Bowman Risk/Return Theory (1980)

DF#^SY LIBRARY

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ALFRED

P.

WORKING PAPER

SLOAN SCHOOL OF MANAGEMENT

A RISK/RETURN PARADOX FOR STRATEGIC MANAGEMENT

Edward H. Bowman

WP 1107-80

March 1980

MASSACHUSETTS

INSTITUTE OF TECHNOLOGY

50 MEMORIAL DRIVE

CAMBRIDGE, MASSACHUSETTS 02139

A RISK/RETURN PARADOX FOR STRATEGIC MANAGEtffiNT

Edward H, Bowman

WP 1107-80

"

March 1980

To be published in the Sloan Management Review

Spring, 1980

A RISK/RETURN PARADOX FOR STRATEGIC MANAGEMENT

by Edward

H.

Bowman

Abstract

The total set of industries from Value Line is used to

demonstrate that business risk and return are negatively correlated

across companies within industries.

Some empirical questions

about industries themselves are also raised.

The concepts of

income smoothing and corporate strategy are utilized to explain

this apparent paradox.

elaborated.

Further work is both suggested and

A Risk/Return Paradox for Strategic Manc.gement

by Edward H. Bowman*

Strategic management is concerned with choosii g environmental

domains, determining the nature of the interaction:; with these domains,

and making the internal adjustments suggested or required by these choices.

An organizational and hierarchical way of capturing these activities, and

differentiating among them, is to analyze the issues of corporate

strategy, of business strategy, and of functional strategy. [1]

One of the major elements present at all three stages of strategic

decision making is resource commitment in its various generic investment

forms.

Examples would be a) acquisition of a company in an unrelated

product/market - at the corporate level, or b) mounting a substantial

research and development program to reposition a product line - at the

business level, or

c)

beginning a different promotion and advertising

program for a product in the mature stage of its life cycle - at the

functional level.

Ideas about the...