Category Archives: Leadership

Corporate Finance: Value Maximization

Value Pentagon

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Company as-is value is the value of the company without any restructuring or change.

The company’s optimum value is the value that can be achieved after the restructuring is done.

Internal restructuring: Find out redenancies, wastages, remove bottlenecks.

External Restructuring: Merger, demerger, acquisition, etc.

Financial restructuring: Writing down useless assets, debt restructuring etc.

Shareholder vs Stakeholder value

When we talk about the value of the company, they normally have two approaches, increase shareholder value or stakeholder value. Both approaches have their pros and cons. The shareholder value approach is easy to track, as you can look at the numbers and figure out if the shareholder value has increased. But at the same time, this approach can be myopic and focus on short-term goals.

The stakeholder value approach has a broader view, where it talks about customers, employees, society, shareholders, and other stakeholders. The problem here it is hard to track as there is no direct way to track it. For example, giving better discounts and better salaries might help me keep my customers and employees happy, but might add to losses.

Measuring shareholder wealth creation

Market Value Addition or MVA is an important aspect to understand shareholder value. For example, there are two companies, A and B, both with a market cap of say 1000 crore. But the network of company A is 500 crore and company B is 250 crore. We can see MVA for company A is 500 crore whereas company B is 250 crores. In other words, the market view potential for growth in company B.

Corporate Restructuring

Corporate restructuring includes acquisitions, demergers, joint ventures, etc. For example, buying Corus helped Tata steel to jump from 55th ranked in steel revenue worldwide to 5th rank.

Corprate restructuring can be done by

Expansion: Absorption, Tender Offer, Asset acquisition, Joint venture, etc.

Contraction: Demerger – Spin off, split off, split up, Equity carve out etc.

Corporate Control: Going private, Equity buyback, leveraged buyout, etc.

Corporates can unlock value by demergers. Studies report that the observed value of the diversified firm is, on average, 15 percent less than the sum of the implied market value of its divisions, as compared to stand-alone market values of single-segment firms in those industries.

Factors behind diversification discount

Information hypothesis: the inability of markets to correctly evaluate conglomerate structures with unrelated businesses, leading to possible undervaluation.

Inefficient Management hypothesis: the inability of the managers to efficiently manage unrelated businesses.

Inefficient investment hypothesis: distortion of investment due to competition among units for resources.

Modes of asset disposition

Slump sale:  Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration. For example, Ruchi Soya buying biscuit business from Patanjali Natural Biscuits Pvt Ltd (PNBPL) for 60 crores.

Spin-Off: A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. When a new company B is carved out of company A, mostly shareholders of company A will get some proportional shares of company B.

Spin-Off helps in

  • Unlocking hidden value: establish a public market valuation for undervalued assets.
  • Undiversification: divest non-core business and sharpen strategic focus
  • Institutional sponsorship: Promote equity research coverage
  • Public currency: the public currency for acquisition and stock-based compensation programs
  • Motivating Management
  • Eliminating dis-synergies
  • Corporate Defence: Divest “crown jewel” asset to make the takeover of parent company less attractive.

Challenges in spin-off: There are certain aspects that need to be managed, for example, if the parent company has debt, how this debt will be divided between parent and spin-off company. The lenders need to agree on the arrangement.

Split-Off: In a split-off, the parent company offers its shareholders the opportunity to exchange their parent-co shares. For example, a big shareholder can give up shares in the parent company to gain controlling stakes in the new company.

Split-up: Division of a company into two or more publically traded companies. The difference here is that instead of the parent company and spun-off company, we have completely new companies into existence.

Equity Carve-out: Also known as IPO carve-out, the parent company sells a portion or all of its interests in a subsidiary to the public in an initial public offering.

Financial Restructuring

Cleaning up a balance sheet: writing off losses, writing down useless assets, can be done through asset restructuring and recapitalization.

Debt Restructuring

  • Strategy-Driven: Restructure debt by lowering the interest rates.
  • Crisis-Driven: When a company defaults, the company is forced to restructure debt.

