Managing Strategic Risk

What is Strategic RISK

Many business leaders do not understand the strategic risks within their business. Risk analysis often focuses solely on management and operational risks but fail to mention or underestimate the likelihood to possible impact of strategic risk on their business. Strategic risks though are far more critical in the determining the success or failure of an enterprise.

When leaders think about risk management in business they are too often talking about legal compliance or about the operational risks around issues such as health and safety.  

Drawing up lots of rules and making sure that all employees follow them on the other hand can solve operational risk. Many such rules, of course, are sensible and do reduce some risks that could severely damage a company. But rules-based risk management focuses on legal requirements, not complete risk management. 

Management and operational risks have attracted leaders attention for obviously important reasons around safety and compliance, but the risks have become over prominent in leadership thinking about risk. This is a common misunderstanding of risk by leaders, not seeing risk as primarily a strategic issue in business. This view of risk misses the strategic elements of risk, which leaders need to actively consider in defining their business model and in making strategic decisions. From start-up to exit risk is a strategic issue, which should underpin all strategic thinking.  

Risk is an essential element of strategic thinking. Every business idea creates and must deal with strategic risks. When someone comes to me with an idea and their opening phase goes along the lines of "no-one has done this before, that's why it will succeed" immediately gets me thinking is there an obvious reason about why no-one has done this before? In the real world there are no natural vacuums. So why has no-one else done this before.   

Strategic risk must be the first risks which entrepreneurs, owners, leaders and stakeholders (the shareholders, NED's, advisors and accountants etc) need to identify and identify and scrutinise. Strategic risk defines the real opportunity a business has to succeed, as an entity or within any chosen opportunity it sets to undertake, from a new product or service through to entering a new market.

Risk v Opportunity

All opportunities carry a risk. The two elements are tangibly linked, there are no opportunities that do carry risk, and the direct link between the two means the greater the opportunity so the greater the risk.  Too few business leaders identify that clearly and develop a clear plan to deal with those strategic risks. In Dragon's Den the reason why the dragons often want so much of the shares for their investment is to deal with that risk. I the risk is low (clear market, clear routes to that market, experienced and viable leadership team and clear plans to get to market with an plausible exit strategy) then they fall over themselves (trample over each other) to make corresponding offers for a far smaller share of the pie. This is a simple example of the value of understanding strategic risk in setting up a new business. But this is what experienced consultants like myself assess when we strategically plan a business. 

As an independent experienced strategic planner identifying the strategic risks, profiling these and then assessing these risks is critical for leaders to understand and actively overcome in their strategic thinking.     

Developing leadership risk skills is an important element for leaders to understand that their approach to risk defines how the lead and what they lead. Strategic risk defines the type of business model that leaders develop through to which markets and where in them they choose to operate. 

Understanding strategic risk and learning to how to manage key business risks throughout your business is an important skill set for leaders to develop in establishing their judgment in risk considerations and ensure they are integrated into strategic thinking.  There are two parts to risk, firstly identifying your strategic risk and then secondly how to actively manage the identified risks, which this article covers. If you would like to know more about strategic business planning then click this link here.

Here are some key questions to consider in identifying strategic risk:  

1. Risk Appetite 

The first stage in managing risk is to look at the leadership team and its surrounding stakeholders, both formal (Board, NED, shareholders) and informal (employees, advisors, channel partners) to map out the appetite to risk. The leaderships' risk appetite determines the overall approach the business will take to risk. Risk is always directly linked to opportunity and therefore reward, take no risk and you take no reward. Conversely take high risks and you could achieve high rewards (think Amazon), but equally exposes the business to potential high failure. 

The more the leadership diversifies from its core skill sets so it increases the risk it is likely to face. This is why investors want to see both  the leadership teams track record but also their relevance to the market. Diversity in its self is also vitally important, too many people from within a narrow field often limits risk taking due to lack o wide and group think mentality. Leadership diversity increases risk, and lack of diversity reduces risk appetite.

Risk appetite is also directly correlated to the experience of the sector you are operating in, the more established and known the sector is to the leadership team has so the lower risk the leadership team sees in operating with in it. than emerging and unknown.       

2. How well is your strategy defined? 

Without a defined strategy your business is at high risk. If the leadership does not have a clear and articulated strategy, which is shared and owned, then the business is vulnerable to strategic drift, living in a dream without clarity and purpose. Having a strategy in place, provides the context of the business, with strategic goals, intent in positioning and outcomes defined which enable the business to drive forward. To learn more about strategy click here.

