity Fees Fund
Case 5.1B A Raid on the Student Activity Fees Fund
5.2 A Relational View of Power
5.2.1 Forms of Power
Case 5.2 The Amazing Hacker
5.2.2 Social Categorization
5.2.3 The Mystique of Power
5.2.4 Interaction
5.2.5 Legitimacy
5.2.6 Endorsement and Power
5.3 Power and Conflict Interaction
Case 5.3 The Creativity Development Committee
5.4 The Use of Power in Conflict Tactics
5.4.1 Threats and Promises

5.4.2 Relational Control
5.4.3 Issue Control
5.5 The Balance of Power in Conflict
5.5.1 The Dilemmas of Strength
Case 5.4 The Copywriters’ Committee
Case 5.5 Unbalanced Intimacy
9
Case 5.6 Job Resignation at a Social Service Agency
5.5.2 The Dangers of Weakness
5.5.3 Cultural Differences in Values Concerning Power
5.6 Working with Power
5.6.1 Diagnosing the Role of Power in Conflict
5.6.2 Fostering Shared Power in Conflicts
5.6.3 Bolstering the Position of Those Not Typically in Power
5.8 Activities
5.9 Conclusion

Chapter 6 Face-Saving
6.1 The Dimensions of Face
6.2 Face-Loss as It Relates to Face-Saving
6.3 A Threat to Flexibility in Conflict Interaction
Case 6.1 The Professor’s Decision
Case 6.2 The Outspoken Member
Case 6.3 The Controversial Team Member
6.4 Conflict Interaction as a Face-Saving Arena
6.5 Face-Saving Frames in Conflict Interaction
6.5.1 Resisting Unjust Intimidation
6.5.2 Refusing to Give on a Position
6.5.3 Suppressing Conflict Issues
6.6 Face-Saving in Other Cultures
6.7 Face-Giving Strategies
Exhibit 6.1 Why Do Meteorologists Never Apologize?
Exhibit 6.2 Disagreeing Agreeably
6.8 Working with Face-Saving Issues
Exhibit 6.3 When Honor Can Kill
Case 6.4 The Productivity and Performance Report
6.10 Activities
6.11 Conclusion

Chapter 7 Climate and Conflict Interaction
7.1 Climate and Conflict
Case 7.1 Riverdale Halfway House
7.1.1 More Precisely Defining Climate
7.1.2 Climate and Conflict Interaction
Exhibit 7.1 Identifying Climates
7.2 Working with Climate
Case 7.2 Breakup at the Bakery
Exhibit 7.2 Climate and Predicting What Marriages Survive
Case 7.3 The Expanding Printing Company
7.3 The Leader’s Impact on Climate
10
Case 7.4 The Start-Up
7.5 Activities
7.6 Conclusion
Chapter 8 Managing Conflict

8.1 Review of the Normative Model for Conflict Management
8.2 Navigating Differentiation
8.2.1 Framing Problems or Issues
8.2.2 Rethinking How Problems Are Defined
Case 8.1 The Psychological Evaluation Unit
8.2.3 Cultivating a Collaborative Attitude
8.2.4 Moving from Differentiation to Integration
8.3 A Procedure for Managing Conflicts
Exhibit 8.1 A Procedure for Moving Through Differentiation
and
Integration
8.4 Addressing Severe Challenges to Conflict Integration
8.4.1 Challenging Belief Systems That Escalate Conflict
Responses
8.4.2 Moving Beyond Deep Transgressions Through
Forgiveness
8.5 Dispute Systems: Managing Conflicts Within Organizations
Exhibit 8.2 What Type of a Dispute Resolution System Does an
Organization Have?