Equity Restructuring

  • Special dividend: One-time dividend
  • Share buyback: reduces the shareholder base. As a regulatory requirement, the debt-equity ratio should be 2:1, after the buyback. Buyback can happen through the open markets, tender offers, and buyback from employees.
  • Stock Splits: helps with liquidity
  • Bonus Shares: When the company is growing fast but does not want to distribute cash in form of a dividend, a bonus share will help reward the shareholders.

Human Resource Management

Any system has the following core features – Inputs, Processes & Procedures, Output, and Feedback. When we think of HRM systems, we can look at these features as

  • Inputs- People with their Knowledge, Skills, Abilities, and personalities.
  • HRM Processes, Procedures, and Policies
  • Outcomes- Organizational Perspective and Employee Perspective
  • Feedback – Internal or External

Core objectives of any HRM system from Org side

  • Productivity or Performance (Ability * Motivation* Opportunity)
  • Job Satisfaction
  • Motivation or Engagement
  • Low Attrition

Objectives from Employee side

  • Employee Contract: When an employee joins a company, there is a formal contract between employee and company. It is HR’s responsibility to make sure terms are fulfilled (leaves, medical benefits, etc)
  • Psychological Contract: A more important aspect from the employee’s side is a psychological contract which is unwritten, for example, the firm will help employees to learn and grow.

HR system has following processes

  • Recruitment and Selection
  • Orientation
  • Performance Management -> Compensation (Increments & Incentives), Training and development
  • Exit Processes

HR Environment impacting policies


  • Economic
  • Product Market
  • Labor Market
  • Government regulations
  • Social environment


  • Organization Culture
  • Business strategy
  • Org Size
  • Leadership
  • Technology
  • Lifecycle stage

Any organization goes through various lifecycle stages like startup -> Growing -> Mature -> Decline. HR policy will be impacted by the current stage of the organization. For example, an org in the startup phase will have different policies to attract organizations like profit-sharing in terms of ESOPs.

HR Strategies

Innovative Strategy: Firms need employees to be innovative, risk-taking, develop new skills, and exchange ideas. Firms allow employees to become stockholders by providing stock options as part of pay.

Quality Enhancement Strategy: Firms that are looking to gain a competitive advantage by improving the quality of products and production. Mostly comes with a fixed job description but employees need to be flexible and adaptable to new technologies. Performance appraisals are mostly short-term and result-oriented.

Cost reduction strategy: Firms with relatively fixed and explicit job descriptions try to gain a competitive advantage by cost reduction strategy. Narrowly designed career paths encourage specializations, expertise, and efficiency. Appraisals are short-term and result-oriented.

Different organizations are looking for different aspects in an employee. For example, a startup would look for employees

  • Risk-taking
  • Ready to experiment
  • Tolerance for failure- fail fast and learn
  • Entrepreneurial
  • Problem solver
  • Handle ambiguity

Innovation = AMO (Ability * Motivation * Opportunity)

Land, Labor, and Climate- Nonmarket forces

When we talk about nonmarket strategy, there are many factors that impact a firm. Here we will talk about the three most important aspects that a firm needs to be thinking about are – land, labor, and climate. We already talked about the climate in the last post. We will discuss more labor and land here.

Volkswagen Emission Scandal: An important case to understand the impact of non-market forces on a company is the case of Volkswagen which came into light in 2014-15. The company used a defeat device to cheat the emission tests giving false readings while the cars were being tested for emission against CCA emission standards. Volkswagen had ambitious revenue and sales goals, but at the same time, it suffered from high labor and manufacturing cost due to the way decision-making power had a big role in labor representations. Once the scandal was highlighted, Volkswagon came up with a strong nonmarket strategy under the new CEO where they invested heavily in future-oriented electric cars.

Land: Land is an important input for any business, to open factories, offices, storage units, etc. any firm needs land. Along with being important, the land is also a very complicated input to attain. Most land is owned by private owners or households. Obtaining a big chunk of land in a developing country like India which has a high population density can be a big challenge. The difficulty factor will vary based on factors like population density, type of land (land currently used for agriculture or residential purpose), connectivity (factories want easy access to roads, airports, shipping ports, etc.), and so on.

An interesting case study for land acquisition in India is the Tata motors Singur case in West Bengal, where the organization failed to set up the factory due to opposition from landowners. Without getting into political aspects, we will look at the Land acquisition act LARR which was the result of the Singur case.

