Importance of Strategic Risk
Disruption, change, globalization, an endless supply of non-traditional competitors, and a rapid growth in new business models seem to be making executives and boards more nervous than ever and success is more uncertain. Strategic risk is more important than ever.
Normal ERM can produce a set of risks via interviews and workshops and, in many organizations, a few of these risks might be categorized into strategic, financial, operational, etc. However, categorizing such risks into the strategic category is not the same as conducting a thorough strategic risk analysis and is unlikely to uncover the most significant strategic risks.
Given the importance of strategic risk, leaders and boards should demand and do more. They should specifically ask questions that address the two major dimensions of strategic risk and they should expect a strategic risk approach that is the most likely to identify strategic risks and, therefore, increase the likelihood of future success.
Strategic Risk Dimensions and Related Questions
Strategic risk has many dimensions but two potential broad dimensions are:
1. Risks related to setting the strategy and,
2. Risks related to implementing and delivering the strategy.
Key questions around setting the strategy include:
- “How do we know, or have comfort, that the right strategy has been chosen?”
- “Who are those companies that we do not know about that may become competitors and how is their business model different?”
A financial institution on Wall Street recently conducted a workshop with the top leadership team to address these types of questions. Similarly, a major NYSE manufacturing company is known for its black swan and emerging risk workshop that is partially designed to address this same topic.
Key questions around implementing and delivering the strategy include:
- “How do know, or have comfort, that we are on track?”
- “Would we know soon enough if we are off track (not on target), and how would we know?”
The only way to really answer these questions is to conduct a thorough strategic risk analysis and apply strategic risk tools around each of these dimensions.
A key to being a great company is to manage the risk, volatility, and uncertainty of known, should-have-known, and unknown events that impact strategic goals and objectives. Strategic risk analysis is one method to manage that risk.