Stable Investments Through a Stability Strategy in Strategic Management
The subject of stability strategy in strategic management is a relatively new one, and yet it is an extremely important concept. I have some preliminary thoughts on why I believe its importance is not well understood, as I believe its definition needs to change to allow better understanding. In general terms, stability strategy focuses on identifying and measuring the risk-adjusted value of an investment portfolio. In more detail, I will discuss what are the various types of stability strategies.
The main content of this post will be an examination of what are the most common definitions of stability strategy in strategic management, what its implications for those involved with long-term investment management and corporate planning are, and what its implication is for those managing uncertainty. It also will explore the question of how this strategy should change in light of emerging changes in financing markets, such as the shift from fixed-rate capital financing to floating rate capital financing. Finally, I will discuss what are the different types of stability strategies. For ease of discussion, I will lump all of these strategies into a single category; risk/reward or stability. I will explain each type separately.
A risk/reward stability strategy focuses on maximizing the return that the investor would obtain from his investment portfolio over the short and long term. A key concept behind this is that the longer a manager has been in the game, the more experience he has, and therefore the more knowledge he has, the more likely he is to make good decisions about what to invest in, when to invest it, and for how long to hold onto it. Therefore, the longer the investment period, the greater the expected reward (e.g., higher profit), and the greater the expected risk (e.g., lower risk). And since the expected benefit and risk are both known at the outset, this stability strategy has the goal of maximizing the return while minimizing the risk to the investor. In most cases, a long-term stability strategy would be the best approach to long-term wealth creation.
Another type of stability strategy in strategic management is called the balanced portfolio approach. With this particular strategy, an investor would seek to obtain a mix of assets that are correlated with each other in a way that ensures maximum growth potential. Typically, the assets being selected are those with the greatest potential for upside (with the possible exception of a few items such as raw materials and sometimes certain highly volatile financial products). Typically, the balanced portfolio approach is considered to be the more conservative of the two strategies discussed above.
An alternative to the balanced portfolio approach is the long-term planning approach, sometimes called the peacetime strategy. With this particular strategic management approach, an investor would look to obtain a mix of assets that are correlated in a way that ensures the maximum long-term viability of those investments over time. Obviously, this is a much more aggressive approach than the balanced portfolio approach. Often, this strategy is used by finance professionals to react to changing economic conditions. The primary advantage of a long-term planning approach to stability strategy in strategic management is that it provides a much more stable form of investment portfolio management over the course of a typical investment time frame. A major disadvantage, however, is that the peacetime strategy is usually only adopted when the immediate or distant future actually presents either a clear, present or predicted to benefit from the investment.
Both the peacetime and the long-term planning approaches are appropriate for overall asset allocation purposes. Each has its own benefits and drawbacks. For specific purposes, some of these approaches may be preferable to the stability strategy in strategic management. Regardless of which of these strategies is used, however, it is important for any investor seeking stability in their investment portfolio to understand just how their strategies will affect their portfolio's future value.
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