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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...