Magazine article Risk Management

Rethinking Strategic Risk

Magazine article Risk Management

Rethinking Strategic Risk

Article excerpt

Risk professionals have traditionally deployed a number of enterprise risk management frameworks that focus on monitoring financial indicators and the evolving regulatory environment (for example, the global risk framework of ISO 31000). Many of the most commonly deployed frameworks rely on strategies and hedges based on prior performance and past negative events. But they do not necessarily serve to detect future strategic risks or predict future performance.

In determining the nature and extent of strategic risks facing their companies, executives should concentrate less on current or static threats and instead turn their focus to the future. These risks can encompass such complex variables as future marketplace decisions by competitors and the consequences that these decisions have on market share or reputation.

However, determining the composition and nature of strategic risk going forward requires a more dynamic and fluid approach. Traditional models-despite their best intentions and design--tend to encourage passive monitoring of risk: a "set it and forget it" mentality. Companies will likely need to make modifications to include sustained interaction with data and ongoing changes to the strategic risk profile.

In other words, companies need to constantly call into question their fundamentals: everything from the products and services they offer to their price points and how that connects with the mission of the company. Naturally, this implies an ongoing review and assessment of business partners and vendors. As supply chains and partnerships grow ever more complicated, the risk of a weak link increases exponentially.

On the reputation side, companies must confront the information explosion that has occurred in the past decade, something Tom Friedman of the New York Times calls "The Great Inflection." We now live in a hyper-connected world grounded in social media, cloud computing, 4G wireless, ultra-high-speed bandwidth, smart phones and tablets. Managing a company's reputation in such an environment requires much more than listening to customer feedback. The accepted information hierarchy, such as newspapers and established media outlets, has rapidly given way to an information matrix where no single voice necessarily dominates. Information and opinions of all kinds are easier to access, but also more difficult to assess. For corporate stakeholders, the strategic risk implication of the Great Inflection is that once-common reputational risk assumptions can be neither common nor readily assumed anymore. …

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