In today’s fast-paced and constantly changing business environment, strategic risk management is a critical field. Organizations are subjected to numerous risks during their daily operations that might expose them to a possible shutdown of operations or disruption.
The difference between success and failure will likely stem from the correct identification and mitigation. This blog introduces the basics of strategic risk management, providing you with insight and tips on how to effectively navigate through what seems to be a complex field.
Strategic Risk Management
Strategic risk management entails identifying, assessing, and managing risks that impede an organization from realizing strategic objectives. Strategic risks are contrary to operational risks because the former cannot be handled at the level of the specific departments. The strategic risks need a holistic view and are often under leadership and direction from senior staff and the board of directors.
Why Strategic Risk Management?
It is important to manage strategic risk because it:
- Align risk appetite with strategy: Guarantees that the level of risk taken coincides with the organization’s goals.
- Enhanced decision-making: It provides an organized way of understanding the possible impacts, thus resulting in a better choice.
- Value protection and creation: It protects the firm from potential loss and, at the same time, ensures growth and improvement through opportunities.
Identifying Strategic Risks
The first step in strategic risk management is the identification of potential risks, which involves a close analysis of both internal and external factors that could cause harm to the organization.
Generic Classes of Strategic Risks
- Competitive Risks: Change in the competitive scenario through new entrants or changes in market share.
- Economic Risks: Economic fluctuations, such as recession, inflation, and currency exchange rates.
- Regulatory Risks: Changes in laws, regulations, and compliance requirements.
- Technological Risks: High-speed technological advances can change current business models.
- Reputational Risks: Situations with potential impact on the organization’s reputation and brand could occur.
- Operational Risks: Internal process failures, human errors, or system malfunctions that impact strategic objectives.
Tools and Techniques for Identifying Risks
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SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats): Can help to identify the internal and external factors that will have an impact on the strategy.
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PESTLE Analysis (Political, Economic, Social, Technological, Legal, Environmental): An analysis that goes through the macro-environmental.
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Scenario Planning: Takes into account various scenarios for the future and the implications they might have on the organization.
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Risk Workshops: Involves stakeholders from different parts of the organization in brainstorming potential risks.
Strategic Risk Assessment
The next step is to assess the potential impact and likelihood of the risks identified. It actually prioritizes which risks need immediate attention and which ones can be monitored over a period.
Risk Assessment Approaches
- Qualitative Assessment: Utilizes subjective judgment to estimate the impact and likelihood of risk to occur. This can be carried out by using methodologies like risk matrices, heat maps, etc.
- Quantitative Assessment: This bases its findings on numerical data and statistical approaches, evaluating the impact and likelihood of risks; techniques commonly used are simulations of Monte Carlo and value-at-risk (VaR) calculations.
Key Considerations in Risk Assessment
- Impact: What would be the consequences if the risk materializes?
- Likelihood: How probable is it that the risk will happen?
- Velocity: How fast could the risk impact the organization?
- Mitigation Complexity: How difficult and costly would it be to mitigate the risk?
Mitigating Strategic Risks
Mitigation of risks is the development and putting in place of strategies to reduce the likelihood and impact. This involves a combination of preventive measures and contingency planning.
Risk Mitigation Strategies
- Avoidance: Taking steps or eliminating activities or conditions from the organizational process that expose the organization to risk.
- Mitigation: Application of controls or measures to reduce the effect of an already existing risk.
- Sharing/Transfer: Sharing risks to other parties by insurance, partnerships.
- Acceptance: Recognize the risk and decide to assume impact, usually based on prepared contingency plans.
Developing and Executing Risk Mitigation Plans
- Develop Action Plans: Clearly outline the steps that should be taken to mitigate each of the risks listed, including who needs to do what and by when.
- Monitor and Review: Continually keep track of the effectiveness of the mitigation measures and change them as needed.
- Communicate: Ensure that all stakeholders know of the risks and what can be done to abate them.
Example Application of Risk Mitigation
Consider a technology company exposed to the risk of fast technological change. Mitigation of such a risk would involve:
- Invest in R&D: Never lag behind in technological trends. Form Strategic Alliances: Form strategic alliances with other tech companies to pool knowledge and resources.
- Upskill Workforce: Train employees in new technologies to keep competitive.
Role of Leadership in Strategic Risk Management
Effective strategic risk management requires robust leadership and a risk-conscious culture, where leaders shall take part in:
- Setting the Tone: Promote a culture of risk awareness and assure integration of risk management in the strategic planning process.
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Resource Allocation: Provision of the resources necessary for all activities to identify, assess, and minimize risks.
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Ensuring Accountability: Ensuring responsibilities and accountabilities for each participant in managing the risks.
Conclusion
Strategic risk management is not only to avert the adverse consequences but also to look for opportunities to harness growth. Such systematic risk identification and analysis lead to ways of evading it by an organization confidently to wade through uncertainties and attain their strategic objectives.