8.5.1 Working with Organizational Dispute Resolution Systems
8.7 Activities
8.8 Conclusion
Chapter 9 Third Party Intervention
9.1 Property 1: Conflict Interaction Is Constituted and Sustained
by Moves and
Countermoves During Interaction
9.1.1 Third Party Mandate
9.1.2 Responsiveness to Emerging Interaction
Case 9.1 Organizational Co-Heads
Case 9.2 The Family Conflict
Case 9.3 Mediator Pressure and the Intransigent Negotiator
9.2 Property 2: Patterns of Behavior in Conflict Tend to
Perpetuate Themselves
9.2.1 Third Parties and Conflict Cycles
Case 9.4 Party Process Control
Case 9.5 Neighbor Noise Problems
9.2.2 Third Parties and the Overall Shape of Conflict Behavior
Exhibit 9.1 Third Parties, Differentiation, and Integration

9.3 Property 3: Conflict Interaction Is Influenced by, and in
Turn Affects,
Relationships
9.4 Property 4: Conflict Interaction Is Influenced by the Context
in Which It
Occurs
11
9.4.1 Third Party Roles and Ideologies
Exhibit 9.2 Transformative Mediation: A Relational Approach
to Conflict
Intervention
9.4.2 Third Party Roles and Climate
Exhibit 9.3 Testing Your Own Ability to Intervene
Transformatively
9.6 Activities
9.7 Conclusion
References
Index

12
Cases
I.1A The Women’s Hotline Case
I.1B The Women’s Hotline Case
1.1 The Columnist’s Brown Bag
2.1 The Parking Lot Scuffle
2.2 Psychodynamic Theory and the Parking Lot Scuffle
2.3 Emotion in the Parking Lot Scuffle
2.4 Social Knowledge About Conflict and the Parking Lot
Scuffle
2.5 Expectancy Violations and the Parking Lot Scuffle
2.6 The Role of Attributions in the Parking Lot Scuffle
3.1 Stage Models and the Parking Lot Scuffle
3.2 Interdependence and the Parking Lot Scuffle
3.3 Reciprocity and Compensation in the Parking Lot Scuffle
3.4 Issue Framing and the Parking Lot Scuffle
3.5 Intergroup Conflict Dynamics and the Parking Lot
Scuffle
4.1 Conflict Styles in the Parking Lot Scuffle
4.2 College Roommates

4.3 The Would-Be Borrower
5.1A A Raid on the Student Activity Fees Fund
5.1B A Raid on the Student Activity Fees Fund
5.2 The Amazing Hacker
5.3 The Creativity Development Committee
5.4 The Copywriters’ Committee
5.5 Unbalanced Intimacy
5.6 Job Resignation at a Social Service Agency
6.1 The Professor’s Decision
6.2 The Outspoken Member
6.3 The Controversial Team Member
6.4 The Productivity and Performance Report
7.1 Riverdale Halfway House
7.2 Breakup at the Bakery
7.3 The Expanding Printing Company
7.4 The Start-Up
8.1 The Psychological Evaluation Unit
9.1 Organizational Co-Heads
9.2 The Family Conflict
9.3 Mediator Pressure and the Intransigent Negotiator
9.4 Party Process Control
13

9.5 Neighbor Noise Problems
14
Preface
The Study of Conflict
The main objective of Working Through Conflict is to provide a
summary and synthesis of
social science research and theory on conflict. It offers students
of conflict a review of the core
concepts and theoretical frameworks that enhance an
understanding of human behavior in a
wide range of conflict situations. The research and theory
covered in this book reflect the
many social science disciplines that have contributed to the
study of conflict.
Although it takes an interdisciplinary view of conflict, this book
emphasizes understanding
conflict as a communication phenomenon. It assumes that
conflict is something that people

create and shape as they interact with each other. Sometimes
conflict interaction is immediate
and face-to-face. In other instances, it is played out in a series
of moves, actions, and responses
that occur over time and in different places. This book
highlights the interactive nature of
conflict, no matter what form it takes. This focus on
communication means that readers gain
an appreciation for how mutual influence occurs, how language
and message choices shape
conflict, and how patterns of behavior and the structure of
human discourse create important
dimensions of any unfolding conflict.
In addition, Working Through Conflict offers a road map for
how theory and research can
be used to understand and influence conflict dynamics in
everyday life. The field of conflict
management is supported by a long history of useful research
and theory that forms a basis
for a wide variety of conflict management work. This book
demonstrates how conflicts across
settings can be understood by seeing them through a range of
theoretical lenses. It illustrates
how students of conflict can begin thinking and acting in ways

