5 Steps of Effective Strategic Risk Management

Steps of Effective Strategic Risk Management

Strategic risk management is the process of identifying, assessing, and responding to risks that could threaten an organization’s strategic objectives. It is a key part of any organization’s risk management framework and helps ensure that strategic risks are taken into account when making decisions.

Contents

What is Strategic risk?

Strategic risk is a risk that could have a major impact on an organization’s strategic objectives. It can include risks to the organization’s reputation, financial stability, or ability to meet its strategic goals.

How do you measure and manage strategic risk?

Strategic risks are unique in that they can threaten an organization’s strategic objectives. These strategic risks must be identified, assessed and managed through strategic risk management processes in order to ensure that strategic objectives aren’t threatened. This is done by identifying the key business drivers that could pose a strategic risk, assessing the likelihood of these risks occurring and the impact they could have, and developing a response plan to mitigate the risk.

What is strategic risk management?

Strategic risk management is the process of identifying, assessing and responding to strategic risks that threaten an organization’s strategic objectives. It is a key part of any organization’s overall risk management framework. The strategic risk assessment typically covers the whole organization, while other types of risk assessments may focus on particular business activities or strategic targets. Strategic risk management should be considered early in strategic decision-making processes, to reduce the likelihood that strategic decisions are taken under conditions of uncertainty.

Steps of effective strategic risk management

Managing strategic risk involves five steps that must be integrated within the strategic planning and execution process in order to be effective:

Define business strategy and objectives: The first step in strategic risk management is to define the organization’s strategic objectives. These should be specific, measurable, achievable, relevant, and time-bound (SMART).
Establish key performance indicators (KPIs) to measure results: Evaluate strategic risk using a strategic risk management framework that includes strategic risks, strategic opportunities, and strategic assumptions. These should be aligned to the organization’s purpose, values, and objectives to ensure that they are relevant
Identify strategic risks: The strategic risk assessment should address both current and emerging strategic risks (strategic risks) as well as missed opportunities (strategic opportunities)
Establish key risk indicators (KRIs) and tolerance levels for critical risks: KRIs indicate the strategic risk management process and key risk indicators (KRI) should be established to measure strategic risks. Some examples of KRIs include strategic risks, strategic opportunities, and strategic assumptions. Assessing strategic risk requires establishing tolerable or acceptable levels for such factors as strategic risks and strategic opportunities as well as limits on the escalation of risk-taking.
Provide integrated reporting and monitoring: The strategic risk management process should be integrated into the overall risk management process and regular reporting on strategic risks should be provided to senior management. This will allow for early identification of strategic risks that have the potential to impact strategic objectives and an organization’s ability to achieve them.

The strategic risk management process is important for any organization, but it is especially critical for organizations that are undergoing a strategic change or those that are expanding into new markets. It allows the organization to identify and assess the risks associated with pursuing strategic objectives and to develop a plan to mitigate those risks.

Organizations that don’t have a strategic risk management process in place can experience strategic risks, strategic opportunities, and strategic assumptions that are not realized or managed effectively. This often results in the pursuit of strategic objectives that do not align with organizational values or strategies, which can lead to missed opportunities and reduced performance.