Strategic risk are the possible losses a business may incur based on decisions made at the strategic level. These include failures in business strategy or a business plan as they relate to either internal or external forces. Internal events that could cause the failure of a business strategy include poor communication, low cash flow, an unsuccessful merger, or a change in senior management. External events—such as changes in consumer demand, new technologies, and new market entrants—can also undermine a business’s ability to meet its core objectives.
Though some of these factors remain outside the control of the company’s leadership, what creates the risk is the possibility that they are not sufficiently accounted for when setting strategic objectives. Some strategic risks may be considered inherent risks—the cost of doing business. They may be accepted as necessary in the short term in order to meet long-term business objectives.
Strategic Risk vs. Operational Risk
Both strategic risks and operational risks can be cause by internal or external factors. Strategic risk and operational risk are both a part of enterprise risk management (ERM), a holistic approach to risk management wherein all sectors of a company adhere to the same risk management strategies. Operational risk refers to risks that a company faces in its day-to-day operations, such as the potential of a breakdown in manufacturing processes, a security breach, corruption and mismanagement, and even natural disasters. On the other hand, strategic risks refer to the potential of errors at the strategic planning level, which can threaten overall business objectives.
6 Examples of Strategic Risk
Here are some common examples of strategic risk that can impede business performance.
1. Change risk
Launching new products or initiatives, or changing organizational structures comes with inherent risks that must be accounted for in the planning process. Launching something also new requires confidence. One of Virgin Atlantic founder Sir Richard Branson’s first business ventures was a publication called Student Magazine, which he launched with a bootstrap attitude—and a unique office space—as a university student. “How do you start a magazine without any money?” Richard says. “I worked out of the school phone box, and those days, you picked up the phone, dialed the number, put a couple of coins in, and I would get through to Coca-Cola or Pepsi or the National Westminster Bank or Barclays Bank.
I would tell them this magazine is gonna have a circulation of a hundred thousand copies a month, and it’s gonna be the only way you can reach students. It didn’t matter that the magazine didn’t exist yet—I had the whole vision of it in my head that I refined over months of pitching in this little phone box.”
2. Competitive risk
Competitive risk is the possibility of losing traction because your competitors develop new technologies or introduce new products before you. To mitigate the risk of competition at Virgin Records, Richard created global businesses for every step of the music life cycle, from recording studios to venues. “Recording artists need shops to sell their music, and so we set up shops,” Richard says. “They need mail order companies to mail the records out to people, so we’d set up a mail order company. They need a publishing company to publish their music, so we had set up a publishing company…We could offer an artist or the whole spectrum that they needed. Once rock musicians had a taste of that, they wouldn’t go elsewhere.”
3. Regulatory risk
Regulations are being change and added to all the time in the business sector. This provides an inherent risk as any failure to comply with a change in regulation could disrupt day-to-day operations or require the implementation of expensive new technologies.
4. Economic risk
Economic risk refers to potential fallouts from a change in the economic landscape or legal framework within which a business operates. For example, lower government barriers to entry may allow new entrants to flood into the market, or high inflation may lead to a change in consumer behavior. Richard recalls an early business failure as a kid, when his plans to grow a Christmas tree farm were thwarted when rabbits ate the seedlings. “A well thought out scheme can go South when you’re not closely tending to your investment,” Richard says. “And I think throughout my life, if something’s gone wrong and there’s nothing we can do about it, we’ll move on to the next chapter, and either laugh at ourselves or maybe kick ourselves as well, but anyway, definitely laugh it off and move onto the next challenge.”
5. Management risk
This is the risk that poor strategic planning or communication may lead to unclear directives, or a poorly planned decision such as a merger or acquisition may fall through.
6. Reputational Risk
This is the possibility of a company damaging its reputation, whether due to the quality of a product or service, regulatory compliance breaches, or shareholder activism. Companies can turn controversial ideas into opportunities to boost brand image, like Richard did with Virgin Records. The name gave the record company an edgy reputation. “If you’re building a company, don’t be afraid of a little bit of controversy,” Richard says. “I mean, [with] the name Virgin, we couldn’t register for four years because the registry office said it was rude. As long as you’re not hurting anybody and you’re doing it in a sort of fun way, then come up with fun ideas that stand out from the crowd.”
What Is Strategic Risk Management?
Strategic risk management is the process of identifying, assessing, and managing risks. A successful strategic risk management framework establishes clear business goals, and key performance indicators (KPIs), and identifies key risk indicators (KRIs) to help anticipate risks and their potential impact on business decisions. When creating a strategic risk management plan, it’s important to include key stakeholders, including senior management and the board of directors.
Strategic Risk Management falls under the umbrella of enterprise risk management. Some companies have a full-time risk manager (sometimes called a chief risk officer or CRO). Whose team continually conducts risk assessments and develops risk management plans for the entire company. This team works with company leadership to understand the competitive landscape to determine potential risks and the likelihood of them occurring and then formulates a strategic risk management strategy to prevent and mitigate risk.