August 25, 2020

Strategic Risk: Top Tips to Transform Finance

Finance Leadership
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If you’re in business, you know many types of risks exist. It’s safe to say that every kind of company faces threats, but the degree by which they affect daily operations and strategy vary greatly. Strategic risk can affect every organisation, but there are ways to help manage it. Many people have a hard time distinguishing the differences between strategic risk and operational risk. 

Here, we will define what strategic risk means, understand how it differs from operational risk, and how to mitigate and manage strategic risk in the best interest of your business. We will also look at how automation tools can help.

What is Strategic Risk?

Strategic risks tend to be external factors that cause an organisation’s strategic direction to have to shift. Strategic risks can occur because of legislative changes, weather events, finance events (such as interest rate rises) or the competitive landscape, to name a few examples. 

It can be confusing to determine strategic risks because they don’t just happen from outside an organisation. They can also stem from poor decisions that are made internally but are ill-adaptive or defective in responding to changes within your industry or business environment. 

Strategic Risk vs Operational Risk

Strategic risks and operational risks are different beasts. Operational risks come from both internal and external events. These events impact the ability to achieve current business goals. Operational risks affect day-to-day operations, as the name implies. 

Some examples of operational risks include:

  • Fraud 
  • Failure to follow internal policies 
  • Risks that happen from extreme external events (i.e. hurricanes, floods, etc.) 
  • Hacking and lack of privacy 

Perhaps you’re wondering how strategic risks and operational risks can both be caused by catastrophic external events, yet they are regarded as different types of hazards. To clarify, if a hurricane wipes out your warehouse or affects your suppliers, then your operations have been affected, thereby it’s considered to be an operational risk. If a hurricane causes you to choose to move to suppliers in a state without the possibility of a hurricane, then you’re dealing with strategic risk. 

Financial Distress and Strategic Risk

In many instances, strategic risk is at the very heart of financial distress that a company may face. It’s become one of the most commonly reported types of risk that affect business’ success. This is because strategic risk encompasses consumer demand, competitive threats and mergers and acquisitions. 

Although the strategic risk is pervasive and could be detrimental, so many businesses ignore strategic risks. Luckily, as people become more aware of what it is, they are implementing solutions like automation tools to mitigate this risk (more on that later). 


Importance of Strategic Risk

By no means is a strategic risk something new. However, the importance of strategic risk is increasing because regulations increase with time. Additionally, stakeholders’ expectations grow, and technology creates the need for increased security. 

Within the financial industry, strategic risk is ever-present. An organisation must allocate resources to address strategic risk. For starters, communication within an organisation should be made a priority. An easy way to make sure that employees adhere to regulations and can also access what they need to work towards to achieve business goals is to consider implementing an automation software tool. An automation tool increases transparency and allows people to be set up with access controls and roles. Data is stored in a centralised location, and team members can collaborate. 

Identifying Strategic Risk

Knowing how to identify strategic risk is the first step in addressing and reducing its effects. To identify strategic risk, you must be able to:

  • Understand the overall strategic objectives of the company
  • Have in-depth knowledge of the company, including the legal, social, political and cultural environment 

Strategic risk can come in the form of:

  • Reputational damage
  • Competition
  • Change management
  • Consumer demand shifts 
  • Human resource issues (i.e. staffing) 
  • Financial issues 
  • Equipment failure 
  • Changes in the market 

There’s no one-size-fits-all approach to identify strategic risk, but some ideas that can help your organisation do so are:

  • Brainstorming: Get together a group of people who work together to help identify potential risks. 
  • Interviews: You can interview key stakeholders to understand their concerns better. 
  • Surveys: For a bigger sample size, consider sending out a survey to internal and external stakeholders. Some companies choose to do this on an annual basis and adjust their risk strategy accordingly. 
  • Team-based exercise: You can facilitate a team exercise to help understand the company culture regarding risk. One example is called SWIFT (Structured What If Technique) in which you can use a list of prompt phrases to help team members identify risk.
  • Analyses: You can leverage analysis techniques like fault tree analysis, scenario analysis, incident analysis or bow-tie analysis to help understand where the risk comes from and what your business can do to face it. 

