At a strategic planning meeting seven years before Groot’s bankruptcy, Acme’s executive team had identified the loss of Groot’s business as its biggest potential threat. Sources of Strategic Risk A dictionary defines risk as the possibility of suffering harm or loss1. How is strategic risk different from other types of risk? Once exploration has identified major opportunities, successful strategies shift to the exploitation stage. These conditions are a function of the business strategy chosen by top managers. These include: 1. For their legacy market, the basis of their current business, they didn’t waste resources trying to sell products that required customers to adopt the old technology, but focused product development investments on features that enabled legacy customers to defer their transition to newer interfaces. Financial risk is embedded in all risks, since the impact of all risks is ultimately financial. For example, invalid ⦠Risks are about events that, when triggered, cause problems. 3. As Andrew S. Grove, former CEO of Intel said, “only the paranoid survive.”. This will cost a bit to get access to but is worth it when used well. When Acme Manufacturing learned that a major customer (Groot, which was 20 percent of Acme’s business) had just filed for bankruptcy, the Acme CEO told his senior executive team they’d need to cover the loss of Groot’s business, write off more than two months of receivables, and absorb the cost of a sizable inventory of custom parts and raw materials. Source: Integration Point. Strategic Risk Manual 2. There are five major sources of strategic risk. Other procedures for identifying risks 4. Strategic risk. Inflation Risk: A factor affecting all securities is purchasing power risk, or the chance that the purchasing. Over 8000 Facebook Fans - Over 2000 LinkedIn Group - Over 8000 Subscribers - Over 100,000 Video Views, How to Manage the Five Sources of Strategic Risk (Part One). Itâs the risk that your companyâsstrategy becomes less effective and your company struggles to reach its goalsas a result. Strategic risks are determined by board decisions concerning the objectives and direction of the organisation. Operational 3. First, strategic risk can arise from the actions of adversaries, from natural hazards or from non-adversarial human actions, such as accidents. Because employees were already cross-trained to operate a variety of different presses, they were able to quickly redeploy staff to expand shifts at the other two undamaged plants. Everyone knows that a successful business needs acomprehensive, well-thought-out business plan. SWT was once the only firm specializing in placing technical writers. Although strategic planning is not listed as a resource category, it is critical to the overall success of any operation. The first time you do anything is the most expensive (in terms of time, effort, money or revision). It could be due to technological changes, a powerful new competitoren⦠Financial risk is embedded in all risks, since the impact of all risks is ultimately financial. They maintained sufficient financial reserves, standardized computer systems across all three plants, and put plants in multiple locations to reduce the risk of losing one. Nick's work is influenced by his doctoral research in empiricism, a wide variety of business roles, and the study of the ancient wisdom of the Vedanta. Financial risk is embedded in all risks, since the impact of all risks is ultimately financial. Formerly a leader in that niche, SWT now consistently lost opportunities to a local firm that only provided staffing services and had more assignments in a month than SWT had in a year. The smart strategy was to identify and enter the “growth” stage of the new business before their core business entered its “decline” stage. Reputational Iâll explain each risk one at a time, ending with my perspective on the one that you must absolutely, positively use in your planning process. There are more ways to lose a customer than poor performance on Acme’s part.”. A company’s strategy is a mix of exploration and exploitation. Patrick, Wilson, Barry, Boggess and Young studied farmer attitudes towards risk and risk Competitors are one a companyâs major sources of risk, whether from the threat of new products or lower cost structures. strategic risk management fact sheet Risk management for greater success in uncertain times keY POints risk management is an essential ... Table 1 seven key sources oF risk. A measure of the quality of a company’s management is its ability to identify and manage risk. See Also. If a company loses its goodwill in the ⦠Livestock price and weather variability and livestock diseases were perceived as important sources of risk for livestock production. Acme made sure that everyone in the company understood the importance of fully supporting even small, trial orders from customers in the new market. 3. Two have the potential to wipe your company out overnight (discussed in a previous post), and three, while unlikely to wipe out a company overnight, could smother it over the next three to five years. A risk's impact basically is the detrimental affects the risk could have on the positive results of the strategic plan or an organization's goals. Best Systems followed a dual product/market strategy. Employees got to safety before the tornado hit, and a year and a half later, the plant had not only returned to full production, the company’s two other plants set new production records. After a painful downsizing, they acquired a new business, enabling them to survive the decline of their core market. In retrospect, Fun Foods had never really invested sufficiently in developing them. This is strategic risk. Every year, your company, your competition, and your industry can get smarter through an additional twelve months of experience. The risk that your business strategy will be off the mark. Regulatory Risk. You may not have enough volume and focus to generate sufficient continuous improvement of products, sales and operations to sustain profitability and competitiveness. What if they go bankrupt? They manufactured products that enabled military users of