Inside a good strategic plan the strategic risk must be identified, clarified and clearly mitigated, with realistic, affordable and attainable mitigations in place.  A great strategy does not avoid risk but embraces it.  Many of the leading and successful businesses were begun by entrepreneurs who fully embraced strategic risks.   

3. Strategic Risk Analysis

A business strategy must define the risk environment within which it operates. Strategic risk starts by looking at the risks that exist within a market (and defining why and how you will succeed despite them) as we as the strategic risk in entering a market compared to the risk of not entering a market. Strategic risk management should compare not only the risks of the strategy but the reverse risks of not doing the strategy, the gap risk of missing the opportunity. Why are we going here not there is a classic question which I ask, and so often hear no coherent argument as an answer.

Strategic risk also covers risk analysis of the leadership and its approach to risk, how comfortable it is with risk reflects in how leadership teams actively manage risk which reflects its established risk skill set and appetite to risk across the board. How well can the senior team deal with risk, and to just ignore it, is an important element of risk analysis. 




4. Strategic Risk Assessment

Risk, any risk is defined by the potential impact of the consequences from it. The manifestation of its likelihood of occurring is the assessment which must be undertaken, this is often scrutinized by undertaking scenario analysis (driven by board, NED and expert support and advisors) will encourage the leadership to consider a range of scenarios that can result in significant adverse consequences for the business and assist the leadership to make sure full width and depth analysis of strategic risk is undertaken.

This assessment provides the basis of mapping the risk and determining the investment in mitigation required to reduce or remove that risk. Often risks are not seen across the business, the strategic risk assessment fails to understand that a company is a whole entity not just a product or service, so its IT, people, location and environment  are as vulnerable to strategic risk as is the market it operates within. Strategic risk is as (and often more) likely to occur within the infrastructure of a business as it is within a market. 

The other strategic risk assessment that is often under assessed (if at all) are global risks. The era of global issues from terrorist attacks, natural disasters or global pandemics are now part of strategic risk assessment.




5. Strategic Risk Mapping

The
leaders must see risk in the context of how shareholders or stakeholders measure value in the organization. This essential mapping of risk enables the leadership to articulate to stakeholders how the risks they are taking or the risks the business is exposed to may affect the organization’s ability to realize its strategic goals. By identifying common metrics for risk and performance also allows the leadership to define the priorities of risk management activities and focus on the mitigation of relevant and important and decision defining risks the board.

Defining Strategic Risk

The second step, in creating an effective strategic risk management system is to understand the qualitative distinctions among the types of risks that a business could face and determining how to actively manage those risk. Risks typically fall into one of three categories and here's how leaders should be managing them:

1. Managing: Strategic risks.

The leadership having determined the level of risk it is willing to take in order to generate the returns from its strategy, its risk and reward profile, leaders must then develop appropriate channel partners to achieve that strategy. From its bankers credit risk, its strategy of launching new products through to its channel partner selection, all these decisions impact upon the strategic risk strategy. 

Strategic risks are quite different from operational risks because they are not inherently undesirable; they are quite the reverse they are deliberately accepted as part of operating within that industry. A strategy with high returns requires the business to take on higher risks, and actively managing those risks is a key driver in achieving those potential gains.

Strategic risks cannot be managed through a rules-based control models, such as compliance to legislation. Instead, the leadership must install a risk-management system designed to reduce the probability that the assumed risks actually materialize and to improve the company’s ability to manage or contain the risk events should they occur. Such systems enable companies to take on higher-risk, higher-reward ventures by identifying drivers of strategic risk, most often these are identified through 5 Forces analysis within markets and systems usually include primary (and secondary fallback) detailed objectives which must be achieved which underpin the strategy to actively manage the strategic risks.    

2. Managing: External risk factors

Certain strategic risks arise from events outside the company and are beyond its influence or control, often identified through PESTLE analysis. These major macroeconomic risks are outside the market but directly influence it. PESTLE identification and analysis enable leaders to manage the external risks effectively, through proactive identification and mitigation of their impact. For example changing economic conditions may raise global interest rates, which put pressures on even successful businesses, which impacts upon costs and profits.

Businesses need to build a defined risk management processes to these different PESTLE categories. By identifying key drivers of external change leaders can devise stress testing through scenario planning and devise alternative strategic options should external risk factors come into play.

3. Managing: Preventable internal risks. 

Conversely internal risks, arising from within the organization, that are controllable and ought to be eliminated or avoided. Businesses should have well defined internal risk systems in place which includes a tolerance level, such as 95% of all calls must be answered within 3 calls, in other areas health and safety for example mandatory 100% requirements for the use of PPE and operating systems must always be in place.  

