Strategic risk refers to the internal and external events that may make it difficult, or even impossible, for an organisation to achieve its objectives and strategic goals. These risks can have severe consequences that affect organisations in the long term.
Given the significance of this type of risk, we have put together this quick guide to help you get up to speed with all things strategic risk, including strategic risk examples, definitions and an overview of strategic risk management.
Let’s start by looking at what exactly strategic risk is.
What is strategic risk?
Strategic risk is the risk that internal or external events, or the strategic decisions an organisation makes, will stop it from setting or achieving its strategy and objectives. It is a category of risk in the same way that operational risk, financial risk, reputational risk and regulatory risk are. Strategic and operational risk are sometimes confused with each other, but we will cover the differences later. First, let’s look at some strategic risk definitions.
Roberts, Wallace and McClure (2003) describe strategic risk as relating to ‘risk at the corporate level’ which ‘affects the development and implementation of an organisation’s strategy.’
Similarly, the Economist Intelligence Unit (2010) explain that ‘Strategic risks are those that pose a threat to a company’s ability to set and execute its overall strategy.’
Deloitte (2013) expand on this definition, stating that these risks can also be ‘created by an organization’s business strategy and strategic objectives’. In other words, as well as affecting how likely an organisation is to achieve its strategy, strategic risks also arise from strategic decisions themselves.
Furthermore, Louisot and Ketcham (2014) state that strategic risks are ‘associated with adopting or not adopting the correct strategy for an organization in the first place or, once adopting, not adapting the chosen strategy in response to competition or other forces’. This, and the definition from Deloitte, align with Roberts, Wallace and McClure’s statement that ‘one example of strategic risk is the risk that the strategic decision is wrong.’
So, what can we learn from these strategic risk definitions?
In essence, strategic risk refers to the events or decisions that could stop an organisation from achieving its goals. It also refers to the danger of an organisation’s strategic choices being wrong, or not responding effectively to a changing environment.
Your organisation therefore needs to be aware of the circumstances that could put an obstacle between it and its objectives, and be ready to adapt and respond quickly to any changes.
What is the difference between strategic risk and operational risk?
Both strategic and operational risk can have serious consequences for organisations if they materialise. After the 2008 financial crisis, many organisations wanted those working in risk management to look beyond operational risks and focus on strategic risks due to a lack of effective foresight. However, as operational risk refers to the more immediate and tangible risks your organisation could face, disregarding it completely would be a mistake.
Here are the key differences:
| Strategic risks | Operational risks |
| Relate to strategic decisions or objectives set by the board | Are broad in scope, relating to systems, processes and products |
| Are long-term, affecting an organisation's future | Are short-term, affecting daily activities |
| A 'high-level' look at risk | A 'ground-level' look at risk |
Strategic risk examples
Examples of events or circumstances that could derail an organisation’s strategic goals include:
- Strategic decisions that are unclear or poorly made
- Changes in senior management and leadership
- The introduction of new products or services
- Mergers and acquisitions that prove unsuccessful
- Market or industry changes, such as a shift in the needs or expectations of customers
- Problems with suppliers and other stakeholders
- Financial challenges
- Failure to adapt to a changing environment or keep up with competitors
- Company reputation damage
That list is not exhaustive. Almost any strategic decision the board makes can fail, and a range of activities, operational and otherwise, have the potential to stop your organisation from achieving its aims. That’s why an effective strategic risk management process is so important.
What is strategic risk management?
Strategic risk management can cause some confusion. Does it mean risk management that is strategic in nature, or the management of strategic risk? It can mean both. For the purposes of this guide, we look at how you can manage strategic risk.
The good news is that you can follow the same 5-step process of identifying, assessing, treating, monitoring and reporting that you would use for other types of risk.
Your strategic risk management framework may therefore look something like this:
- Identify the strategic risks your organisation could come up against
- Conduct a strategic risk assessment to determine the likelihood of risks occurring and the impact they might have
- Choose a strategy for dealing with each risk
- Monitor each risk over time to keep on top of any changes
- Report at each stage of the strategic risk management process
When managing strategic risk, pay close attention to organisational strategy and objectives, keep a broad oversight of the strategic risks you could face, and be proactive by adapting to changes and responding effectively.
Improve your strategic risk management framework with technology
A proper risk management process helps ensure your organisation is prepared to handle strategic risk, and risk management software helps you get more from it. The benefits of technology include time-saving automation and better quality and efficiency of risk decisions. It can also help you stay on top of a constantly changing risk landscape, which is essential for managing strategic risk.
What’s more, the right software can bring your strategic risk management framework into focus, so you can be sure your organisation is doing all it can to achieve its strategy and manage any risks that arise along the way. Find out how Ideagen Risk Management can support your approach.
You can also find out how to choose the right risk management technology for you, to help your organisation better manage strategic risk.
Explore risk management solutions
Roll up your risk into one system for full visibility, maximum control coverage and joined-up reporting.