Types of Strategic Risk

When identifying strategic risks, keep in mind these types:

  • Regulatory: Regulations can change quickly. When a business operates in a regulated industry, then any shift in regulations can pose a strategic risk as a business needs to adjust. Staying up-to-date on compliance is one of the best ways to predict regulatory risk. Furthermore, an automated solution can help to mitigate regulation risks all the time. This solution is designed to produce audit trails and reports. Also, if changes occur, it adapts to your processes. 
  • Competitor: Companies undoubtedly have competitors. Pricing and quality affect your market share. It’s always a good idea to stay informed about who your competition is and what they are planning. Competitor analysis is the key.
  • Economic: While regulatory and compliance risks can be monitored to some degree, economic risks are a little more unruly. These are changes in consumer habits and the overall market. However, again, automation tools can prove useful because they can capture consumer data that helps to predict trends or notice when patterns are changing. 

Strategic Risk Examples

Knowing the categories helps, but seeing strategic risk inaction will help make it even more evident. Streaming services seemingly blew up out of nowhere. Netflix, Amazon Prime and HBO Go are household names, just like Blockbuster used to be. The movie rental provider had monopolised the market before streaming entered the market. Even when Blockbuster had the opportunity to shift to a streaming platform, or also buy Netflix, they failed to do so. 

A few years later, Blockbuster was forced to shut its retail locations, and Netflix became a market leader. 

Measuring Strategic Risk

How can you measure something unknown? Like most unknowns, there are ways to estimate impact before the risk occurs. By quantifying the situation, you can measure strategic risk. The financial ways to do this are to know your:

  • Economic capital: How much equity do you need to cover unplanned losses? 
  • RAROC: Know your risk-adjusted return on capital or the expected after-tax return on a plan divided by economic capital 


Mitigating & Managing Strategic Risk

There’s a five-step process that helps organisations manage their risks, including strategic risk. It looks like this:

Define business goals: Before addressing what can affect your business strategy, you must define what your goals are. Various frameworks can be used, including SWOT analysis, or a Balanced Scorecard. 

Identify KPIs: Communicate how you will measure if you are achieving business goals by identifying the Key Performance Indicators you will track. This can be concerning customer behaviour, like sales, or the number of users you have on your website per month, for example. 

Outline risks: Make a list of what unknowns exist, i.e. shifting consumer demand, a competitor’s upcoming product release, etc. 

Establish KRIs: Key Risk Indicators and tolerance levels will help you to look ahead and serve as a trigger to when you should implement an action plan to deal with risk. 

Report and monitor: Use an automation tool to continuously monitor and report risks and opportunities as they come into plain view. 

What is Strategic Risk Management

Strategic risk management is the way by which organisations can identify, analyse and manage risks that can affect business strategy. It involves designing an action plan in the event a risk materialises. 

To perform the process of strategic risk management, one must:

  • Assess how scenarios will affect business strategy 
  • Try to understand how risks will impact the company’s value 

Strategic risk management also means that you will define tolerance levels for risk. The process is intended to be continuous as the business evolves, since like business, risks change and can grow, too. 

How to Use Automation to Manage Strategic Risk 

As mentioned throughout this article, you have seen ways in which automation tools can help to manage strategic risk. To understand further, consider these benefits of automation software solutions: 

  • Audit trails: The system stores which and what was done every time someone accesses it. That means you can efficiently run reports and provide audit trails to regulatory agencies. 
  • Compliance and regulations: One of the most common forms of strategic risk arise because of failure to adhere to rules. This could happen because of avoidable human error. Trust a machine to do the repetitive work for you and be better able to manage operations according to regulations.  
  • Security management: Automation tools are built with top-notch privacy and protection. The high level of security management can help to make privacy risks a thing of the past. 
  • Data accuracy: Software solutions can manage, store and transform data from disparate locations into one centralised hub. This helps to keep data up-to-date and accurate. The data can be used to mitigate strategic risks by storing the lastest customer data and more. 
  • Trend analysis: You can easily run data analytics to help assess the market and future events based on historical data points. This means that you can minimise the strategic risk that comes from competitors, changes in price points and more. You can gauge how decisions will affect your business before you implement them.  
  • Process automation and standardisation: With an automated solution, you know that processes will run standard across the organisation. You can say goodbye to costly errors and bottlenecks. 

The Bottom Line 

While no business is free from strategic risk, it can be actively monitored and managed. Strategic risks stem from external factors and affect business strategy and decision-making. To stay agile and adaptable to the changing business environment, it’s considered to be best practice to utilise automation tools as they assist in processes and supply data. 

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