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What is Strategic Risk Management?

Carrieanne Larmore
Carrieanne Larmore

Some say getting out of bed in the morning is a risk, because you never know what is going to happen, even if you think you have your day carefully planned. The same can be said of running a business, which can involve all sorts of plans that may not have the expected outcome. That’s where strategic risk management comes in, identifying and assessing risks from various aspects of a business to create a comprehensive strategy for countering or reducing the risk's impact.

While traditional risk management focuses on risk in isolation within a department, strategic risk management provides a more integrated approach throughout the business. The categories of external risk generally monitored by strategic risk management are industry, technology, brand, competitor, customer, project, and stagnation. Internal risk includes poor decision-making, improper implementation of decisions, and inadequate responses to change. When assessing competitor risk, for example, a business may think it knows how its competition will respond to the business introducing a new product to the market. Managing the risk involved in the product introduction means identifying other possible responses by the competitor and developing a plan to address the competitor’s next move, however unexpected.

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The main objectives of strategic risk management are countering risks and reducing the impact of unavoidable risks. It is also responsible for making sure financing is available for recovering losses. Strategic risk management accomplishes these objectives by ensuring departments receive better and more timely information, increasing responses to change, creating financial and operational flexibility, and preparing financial and human resources in case of a crisis. The strategic risk management team works with each department to integrate its systems with others, so stops are in place to catch and manage future risks.

Risk management software is available to help businesses with strategic risk management. The key is to find software that embeds risk management into everyday processes throughout all levels of the organization. Risk management software works by identifying the risk associated with specified assets through a dashboard and alert system. Risk management applications are different in that they provide businesses with a way to manage their information technology (IT) risk by notifying them of security breaches. Depending on the size of the organization, it can be costly to integrate risk management software so that it pulls data from all departments.

The focus of strategic risk management is commonly on financial risks, because non-financial risks are not quantifiable. Most research done in strategic risk management, therefore, focuses on quantitative analysis for financial risk. It is difficult for businesses to strategically manage risk that is not quantifiable, because software is unable to compute the risk of quantitative data, such as the risk of a brand’s reputation. For a business to measure non-quantifiable risk, it must have a person or team in place to manually review decisions to measure their potential impact based on past performances, surveys, or industry experiences. For instance, if measuring the risk of altering a product to reduce costs, the business can conduct a test and survey an isolated group to see what the risk would be to its brand’s reputation.

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