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Rather than a forceful acquisition of land, consent-based ownership transferred needs to be in place. One solution is to go for an auction-based option given to landowners, where every owner can give their expected value of the land. The firms can choose the lowest bidders and an option of giving an alternate land can be given to people who are not ready to give up land for money. Another option that is in need of the hour is to rather than going horizontally, firms need to think more of going vertically when setting up new factories to help optimized usage of land. Also, profit-sharing options should be given to landowners.

Labor Laws: Labor is a necessary requirement for any kind of business. Any firm looking to set up a business at any location needs cost-effective skilled labor. A very simple calculation is how much investment of X per hour in labor is yielding in terms of outcome. Labor laws in any country will give directions for the discharge or dismissal of workers, wages, bonuses, lay-offs, retrenchment, and work conditions. For example, minimum wages laws help ensure that firms are paying a basic minimum wage so that workers can live a decent lifestyle.

Climate Change and Sustainable Value Framework

Climate change is an important factor in recent times which has been talked about in business and non-business environments. Every degree rise in temperature is going to have a long-lasting impact on our planet. Every business is a social entity, hence has a responsibility of making sure it is looking at growth keeping future generations in mind.

Projected Impacts of Climate Change
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Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs.

To contain global warming to a 1.5 degrees C rise, global net human-caused emission of carbon dioxide CO2 would need to fall by 45 percent from 2010 levels by 2030, reaching net zero around 2050.

Firms need to change the way they conduct business over next 2-3 years.

Business Megatrends and Sustainability

Business Megatrend refers to societal and economic shifts such as globalization, the rise of the information society, and so on.

Current Megatrends: Rapid Urbanization, climate change, and resource scarcity, shift in global economic power, demographic and social changes, technical breakthroughs, etc.

Sustainability is an important megatrend. GM’s decline can be clearly traced to its failure to understand how quality considerations would transform the auto industry. Similarly, Kodak’s dominant position in photography eroded quickly as it missed the signals in digital technologies.

The interconnection of the elements of the Triple Bottom Line concept.
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A sustainable business model is the one when a firm can keep a balance between the three factors – Profit, People, and Planet.

A firm cannot just focus on today’s profit but also need to think of tomorrow’s growth and sustainability.

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For sustainable growth, a firm needs to do well in all four quadrants. Firms need to reduce material consumption, reduce pollution, reduce waste generation. This can be achieved by a greater level of transparency and responsiveness

Some of the strategies including adopting green technologies and work towards inclusive wealth creation and distribution (reduce poverty), will help firms move towards sustainable growth.

The Sustainable Value Framework  
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Business, Government and Society

Normally one only considers market forces that impact business decisions. But there are some important nonmarket forces like government and society that impact business. Hence, every business needs a market strategy as well as a nonmarket strategy to be successful.

Three institutions for allocation of the resources

  • Market (Private Sector): Capitalist system operates on the basis of private property, voluntary exchange, competition, and the profit motive.
  • Government (Public Sector): Centralized mechanism in which government provides public services to citizens on the basis of criteria other than the ability to pay.
  • Community: Decentralized mechanism for allocating resources where the purpose is to meet certain categories of need rather than to make a profit.

Globalization and De-Globalization

Globalization is a concept when local markets open up for global markets. This impacts the import and export of the country. Whereas in certain cases, the government takes decisions based on National priorities over globalization, giving rise to de-globalization.

Business Environments: Internal vs External

Every business has to deal with external and internal environments. Internal factors are straightforward where the business has control over, for example, its policies, production units, etc. The external environment is the one where the business has no or little control like government policies, cultural differences between countries, laws in different countries, and so on.

Business flow: Inputs — > Production — > Outputs

Inputs can be land, labor, raw materials, etc. A lot depends on external factors in this case.

Production is the process of converting the inputs into outputs. This is the firm’s internal environment which it can control.

Outputs are the output generated by a firm in form of products and services, which it needs to supply to other firms, government, end customers, again external factors play a role.

