The disadvantages of stability strategy plan were recognized a long time ago. In the early days of market evolution, stable markets were perceived to be safe investments. As time passed and competitive pressures increased, a more flexible and less safe strategy became a popular choice. Stability strategies gave up the investment return guarantee in exchange for allowing the company to change its business plans and strategies as it saw fit. With the passage of time and a more competitive environment, this type of strategy proved to be a costly proposition for the organization.
Competitive forces and fluctuating market prices have made the investment in stability strategies costly. Some companies have spent more on stability assurance than the returns earned, and some even have not realized any benefit from such policies. This is because stability has not brought about any tangible results, but rather has led to financial loss for the company. Companies that have failed to make use of a stable investment approach have suffered greatly as a result. Results into the disadvantages of stability strategy.
Adverse economic conditions have played a key role in weakening the sustainability of a stability strategy. This was identified during the Global Financial Recession when an unstable global economy resulted in a sharp decline in investment and lending rates. When a corporation adopts this approach, it risks losing its credibility quotient in the eyes of investors. Investors are sceptical about large corporations adopting this approach since it does not bode well for the company's profitability in the future. It also poses a significant risk for the company's employees who will find it difficult to retain their jobs during the economic downturn. Many companies have lost thousands of jobs and hundreds of millions of dollars because they adopted an ill-conceived stability policy and did not prepare themselves for the adverse effects of the external environment.
The disadvantages of stability strategy include short-term payouts, low rate of dividends, reduced company efficiency, and a reduction in company mobility. Since these corporate strategies do not have a growth objective, companies adopting this approach do not address the problem of competitive devaluation that occurs during periods of economic downturn. In addition, most companies that adopt a stability strategy fail to acknowledge the importance of diversification and that is essential if they want to maximize their potential for future profits.
A more appropriate approach to address the problem of competitive devaluation is the adoption of a mixed portfolio approach. Companies can adopt a strong long-term earnings management strategy and use short-term assets and liabilities to address the problem of competitive devaluation. They can also adopt a short-term business strategy coupled with long-term effective cash management strategies to counterbalance the effects of fluctuating equity markets. Moreover, this balanced portfolio approach also enables companies to adopt a variety of corporate strategies that address different aspects of their businesses. When a company adopts this mixed portfolio approach, it takes advantage of its overall capital structure to achieve greater asset value, faster return on equity, and better returns on equity relative to the cost of capital.
Disadvantages of stability strategy that does not address the problems of market share will not be effective. The strategies adopted by companies should address three major issues: (a) long-term viability of the organization; (b) expansion potential; and (c) competitive positioning. This analysis provides a clear picture of what the organization needs to do to maximize its assets and potential for future growth. The use of financial statements to generate a stability analysis provides additional information about the operating cash flow and balance sheet, surplus/deficit, and free cash resources. Also, the analysis will reveal weaknesses in the organization's strategic management function that can be corrected through prudent investment choices.
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