Running a business means taking on a certain amount of risk. Nearly every part of a business comes with some varying levels of risk. Some risk is considered strategic, and there are ways to manage strategic risk to benefit a company overall. Read on to learn more about strategic risk management.
What Is Strategic Risk?
Strategic risk is the chance that an organization’s strategy will fail. Essentially, it’s the idea that a company experiences risk when they pursue a certain strategy—any strategy—whether it could fail or not, and they could experience a major loss. All companies have certain amounts of strategic risk because every company makes strategy decisions. Selling a certain product is a strategy that comes with risk, after all. There are two types of strategic risk: internal and external strategic risk.
Internal Strategic Risk
Internal strategic risk is any type of strategic risk that has to do with internal strategies. It’s the risk that comes with advertising strategies, product development routines, or sales processes. This type of strategic risk directly affects the performance of the company and the overall results of the strategy.
External Strategic Risk
Other aspects of the business world can affect how much strategic risk a company is taking on. A company’s competitor’s growth can increase external strategic risk by increasing the chances that the company’s strategy might fail. For example, a company launches a new product, but their competitor’s product grows, so their product launch fails. That’s how external strategic risk could play out. In addition, economic shifts and other business world factors can increase or even decrease strategic risk companies face.
What Is Strategic Risk Management?
All companies face varying degrees of strategic risk, but that doesn’t mean organizations can’t do anything about the risk they face. That’s where strategic risk management comes in. Strategic risk management (SRM) is identifying, quantifying, and mitigating strategic risks. Risks can arise internally or externally, so the first key step is to be able to identify strategic risks as they crop up, so the company can take steps to determine the level of risk and take action to reduce and mitigate risk.
Why Is SRM Important?
Strategic risk is something that a company will encounter regularly. While it would be nice to prevent risk entirely, prevention and complete elimination of all risks is nearly impossible. But letting risks evolve into losses isn’t an option for most companies that want to thrive and stay in business. And that—at its core—is why strategic risk management is so important.
Strategic risk management helps companies protect themselves and insulate themselves from the risks that come with doing business. SRM helps companies mitigate risks to pose as minimal danger to the business as possible. With strong SRM, organizations can protect themselves from the negative consequences that could come from strategic risk and help keep the business operating smoothly.
What’s the Difference between Strategic Risk Management and Enterprise Risk Management?
Strategic risk management and enterprise risk management (ERM) are often confused. But SRM and ERM aren’t the same, and there is a key difference. Enterprise risk management is about observing risks and mitigating them across an entire organization while still pursuing the organization’s goals. Typically, ERM is implemented by a board of directors for a company.
SRM is actually a component of a larger enterprise risk management plan. While SRM focuses specifically on strategic risk, it’s part of the larger umbrella of ERM. A good ERM approach will include strong SRM. So while SRM and ERM are very related and both important, they are different, and it’s worth spending time developing good management practices for both.
How to Manage Strategic Risk
Managing strategic risk is important, but many companies aren’t sure where to start. There are some general ways to begin managing strategic risk to consider as the foundation for a strategic risk management plan. These are the basic steps in the risk management process.
Define the business strategy
When a business defines its strategies, it might come through a SWOT analysis or other scorecard. But often, defining business strategies comes without accounting for risk. At the planning stage for strategies and objectives, it’s important to begin with an idea of what the strategic risk might look like and where it will become increasingly important to work with risk. Identifying risks should start in this planning stage.
Key performance indicators (KPIs) are a regular part of any business plan, and they should be a part of strategic risk management as well. As a business defines its KPIs, risk should be taken into account. In addition, companies should create KPIs to determine the results of their risk management plans. How will the company be able to determine if a SRM plan is working? How will risk affect other business KPIs? Businesses should consider these as they work with KPIs.
KPIs are crucial, but they are typically more oriented toward the past. Key risk indicators (KRIs) are all about looking forward and anticipating future risks and roadblocks the organization could face with strategic risk. A strong SRM plan will include KRIs that help plan for risk, identify tolerance levels, and indicate when action should be taken for particular risks.
Include external perspectives
Sometimes companies on their own don’t have the resources or experience to properly work with strategic risk and create a strong management plan. That’s why many organizations benefit from working with external perspectives. External perspectives are also valuable when the current team is too close or too involved with the company to accurately assess and mitigate risks. A risk strategies company could be valuable to help provide that outside perspective.
The Bottom Line
All in all, strategic risk management is an important part of protecting a business from naturally occurring risk that comes with business strategies. Managing strategic risk can take many forms, but at the end of the day, it always involves proper planning and clear expectations for action.
Many companies find that they need support with strategic risk management, and could benefit from an external perspective for rounding out a management strategy. Acrisure is here to help these companies find the support and help they need to improve their strategic risk management.
Using artificial intelligence, Acrisure can help organizations find their ideal risk management partner to help make strategic risk management successful. Contact us to learn more about improving strategic risk management.
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