Today’s organizations operate in a highly risky business environment comprising many types of risks. One such risk is strategic risk.
Strategic risk is the risk that an internal or external event may prevent your organization from executing or achieving its strategic objectives. These failures can have severe long-term consequences for the firm and its stakeholders.
To prevent such failures, a robust strategic risk management (SRM) process is essential. Moreover, SRM should be part of an overall enterprise risk management (ERM) program and integrated risk management system.
What Is Strategic Risk?
Strategic risk arises when the organization’s strategy fails to deliver on expected outcomes. The term can also refer to the risk that the company may make an incorrect strategic choice, resulting in losses or other kinds of damage.
Strategic risk is often confused with operational risk, but the two are different types of risk. Operational risk is the risk of losses arising from inadequate or failed business processes, employee errors, or cybersecurity events. Its impact is more immediate.
Strategic risk has a more long-term time horizon. It is the risk that prevents the organization from meeting its strategic goals.
Examples of Strategic Risk
Strategic risk may arise from decisions taken by enterprise leadership or from the organization’s position in its environment.
Some examples of strategic risk are:
- The introduction of new products or services by a competitor;
- Unsuccessful mergers or acquisitions;
- Evolving customer demands;
- Changes in senior leadership;
- Damage to the company’s reputation;
- Poor cash flows and other financial challenges;
- Changes to the competitive or industry landscape (such as a merger of two rivals into a single, larger one);
- Supply chain issues, such as problems with suppliers or vendors;
- Technology risk.
In addition, some organizations also consider the following as sources and examples of strategic risk:
- Human resource issues, such as staffing shortages;
- Cybersecurity or IT disasters;
- Economic instability;
- Political risk;
- Exchange rate risk.
Any of these risks can affect the firm’s future performance and innovation capability. They can also make it harder to respond to change and deal with supply chain and other disruptions.
How to Identify Strategic Risk
Strategic risk management starts with strategic risk identification. There are many ways to identify the organization’s strategic risks. One is through brainstorming. A group of people – senior managers, board members, the ERM team – work together to identify potential strategic risks and determine which risk mitigating controls are required.
It’s also useful to interview or survey key stakeholders to identify strategic risk and design the risk management framework.
Finally, different types of analyses can be used to identify strategic risk, such as:
- Scenario analysis: an analysis of the potential causes and consequences of a risk that may be created in some future scenario;
- Fault tree analysis: a technique to identify the factors that may result in or contribute to an undesirable outcome;
- Bow tie analysis: a graphical depiction of risk causes and consequences that informs risk treatment strategies;
- Incident analysis: a technique to uncover the root cause of a strategic risk.
Strategic Risk Assessment vs. Strategic Risk Management
The terms strategic risk assessment (SRA) and strategic risk management (SRM) are often used interchangeably, but the two concepts are not the same. SRA is part of an ongoing SRM program. It is a systematic process to assess the strategic risks facing the enterprise.
An SRA is crucial for organizations to understand strategic risks and build their risk profile. For maximum effectiveness, an SRA should involve senior management teams and board members.
The SRA should also be tailored to the organization’s strategic objectives and support its unique culture. Finally, stakeholder consensus about the key risks facing the organization is vital for effective SRM.
Performing a Strategic Risk Assessment
Harvard Business Review recommends a seven-step risk assessment process.
- Understand the organization’s business objectives and strategies. Without this data, the SRA will result in a “laundry list” of potential risks without showing a way to prioritize them or create appropriate risk management strategies.
- Gather data about strategic risks. The previous section identifies the many ways to identify strategic risks.
- Create the risk profile. The risk profile clearly communicates the top risks and ranks them by potential severity.
- Validate the risk profile. Key executives should validate, refine, and finalize the risk profile.
- Develop the SRM plan. Strategic planning enhances risk monitoring and guides risk management.
- Communicate the strategic risk profile and SRM plan to stakeholders. The goal is to communicate risk information and build a strong risk culture across the enterprise.
- Implement the SRM plan. SRM is a circular, ongoing, and continual process within the organization.
Strategic Risk Management
SRM is aimed at managing and monitoring identified strategic risks. For this, a proper SRM action plan is essential. The plan allows risk teams to prioritize each risk, predict potential impact, and identify the appropriate risk response – for example, risk avoidance versus risk reduction.
The SRM plan also:
- Clarifies the organization’s risk appetite;
- Identifies the forward-looking key risk indicators (KRIs) to anticipate potential risks and trigger proactive actions;
- Establishes metrics and key performance indicators (KPIs) to measure the program’s performance;
- Assigns roles and responsibilities for risk monitoring and management;
- Guides robust risk analysis and treatment.
The right risk management software can streamline SRM. It will also provide integrated reporting and dashboards to simplify the monitoring of significant risks, allowing the organization to mitigate new risks as they emerge.
Manage Strategic Risk with Reciprocity ZenRisk
Strategic risk is one of the most dangerous risks to a company. To avoid the danger and minimize exposure, it’s crucial to manage strategic risk at the enterprise level. Here’s where SRM and Reciprocity ZenRisk come in.
With ZenRisk, an integrated, feature-rich risk management software tool, you can manage all kinds of enterprise risks, including strategic risk. Leverage ZenRisk’s guided approach, built-in content, beneficial templates, real-time risk monitoring, and cross-object risk scoring to stay ahead of threats and strengthen your risk posture.
ZenRisk also provides advanced contextual insights to guide decision-making and help you optimize security. Schedule a demo to see what Reciprocity ZenRisk can do for you.