The Market Economy


The image above shows financial flow in a market economy. In this case, households are engaged with firms by working in them and earning wages, investing in the firm and earning dividends, renting land or resources and getting an income, or directly owning the firms and making profits. Households in turn buy from the firms adding to their income.

Government purchases from firms and adding to revenue. Additionally, Government gets tax from firms and households which adds to its income. The government also gives back to households in terms of various schemes like policies for people below the poverty line.

Firms and households interact with the rest of the world in terms of import and export. this also depends on various government policies.

Market and Non-Market environments in business

The Nonmarket Environment of Business
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Information about the nonmarket environment is important for any firm. One needs to understand what citizens are thinking about the product, what the media is talking about, what are government policies, what are issues raised by NGOs, and so on. Firms need to engage and form coalitions with these units. Firms need to deal with uncertainty around these factors.

The market environment includes direct interactions between firms, suppliers, and customers that involve voluntary economic transactions.

The nonmarket environment is composed of social, political, and legal arrangements and interactions between the firm and individuals, interest groups, government entities.

Non Market strategy

In short, senior management for any business needs to understand that business is not only economic agents but also are social and political beings. Firms are impacted by a lot many actors like laws and regulations, social pressure, activism, and public perception. So any business management needs to make sure to form a non-market strategy, along with a market strategy.

Decision Making Under Certainty

There can be cases where we have all the needed data is available, and we need to make decisions such that a given objective is achieved in the best possible manner while satisfying conditions imposed.

To understand the concept let’s take the problem of optimizing resource utilization and maximizing profit, where we have all the details on how much resources are being used by the products. Say in a factory, we are building 2 products, Product A and B. The Factory has 4 units. Product A generates 30000 in profit and manufacturing needs 1 hr in unit 1, 2 hr in unit 2, and 2 hr in unit 3. For product-B, it generates 50000 in profit and its manufacturing needs 2 hr in unit 1, 2 hr in unit 2, and 3 hrs in unit 4. As given constraints, we know that unit 1 can operate 4000 hrs, unit 2 can operate 6000 hrs, unit 3 can operate 5000 hrs and unit 4 can operate 4500 hrs in a month.

To solve this problem, we are going to use the Simplex Linear Programming method. This is available off the shelf in Microsoft Excel, so we will set up the data in an excel sheet.

Simplex LP

Let’s try to understand the data here before moving ahead. We have added data for Product A and B, Profit data for per unit, units manufactures is just a placeholder for now, and then we have given the number of hours spent in each unit by both the products.

Column E2 has total profit, i.e. number of units for product A * per unit profit product A + number of units for product B * per unit profit product B or =SUMPRODUCT(B2:C2, B3:C3)

Column E5 to E8 is also dynamically calculated. For example, E5 has Time spent by product A in unit 1 * units manufactured Product A + Time spent by product B in unit 1 * units manufactured Product B or B5 * B3+ C5 *C3. Similarly, E6,7 and 8 are calculated.

Once we have an excel setup, the next steps are easy. Go to Data -> Solver -> Object (choose column E2 where we calculate total profit) -> For “To”, let the default max be selected as we want to maximize profit -> For Changing variable cells choose B3 and C3 where we have units manufactured for A and B -> Add constraints by selecting Hours available cell reference i.e. from E5 to E8 is <= G5 to G8 (constraints can be added one by one or in one go when the comparison is same i.e. in this case <=) -> Choose Solving method as Simplex LP.

When you click on solve, you will get an optimal solution

The solution says that we should produce 2000 units of product A and 1000 units of product B with a maximized profit of 110000000.

Now there can be situations like due to some operational issue we lost 100 hrs in unit 1 or there is a way we can borrow 100 hours for unit 2 from another factory, what is the impact on our profit. Or say due to change in market dynamics product A can give a profit of 40K instead of 30 K. An valuable tool to look at all the related data is sensitivity analysis. When we clicked solve button on Solver, we are given an option to generate a sensitivity analysis report.

The generated report looks like

sensitivity analysis

The upper 2 rows here talk about 2 products. So coming back to our question, that if instead of 30K, we get a profit of 40K from product A, shall that change my product mix. The report says that there is no impact on product mix for increase by 20 K or decreases by 5K, or in other words, product A profit can range from 25K to 50K and current product mix remains valid. Similarly for Product B, the profit range is 30K to 60K. Any change beyond this will need us to recalculate the analysis.