Businesses should seek to eliminate these risks since they get no strategic benefits from taking them on. This risk category is managed through active prevention by monitoring operational processes and guiding people’s behaviors and decisions toward desired norms.

Identifying and managing preventable risks is about good management of existing best practices within the legal and industry best practice.  Companies cannot anticipate every circumstance or conflict of interest that an employee might encounter, so ensuring that risk is talked about, reviewed and assessed against best practice. 

Managing Risk effectively

Risk is a difficult subject for leaders, precisely because it is seen as an operational detail rather than strategic in nature. Business planning sets over optimistic forecasts, from unrealistic timescales to launch new products and services through over inflated revenue streams.  This form of linear extrapolations, how leaders have done it before will be immediately repeatable with something new is compounded by the use of conformation bias, selectively picking supportive data and ignoring unsupportive data. This form of groupthink often limits the risk discussion by narrowing the discussion down to it will happen rather than taking a holistic approach to risk.

Other key drivers of strategic risk failure come from leaders ignoring industry activity, how fast and quickly competitors will react to any new strategic initiatives to minimize their impact upon the status quo and how channel partners and customers will sound supportive but will measure the risk to them and mitigate it by limiting their exposure to risk. How industries react to change is one important consideration from an effective 5 forces analysis of any market. How do they players react to change is often analyzed by war-gaming with scenarios played out in theoretical games to see the impact of industry competition.

By strategy mapping your business leaders can often assess all risks linked to objective setting, looking at risk events associated with each objective and generate a risk profile for each risk and associated mitigation strategy.

Recently the adoption of the balanced scorecard has become a major way of mitigating risk, by linking mitigation to performance driver indicators of behavior within the organization. This highly effective risk management tool enables companies to engineer risk out of departments through positive mitigation strategies.  

For areas of risk which cannot be mitigated from within the company, such as natural disasters or acts of terrorism, then developing contingency plans act as mitigation to unforeseeable external risks. Not putting all leaders on the same plane is a simple example of contingency planning as is having secondary operational site, should your primary site be unusable from either natural causes such as flooding or from acts of terrorism.

Like to know more about strategic business planning then learn more through my video course on strategic business planning, which will reduce your risk in succeeding within your market, then click this link.

Good leaders embrace risk, they do not avoid it and investing time and skills into understanding and actively managing risk is an important element of leadership.  Good strategic planning encompasses strategic risk assessment and leadership teams need to invest in understanding their risk if they wish to succeed in their market.  

Deconstructing Leadership Development

Developing leadership is the most effective investment any enterprise can make in its people. It is the most effective investment any organisation can invest in, but it is also one of the most misunderstood investments organisations often make. 

For organisations to achieve success across the complete basket of performance measures, from top-line sales growth, operations through to shareholder returns, developing the current and next generation of leadership is the core driver of tangible and intangible success.

The challenge for organizations is to understand the context of the leadership they need which varies over time. This is one of the key challenges I face when working with organizations, what type of skills do they need to develop within their organization; all depend upon where they are today and where they are trying to get to tomorrow. That context defines organizations immediate and foreseeable skill needs in its leadership, which once delivered, will open up the next set of leadership skills, which an organization then needs to deploy.

There are a huge number of leadership skills which leaders will need and use at differing times, these can be broken into three main groups.

Strategic Leadership Skills

The traditional skills leaders are most often selected for by shareholders to deliver and therefore need to develop are in defining the vision of the organization and in shaping the organization to achieve that vision. These primary role of the leader as a strategic business developer are often the most challenging to leaders as it is the most difficult role to deliver, mainly because it is the one undertaken the least and the most high risk to undertake.

Operational Leadership Skills

The second set of leadership skills based around day-to-day operational skills include acting as a role modeling, decision maker, situational leadership, and shaper create leaders who are good at adapting to changing circumstances.

Advanced Leadership Skills

The third set of leadership skills often defined as the soft skills, which always include communication at there core, are have been defined under skill sets such as emotional intelligence, motivation skills and succession planning. These skills, often seen as higher skill sets are often the defining ones in what makes leaders stand out in their field and why some organizations become benchmarks of success.

By redefining leadership skills into these three sets of strategic, operational and advanced skills, it helps leaders see what skills they need to develop to be effective in context to their needs and the organisations requirements. Leaders are not only real people, but they operate in real time within their organizations business cycles. Where the business is in that cycle drives the types of key performance characteristics, which the leadership skills need to deliver. That makes the definition of what skills a leader needs to deliver harder to define; it all depends of where the organization is in terms of performance results.      

