As your business attempts to achieve your strategic objectives, internal and external events can deter or prevent you from accomplishing them. This is known as strategic risk.
You can define strategic risks as:
- the potential impact of strategic decisions, or of a defective or inappropriate strategy
- lack of responsiveness to industry changes
- risks related to future plans, eg entering new markets, expanding existing services, etc
Managing strategic risks shouldn't just focus on challenges that might cause a particular strategy to fail, but on any major risks that could affect a company's long-term positioning and performance.
Identifying strategic risks
Sources of strategic risk can be any of the following:
- mergers, acquisitions and other competition
- market or industry changes
- changes among customers or in demand
- change management
- human resource issues, such as staffing
- financial issues with cashflow, capital or cost pressures
- IT disasters and equipment failure
- relationship issues, eg with suppliers
- reputational damage
For example, the possibility of a US company buying one of your European competitors would constitute a strategic risk. Such an acquisition would give the US company a distribution arm in the UK, making them a direct competitor. In this situation, you might want to consider:
- any US companies which have the cash/share price to do this
- any European competitors that are likely takeover targets - eg due to financial problems
- the prospect of the US company cutting prices or launching new products to compete against you
Where there's a strong possibility of this happening, you should prepare some sort of response.
What is strategic risk management?
Strategic risk management (SRM) is a process that can help you to identify, assess and manage the risk in your business strategy. It also allows you to take quick action when risks materialise. It involves evaluating:
- how possible events and scenarios may affect your strategy and its execution
- the ultimate impact of these risks on the company's value
See how to evaluate business risks.
SRM requires you to define tolerable levels of risk as a guide for making strategic decisions. Rather than a one-off effort, SRM is a continual process that you should embed into your strategy setting and execution. See how to develop a strategic plan.