In the governance world, strategic risk is on everyone's minds. 94% of companies have adapted their strategic risk management system in the past three years to better suit current industry needs. While there is debate over whose shoulders strategic risk management falls on, it is clearer than ever that strategic risk is a top priority for industry leaders. As organisations reframe their understanding of strategic risk and its potential, they gain crucial insight into community-focused growth opportunities for their organisations.
However, it can take some work to know where to start when it comes to shifting your company's strategic risk management framework. This is because many organisations get stuck on an operational level, where they need help to dive deeper into their data and analyse the trends that they observe for their future implications, revealing opportunities that lie five, 10 or 15 years into the future.
Surmounting this obstacle and transforming how your company approaches challenges is critical to flourishing in the modern business world. This is true not just in business crises, such as the COVID-19 pandemic, but in daily company operations. Therefore, it is in your company's best interest for it to learn to think ahead, considering the implications of its choices far into the future, how closely these align with its vision statement and its interactions with the community it hopes to shape. If you struggle to understand how to effectively instigate this shift in business strategy, read on.
Below, the BoardPro team have outlined everything that you need to know about strategic risk and awareness. We’ve also delved into the mind of governance expert, Steve Bowman, who shares his thoughts on strategy in organisations today.
Strategic risk refers to the risk inherent in an organisation's strategy. This is the chance that the strategy might work out differently than envisioned, falling or underperforming. Strategic risk covers all of the smaller risks associated with company decisions, and awareness of said risk is crucial for business success.
Risks can be both internal and external to the company and include factors such as advertising campaigns, investments and developments on the internal level, economic shifts, consumer loyalty and ethics and technological revolutions on the external stage.
When companies fail to address their strategic risk, they risk negative outcomes that may permanently impact their business, including loss of shareholder and/or stakeholder value and confidence, negative impacts on their community and decreased profitability. Many successful companies have fallen due to a lack of strategic risk awareness on their part. Managing risk can help companies avoid these negative outcomes and instead make decisions that capitalise on business opportunities, keeping them ahead of the competition and relevant in their industry.
Operational risks refer to internal disruptions to workflow, whereas strategic risks can stem from internal or external factors that impact an organisation's strategy. The difference lies fundamentally in the decision-making process involved: strategic risks impact high-level decision-making that forms the company's overall vision and strategic plan, whereas operational risks pose a threat to lower-level decisions regarding the execution of the said plan.
Understanding and effectively managing strategic risks is key to overall business success. Additionally, understanding the difference between strategic risks and other challenges, such as operational risks, can be beneficial in ensuring that your company reaches its full potential.
Leaders should seek to maximise business performance and overcome potential risks in strategy. Understanding the organisation's position on a market-wide level and a clear awareness of its strategic goals is critical to overcoming strategic risks, no matter their scope or focus area.
Approaches to managing strategic risk include prioritising disruption of normalcy in favour of innovation. Companies should avoid complacent business strategies, as these allow them to run the risk of becoming irrelevant to their customer base and falling behind industry and technological trends. Organisations should also seek to avoid regulatory challenges, prioritising customer safety and ethical operations through effective strategic risk management.
Economic capital: This speaks to the equity needed to cover unforeseen capital losses based on desired debt rating for organisations. Organisations can anticipate the impact of foreseen risks, such as a new product launch or restructuring initiative, by consulting this tool.
Risk-Adjusted return on capital: This calculation determines how well an organisation, such as a bank or other financial institution, manages its capital. It allows companies to calculate the expected after-tax return on a project. In short, it is a measure of the return on an investment that takes potential economic risk into account. Effective organisations use this tool to guide their decision-making process.
Decision trees: Decision trees act as a visual aid for mapping possible outcomes of strategic decision-making. This allows companies to visualise and work through all of the implications of their decisions, anticipating both opportunities and risks.
Speaking on this topic, Steve Bowman, managing director at Conscious Governance, explains, "If we're truly going to be strategic, we need to understand that every choice that we make creates the future, whether it be a little choice,
For Bowman, “There's no straight line as such because opportunities appear at every opening of the door. If we actually want to be strategic, then we need to understand the difference that we want to make, which typically is your vision statement or your purpose statement.
Understand the difference we want to make to the communities that we serve and how we are going to get there in the next two or three years, which is pretty much what a strategic plan is.
Being strategic is always [about] both now and [looking] into the future; what are the implications for us? And, what do we need to put in place now, which would make sense if this were to occur in three or four or five years' time, so that we're going to be in good shape no matter what happens? So always looking at it from that perspective, being strategic continuously rather than taking a particular episode and saying, 'Let's think strategically about this.'"
The reality is that strategic risk management is an ongoing process. An organisation that is truly committed to its long-term success must be constantly aware of its potential risks and work to mitigate said risks, seizing opportunities as they arise that bring its operations in line with its overarching goals.
Risk management strategies and an in-depth understanding of where the company stands in relation to internal and external risk factors is key to enabling businesses to make effective decisions when it comes to practising strategic risk management.
Interested in learning more about risk management and strategic risk awareness? Visit here to read our expose with Bowman.
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