that can have profound effects
on the dynamics of difficult conflicts.
New to This Edition
We have revised this eighth edition of Working Through
Conflict to reflect new developments
in theory and research on conflict and conflict management. We
also clarified and expanded
certain discussions to make this the most user-friendly edition
to date, with special emphasis
on applying theory to practical, contemporary topics. Here are
the highlights of the changes in
this eighth edition:
Updated citations and inclusion of new literature throughout the
volume;
Suggested activities for each chapter to engage students in
exploring the meaning and
significance of the ideas discussed in the chapter;
A new section on the impact of communication media on
conflict and conflict
interaction in the Introduction;
15

Inclusion of the latest scholarship of the impact of media on
conflict throughout the
book;
Updating of Chapter 4 to include new research on conflict styles
and discussion of
racial and ethnic impacts on conflict styles;
A revised Chapter 5 to streamline and better define how power
is produced in
interaction and the role this plays in conflict;
A new case study has been added to Chapter 5;
Discussion of the leader’s role in shaping climate in Chapter 7.
While we capture the most current thinking about the topics
covered in this book, we have
also retained older references because they point to classic, core
work that has served as the
foundation for more recent studies. New, contemporary
scholarship is important, but we
believe that students should also be aware of the field’s
conceptual roots as represented in
classic conflict literature.
We consider conflicts occurring in a wide range of arenas, from

intimate relationships,
marriages, and friendships to group, inter-group, organizational,
and negotiation settings. This
added breadth makes the book suitable as a primary text for
courses in conflict and conflict
management, as well as a useful supplement to courses that
devote substantial attention to
conflict or third party work.
The title of this book is an intentional double entendre. Because
its major emphasis is on
communication patterns people use when attempting to manage
conflict, we hope that the
book will help people successfully work through difficult
conflicts. The book is also built on
the assumption that effective work is often promoted by the
emergence and productive use of
conflict. It is our hope that this book will encourage people to
confront their conflicts and to
work through them creatively rather than suppressing or
superficially “resolving” conflicts.
Developing Theory-Based Intuition
It is often said that people who are good at their work have
excellent intuition. Usually this

means that they instinctively make good decisions and employ
effective strategies to create
change or accomplish productive objectives. Intuition is often
assumed to be innate—it is seen
as a gift that some people have. But in most cases effective
professional intuition comes from a
broad background of knowledge, study, and experience gained
over time. Working Through
Conflict is written for those who want to develop their intuition
about how to react, interact,
and intervene in conflict situations. Conflict is usually
complex—it is often multilayered,
steeped in a history of events, and shaped by diverse
perspectives and understandings. As a
result, having good intuition about conflict starts by mastering a
broad repertoire of ideas—
ideas that create different explanations for why conflict
interaction moves in destructive or
constructive directions.
Working Through Conflict covers a wide range of essential
concepts and theories that
clarify the practical implications for managing conflicts in
relationships, groups, teams, and
organizations. It is a primer for those who might want to pursue

professional work in the
conflict management field as mediators, ombudspersons,
facilitators, or conciliators. It can also
help build a strong intuition in those who deal with conflict
daily in work and professional
16
settings and in those who want to have an impact on conflicts in
their personal lives within
families, romantic relationships, marriages, and friendships.
17
Acknowledgments
We thank Ann Bryan and David Roache for assistance and ideas
related to this revision. Once
again, we owe our greatest debt to our colleagues at the Center
for Conflict Resolution in
Madison, Wisconsin. We are very grateful to Lonnie Weiss for