Coming to Constraint data, shadow price indicates that each hour in the current unit has this much impact. For example, if we can increase unit one capacity by one hour, from 4000 to 4001, we can increase our profit by 20K, so getting extra 100 hours will result in 2000K, and reduction by 100 hours will have the same negative impact on profit. The range of increase and decrease of 500 each says that the calculation is valid till this range, so if we say unit one can get more than 500 hours, we will need to recalculate the values as the current calculation will no more hold good.

Hypothesis Testing for Decision Making

In the last post. when I talked about Sampling and Estimation, we discussed P-Value in regression analysis and how this should be less than our error threshold α (alpha). We will understand what is this α value and how we get this while understanding the hypothesis testing.

Hypothesis testing is all about coming up with a hypothesis and figure out if should reject or not. The two components we have here are

  • Null Hypothesis or H0
  • Alternate Hypothesis or H1


  1. Together the two hypotheses should cover all possible outcomes
  2. The two hypotheses should be mutually exclusive.

α is the tolerance level or level of accepting the error. so we can say

P-Value or Probability of current outcome <= α [Reject H0]
P-Value or Probability of current outcome > α [Do not Reject H0]

Reject H0Do not Reject H0
H0 is TrueType 1 ErrorOK
H0 is FalseOKType 2 Error
Hypothesis testing

α is Probability of Type 1 Error.

Let’s take an example, the judiciary system says “innocent till proven guilty”. So consider this as the null hypothesis

H0 Person is innocent (we need to reject this to prove the person is guilty)
H1 Person is guilty

Type 1 Error: Person is innocent but is treated guilty (we target to minimize this)
Type 2 Error: Person is guilty but is treated innocent

Sampling and Estimation

An important tool for decision-making is sampling and estimation. For any promotional campaign, new product launch strategy, marketing ad campaign, etc. companies need to understand their customer behavior. Sampling and estimation is a strong tool to analyze the customer’s data, for example, say a supermarket company wants to understand how profitable is an online customer vs an offline customer. Rather than going through data for all the customers a random sample is taken and analyzed.

Sample Data snapshot

Data Analysis: Let’s say we are able to calculate following data

Sample Size: 14998
Profit for Sample: 1665295
Average: 111.03
Standard Deviation: 275.30

Similarly we can find data for Online vs Offline Customers

Online Customers

Sample Size: 3830
Profit for Sample: 448509
Average: 117.13
Standard Deviation: 283.91

Offline Customers

Sample Size: 11168
Profit for Sample: 1216786
Average: 108.94
Standard Deviation: 272.27

Point Estimates vs Interval Estimates

The above estimate that we have done is a form of a point estimate as we are trying to find an average point and use it as an estimator for the population. For example, we have an average profit estimate for online customers is 117.13. But it is highly unlikely that an online customer’s profit is actually 117.13. So we try to find a range or interval in which the profit is likely to fall. An important aspect of such an analysis is how confident are we with our range. Normally such an analysis is done for confidence levels at 90%, 95% (mostly used), and 99%.

90% Confident Interval (CI) = (sample mean – 1.645* SD/√sample size, sample
mean + 1.645* SD/√sample size)

95% Confident Interval = (sample mean – 1.96* SD/√sample size, sample
mean + 1.96* SD/√sample size)

99% Confident Interval = (sample mean – 2.576* SD/√sample size, sample
mean + 2.576* SD/√sample size)

Let’s solve for online customers CI level 95%

117.13 – 1.96*275.30/√3830 , 117.13 + 1.96*275.30/√3830

108.41, 125.84

Simple Regression Analysis

An important tool for analysis is simple regression, where we try to predict a dependent variable based on the value of the independent variable. The equation would look like

y = mx + c

You might recognize this equation as an equation for a line in the 2D plane. So basically we try to plot all the points on the 2D plane and try to figure out a pattern.

y is the dependent variable
x is the independent variable
m is slope
c is intercept

To solve this, Microsoft Excel provide us off the shelf tool for Regression.

