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Strategic Risk examines a fundamental issue in the field of strategic management and organizations: how to study changes in the competitive outcomes of firms. Collins and Ruefli develop the concept of ordinal risk and extend this concept and its associated measures to the more general framework of state-defined systems. The book makes the state-defined risk methodology more accessible to strategic management researchers, and to social scientists in general. The need for quantitative frameworks with which to analyze the dynamics of strategic management has been apparent for some time. The state-defined risk methodology has the advantage of being based on a common usage definition of risk, and is also based on a mathematically well-behaved function. It permits investigation of the chance of gain while yielding a measure of environmental uncertainty. Finally, the development is general and permits applications employing a variety of performance dimensions over a range of entities in a diversity of contexts. The authors demonstrate the practicability and reliability of this approach by applying the model to mutual funds, large mining and manufacturing firms, and public firms on an industry by industry basis.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
Strategic management thought is in a period of transition. For some time now managers have been forced to devise innovative strategies to cope with environments that are increasingly dynamic in nature, but traditional strategic management concepts and models have emphasized primarily the static and inertial aspects of strategy and have not provided these managers with much help in this regard. However, recent developments in strategic management thinking and research indicate that the obvious growing dynamics of the environments of practitioners of strategic management are, at last, finding multiple echoes in the halls of academia.
James M. Collins, Timothy W. Ruefli

Chapter 2. Review and Analysis of Traditional Conceptualizations and Related Measures of Risk

Abstract
Before proceeding to the development of a concept and measure of strategic risk, it is important that a foundation of antecedent concepts, measures and approaches to risk be established. To accomplish this, we will review a number of segments of the strategic management-related literature and overview aspects of risk in this historical context.
James M. Collins, Timothy W. Ruefli

3. A Concept of State-Defined Risk

Abstract
The discussion contained in the preceding chapter demonstrated that during the past twenty years researchers in strategy and in a range of strategy-related disciplines have developed a paradigm of risk that has found wide-spread use, if not whole-hearted acceptance, among strategy theorists. As discussed in Chapter 2, this paradigm looks at risk in terms of fluctuations of outcomes and has usually been operationalized in terms of a variance-based measure of some sort. Unfortunately, not only have the predominate measures of risk in the literature been shown to be lacking, in the course of elaborating and using this paradigm of risk researchers have failed to determine if the paradigm parallels common managerial usages of the idea of risk. In spite of all of the research which has been directed toward developing a reasonable general model of risk, an underlying problem, of special interest to strategy theorists and practitioners, remains: What is risk in a strategic context, how can it be conceptualized, and how, given such a conceptualization, can strategic risk be measured? This chapter will address these issues in a state-defined context.
James M. Collins, Timothy W. Ruefli

4. A Measure of State-Defined Risk

Abstract
As the behavior of a set of firms is observed over time, the “reshuffling” or relative change of categories within a set of firms along some dimension occurs on an ongoing basis and may be thought of as a direct consequence of both the differing strategies which firm managers formulate to guide their organizations, and the various differential effects of the environments in which the firms operate. The ability to describe relative movements and to utilize the information contained in these descriptions provides a basis for evaluating the risk and uncertainty associated with a set of firms either individually or collectively.
James M. Collins, Timothy W. Ruefli

5. A Generalized Measure of State-Defined Uncertainty

Abstract
To this point in the development, attention has been focused on the development of entropic measures of uncertainty for a system of entities as a whole. Such classical measures of informational uncertainty assume that all outcomes in a system of events are of equal importance to a managerial decision maker. There is no distinction between the treatment of a category shift from first to last category and the treatment of a category shift from second to third category. However, other things being equal, it is reasonable to suppose that these two events should contribute differently to an evaluation of a firm’s state-defined uncertainty. What is needed is a way to distinguish among different classes of category shifts in terms of their amount of loss or gain if their differences and evaluation are to be reflected in a measure of risk.
James M. Collins, Timothy W. Ruefli

6. Concepts and Measures of State-Defined Prospect and Hold

Abstract
The focus of concept development and measurement to this point in the exposition has been on the concept of risk and, by definition, the realm of loss. This focus differs significantly from the emphasis in almost all research literature on risk. As mentioned in Chapter 1, the bulk of the literature in strategic management has utilized a measure of risk—variance—that does not distinguish positive from negative changes in performance (March and Shapira, 1987). Similarly, ß from the CAPM, only measures association with movements in the market line, not whether those changes were positive or negative in nature. Only the few studies (e.g., Hogan & Warren, 1972, 1974; Bawa & Lindenberg, 1977; Harlow & Rao, 1989) that employed a semivariance or mean lower partial moment approach explicitly treat risk as being a downside phenomenon.
James M. Collins, Timothy W. Ruefli

