Linking Risk to Strategy

Articles

Linking Risk to Strategy

31/10/2014

Last month we featured an article on “strategic non-planning”. This month we present a follow-on article, with a selected summary arising from a recent RMIA briefing conducted in Melbourne.

Risk means more things can happen, than will actually happen

Whilst Boards formally review the business strategy, along with the key risk register at least annually, this is a dynamic and flexible process in real life and requires frequent tweaking of the plan. Strategic planning should also focus on the key (e.g. top 10) risks.

Strategic Risks are the uncertainties and untapped opportunities

Strategic risk management is our response to these uncertainties and opportunities.

Build Strong Relationships Now

We need to build strong relationships now, both internally and externally, so you can have quick meaningful dialogue that will more likely be accepted and supported in crisis situations. It is too late to establish robust and trusted working connections when everyone is stressed and struggling to understand and control an emerging issue.

Risk Appetite & Risk Management

Well defined understanding how risk impinges on your business strategy is essential. “As we assess our corporate strategy, we should also consider what we are prepared to trade off for different possible outcomes”. This is an iterative process, not a one-off assessment.

There are; many risks, many ways they can arise, many business options and many ways to achieve the business strategy. Good strategic planning considers all of these factors. The impact of risk events can be expressed as a variation in the strategic goals.

Risk vs Reward

The iterative process requires us to test strategic plans, and re-test for different scenarios and possible circumstances.

For example testing should include consideration of things like; business changes, key personnel changes, the economy, customer pressures, different staffing levels, and technical problems.

Business Strategy

Diversification doesn’t necessarily require owning different things, but having things that respond differently to events in our environment.

The above applies to business strategies which are trying to maximise profit while minimising risk.

As we think about strategic objectives and opportunities in front of us we need to understand that we shouldn’t expect to make money without bearing some risk. But we shouldn’t expect to make money just because we do take risk.

An important principle of good strategic planning is that risk control is essential, and whilst desirable, risk avoidance is often not possible in the real world to achieve all of our business objectives.

The above appears to contradict workplace safety law which mandates a hierarchy of control when managing workplace safety risks. However, boards and executive teams who make large investment decisions 5 or 10 years into the future need some certainty that the expensive facilities which meet current standards are not later assessed as “non-compliant” through the “low as reasonably practicable” concept.

At a personal level we are all good risk managers, whether we realise it or not. Proof? You are still here today. Most of us will know of friends or acquaintances in the past, who are not alive today because of accidents. So we have likely been identifying and managing risks satisfactorily to date. However, businesses cannot rely on intuitive reactions to known risk exposures, but need formal processes to identify, assess and prioritise strategic actions.

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