Demystifying "Strategic Risk", A Tool-based Approach

May I start by emphasizing that this article is about “Managing Strategic Risk”, not “Strategic Risk Management”.  The former guards against charting the wrong course to your company’s growth and investments, while the latter is an end-to-end framework covering many risks such as; Financial, Operational, Reputation, Legal, Compliance and of course Strategic Risk.

As a CEO, COO, Business Executive or a Board Member, you are surely to brush against “Strategic Risk” when you debate your company’s 5-year business strategy, exercise governance over the ongoing business or seek compliance to various regulations (e.g. Basel, SoX, MiFID).

But why write about “Strategic Risk” and not any other risks?  Well, I think my hands itched for writing about “Strategic Risk” – in particular – because of the lack of a standardized and widely accepted measurement framework for this type of risk, despite its overarching impact. I do appreciate that many consulting firms provide some proprietary methods for measuring Strategic Risk based on scenario play, past performance analysis, market forecasting and risk appetite.

Besides, I found a nice tool to help on that which I thought to share!!  You cannot blame someone for being a bit impulsive and technology tuned.

Now, let’s drill deep and stir some dust.

Strategy is all about making choices; hoping they are wise and lucrative on the long run. Within a Business Strategy, you choose what clients’ problems you want to solve, how you will solve them in a unique manner that is cheaper, quicker or generally better than the status quo, and finally, work out how to bring your solution to the market to generate demand. These are – among many – the 3 top choices you typically invest the lion share of your time stamina and nerves in. The same factors are depicted as the row tags in the diagram above.

Each of the above 3 choices (i.e. Pain, Differentiated Solution and Go-To-Market) are prone to threats emanating from clients no longer having that pain, changing cost and revenue dynamics and new market, regulatory and industry changes.  These 3 threat categories are presented as the column tags in the above diagram.

Now that you broke your Strategy into components and classified your threats, you can measure “Strategic Risk” easily.  Wrong !!!  A key obstacle is how you will predict the future trends changing the world in the coming 5, 10 and 20 years.

Haphazard google searches, book readings and conferences participation will not crack your challenge open as you need reliable, structured future insights. Moreover, these foresights should be incorporated in your scenario play for the routine activities of strategy review and risk management.

A big part of the answer comes from up, freezing north; Finland.  A Think Tank called “Futures Platform” built an online tool and database that collects, classifies and describes the future trends shaping the world today in the areas of; Globalization, Technology, Climate Change, Urbanization, Society Development, Ethics, Health, Science and Technology.  Each trend is further explained in terms of adoption rate, impact, time horizon and relationship with other trends.

Saving the best to the last, the tool allows you to prioritize these trends by engaging various stakeholders in your organization so “Measuring Strategic Risk” becomes a balanced corporate-wide exercise, not a chore or a fad for the elite few!

The tool structures the trends your company’s prioritized in a Radar so you can incorporate it in your scenario play and assess whether they are a threat or an opportunity to your strategy.  If you are a COSO-ERM fan then, this will surely resonate with you.  COSO ERM framework advocates that an organization should look at positive risks, not only negative risks.  Positive risks are those enriching your market position and financial performance, once properly capitalized.

Finally, please note that the tool has an online demo version where you can try and fiddle with over a weekend or a lunch break.

Have a try and let me know what you think.

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Alberta Advisory Group is an international consulting power house specialized in driving large scale business transformation by orchestrating the elements of strategy, people, process, technology and market.