Strategic Risk Management – By Magnus Management Consulting LLC
Strategic risk is the chance that a companys strategy will fail. It is an assessment of the future success of the chosen strategy. Since strategy is a set of specific decisions strategic risk reflects the sum of the risks of those decisions.
The main aspect of strategic risk is that it affects the overall strategy of a company. Sometimes difficult to diagnose and manage.
This means that particularly at an executive level, leaders and teams need to be able to look for strategic risks and, instead of categorizing them as things to hedge or mitigate, develop the acumen to ask the appropriate questions:
- Are we going to resist this, avoid it or maybe push it away?
- Or do we embrace it, use it as an indicator for the market and take it as an opportunity for a strategic change?
Why strategic risk management is important.
Organizations that fail to manage risk properly face significant risks. Sometimes they face an existential threat.
Every great company takes risks.
Successful organizations safeguarded their success with a strong risk management strategy. They knew what success would look like, which factors could cause them to fail, what failure could cost them, and how they would respond to obstacles in their path.
Strategic risk management is an important activity for any business whether it is trying to bring innovative solutions to market or maintain a competitive advantage.
Understanding risks (however small) and their potential impact (however small) enables managers at various levels to make more informed decisions.
That’s easier said than done.
Risk management shifts focus as internal and external influences change. It also requires joined-up thinking and communication across an organization.
If you’re tasked with strategic planning and execution within your business, it can seem like an insurmountable task. Yet, armed with the right information, you can help ensure that your organization achieves its goals.
The two kinds of strategic risk factors
Internal strategic risk factors
Strategic risk refers to the risks organizations face as they attempt to achieve their strategic objectives. Even if your plan seems feasible and on track for success examining the relevant strategic risks will help the organizations (or opportunities) caught up in the roadblocks and resolve them before it’s too late.
Strategic risks relate to internal business choices such as product development practices advertising communication tools sales processes investments in advanced technology and more. All of this directly affects performance and overall results.
External strategic risk factors
Some strategic risks originate outside the company.
These could apply to the current or projected environment into which products will be released.
It’s often easier to understand strategic risk through real-world examples. For instance, a new type of smartphone might be in high demand today, but economic changes could lead to a drop in commercial interest, leaving the business in a different position than it might have expected.
Or a competitor may release a groundbreaking product or innovative service that fills the gap first, creating significant risk to the success of a strategy.
And let’s not forget that technology’s swift evolution could cause a new product to become obsolete within a few months — I’m sure that the manufacturers of wired headphones felt their stomachs drop when they saw Apple had cut the headphone jack.
These types of risks pose a real danger to companies. Investing in a business model with little chance of achieving the envisioned success can lead to severe financial strain, loss of revenue, and damage to reputation.
Strategic risk management is the process of recognizing risks, identifying their causes and effects, and taking the relevant actions to mitigate them. Risks arise from inside and outside factors such as manufacturing failures, economic changes, shifts in consumer tastes, etc.
Strategic risk can disrupt a business’s ability to accomplish its goals, break out in the market or even survive. Effective, efficient management puts the power in leaders’ hands to avoid potential obstacles to success and maximize their performance.
One of the first things you need to do to better manage risks is learning to identify them.
Strategic risk assessment – How to identify strategic risks.
Recognizing and taking action on strategic risks is vital to mitigate costly problems.
In your strategic risk management toolkit, you’ll need two essentials:
- An in-depth understanding of where your organization stands. This includes your target audience, market sector, competitors, and the environment in which your business operates.
- A clear awareness of your organization’s core strategic goals, from conception to proposed execution.
Gathering data on both areas can take time and investment, but it’s worthwhile to achieve accurate insights into strategic risks.
The more information you have to draw upon, the more likely it is that you’ll be able to implement processes and safeguards that facilitate organizational success.
Teams have a choice of different approaches when identifying strategic risks.
Initiate “What if” discussions.
Gather employees from across the business to explore ‘what-if’ scenarios.
By mind mapping risk factors collaboratively — with a mix of perspectives and experiences from different departments — Heads of Strategy, Change Managers and Business Analysts may discover risks they wouldn’t have thought of on their own.
All potential risks are worth considering, no matter how unlikely they may seem at first. That’s why participants should be encouraged to let their minds wander and suggest virtually any viable risk that occurs to them.
It’s best to have a long list that can be reduced through elimination: underestimating risks can lead to businesses being unprepared down the line.
Speak with the stakeholders and consider their views on strategic risks.
If you consult a wide enough group, they have different perspectives on an organization from your core employees.
Collecting a wide range of perspectives creates a holistic view of risk factors which can prove hugely beneficial when trying to understand the dangers the organization faces.
Their broad awareness of how the company operates can raise unexpected possibilities that need to be factored in.
Strategic risk examples
- Regulatory risks
- Competitor risks
- Economic risks
Strategic risk management strategies
Now you have all the information, you need to capture it in one place: the strategic risk management framework. This is where you bring together all the resources (employees, technologies, capital, etc.) required to mitigate losses caused by internal or external forces.
Exactly how your framework is structured is your choice, but the following is a great strategic risk management template:
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- Understand where you are right now. You could use a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, for example. Here you need to know where your organization is, your vulnerabilities, and what threats you face in the market.
- Define your strategy and its goals. This is where you clearly outline the strategy for your organization.
- Next, key performance indicators (KPIs) should be selected. These can be used to measure success, monitor changes, and explore improvement opportunities over time.
- The next step is to identify those risks which can affect productivity and performance in the future.
These factors may not be as apparent as others. For example, consumers’ changing tastes can be hard to predict but still have the potential to knock plans off the rails.
- KRIs (key risk indicators) should be identified to gauge your business’s tolerance to obstacles. Be sure to look ahead at issues that may lurk around the corner and determine the right time to put mitigating actions into effect.
- The final step is to continually monitor KPIs, KRIs, and their internal processes to chart progress.
Are problems being resolved fast enough? Are target customers’ needs being addressed? Are all essential programs and processes in place? The aim is to stay on track and adapt to ensure you achieve your objectives.
A long-term strategic risk management strategy
Managing strategic risk is an ongoing process.
It enables organizations to minimize their danger of experiencing severe losses and, ultimately, failure. It doesn’t guarantee every project will be a success (far from it!), but it will provide all the necessary tools to make better decisions in the long run.
Remember to take your time, even if there’s market pressure to act fast. Trying to rush this process could lead to missed threats or opportunities in your risk analysis. Stay on top of your strategic risk management well into the future, that’s the key to organizational success.
Book a consulting for strategic risk management with us: https://www.mmcc.qa/service/strategic-planning-consultancy/
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