The cohesion between your strategy and your risks

Earlier I wrote about making a good inventory of what exactly your strategic risks are. Especially the difference between hygiene / business risks and strategic risks is not clear to everyone. Today I will reflect in more detail on the cohesion/relationship between your strategy and your risks: how do they affect each other?

Strategy → risks

Not everyone agrees with me (and that is ok) that your chosen strategy also determines your strategic risks. To illustrate: the risk of data breaches, or perhaps the integrity of your employees, are important points of attention, but not strategic risks. These risks are always relevant to your organization. If you switch strategies (be it rigorous or subtle), the risk of data breaches does not suddenly disappear. The integrity of the employees must also always be of a consistently high level. I tend to call these types of permanent risks business or hygiene risks; you should always have them in order. You can learn more about this in this article.

How does your strategy influence what your risks are? Let's take a classic restaurant for example that has decided to focus more on delivery meals over the next two years, in addition to the profit that is generated in the restaurant in the evening. The following points could be strategic risks:

1. The costs of ordering and delivery apps such as Ubereats and Thuisbezorgd.nl. Participation on these platforms is not free of charge, and if these costs become too high, delivery meals could no longer be profitable.
2. New legislation regarding the use of single-use plastic packaging. If these are banned or heavily taxed, alternative packaging costs can become too high to remain profitable.
3. Availability of staff, such as delivery staff and chefs. More meals means more people preparing them and delivering them. Without this manpower, it is possible to sell your meals but you will not be able to deliver.
4. Purchase costs of ingredients vs. the price consumers are willing to pay for delivery meals. These price fluctuations (due to crop failures, for example) can also make delivery meals unprofitable.

As you can see, these risks arise directly from the chosen strategy. Perhaps you could come up with more risks, I will omit this for the brevity of this article. The availability of staff could be up for discussion, this could also be an issue if you do not deliver. It just depends on the labor market at the time of your decision. If the entrepreneur in question finds it relevant to the strategy: keep it. If not? Leave it out.

Another observation: all these risks arise from the external environment of this company. It is difficult, if not impossible, for the individual entrepreneur to effectively influence these risks. In practice, this means that you are at the mercy of the whims of the market and politics. Where the legislation on packaging will not change every day and is therefore still reasonably clear, the food market can fluctuate strongly on a daily basis.

Risks → strategy

Can risks also influence your strategy? Of course, that is why you map them. But I mean a different point in time here than after you have outlined your strategy. In fact: the period in which you think about which strategy you are going to follow, so in advance. Most entrepreneurs / boards only start to think about strategic risks when the strategy has already been set in stone. Why then and not a few steps earlier?

Let's take our restaurant as an example again. Our entrepreneur has made the choice to focus on delivery meals as an alternative source of income in addition to running a restaurant on location. From this decision follow the four mentioned risks, all external. What happens if we partially reverse the process?

First, determine a number of possible strategies - this can be done at a fairly high level. For our restaurant this could be, for example: opening a second location, also opening during the day and then offering a menu aimed at "terrace guests", delivering meals, and giving cooking courses. Then you determine per strategy which specific risk is associated with it. You could, for example, simply organize this in a table.

A number of quick conclusions can be drawn from this overview:

1. Most risks are external here too. The design of the building and suitability for cooking courses is somewhat more internal, you have a lot of influence on that.
2. Legislation creates the fewest obstacles.
3. Starting with delivery meals has four risks, the other options have only three risks.
4. Cooks and fluctuating ingredient prices are a bottleneck in every scenario; in that case my advice would be to move these risks to the hygiene risks and to leave other risks.
5. In all scenarios the location is a problem, but the difference is sufficient enough to stick with it.

If I then edit the table, it looks like this:

Conclusion

Delivery meals continues to have four strategic risks, the day menu and the cooking courses both have only one strategic risk. My advice would be to investigate these two scenarios further; it may be that cooking courses simply do not fit in your current building, or that your terrace is too small to make it profitable to open during the day. It shows that a little bit of research and a little more brainstorming yields valuable insights that allow you to select a good, feasible strategy that has the best chance of success.

Artwork via Unsplash