Too many leadership support programs are sheep dip sessions of theoretical skills rather than bespoke packages focused around defined needs at stages of organizational and person needs.  This is often why leadership and development programs don’t deliver the anticipated results. The second reason why many leadership programs not deliver results is because they are theoretical in nature, rather than practical in application. So leaders don’t get to apply what they have learnt relative to their precise situation. This is compounded by a third failure of leadership development programs is that too many are in reality mutual support clinics, piling leaders into a mixed group of leaders and potential leaders all with differing skill development needs.

In constructing leadership development programs it is therefore important to put the context of where the organization is within the business cycle as well as the individual needs to the leaders themselves. The range of skills which leaders need across the three types of skill sets are significant, and while all are important, recent studies by McKinsey and others show that the most effective four skills that ultimately define leadership effectiveness are:-

1. Diverse Network Perspectives   

Successful effective leadership relies upon being outward looking by establishing effective networks with other leaders in differing sectors, differing cycles, sectors, and personality types, this provides leaders with the ability to base their decisions on sound outward viewing analysis and avoid the many biases to which inwards decisions are often prone. 

2. Being Results focused

Nothing succeeds like success in business; successful leaders follow through their plans with a passion and determination, by being results orientated leaders drive their people forward improving other aspects of their organization to support results through efficiency and productivity towards those results.  

3. Effective Problem Solving

The skill in in gathering relevant information from the tidal wave of data and converting it into intelligence necessary through effective analysis to be able to solve problems effectively is a vitally effective skill. This skill set enables effective leaders to take control of situations with one touch decision making.

4. Supportive Leaders

Giving time to listen to others, with an open mindedness to understand others challenges builds trust and is seen to inspire subordinates in their performance. Investing time in people and teams providing them with ideas to overcome blocks and supporting progress, is the final vital skill leaders need to have to be effective.  

These four core skills make the biggest impact upon leadership effectiveness, but do not distract for the need to focus on the context in which the leadership operates.  Different business situations require different styles of leadership, but the four core leadership behaviours above are a constant across all leadership situations and transcend the three sets of leadership skills which all leaders face in their role, strategic, operational and advanced. 

By developing diverse networks leaders build core skills in understanding strategic perspectives. While both being results focused and effective in problem solving leaders drive their operational skill sets and through being supportive as a leader, they enable themselves to develop their advanced leadership skills in getting the most out of their people at every level. So these four core skills drive the top-line behaviours of leaders under which all other skills can be developed and delivered. Without these four core skills todays and future leaders will struggle to be truly effective leaders.

If you are looking to develop leadership skills then click here 

Leading Transformational Change

Leading Transformational Change 

Successful change in business, in fact any change, does not happen by accident. Happy accidents of good fortune can easily be undone by leadership teams focusing on measuring the wrong outcomes. One leaders' variation from the expected, is seen as an error, to another leader the same variation is innovation. That difference, maybe the difference, between success, and failure in business.  

The Post-It Notes Example

Think about Dr Spencer Silver and his pressure-sensitive adhesive which he failed to succeed in promoting as "solution without a problem" but which Arthur Fry identified as very useful sticky pad useful for book marks and rebranded it "Press 'n Peel" and accidentally in the process picking yellow as its iconic colour. Even then, what we today know as "Post-It Notes" did not take off, it was only his passion and determination which led to them being given away as free samples in 1980, which led Post-It Nots winning a customer approval rating of 94% which ultimately guaranteed its success as a product. To many a glue which failed to stick has become an iconic office product that none of can imagine an office not having.

Change is Painful BUT Vital

Change is always painful and for many organisations it is actively discouraged. Often it is not just ideas which are disregarded but also the people asking challenging questions, those who challenge the status quo, asking why we are doing something and why are we not doing something, are often labeled as loose cannon's within the organisation, or trouble maker's in today's politically correct world they are described as "off message". 

These people who ask awkward questions are seen as not towing-the-line, need to be re-educated or eradicated. The language used to describe those who seek to ask the most valuable and powerful questions in any organisation, the question "why" and "why not" often reflects the institutionalised nature of the organisation.  People who ask this type of question are the voices of change from within organisations which leaders can either choose to listen to or not.  

Leader's Must Look For Change

Leader's need to not to discourage people who challenge the organisational, but understand         what the driving force behind those who challenge the status quo.  The larger the organisation the harder it is to see change as hierarchy and multiple levels of engagement can cloud and confuse the ability of leader's to see and understand the drivers of change.

