Modern-day enterprise risk management (ERM) is a disciplined, organization-wide approach to identifying and addressing a wide range of enterprise risks, such as operational risk, financial risk, compliance risk, and strategic risk.
Organizations with robust ERM programs can better manage and mitigate risk and minimize the potential for losses or damage. ERM incorporates different strategies, tactics, and plans for each type of risk because those risks affect the organization in different ways.
For example, operational risk affects a company’s business continuity, while financial risk hampers financial growth and profitability. Strategic risk harms the organization’s ability to achieve its strategic objectives.
Unfortunately, many organizations focus on operational and financial risk, without paying enough attention to strategic risk. Such a choice can hinder the company’s ability to function in competitive environments and cause major problems for business continuity and financial performance. In the worst cases, failing to manage strategic risk can even push the firm closer to obsolescence and shutdown.
This article unpacks the meaning of strategic risk, and explains how organizations can implement an effective strategic risk management program to protect the organization and ensure its sustainability.
What Is Strategic Risk?
Strategic risks are those threats to an organization (both internal and external) that can hamper its ability to execute its strategy and deliver on expected outcomes. These risks usually arise when the management team makes a poor strategic decision or fails to respond appropriately to changing environments.
Examples of Strategic Risks
The catalyst for strategic risks is usually an event or development that makes it difficult (or even impossible) for the company to achieve its objectives. Examples of strategic risks include:
- Technological changes
- Senior management and leadership changes
- The introduction of new products or services
- New competition
- Legal and regulatory changes
- Industry or market changes
- Shifts in customer demands or expectations
- Damage to the company’s reputation
- Problems with suppliers or vendors
- Unsuccessful mergers and acquisitions (M&A) or joint ventures (JVs)
Many other events or circumstances could also derail a company’s strategic goals and affect its long-term future. Fortunately, organizations can avoid such bad outcomes by correctly identifying, quantifying, and mitigating strategic risk. Here’s where an effective strategic risk management process comes into play.
What Is Strategic Risk Management (SRM)?
Harvard Law School defines strategic risk management as “the process of identifying, assessing and managing the risk in the organization’s business strategy – including taking swift action when risk is actually realized.”
SRM is a deliberate, action-oriented, and continuous effort to identify, analyze, and address the risks that affect business strategy and strategy execution. Risk – which is, remember, an integral part of any company’s strategy – can affect the organization’s decision-making and overall performance. That’s why SRM is a crucial part of enterprise risk management.
SRM takes a high-level look at strategic risk. It aims to address the unintended consequences created by or arising from the execution of enterprise strategy. SRM activities and controls are based on the organization’s capabilities, business environment, and stakeholder requirements.
An effective SRM program protects enterprise value and helps to create a competitive advantage. To do this, it evaluates risk-reward trade-offs in the context of the organization’s risk appetite and risk control framework.
Furthermore, an SRM process:
- Generates crucial risk intelligence and improves risk-informed decision-making
- Provides a systematic method and process to manage strategic risks
- Helps prioritize strategic risks by relevance, priority, and potential impact
- Supports strategic planning, risk management, and strategy execution
Strategic Risk Management vs. Tactical Risk Management
Strategic risks are related to the strategic decisions taken by senior management or the board. SRM is about identifying and mitigating these risks to assure that the company’s future isn’t harmed.
In contrast, a tactical risk refers to the chance of losses due to changing business conditions on a real-time basis. Unlike strategic risks, tactical risks are not associated with long-term conditions but with current threats.
Tactical risk management (TRM) focuses on preparing the company for emerging threats, so it can react immediately when one emerges. Threat awareness, preparation, and responsiveness can help the enterprise protect its business-critical assets, maintain operational continuity, and safeguard its reputation.
What Is a Strategic Risk Assessment?
A strategic risk assessment is a vital step in the organization’s SRM program. The company’s core strategy drives this assessment, which is a systematic and ongoing process to evaluate strategic risks. Linking risks to the business strategy allows risk managers to identify the leading indicators of current and emerging risks and how those issues might affect the company.