Chapter 7. Recapitulation

Abstract
The first part of the book has laid the groundwork for and presented the development of a new approach to strategic risk, prospect and uncertainty. The empirical differences between the new concepts and measures presented in this book and three existing risk measures: variance, beta from the CAPM, and the measure used by Morningstar, Inc. (the sum of the difference in rates in each month that the fund’s performance was below the risk-free rate divided by the total number of months the fund was below the risk-free rate; Dunkin, 1995) to evaluate mutual funds can be summarized by the hypothetical data in Table 7.1.
James M. Collins, Timothy W. Ruefli

Chapter 8. Two Illustrative Examples

Abstract
The U. S. airline industry provides a particularly rich research environment in which to examine the efficacy of new conceptualizations of risk and prospect. The industry is well-defined along several meaningful regulatory, market, and managerial dimensions (Wycoff & Maister, 1977), and may be divided into strategically distinct groups of “major” and “national” airlines (as classified by the Federal Aviation Administration in 1984). Further, the Airline Deregulation Act of 1978 led to dramatic changes in the industry’s structure, presumably resulting in increased levels of strategic risk in an industry previously characterized by a tranquil environment determined by governmental fiat (Ruefli, 1986, 1989, 1990d). In many respects, the industry offers an expansive “natural experiment” in which firms and groups of firms may be examined as they strategically react to a great unsettling event. Because the state-defined risk approach filters out effects of events that affect all firms in the reference set in a proportional way, the differential effects of an event such as deregulation are what remain for examination.
James M. Collins, Timothy W. Ruefli

Chapter 9. Ex Post Risk and Return Relationships

Abstract
Given an economic system with N firms, i = 1,2, …, N, such that the a priori return performance of firm i is assumed to be normally distributed with expected mean E(m i ) and expected risk E(r i ). Assume that if E(r i ) > E(r j ) then E(m i ) > E(m j ), for all i, j, in such a manner that a risk neutral investor is indifferent between investing in firm i and firm j; i.e., there is a positive relationship between a priori risk and return. This is a restatement of one of the implications arising from the assumption of market efficiency (see, e.g., Fama & French, 1992: 427) underlying much of financial economic theory (e.g., Markowitz, 1959; Brealey & Myers, 1992)—including the CAPM (Sharpe, 1964; Lintner, 1965; Mossin, 1966; Black, 1972). The problem with testing this assumption or its implications is, of course, that expected risk and expected return are a priori concepts, but they are usually measured only in an ex post fashion. Most researchers, however, make the segue from the a priori concepts to the ex post measures without alerting the reader or explicitly equivalencing a priori concepts and ex post measures. This is true in both the financial economics literature that discusses market risk and in the strategic management literature which also discusses accounting, or total, risk. (Financial economists justify this substitution by recourse to the assumption that in an efficient market context, expected return is equal to realized return and expected risk is equal to realized risk.) One result has been a confusion regarding the nature of risk-return relationships.
James M. Collins, Timothy W. Ruefli

Chapter 10. Asymmetries in State-Defined Risk and Prospect

Abstract
Because they employ risk measures that are either explicitly or implicitly symmetric in nature the vast majority of the empirical studies reviewed in Chapter Two clearly do not take in to account the idea that “risk” must be conceptually and empirically linked to a loss of some kind. Common realizations of risk such as variance or beta examine changes in performance without considering whether or not these fluctuations actually represent losses in performance. Confusion resulting from the equivocation of upside and downside movements in performance leads to a curious situation where measures often consider patterns of events that result in gains in performance to be as risky or more risky than patterns of events that represents substantial losses in performance.
James M. Collins, Timothy W. Ruefli

11. Implications, Contributions, Limitations, and Directions for Future Research

Abstract
As befits a book treating a subject as wide-ranging in import as risk, the first ten chapters have considered a considerable amount of territory. After first providing an overview of the implications of the ideas put forth in this work, this section provides an overview of the contributions, limitations, and future potential of the research presented in the book. The discussion is ordered in the following fashion. First, the theoretical and empirical contributions of the research are discussed. Second, the limitations associated with establishing strategic risk in an ordinal context are examined. Finally, ideas for research that will build on this present work are proposed.
James M. Collins, Timothy W. Ruefli

Backmatter

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