The risk‐return paradox for strategic management: disentangling true and spurious effects

The concept of risk is central to strategy research and practice. Yet, the expected positive association between risk and return, familiar from financial markets, is elusive. Measuring risk as the variance of a series of accounting‐based returns, Bowman obtained the puzzling result of a negative association between risk and mean return. This finding, known as the Bowman paradox, has spawned a remarkable number of publications, and various explanations have been suggested. The present study contributes to this literature by showing that skewness of individual firm' return distributions has a considerable spurious effect on the empirically estimated mean‐variance relationship. I devise a method to disentangle true and spurious effects, illustrate it using simulations, and apply it to empirical data. It turns out that the size of the spurious effect is such that, on average, it explains the larger part of the observed negative relationship. My results might thus help to reconcile mean‐variance approaches to risk‐return analysis with other, ex‐ante, approaches. In concluding, I show that the analysis of skewness is linked to all three streams of literature devoted to explaining the Bowman paradox. Copyright © 2008 John Wiley & Sons, Ltd.     

Exploring longitudinal risk‐return relationships

We study a longitudinal fit model of adaptation and its association with the longitudinal risk‐return relationship. The model allows the firm to adjust its position in response to partial learning about a changing environment characterized by two path‐dependent processes—a random walk and a stochastic trend. Computational simulations at low levels of learning in both environmental contexts are consistent with empirical data. However, the results are also consistent when firm behavior appears to be mindless in the form of a random walk. Hence, both imperfect learning and a mindless random walk can lead to the inverse longitudinal risk‐return relationships observed empirically. We discuss this apparent paradox and the possible resolution between mindless and conscious behavior as plausible causes of the longitudinal Bowman Paradox. Copyright © 2014 John Wiley & Sons, Ltd.     

Dynamic and risk measurement perspectives on bowman's risk-return paradox for strategic management: An empirical study

Bowman's (1980, 1982) widely quoted papers have reported the existence of a risk-return paradox for strategic management. In this paper the authors examine the dynamic behavior of the risk-return relationship and analyze whether the risk-return paradox is stable across time. The analysis involves tracking Bowman's so-called negative association ratio across time. Using accounting measures of risk and return, it is demonstrated that while the paradox holds during the 1970s, the finding does not hold in the environment of the 1960s. Further, the paradox disappears if market-based risk measures are used. Some implications for strategic management are then discussed and attention is directed towards the meaning of risk in the context of strategic management. In addition, possible explanations for this paradox are evaluated and directions for further research are suggested.     

Product Market Competition and Corporate Real Estate Investment under Demand Uncertainty

This article theoretically and empirically analyzes the interactions among corporate real estate investment, product market competition and firm risk. In our model, firms own strategic real estate or lease generic real estate. Our model predicts that strategic real estate ownership is positively correlated with industry concentration and negatively related to demand uncertainty. Also, firm risk is higher for firms with more strategic real estate operating in a more concentrated market. This prediction arises because smaller investments induce greater market competition, which effectively eliminates the right tail of the firm's profit distribution. We provide strong empirical support for our predictions. In particular, firm value is more volatile in less competitive markets for a given level of demand uncertainty.     

The impact of strategic dissent on organizational outcomes: A meta‐analytic integration

Research summary: Strategic dissent represents divergence in ideas, preferences, and beliefs related to ideal and/or future strategic emphasis. Conventional wisdom in strategic management holds that such differences in managerial cognitions lead to higher‐quality strategic decisions, and thus to enhanced firm performance. However, 4 decades of empirical research have not provided consistent findings or clear insights into the effects of strategic dissent. Hence, we analyze the relative validity of predictions about these effects from both social psychological theories of group behavior and information processing perspectives on decision‐making. Then, we conduct a meta‐analytic path analysis (MASEM) based on current empirical evidence. Synthesizing data from 78 articles, we put to rest the notion that strategic dissent leads to positive outcomes for organizations and estimate how negative its effects actually are. Managerial summary: Top management teams (TMTs) set the tone and direction for their firms in important ways. Top managers, however, often disagree over fundamental issues related to strategy. Such strategic dissent affects how important decisions are made, and thus how the firm performs. In more specific terms and contrary to popular belief, strategic dissent creates not only dysfunctional relationships among top managers, but also disrupts the process by which these managers exchange, discuss, and integrate information and ideas in making strategic decisions. In short, firms have not yet generated value through numerous perspectives, ideas, and opinions among their top managers. We discuss interventions that could prove helpful in efforts to benefit from having diverse cognitions in a TMT.     

