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 a 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 UK 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 UK 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.