Avi Fiegenbaum

Attitudes Toward Risk and The Risk–Return Paradox: Prospect Theory Explanations

This study attempted to explain Bowmans risk–return paradox in terms of recent research in behavioral decision theory and prospect theory. The research emphasized the role of reference, or target,...

STRATEGIC REFERENCE POINT THEORY

How can executives achieve a match between expected external environmental conditions and internal organizational capabilities that facilitates improved performance? This paper argues that a firms choice of ‘reference points’ can help achieve strategic alignment capable of yielding improved performance and potentially even a sustainable competitive advantage. Building upon prospect theory and other relevant theoretical perspectives, the strategic reference point (SRP) matrix is developed. A firms SRP consists of three dimensions: internal capability, external conditions, and time. A theory is developed which posits an optimal SRP structure, and propositions are offered which articulate the expected relationships between the SRP, strategic choice behavior, and firm performance. The paper closes with some suggestions for using strategic reference points in both research and practice.

Prospect theory and the risk-return association: An empirical examination in 85 industries☆

A new sample of 85 industries (about 3,300 firms) defined in terms of homogenous products provides strong evidence that prospect theory can explain the tradeoff between two of the most researched parameters in evaluating organizations, namely, risk and return. In particular, organizations below their target level are found to be risk-takers (Hl) while organizations above their target level are risk-averters (H2); moreover, the below target tradeofl was generally steeper than the above target with a median below to above slope ratio of about 3:l (H3). Risk and return are probably the two single parameters most researched by the various and related disciplines of economics, finance, and management. Although each one of them has looked at these two parameters from different aspects and for different purposes, they have provided a wide understanding of these two factors in the contest of the theory of the firm. The purpose of this study is to look closely at the relationship between these two important parameters in order to understand firm’s competitive behavior, using the recent development in behavioral decision theory, namely, prospect theory [Kahneman and Tversky (1979)]. Although March (1988) has criticized the discipline of management for its later adaptation in considering risk elements for evaluating organization performance and decision making processes, recent studies [e.g., Bettis (1981), Rumelt (1974), Singh (1986), Jemison (1987) and Baird and Thomas (1986)] have paid considerable attention to risk aspects in evaluating the performance of firms. In general, these studies have concluded that the characteristics of the firms environment, strategy, and implementation processes have significant and important influence on the firm’s risk level and its associated rate of return. Bowman (1980) has looked closely at 85 U.S. industries and explored the

Reputation Building: Small Business Strategies for Successful Venture Development

A positive corporate reputation can be crucial to successful venture development. Making use of the Strategic Reference Point theory, four reputation strategies were conceptualized: 1) dynamic exploitation of existing assets; 2) development of core competencies; 3) image management; and 4) strategic alliances. In a comprehensive investigation of three software enterprises in Israel, companies were found to differ in policies that possibly could lead to a good reputation. One company emphasized the long–term establishment of core competencies and remained a fairly unknown enterprise. A second company accentuated the short–term exploitation of assets and had a middling success in reputation building. A third enterprise invested in a broad spectrum of reputation building strategies and quickly developed a reputation for excellence in the field. In conclusion, corporate success often depends on the extent to which managers develop an integrated package of policies for systematically building the intangible asset of corporate reputation.

Competitive determinants of organizational risk‐taking attitude: the role of strategic reference points

A growing body of literature has emphasized the importance of innovative strategy as a source of competitive advantage. Drazin and Shoonhoven summarized the literature using multilevel theoretical perspectives (community, population, and organization) that affect organizational innovative behavior. In parallel, Fiegenbaum et al. developed an organizational level theory, based on prospect theory, to explain how risky strategies are determined within organizations. They argued that organizational reference points delineate organizational attitudes toward risk‐taking into two polarized regimes: risk‐aversive whereas below it is risk‐assertive. They described the organizational mechanism that converts attitudes toward risk‐taking into actual risk‐aversive and risk‐assertive strategic behavior. A three‐dimensional space is provided that illustrates the spectrum of strategic reference points (SRP). The current study extends SRP theory. It is proposed that the nature of the industry, organizational strategy, and performance impact the kind of reference points used, which, in turn, impact risk‐taking behavior towards innovative strategy.

Integrating Behavioural and Economic Concepts of Risk into Strategic Management: The Twain Shall Meet

This paper develops an integrated framework of risk management and strategic competitive advantage that incorporates behavioural and economic notions of risk. The resulting model argues for the importance of risk-taking to sustainable competitive advantage and ultimately to firm performance. The model integrates framing effects of attainment discrepancy, transaction costs from implicit contracts theory and capital costs from finance theory. The proposed model suggests that continuous risk-taking by firms may help sustain competitive advantage and thus lower firm risk. This, in turn, effectively increases market returns to shareholders by ensuring earnings growth while simultaneously reducing the risk premium discount attached to a firm’s future income stream.

Extending the Competitive Marketing Strategy Paradigm: The Role of Strategic Reference Points Theory

The purpose of this article is to extend and integrate the new strategic reference points theory (SRP), developed in the strategic management area, into the discipline of strategic marketing management. The major new tenets of the theory are the inclusion of cognitive, organizational processes and benchmarking simultaneously. First, the authors describe the impact of the marketing SRP on marketing strategic choice behavior captured in the tradeoff between risk and return (risk avert vs. risk lover) as was proposed by prospect theory. Then, they explore the performance consequences of integrating the newly formed stages while considering organizational process and implementation issues of reference points such as content, configuration, consensus, and change.

Which firms expand to the Middle East: The experience of U.S. multinationals

We examine the characteristics of U.S. multinationals that control operations in the Middle East, a geographic region in which the foreign investment climate has been unfavorable. By comparing U.S. multinationals in the Middle East to a random sample of U.S. multinationals absent from the region, we find that the former have significantly greater R&D intensity and sales than the latter. Dividing multinationals with a presence in the Middle East between those in Israel and those in other countries, we find that the former are more R&D intensive, have a greater proportion of overseas sales, but are smaller in terms of total sales. We discuss the strategic implications of these findings and highlight avenues for future research.

The Strategic Reaction of Domestic Firms to Foreign MNC Dominance: the Israeli Experience

Abstract With the promise of regional peace brought about by political developments in the Middle East in the 1990s, Israeli firms found themselves in a radically changing environment, with multinational corporations (MNCs) making massive inroads into their long-standing domestic monopolies. Firstly, this article demonstrates how foreign MNC positioning has dominated that of their domestic counterparts. Secondly, we describe how this strategic dominance has triggered domestic firms into rethinking their strategies, and turned them into global players. The Israeli experience offers lessons for both foreign and domestic firms in how to develop economies better prepared for a win–win situation.

An Examination of the Structural Stability of Boman's Risk-Return Paradox.

The paper examines the dynamic behavior of Bowmans (1980, 1982) risk/return paradox. Using accounting risk measures it is demonstrated that the paradox is not stable across time or industries. Fur...