Stock market undervaluation of resource redeployability

Research Summary : Stock market undervaluation of resources was often assumed to have strategic implications. Such undervaluation lets firms buy resources relatively cheaply, but it can also constrain resource deployment. This article shows that the option to redeploy a firm's resources to a new business can be undervalued in stock markets when investors face ambiguity about that option due to uniqueness of redeployment. The developed formal model derives conditions under which stock markets undervalue resources. Those conditions are summarized with an empirical operationalization that can be tested with a broad range of strategic implications. Besides, the model provides a more complete account of resource redeployability by demonstrating the redeployability paradox. The paradox highlights that some determinants of redeployability enhance undervaluation, while simultaneously increasing objective value of redeployable resources. Managerial Summary : Stock markets can systematically undervalue resources. On the one hand, such undervaluation creates a profitable opportunity for a firm that needs some resources for its growth and compares the option to buy stock in another firm, whose resource are undervalued, with the option to build those resources internally. On the other hand, such undervaluation poses limits to resource deployment strategies of the undervalued firm. When does such undervaluation occur? This study highlights one possible source for undervaluation, ambiguity that is faced by stock market investors about the option to redeploy a firm's resources to a new business. The study specifies conditions under which stock markets are more likely to undervalue resources. The understanding of those conditions can guide managers toward strategic opportunities.     

Teamwork and delegation of decisions within the firm

Teamwork effort is related to a number of firm and workers’ outcomes such as firm productivity, innovation or job satisfaction. Thus, it becomes important to understand the factors conducive to teamwork. In this paper, we analyze the relationship between teamwork and the firm organizational design, with a particular emphasis on the decentralization of decision rights. We develop a simple model allowing for different organizational structures, according to whether or not production and firm strategic decisions are delegated. We find that overall delegation of decision making is positively associated with teamwork. However, when we distinguish between delegation of firm strategic decisions and delegation of production decisions, we obtain that it is just the delegation of firm strategic decisions that induces teamwork. We test the model predictions on a unique dataset of Spanish small and medium size firms that contains information on worker self-reported importance of teamwork. The empirical analysis also corroborates previous findings in the literature regarding the positive relation between cooperation and pay incentives.     

Do strategic groups exist? an economic framework for analysis

This paper offers a framework and methodology for resolving the question regarding the existence of strategic groups. We say that a strategic group exists if characteristics of the group affect firm performance independently of firm-level and industry-level effects. We argue that group-level effects are a byproduct of strategic interactions among members, and develop an empirical testing model, based on the ‘New Economics of Industrial Organization,’ to distinguish true group effects from spurious effects. From this model, we derive a series of logically consistent propositions, suggesting that while strategic interactions are critical for a group-level effect on profits, mobility barriers are necessary to preserve both groups and their effects over time. A review of prior empirical studies of strategic groups suggests that the inconclusive nature of prior research has been due more to the lack of a theoretical foundation for empirical analysis than to the nonexistence of groups. To the extent that our methods have been employed, there is limited evidence that a rigorous search for strategic groups may prove fruitful. © 1998 John Wiley & Sons, Ltd.     

Strategic groups and competitive enactment: a study of dynamic relationships between mental models and performance

This study used computer-assisted content analysis of more than four hundred presidents' letters to shareholders to examine empirical linkages between cognitive strategic groups clustered by themes in the reports and strategic groups clustered by performance. We found these groups converged as predicted by the literature, and that mental models and performance are involved in a recursive process of competitive enactment which contributes to strategic group stability. Our research used inductively derived themes from the letters to structure a mental model widely shared in the pharmaceutical industry, and then employed thematic variations to find stable clusters of companies. These thematic clusters were triangulated with the strategic groups from a published study of the same industry, in the same period, and were shown to converge. Additionally, longitudinal linkages between earlier mental models of strategic goals and later reports of performance were found. The findings of our large-scale empirical study support strategic group theory, demonstrate a novel approach to data mining, and pose questions for future research. Copyright © 2001 John Wiley & Sons, Ltd.     

团队氛围、董事会内部沟通与战略绩效

本文在理论分析的基础上提出研究假设,通过问卷调查的方式搜集数据,以47家企业董事会454份有效问卷为样本进行实证研究,结果表明,团队氛围中的团队信任对董事会内部沟通具有显著的正向影响;团队氛围中的情感冲突对董事会内部沟通具有显著的负向影响;董事会内部沟通对企业战略绩效中的团队学习力、决策有效性和战略一致性均具有显著的正向影响。研究不仅丰富了董事会团队过程理论,而且能够有效地指导公司治理实践。     

Knowledge Creation in Strategic Alliances: Another Look at Organizational Learning

This paper argues that a certain amount of partner conflict must exist for knowledge creation to occur in a strategic alliance. We argue that such tensions can generate opportunities for firms to challenges each other's assumptions and paradigms, leading to novel perspective and new solutions. This position is contrasted to existing theories that present conflict minimization as the route to alliance success. The paper exploits the generative or double-loop learning process (Liedtka et al. 1997; Argyris and Schon 1996) to build a model of inter-organizational knowledge creation and explicitly considers the implications for partner interactions. We suggest that knowledge creation often occurs in turbulent and discontinuous environments associated with the tension between alliance partners of different cultural origins. This paradox is critical to understanding the reasons why strategic alliances often fall short in their potential to create new knowledge.     

