Risk management

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.

Other categories of risk you should prepare for include compliance and regulatory risk, financial risk and operational risk.