The risk assessment process supports the company culture and is owned and governed by top management and the board of directors. These personnel work together to embed assessment of risk into the business model and operational ecosystem. They also monitor that the SRM program delivers the expected risk mitigation outcomes.
The 7-Step Strategic Risk Management Process
The strategic risk management process includes the following steps:
Define the business strategy
The first step to SRM is to understand the company’s business strategy and objectives. This critical step establishes a strong foundation for integrating risk management with the business strategy. Without this initial preparation, the assessment will only result in a list of potential risks without showing why they matter or how they should be prioritized.
While conducting this step, it’s useful to use an established strategy framework to provide structure to the activity and plan the strategy. Popular frameworks include SWOT analysis and balanced scorecard.
Identify strategic risks
The next step is to gather data about the strategic risks that could drive variability in enterprise performance or hinder the company from achieving its goals. These risks could be anything from senior management turnover or unsuccessful M&As to financial challenges or the emergence of new competitors.
Some common ways to identify strategic risks are:
- Interviews with key executives and senior managers
- Analysis of financial reports and investor presentations
- Reports from internal and external auditors
- Surveys of compliance or safety personnel
Create and validate the strategic risk profile
Next, risk personnel assess the identified risks and prepare a strategic risk profile. The level of detail in the profile depends on the risk culture and the need for risk-related communications.
The profile should clearly communicate, ideally via heat maps or color-coded reports:
- The top strategic risks
- The potential severity of each risk
- The expected probability of each risk
- A risk ranking based on the above parameters
Key executives and board members should validate the risk profile, which the SRM team should then refine and finalize.
Establish key performance indicators (KPIs) to measure SRM results
Tangible KPIs are vital to assess whether the SRM program is working and whether the organization is able to meet the objectives of its SRM policies and strategies. KPI metrics monitor the program’s progress, provide performance oversight, and aid with resource allocation.
Examples of SRM KPIs include:
- Number of risks identified
- Improvement in risk severity or frequency
- Number of risks that eluded identification
- Cost of risk management
Establish key risk indicators (KRIs)
KPIs measure the historical performance of the SRM program. KRIs are forward-looking indicators that provide an early signal of increasing risk exposure. They help organizations to anticipate emerging risks and assess the potential impact on strategic initiatives. Together, KPIs and KRIs enable companies to understand the past and future impact of risk events on business strategies.
Develop, communicate, and implement an SRM action plan
A detailed action plan is vital to implement the actions and controls required to mitigate strategic risk. The plan and top risks must be shared with relevant personnel and top management to:
- Promote an understanding of risks
- Enable risk personnel to focus on critical risks and their significance
- Streamline risk management
- Build accountability into the SRM program
- Enhance the risk culture
Report and monitor strategic risks
The organization’s ability to manage strategic risks well depends on regular risk assessments and monitoring. That’s why risk personnel must continually monitor results and KRIs, and tweak SRM processes and controls as required.
Manage Compliance with Reciprocity ZenRisk
The seven steps described in this article constitute a closed-loop risk management process that empowers organizations to manage strategic risks and reduce their risk exposure. To implement this process using manual methods and spreadsheets, however, is simply inadequate. Manual processes can even increase the company’s risk profile.
Effective SRM requires a world-class risk management software such as Reciprocity ZenRisk. ZenRisk is an integrated cybersecurity risk management solution for smart, risk-averse organizations. It provides advanced visibility into strategic and other risks so risk teams can clearly understand the impact of these risks on the business strategy.
ZenRisk’s guided, content-rich approach ensures fast onboarding while automated cross-object risk scoring simplifies risk assessment and treatment. Real-time risk monitoring shows the impact of risks on the risk posture and detailed dashboards quantify risk in the context of business priorities.
ZenRisk can help your organization mitigate strategic risk and make better risk-based decisions. Schedule a demo to know more.