STRATEGIC CHANGE IN THE TURNAROUND PROCESS: THEORY AND EMPIRICAL EVIDENCE

Early corporate turnaround theorists argued that strategic reorientations are central to the recovery process at many declining firms. However, subsequent large-sample empirical studies have reported that performance turnarounds for declining firms are primarily associated with cutback actions that increase efficiency, thus creating a gap between theory and empirical findings. We close this gap by presenting and empirically supporting a model proposing that the extent of strategic change initiated in a successful turnaround varies systematically with a declining firm’s need and capacity to reorient its strategy. Based on our model, we offer explanations for why past large-sample researchers were not able to verify the role of strategic change in the turnaround process and we reassert the adaptive role that strategic reorientations have in the turnaround attempts of declining firms with weak strategic positions. © 1997 by John Wiley & Sons, Ltd.     

Thinking strategically about thinking strategically: the computational structure and dynamics of managerial problem selection and formulation

A new model of managerial problem formulation is introduced and developed to answer the question: ‘What kinds of problems do strategic managers engage in solving and why?’ The article proposes that a key decision metric for choosing among alternative problem statements is the computational complexity of the solution algorithm of alternative statements. Managerial problem statements are grouped into two classes on the basis of their computational complexity: P‐type problems (canonically easy ones) and NP‐type problems (hard ones). The new model of managerial cognitive choice posits that managers prefer to engage with and solve P‐type problems over solving NP‐type problems. The model explains common patterns of managerial reasoning and decision making, including many documented ‘biases’ and simplifying heuristics, and points the way to new effects and novel empirical investigations of problem solving‐oriented thinking in strategic management and types of generic strategies, driven by predictions about the kinds of market‐ and industry‐level changes that managers will or will not respond to. Copyright © 2009 John Wiley & Sons, Ltd.     

Ambidextrous Idea Generation—Antecedents and Outcomes*

Ambidexterity, defined as the capability to develop both incremental and radical innovations, is an important driver of firm success. Idea generation is an essential starting point for both types of innovation. Therefore, this study investigates whether ambidextrous idea generation, defined as the capability to actively generate both incremental and radical ideas, affects new product development (NPD) success. Analyses on the Comparative Performance Assessment Study (CPAS) data, which includes data from 453 companies distributed over 24 countries, demonstrate that ambidextrous idea generation does indeed affect NPD program success. Consequently, this study also investigates which antecedents foster ambidextrous idea generation. The innovation paradox concept predicts that achieving ambidexterity requires overcoming paradoxical antecedents. Therefore, we tested whether combinations of financial and breakthrough orientations (the paradox of strategic emphasis), a formal innovation process and an innovation culture (the paradox of innovation drivers), tight and loose customer coupling (the paradox of customer orientation), and internal development and external collaboration (the paradox of openness) affects ambidextrous idea generation. The results show that only customer orientation and openness have the expected inverted u‐shaped effect. These finding are in line with construal level theory, which predicts that the organizational characteristics that influence idea‐generation activity must be at the same construal level to have the desired effect. The contribution of this study is twofold. First, the analyses indicate that ambidextrous idea generation has significant repercussions for the entire NPD program. Second, the results show that resolving innovation paradoxes only has an effect if the construal level of the paradox and the activity match. This finding indicates an important boundary condition for the innovation paradox concept.     