her insight and help with our
analyses. We also thank Syd Bernard, Jim Carrilon, Betsy
Densmore, Robert Everett, Jay
Herman, Jan Shubert, Rick Sloan, Dennis Smith, Tommy Vines,
and Kathy Zoppi for their
responses to parts or all of the initial manuscript of the first
edition of this book. We also
thank Linda Klug, Jean Kebis, and Wayne Beach for supplying
the transcript of interaction in
Chapter 6. Subsequent editions were greatly improved by
comments from Charley Conrad,
Melissa Dobosh, Mistee Freeman, Tricia Jones, Leanne
Knobloch, Phoebe Kruger, Kevin Real,
Bethany Sills, Cynthia Stohl, Shirley A. Van Hoeven, and
Elizabeth Vegso.
We appreciate the feedback reviewers provided for this
revision: Stuart Allen, Corey Young,
Michael Comos, and Kathy Krone. We also want to express our
continued gratitude to
reviewers of previous editions, whose wisdom persists still:
Wayne Beach, Tom Biesecker, Lori
Carrell, Steven Colmbs, Charles R. Conrad, Alice Crume,
Robert J. Doolittle, David A. Frank,
Dennis Gouran, Bruce Gronbeck, Dale Hample, Thomas Harris,

Gary Hartzell, Tricia Jones,
Keven E. McCleary, Laura L. Jansma, Sara E. Newell, Linda
Putnam, Susan Rice, Gale
Richards, Tracy Routsong, Dale L. Shannon, Cynthia Stohl,
Michael Sunnafrank, Stella Ting-
Toomey, Shirley Van Hoeven, Hal R. Witteman, and Paul
Yelsma.
The excellent editorial and production staff at Routledge, Linda
Bathgate, Laura Briskman,
Nicole Salazar, and Jenny Guildford have greatly assisted with
the production of this volume.
Joseph P. Folger
Marshall Scott Poole
Randall K. Stutman
18
Introduction
Conflict offers a mixture of the good, the bad, and the
uncertain. On the positive side, conflicts

allow us to air important issues; they produce new and creative
ideas; they release built-up
tensions. Handled properly, conflicts can strengthen
relationships; they can help groups and
organizations to re-evaluate and clarify goals and missions; and
they can also initiate social
change to eliminate inequities and injustice. These advantages
suggest that conflict is normal
and healthy, and they underscore the importance of
understanding and handling conflict
properly.
But perhaps more familiar is the negative side of conflict.
Heated exchanges spiral out of
control, resulting in frustration, tension, hard feelings, and,
ultimately, more conflict. Low-
grade family conflicts, perpetuated through criticism,
arguments, nagging, and verbal abuse,
not only distance parents from children and spouses from one
another but also lower self-
esteem and create problems that can follow people throughout
their entire lives. Additionally,
conflicts are sometimes violent, not only between strangers but
also in the workplace and
within the family. Sometimes the source of frustration is not

being able to get someone else to
engage a conflict. If one friend persistently denies that a
problem exists or changes the subject
when it comes up, the other cannot discuss the things that are
bothering her or him, and the
friendship suffers. The various negative experiences we all have
with conflict are reinforced in
the media, where it often seems that the only effective way to
solve problems is to shoot
somebody.
Conflicts also bring uncertainty. As we will see, the great
“unpredictables” in life often arise
in interactions we have with others. Conversations, meetings,
and conflicts all have in
common the fact that they may suddenly move in unexpected
directions. Indeed, the
uncertainties that arise during conflicts often cause them to
move in negative directions.
The twists and turns of the following case—in this instance a
conflict in a small office—offer
a good illustration of the positive, negative, and uncertain sides
of conflict. The conflict in
Case 1.1 at the women’s hotline initially exhibits several

negative features and might easily
move in a destructive direction.
Case Study I.1 A The Women’s Hotline Case
Imagine yourself as a staff member in this organization. How
would you react as this
conflict unfolded? What is it about this particular conflict that
makes it seem difficult to
face—let alone solve?
Women’s Hotline is a rape and domestic crisis center in a
medium-sized city. The
center employed seven full- and part-time workers. The
workers, all women, formed a
cohesive unit and made all important decisions as a group.
There were no formal
19
supervisors. The hotline started as a voluntary organization and
had grown by capturing
local and federal funds. The group remained proud of its roots