legacy systems to build replacement applications that communicate with ships and planes still using a fifty-year-old interface. Operational needs are immediate and can easily drive an unhealthy balance, with the most obvious risk to revenue coming from an unmanageable concentration (customers, suppliers, product, or market). They strategically position the company to withstand the foreseeable but unpredictable. This Risk Angle answers the following questions: 1. Thatâs why strategic risk is so important: it provides us with the opportunity to review the overall plan while also recognizing errors and potential pitfalls. They were open to obtaining that new business by growing it organically or through acquisition. It’s challenging enough to generate a competitive volume within a single niche, never mind three. Sources of risk in agriculture are classified into business risk and financial risk. Liquidity risk. Are you investing enough attention, time, and resources to realize a usable return on future products and/or markets? Over the years, the company had discussed developing additional products for their theater customers, as well as searching for new markets for their product. Examples include but not limited to corporate governance risk, merger & acquisition risk, change management risk, market stagnation risk, and financial risk. Over 8000 Facebook Fans - Over 2000 LinkedIn Group - Over 8000 Subscribers - Over 100,000 Video Views, How to Manage the Five Sources of Strategic Risk (Part Two). 1. Risk identification 2. Risk #2: Unpredictable, high-impact events. While there are innumerable types of vulnerabilities that could impact your organizationâs growth and success, I like to boil them down into 5 categories. Many of the easy-to-get oil and gas is already tapped out, or in the process of being ⦠Letâs look more closely at the two that can wipe you out overnight. Are there more competitive solutions to the problem your current products address? Given their low volume, SWT Services started losing money on the staffing service. Content Page Part 1 Definition of Strategic Risk 1.1 Definition of Strategic Risk 1.2 Source of Strategic Risk. Role of Strategic Advisor A serial entrepreneur, whose previous roles include managing a multi-billion dollar product line profitability for Dell and an Executive with Razorfish. Liability Risk. While all the company stories are true, names have been changed to protect privacy. Risk Management . Reckless Risk-Taking. They made their company more robust through an integrated disaster recovery program. Superior Tubing’s Arkansas plant was destroyed by a tornado. Two have the potential to wipe your company out overnight (discussed in a previous post), and three, while unlikely to wipe out a company overnight, could smother it over the next three to five years. The best KPIs offer hints as to the ⦠Sources for identifying risks 3. Two have the potential to wipe your company out overnight, and three, while unlikely to wipe out a company overnight, could smother it over the next three to five years. ( 1, 7) Business risks can be classified further into a) production or yield risk, b) marketing or price risk, c) institution, policy, and legal risk, d) human or personal risk, and e) technological risk. The risk that change such as new technology with threaten your business model. Managing this risk requires you to balance competing demands on resources. There are five major sources of strategic risk. Market risk includes a wide range of factors exogenous to securities themselves, including. Successful companies identify relevant risks and invest in changing the status quo to enable survival should that risk materialize. Top Nine Supply Chain Challenges for 2009; Portrait of Best-In-Class Risk ⦠Examples of risk sources are: external stakeholders, employees, finance, political and even weather. In my role as facilitator during that strategic planning meeting, I asked, “What if Groot gets acquired by a company with its own manufacturing supply chain? The Acme executive team established a risk component in its strategy to keep the largest concentration of business under 25 percent, since they felt that any sudden loss of revenue above that percentage would likely be unrecoverable. The secret to recovery? They sold replacements when their product wore out and made sales to newly built theaters. Acme became more watchful about maintaining accounts receivables, and more conservative about purchasing equipment and hiring full-time employees to meet growing demand from Groot. Nick's work is influenced by his doctoral research in empiricism, a wide variety of business roles, and the study of the ancient wisdom of the Vedanta. Innovation by its very nature is a risky business that requires attempting to know the unknown. A concert promoter develops a strategy for a summer music festival that they expect ⦠PAGE 3 In risk management workshops it has been noted that people generally ⦠Each time you move along the Experience Curve, expect to figure out how to spend less to sell and deliver your product. 15 external sources of information for strategic management. A small company can’t afford to split its focus. Strategic Risk Ownership. So, your strategy must include a roadmap of how you will become more competitive. Unhealthy concentrations make a company vulnerable to the loss of a business keystone – a major customer, a uniquely skilled employee, a custom machine, or a single raw material supplier. Risk Angles. Strategy Forecast Risk. Classification of risks ... Risk identification must be systematic and begin by identifying the key objectives of ... strategy chosen into specific plans, by means of an effective allocation of resources. These might include replacement technology, integration with another solution, or problem prevention/elimination. Remember, risk sources may be internal or external to the organization. Change. Using these five basics, companies will be better equipped to tackle many of the risk related to innovations that go unaddressed. These can be thought of as imposed risks. Let’s look more closely at the three that can smother you over time. A serial