Does Strategic Planning Enhance or Impede Innovation and Firm Performance?*

Does strategic planning enhance or impede innovation and firm performance? The current literature provides contradictory views. This study extends the resource‐advantage theory to examine the conditions in which strategic planning increases or decreases the number of new product development projects and firm performance. The authors test the theoretical model by collecting data from 227 firms. The empirical evidence suggests that more strategic planning and more new product development (NPD) projects lead to better firm performance. Firms with organizational redundancy benefit more from strategic planning than firms with less organizational redundancy. Increasing R&D intensity boosts both the number of NPD projects and firm performance. Strategic planning is more effective in larger firms with higher R&D intensity for increasing the number of NPD projects. The results reported in this study also consist of several findings that challenge the traditional views of strategic planning. The evidence suggests that strategic planning impedes, not enhances, the number of NPD projects. Larger firms benefit less, not more, from strategic planning for improving firm performance. Larger firms do not necessarily create more NPD projects. Increasing organizational redundancy has no effect on the number of NPD projects. These empirical results provide important strategic implications. First, managers should be aware that, in general, formal strategic planning decreases the number of NPD projects for innovation management. Improvised rather than planned activities are more conducive to creating NPD project ideas. Moreover, innovations tend to emerge from improvisational processes, during which the impromptu execution of NPD activities without planning spurs “thinking outside the box,” which enhances the process of creating NPD project ideas. Therefore, more flexible strategic plans that accommodate potential improvisation may be needed in NPD management since innovation‐related activities cannot be planned precisely due to the unexpected jolts and contingencies of the NPD process. Second, large firms with high levels of R&D intensity can overcome the negative effect of strategic planning on the number of NPD projects. Specifically, a firm's abundant resources, when allocated and deployed for NPD activities, signal the high priority and importance of the NPD activities and thus motivate employees to acquire, collect, and gather customer and technical knowledge, which leads to creating more NPD projects. Finally, managers must understand that managing strategic planning and generating NPD project ideas are beneficial to the ultimate outcome of firm performance despite the adverse relationship between strategic planning and the number of NPD projects.     

An evolutionary perspective on strategic group emergence: a genetic algorithm‐based model

We develop a simulation model to examine conditions under which strategic groups emerge and their performance difference persists. In our model, mobility barriers, strategic interactions among high performers, dynamic capabilities (the mechanisms that allow winners to continue to survive), and boundary of rivalry are put together to derive their joint implications for the evolution of strategic groups. Not surprisingly, our model behavior shows that mobility barriers and strategic interactions play an important role in sustaining intergroup performance difference. However, the extremely high level of mobility barriers is shown to impede the emergence of strategic groups. We also find that dynamic capabilities and boundary of rivalry are as essential as mobility barriers in understanding the emergence and stability of strategic groups. When dynamic capabilities are absent or when rivalry is extended over firms with dissimilar strategies, strategic groups are less likely to exist. These findings can serve as a guideline for empirical research to probe why strategic groups exist sometimes and why they do not at other times. Copyright © 2002 John Wiley & Sons, Ltd.     

Ownership Dynamics with Multiple Insiders: The Case of REITs

We study ownership dynamics of multiple strategic risk-averse insiders facing a moral hazard problem. We show that, when insiders cannot commit,  ex ante , to an ownership policy, the aggregate insider stake gradually declines toward the competitive market allocation. Both the speed of adjustment and the long-term equilibrium aggregate insider ownership level are greater for companies with a larger number of insiders,  ceteris paribus . Using data from U.S. real estate investment trusts, we then test the model and find that the predictions of the model are verified empirically.     

Unmixed signals: How reputation and status affect alliance formation

We analyze how incumbents in technology‐driven industries are influenced by founders' reputation and status when considering strategic alliances with newly emerging firms. We theorize that reputation and status represent two distinct components of perceived quality that exert independent and interdependent effects on alliance formation. Using literature on impression formation processes to derive predictions of signal congruence, we argue that the independent effects of reputation and status are amplified when the two are congruent, and that the effect of negative congruence (both reputation and status are low) is stronger than positive congruence (both are high). We find support for our arguments based on panel data on alliances between pharma and biotech firms, using data on biotech scientists' research output (reputation) and university attended (status). Copyright © 2013 John Wiley & Sons, Ltd.     

Technology Push or Market Pull? Strategic Orientation in Business Model Design and Digital Start-up Performance*

The digital revolution is fundamentally reshaping the business landscape by generating abundant new opportunities and novel business models. As a new source of value creation, a start-up’s business model is critical for its survival and growth. How, then, should a digital start-up design its business model? The present study departs from existing viewpoints on the topic and proposes a strategic orientation view. By integrating the resource-based view and the demand-side perspective, we examine the impact of strategic orientation in business model design on the performance of start-ups in the digital economy. Using a data set of digital start-ups, our empirical results show that both technology and consumer orientations are beneficial to the performance of start-ups. However, it would be counterproductive for a digital start-up to seek a balance between both strategic orientations in business model design. Furthermore, the positive relationship between consumer orientation and firm performance becomes more prominent in a highly open technological environment, but is weakened in environments characterized by high user interactivity. This study advances business model design research by proposing a strategic orientation view, and contributes to business model theory building by offering an integrated view that embraces the resource-based view and the demand-side perspective.