in a democratic, feminist
tradition.
The atmosphere at the hotline was rather informal. The staff
members saw each other
as friends, but there was an implicit understanding that people
should not have to take
responsibility for each other’s cases. Because the hotline’s work
was draining, having to
handle each other’s worries could create an unbearable strain.
This norm encouraged
workers to work on their own and keep problems to themselves.
The conflict arose when Diane, a new counselor who had only
six months of
experience, was involved in a very disturbing incident. One of
her clients was killed by a
man who had previously raped her. Diane had trouble dealing
with this incident. She felt
guilty about it; she questioned her own ability and asked herself
whether she might have
been able to prevent this tragedy. In the months following,
Diane had increasing
difficulty in coping with her feelings and began to feel that her
co-workers were not

giving her the support she needed. Diane had no supervisor to
turn to, and, although her
friends outside the hotline were helpful, she did not believe
they could understand the
pressure as well as her co-workers could.
Since the murder, Diane had not been able to work to full
capacity, and she began to
notice some resentment from the other counselors. She felt the
other staff members were
more concerned about whether she was adding to their
workloads than whether she was
recovering from the traumatic incident. Although Diane did not
realize it at the time,
most of the staff members felt she had been slow to take on
responsibilities even before
her client was killed. They thought Diane had generally asked
for more help than other
staff members and that these requests were adding to their own
responsibilities. No one
was willing to tell Diane about these feelings after the incident
because they realized she
was very disturbed. After six months, Diane believed she could
no longer continue to
work effectively. She felt pressure from the others at the center,

and she was still shaken
by the tragedy. She requested two weeks off with pay to get
away from the work
situation for a while, to reduce the stress she felt, and to come
back with renewed energy.
The staff, feeling that Diane was slacking off, denied this
request. They responded by
outlining, in writing, what they saw as the responsibilities of a
full-time staff worker.
Diane was angry when she realized her request had been denied,
and she decided to file a
formal work grievance.
Diane and the staff felt bad about having to resort to such a
formal, adversarial
procedure. No staff member had ever filed a work grievance,
and the group was
embarrassed by its inability to deal with the problem on a more
informal basis. These
feelings created additional tension between Diane and the staff.
Discussion Questions
Can you foresee any benefits to this conflict?
Is it possible to foresee whether a conflict will move in a

constructive or
destructive direction?
What clues would lead you to believe that this conflict is going
to be productive?
20
Several elements of this case suggest a move in a negative
direction. First, the situation at the
hotline was tense and threatening. This was a difficult time for
the workers. Even for “old
hands” at negotiation, conflicts are often unpleasant and
frightening. Second, the parties
experienced a great deal of uncertainty. They were unable to
understand what was going on
and how their behavior affected the conflict. Conflicts are
confusing; actions can have
consequences quite different from what is intended because the
situation is more complicated
than we had assumed. Diane did not know her co-workers
thought she was slacking even
before the tragedy. When she asked for time off she was
surprised at their refusal, and her

angry reaction nearly started a major battle. Third, the situation
was fragile. A conflict may
evolve in very different ways depending on the behavior of just
a single worker. If, for
example, the staff chose to fire Diane, the conflict may have
been squelched, or it may fester
and undermine relationships among the remaining staff. If, on
the other hand, Diane won
allies, the others might split over the issue and ultimately
dissolve the hotline. As the case
continues, observe staff members’ behavior and their method of
dealing with this tense and
unfamiliar situation.
Case Study I.1B The Women’s Hotline Case (Continued)
Imagine yourself in the midst of this conflict. What would you
recommend this group do
to promote a constructive outcome to this conflict?
The committee who received Diane’s grievance suggested that
they could handle the
problem in a less formal way if both Diane and the staff agreed
to accept a neutral, third
party mediator. Everyone agreed that this suggestion had

promise, and a third party was
invited to a meeting where the entire staff could address the
issue.
At this meeting, the group faced a difficult task. Each member
offered reactions they
had been previously unwilling to …

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