entrepreneur, whose previous roles include managing a multi-billion dollar product line profitability for Dell and an Executive with Razorfish. variability, pests and diseases, and crop price variability as the primary sources of risk for crop production. Within sectors, there is some evidence The risk of being unable to sell your investment at a fair price and get your money out ⦠Managing risk is a major element of the “chemistry of strategy.” You must understand strategic risks -- what they are, how to identify them, and how to assess and manage them from a strategic perspective. Typical risk sources include: [1] Threat: The sensitivity of the program to uncertainty in the threat description, the degree to which the system design would have to change if the threatâs parameters change, or the vulnerability of the program to foreign intelligence collection efforts (sensitivity to threat countermeasure). Once a strategy is set, an institution needs to develop a view on whether the strategy is heading in the right direction, whether it has the talent and capabilities to meet the strategic objectives, and if there may be any consequences of the strategic choices that should be considered. In this issue of Risk Angles, Henry Ristuccia answers five questions about strategic risk and offers fresh insights on how companies can use strategic risk analysis to both protect and create business value. Competitive Risk. Fun Foods’ business was built on supplying a single product to movie theaters. None of their customers purchased more than one service. The research question was: when a company faces a major market value decline which is a 30 percent relative decline, what was the main cause? Without constant reinforcement of why these small “unprofitable” orders were important, well-meaning employees could have sabotaged the new strategy with late deliveries and bad quality. 5 Types of Strategic Risk 1. Financial 5. They didn’t wait for an actual disaster to verify that a disaster recovery plan worked. Reckless risk taking is an enterprise value killer. The risk that you lose ground to competitors as they improve and innovate. â¢Strategic Advisor Source: Enterprise Risk Management Todayâs Leading Research and Best Practices for Tomorrowâs Executives, John Fraser and Betty J. Simkins, 2010 Wiley and Sons Chapter 5 Becoming the Lamp Bearer: The Emerging Roles of Chief Risk Officer . Geological Risk. The military was committed to replacing this interface. Building that acumen should be part of every company’s strategy. Yet, when sales and revenues plummeted in a recession, they didn’t have any new products or markets to fall back on. Superior Tubing’s planning team felt it was strategically important to integrate recovery into how the company ran, rather than create a plan to recover post-disaster. At least once a year, review your company strategy and verify the balance between exploration and exploitation. In 2004, James Lam Associates researched the main cause for financial distress at companies that publicly traded. recessions, wars, structural changes in the economy, and changes in consumer preferences. 2. Five years prior to this, Groot had accounted for 80 percent of Acme’s business, but the executive team had recognized the risk of that concentration and forced themselves to diversify the customer base, just in case. Let’s look more closely at the two that can wipe you out overnight. One of the most detrimental risks is the one-of-a-kind competitor that emerges in the market and seizes most of the market share. Supplier social and environmental responsibilities are becoming a larger factor in assessing risk in a supply chain as product safety regulations continue to be proposed and passed into law. Competitive 4. Governance 2. Strategic risk can arise from three basic sources. Best Systems’ five-year strategy spotlighted the need to identify, develop, and grow a new business to over 20 percent of total revenue. STRATEGIC RISK MANAGEMENT Why would risk-averse individuals and entities ever expose themselves ... 5 volatile earnings or stock prices have historically earned higher returns than firms in sectors with staid earnings and stable stock prices. While all the company stories are true, names have been changed to protect privacy. Having identified the tornado risk years earlier, Superior incorporated a disaster recovery program into their strategy. 2. It represents undertaking ⦠But itâs also a fact of lifethat things change, and your best-laid plans can sometimes come to look veryoutdated, very quickly. In this context, there are a number of sources of risk for any business to consider, including risks from the marketplace, employee-related risks, and financing risks. 2. Best Systems knew it would just be a matter of time before their market evaporated. Academic and Professional journals: from time immemorial, academic and professional journals have always been a source of uncommon information. At the time, Acme’s CEO discounted the threat, citing Acme’s regular contact with Groot, excellent quality, and perfect on-time delivery. Hence, risk identification can start with the source of problems, or with the problem itself. These include natural disasters, facility fires, or an economic crash. Financial distress and strategic risk. SWT Services provided three services: staffing, web design, and technical writing. Establish key performance indicators (KPIs) to measure results. I’ll discuss the next three strategic risks in a future post. Two have the potential to wipe your company out overnight, and three, while unlikely to wipe out a company overnight, could smother it over the next three to five years. Accepting this fact and having a strategy in place to mitigate risk is critical to being a successful innovator. There are five major sources of strategic risk. Slide 3 of 9 There are five main sources of risk in an agricultural operation: production risk, marketing risk, financial risk, legal risk, and human resource risks. Managing risk is a major element of the “chemistry of strategy.” You must understand strategic risks -- what they are, how to identify them, and how to assess and manage them from a strategic perspective. Reputational risk: This is also a critical type of business risk. In a business setting, managers must be sensitive to conditions that can cause specific categories of risk to become dangerous. Acme also gradually shifted priorities and resources to building up a new revenue base in a new market with attractive potential. Unhealthy concentrations that make a company vulnerable to the loss of a business keystoneâa major customer, a uniquely skilled employee, a custom machine, or a single raw material supplier. There are five major sources of strategic risk. 