Why is there a need to Gear Up For Strategic Risk?
Risk and strategy have a symbiotic relationship. There can be no strategy if there was no risk to begin with, and the existence of risk makes strategy necessary. But what exactly is strategic risk? Strategic risk can be broadly defined as a risk that has a direct impact on an organisation’s goals. It deals with the dangers faced by the firm as it strives to achieve its objectives. As every organisation has objectives, identifying its strategic risks will help it to recognise the main challenges confronting it, and work out methods of managing these before they spiral out of control. For instance, not keeping up with technology can have a negative impact on the organisation’s competitiveness.
It could fall behind its competitors if, for example, it doesn’t have an interactive website when everybody else in the industry is already transacting online. What qualifies as a strategic risk may sometimes be hard to pin down because of differences in perspective. Generally, however, strategic risk encompasses both internal and external factors. Internal factors include systems, networks, processes and procedures which the firm may use in the development of its business. All these directly influence the way the organisation functions, its performance and its results. External factors pertain to the environment or the industry the company is operating in, and do not come under its direct control in the way internal factors do.
Today’s business environment is filled with risk; effective strategies are therefore necessary for survival – but how effective can these be, when the environment itself is dynamic? Strategies need to be able to respond to changes, and they need to do it rapidly or they very quickly lose their efficacy. They should be sensitive to the environment and for this reason, they cannot be overly complicated or too difficult to execute, or they would present more of a risk than the risk they are intended to mitigate. Organisations today are beginning to recognise the need for effective strategising, and the risks associated with operationalising it, in an increasingly volatile environment.
In fact, many companies today are actually moving away from traditional operational, financial and compliance risk areas, and prioritising strategic risk management instead. As they do so, they are taking a more integrated, inclusive approach which incorporates other risks as well, instead of viewing strategic risk as a stand-alone matter. This has had the effect of extending strategic risk into overall business strategy and making it a part of the business planning process. Because it has such far-reaching implications, strategic risk and its management has to come under the purview of the Board, with the Board Risk Committee normally having oversight.
With rapid changes in the business and economic environment, spurred by technology which is hurrying the pace of business even further, the need for strategising has become imperative for any firm which wants to stay in business. One of the biggest risks facing companies today is reputational risk; the technology that has advanced operating processes is also just as capable of disseminating information about its failure. Communication has become global, and it doesn’t take much, rightly or wrongly, to ruin reputations which may have taken decades to establish. Public perception is getting harder to control, and companies must tread carefully if they want to avoid being judged by the court of public opinion.
Strategic risk focuses on protecting value although when it is applied correctly, it may have the effect of creating value as well. This is because, in the development of strategy, the risks associated with it will naturally become apparent; identifying such risks and working out how to mitigate them, ultimately result in creating value for the company. But new capabilities and approaches are necessary. These include human resources, intellectual property, appropriate marketing, higher levels of technology, and mindset change. There is also a need to look beyond traditional methods and environments, to where emerging risks and opportunities lie; and learning from the competition.
Companies should begin their strategic risk journeys by learning to ask themselves the right questions because strategic risk management is basically about what the organisation does. Making an honest assessment through an in-depth understanding of the organisation, and clarifying its strategic goals, is the first step. Relevant strategic risks are tied to the industry, products or services, consumer sector and environment or region which the company is operating in. As with all other risks, there is a myriad of areas affecting the management of strategic risk , including regulation and competition. But it needs to be measured to gauge if it is really effective, and being effectively managed.
With strategic risk, organisations need to constantly bear in mind that it not only brings to light the challenges that the firm faces, it also dredges up opportunities that may spur the business. For instance, other niches may be identified when assessing a particular market, which may be more lucrative for the firm to explore, rather than go head-to-head with existing competition. The difficulty here may lie in recognising the opportunity, and not being distracted by the risk. It is also worth remembering that as organisations grow and progress, so do their risks; strategic risk management has to keep pace with this.
The process of strategic risk management is therefore an ongoing one. It should support the firm’s future plans by identifying, assessing and managing areas of potential difficulty. In doing so, it will enable the firm to mitigate risks and progress more smoothly towards achieving its objectives.