Strategic risk definition
/What is Strategic Risk?
Strategic risk is the probability that an event will interfere with a company’s business model. A strategic risk undermines the value proposition which attracts customers and generates profits. For example, if a company’s business model is to be the low-cost provider of a product and a competitor from a low-wage country suddenly enters the market, the company will find that its value proposition has been destroyed.
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Examples of Strategic Risks
Examples of strategic risk scenarios are noted below:
A new product fails catastrophically
A major acquisition fails
A customer gains massive market share and then has an inordinate ability to set prices
A supplier gains monopoly control over supplies and raises raw material prices
A key product goes off patent
There is a sudden shift in technology that makes the company’s products obsolete
The contamination of company products with a hazardous substance leads to brand erosion
The government changes its tax policy, which eliminates a key pricing advantage built into a firm’s business model
A trade agreement reduces barriers to entry, resulting in a flood of new competitors into the market
Company assets are nationalized
Terrorist attacks reduce sales or destroy property
Variability of Strategic Risk
The types of risks to which a business is subjected will vary considerably by company, since risk is based on such factors as geography, industry, product type, and employee relations. Thus, the risk mix is unique to every business. For example, a mining company is subject to the risk of a local shutdown by people who object to local pollution issues, while a business in the apparel industry may face a customer revolt over the working conditions of employees at its foreign clothing factories.
Strategic Risk Management
It is possible to develop an organized approach to reducing the impact of strategic risks. The first step is to identify the most likely strategic risks that will impact the business, followed by the assignment of a probability to each one. Part of the analysis should include an estimation of the impact that each of these risks can have on the business. The result should be an emphasize on risks that are both high-probability and high-impact. The next step is to develop a strategy for how to deal with each identified risk, and assign responsibility of each objective within this strategy. Subsequently, management monitors each strategic risk, as well as the mitigating actions being taken for each one.