Go to Data-> Data Analysis -> Select Regression -> For Y range choose Profit Column -> For X Range choose Online/ Offline Column -> Select Labels checkbox as we have selected header row as well -> Let confidence level default and press OK

Output of Simple regression is

Important values to note here is coefficients, which we can substitute in our equation

y = mx + c
c= 108.94
m = 8.19

x can be online or offline in our case we have values 0 or 1

so for online (x=1) customers, equation resolves to

Profit for online customers = 8.19 * 1 + 108.94 = 117.13

Profit for offline customers = 8.19 * 0 + 108.94 = 108.94

This is ins sync with our earlier calculations.

An important value to note here is P-value. A higher P-value indicates the probability of error in the current analysis. We define a threshold α (alpha), and we keep the p-value below this threshold. I will discuss hypothesis threshold α later, but for now, we can say that a value of 11 is a very high probability of error. So this indicates can we actually associate profit with online or offline parameters. Or are there other parameters that are playing a role?

To understand this, let’s introduce another factor “age” in calculations and solve using multiple regression.

Multiple Regression Analysis

Let’s say we introduce the age data to our excel, and the data is not absolute age but say range id (when you fill a form it gives you ranges 10-18, 19-24, and so on).

Sample Data

We will repeat the steps to calculate regression, just that this time we will select both online and age column for value of x

Multiple Regression

Once calculates, we will see values like

Multiple Regression

As we can see the P-value this time is very low, we can trust our analysis. We have multiple independent variables, so our equation will be like

y = m1x1 + m2x2 + c

or Profit = 27.181 * online + 25.85 * age + 17.080

We can substitute values and find the Profit, for example, we want to find profit for young people (age group 1)

Profit Online = 27.181 * 1 + 25.85 * 1 + 17.080 =70.03

Profit Offline = 27.181 * 0 + 25.85 * 1 + 17.080 =42.85

We can calculate profit for other age groups as well. We can conclude that both age and mode (online/offline) are playing a role in profit.

Decision Trees for Decision Making

We have talked about the basics of decision making and sensitivity analysis. Next, we will look into the usefulness of decision trees in process of decision making.

We will go back to our previous example where we are analyzing between 2 product prototypes, and have probabilities and outcomes available. We will represent the data in form of a decision tree and solve the problem.

Before getting into the problem, we need to understand the basic constituents of a decision tree.

Circular nodes: shows various outcomes, for making the decision we calculate the best option based on values of available outcomes and probability

Square Nodes: These are decision nodes, which shows various options available and we need to choose the best

While drawing the decision tree, we go from left to right, but when solving the tree, we go from right to left, calculating one layer at a time. Let’s go back to our example and see the decision tree in action.

Decision Tree

We start by creating a tree, mentioning all the options available and their outcomes in case the option is chosen. Then we start solving from right to left and update values for circular – outcome nodes (values in red). We move one step backward and at the decision node, the best option is chosen.

Sensitivity Analysis in Decision Making

A few days back I wrote about the basics of decision making. Next, we will look into Sensitivity analysis.

Sensitivity Analysis examines how our decision might change with different input data.

We will start with our previous example, where a company is trying to launch a product and they have the following options right now.

Go with prototype 1200,000-180,000
Go with prototype 2100,000-20,000
Do nothing00
Decision/ Payoff Table

Let us say

P = Probability of a favourable market i.e. Success

(1-P) = Probability of unfavourable market i.e. failure

Sensitivity Analysis

EMV Prototype 1 = 200000P – 180000(1-P)
= 380000P – 180000

EMV Prototype 2 = 100000P – 20000(1-P)
= 120000P – 20000

EMV Do nothing = 0P – 0(1-P) = 0

sensitivity analysis

Point 1

EMV Do nothing = EMV Prototype 2
0 = 120000P – 20000
P = 20000/120000
P = 0.167

Point 2

EMV Prototype 2 = EMV Prototype 1
120000P – 20000 = 380000P – 180000
P = 160000/260000
P = 0.615

So based on sensitivity analysis we can conclude based on probability of success or favorable market P, that

Do nothing if P < 0.167
Go for prototype 1 if P>=0.167 and P<0.615
Go for Prototype 2 if P>= 0.615