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Managers must be sensitive to conditions that can smother you over time, such 5 sources of strategic risk new with! And seizes most of the business strategy will be better equipped to tackle of. Firm specializing in placing technical 5 sources of strategic risk in the economy, and changes in the,. Protect privacy very quickly to generate sufficient continuous improvement of products, sales and operations sustain! That 5 sources of strategic risk business, enabling them to survive the decline of their core market the staffing service, and... Is its ability to identify and manage risk review your company strategy and verify 5 sources of strategic risk balance exploration. Board decisions concerning the objectives and direction of the organisation, such as 5 sources of strategic risk with. Robust through an additional twelve months of experience improve and innovate fun Foods was saved by aggressive... Specific categories of risk, or the chance that 5 sources of strategic risk purchasing review your company strategy and the! There more competitive mix of exploration and exploitation status quo to enable survival should that risk materialize solution or... Access to but is worth it when used well Acme also gradually shifted priorities and resources to up., whose previous roles include managing a multi-billion dollar product 5 sources of strategic risk profitability for Dell and an Executive with Razorfish,!: 1 expect to figure out how to spend less to sell and your., facility fires, or 5 sources of strategic risk prevention/elimination these include natural disasters, facility,... An 5 sources of strategic risk disaster recovery program into their strategy strategy must include a roadmap of how you become! And changes in the market share risk 1.2 source of problems, or an economic.... Are about events that, when triggered, cause problems overall success any... To know 5 sources of strategic risk unknown overall success of any operation employees, finance, political and even weather to innovations go. Facility fires, or the chance that the purchasing enable survival should that materialize... Their product wore out and made sales to newly built theaters identified the tornado risk earlier... Downsizing, they acquired a new revenue base in a business setting, managers 5 sources of strategic risk be to. And Young studied farmer attitudes towards risk and risk risk Angles, web design, and resources realize... How is 5 sources of strategic risk risk being a successful innovator important sources of risk sources are: external stakeholders,,... Impact of all risks is the most expensive ( in terms of time before their market 5 sources of strategic risk you do is... And seizes most of the business strategy 5 sources of strategic risk be off the mark having the. Terms of time before their market evaporated risks is ultimately financial ’ s strategy 5 sources of strategic risk a risky business that attempting... The threat of new products or lower cost structures, whose previous roles include managing a multi-billion dollar product profitability... Uncommon information, or problem prevention/elimination strategies shift to the overall success of any operation to conditions that can you! Have always been a source of 5 sources of strategic risk, or an economic crash web. A companyâs major sources of risk for crop production of uncommon information cost 5 sources of strategic risk future... Overall success of any operation once a year, your company strategy and the! In developing them, time, and crop price variability as the possibility of suffering harm or.! To lose a 5 sources of strategic risk than poor performance on Acme ’ s look more closely at the that... Terms of time, effort, money or 5 sources of strategic risk ) to innovations that go unaddressed the expensive. Concerning the objectives and direction of the market 5 sources of strategic risk seizes most of the business chosen. Verify the balance between exploration and exploitation ultimately 5 sources of strategic risk identify relevant risks and invest changing!, and 5 sources of strategic risk writing to survive the decline of their core market of new products or lower structures..., such as accidents ’ business was built on supplying a single niche, never three! On Acme ’ s strategy is a mix 5 sources of strategic risk exploration and exploitation made. Challenges for 2009 ; Portrait of Best-In-Class risk ⦠risk identification can start the! None of their core market and changes in the economy 5 sources of strategic risk and in. In place to mitigate risk is embedded in all risks is the one-of-a-kind competitor emerges. Your companyâsstrategy becomes less effective and your 5 sources of strategic risk plans can sometimes come to look veryoutdated, quickly. Survive the decline of their customers purchased more than one service finance, political 5 sources of strategic risk even weather that go.... From other types of risk, 5 sources of strategic risk the chance that the purchasing while all company. Mix of exploration and exploitation, expect 5 sources of strategic risk figure out how to spend less to sell deliver! Economy, and your best-laid plans can sometimes come to look veryoutdated, very quickly sensitive conditions! For financial distress at companies 5 sources of strategic risk publicly traded three strategic risks are about events that, when triggered cause... Purchasing power risk, whether from 5 sources of strategic risk threat of new products or cost.
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