Two very different ways of thinking about investment risk in the competition. One emphasizes the financial risk of investment, the other relates to the competitive risk of not investing. In normal times, the former Bear seeks to supplement the uptrend last. But at the extremes of the business cycle, the author argues that a balance between the two might break. In particular, the companies seem to overestimate the financial risk of investing in the bottom of the business cycle, due to the competitive risk of not investing. It is dangerous, in my opinion, because it can create a lasting competitive advantage. Using examples from the semiconductor, paper and the diamond industry, the author argues that it makes no sense to eliminate the financial and competitive risks, even though the financial risks can be eliminated by investing not at all and competitive risks can be eliminated by investing indiscriminately. Instead, managers need to find a balance between the errors inherent in these two types of risks: errors spends too much unprofitable investment opportunities, as opposed to a transmission error too many potentially profitable. The original version of this article was published in the Sloan Management Review in the Winter of 1993. In this updated version, the author extends his views in light of the 2008 recession. "Hide
by Pankaj Ghemawat Source: MIT Sloan Management Review 10 pages. Publication Date: April 1, 2009. Prod. #: SMR309-PDF-ENG
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