Risk Management and Business Strategy: Risk Management and Strategic Planning Are Not Two Separate Things. They Are Two Braids of the Same Rope-And They Must Be Built That Way in Order to Contribute to the Strength of the Whole

By Holmquist, Eric | The RMA Journal, July-August 2012 | Go to article overview

Risk Management and Business Strategy: Risk Management and Strategic Planning Are Not Two Separate Things. They Are Two Braids of the Same Rope-And They Must Be Built That Way in Order to Contribute to the Strength of the Whole


Holmquist, Eric, The RMA Journal


[ILLUSTRATION OMITTED]

There is a light moment in the movie The Lord of the Rings: The Return of the King, the third installment of J.R.R. Tolkien's epic trilogy, when the small band of warriors central to the story is contemplating a critical, but seemingly impossible, mission: facing the enemy head-on at their main gates. After spending a few minutes contemplating this grim task, the dwarf Gimli casually offers his assessment of the situation: "Certainty of death, small chance of success.... What are we waiting for?" And off they go.

Actually, this assessment was fairly balanced. The warriors knew the benefit (saving the world), they knew the cost (probably everything), and they knew the risk (almost certain failure). But the risk was within their acceptable tolerance range and the need was critical. The decision was easy.

The intertwining of risk management and strategic planning is a marriage of strange bedfellows. The two disciplines seek the same goal (maximizing profits), but they approach it from two uniquely different perspectives. No one would argue that risk isn't considered in some form when thinking about possible business strategies; of course it is. The question isn't whether risk management is woven into the process of strategic planning, but how.

A recent survey conducted by the Economist Intelligence Unit (1) and sponsored by KPMG and ACE found that only about 44% of respondents included their risk management function when setting strategy. This figure is hard to interpret because the question is so broad, and it doesn't address whether a risk management process was included, but still it's a disappointing statistic. Risk management must be included in setting business strategy, because to do otherwise is at best reckless, and at worst incredibly negligent. The basic purpose in setting a strategy is to determine a set of business objectives that will yield positive results for the shareholders, customers, and employees. The process of planning strategy should identify and quantify the expected positive result and lead to the design of systems and processes to execute it. This is all predicated on a set of assumptions that may or may not be accurate, not the least of which is management's ability to execute on that strategy.

All strategic initiatives have one element in common--they involve some form of change. The seeds of risk are sown in change, both change we encounter and change we invoke. Since strategic planning clearly falls into the latter category, it is imperative that we manage change in a way that considers all aspects of risk without dragging the process into the bottomless, soul-crushing abyss of "What could go wrong?"

The Challenge

In the simplest terms, any new proposal has to involve three major considerations:

1. What is the expected benefit?

2. What is the expected cost?

3. What is the potential risk?

The proposal's success requires both a willingness to honestly explore all three considerations and an understanding of how to assess both the benefit and the risk. This is where deep cultural and organizational issues are often encountered. In many cases, the first (benefit) is enthusiastically embraced, the second (cost) is tolerated, and the third (risk) is suffered. This dynamic is not unique or surprising. Consider the following challenges:

* People want to trust their instincts. A room full of 50-year-old bankers doesn't want to be told by a 30-yearold "risk guy" why the idea is a bad one. The problem is, sometimes the 30-year-old is right.

* The benefit of a strategic proposal is easy to embrace because it is all good news. Who doesn't like good news? Humans are masters at rationalization. Simply put, human perception is not rational. How many of us have justified a major purchase because of all the "good" it will bring to our lives? The cost aspect is easy to estimate and can be rationalized as necessary to achieve the benefit. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Risk Management and Business Strategy: Risk Management and Strategic Planning Are Not Two Separate Things. They Are Two Braids of the Same Rope-And They Must Be Built That Way in Order to Contribute to the Strength of the Whole
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.