For organisations to successfully compete they have a to change in response to, or to lead their market. For leaders' to achieve success within their market they have to look for where does tomorrow's growth come from and ensure that transformational change takes their organisation to where they need it to be to succeed. 

In every market change is the only constant. Leaders can embrace it or defer it, but they can never ignore it, for any lengthy period of time. Change can be incremental in any sector or it can be revolutionary, how the leadership responds to that change not only reflects their comfort with dealing with transformation but more importantly how they see their organisation in the future. Those who defer transforming to meet changes find their position in a market sector often eroded through hesitancy of action and uncertainty of direction. 

Transformational Baby Steps Create Tidal Waves

For transformation to happen in any organisation there has to be a will to change, driven either by desire to succeed or by fear of failure. The desire to achieve, a market position, turnover, profit, margin, efficiency or win certain customers is always the easier option for leaders to focus efforts upon, rather than being led forward in response to changes, transformation through fear, we do or we die!    

Leader's Mindset

Leading transformational change is as much a mindset as is a process. It requires a mindset that says yes we can, as well as an understanding that moving people out of their comfort zone, their institutionalised state requires not only a visionary and passionate leadership but also baby steps, which everyone can take.  If you are going to move an organisation first decide why then how before worrying about when. I work with leaders who always want to focus on creating a timescale to completion, to make it happen by, often led by the perception that momentum will solve every problem.  

The reality is that people are always willing to hear about transformation, the "I have a dream moment" (especially if they are part of an away day to an exotic location) but the reality of transformation is that it requires people to change their institutionalised ways, which while talk is cheap and (freely available) people are less keen to make change than to talk about it as some abstract future requirement. As Mark twain said "why put off tomorrow what you can put off to the day after". To make change happen often the most effective leadership tool is finding an effective baby step which moves people forward together, out of their comfort zone and enables leaders to see their people as they really are when it comes to change, a diverse group of individuals siting along an adoption curve. 

The first step is often decisive in enabling leaders to move everyone forwards to a successful outcome, or in failing and being left with false starts and fragmented pieces of transformation, where some people and departments are somewhere else from others. The natural reaction to failing to transform everyone at the same time is to retake back to safety rather than push forward. Leader's must take all their people to somewhere new, not just the evangelists for change.    

Successful transformation needs to be driven forward, either by the classic burning the bridge to prevent  going backwards (removing the old system and its architecture so it cannot be used as comfort blanket / default option) or by restructuring the organisation so there is no memory or ability for the organisation to go back to. 

Leader's Must Communicate and Champion Change 

The leaders' ability to make change happen is paramount in communicating why change is necessary. This paradox is that for any successful organisation is that the need for change is not appreciated until after it has become a significant problem. In any market change only appears at the edges, those in the middle and doing well don't need to change, (unless their market is changing rapidly and they are used to it). In most markets leadership teams come into existence, develop and deploy their strategy and then manage that situation until the strategy wains and then they are replaced as failure to satisfy stakeholders drives them out of their role. This cycle of renewal, success and decay is why in many markets there are leaps forward in transformation as the leading brands ebb and flow in sync with each there, responding to the changing fortunes of the leading brands. 

In organisations or markets which are successful in transformation or where change is the only constant, then continual jockeying for position with new products and services enable continual transformation to be the normal state of affairs. In these sectors transformational leadership is the expected and the pressure is on to ensure that it continues not just as the status quo but happens in the right direction. In accelerating markets often change can outpace the ability of organisations to moneterise the changes they are making, which requires leaders to hold back changes so that transformation does not kill the company. If you move too fast you can outstrip the markets ability to expense the value of your brand. This can most commonly be seen in products where by the time it is made it is out of date, such as in IT programmes. 

Change only happens when people change

Change happens not when processes change but when people change. Leaders need to remember that as the identification for them of change being lived rather than talked about. Meetings about implementing change always indicate that while the process can change, not all the people have, can or will.  

Leaders need to focus on carrying their people with them through the whole transformation 

process, from start to finish. The fundamental weakness of leadership in the transformational process, is that they are there at the start and appear at the end, but where they are most needed is in the middle. It is at the danger point in any transformation when people are letting go of their institutionalised behaviour but not yet able to see the tangible benefits of their new transformed behaviour that they need to see the leadership and know they are on the right track. 

It is at the point of no return, the point where success in change is fleeting if at all discernible that people at every level need to know they are heading in the right direction. It is here that transformational leaders make the real difference. It is here that successful leaders know they are most valuable to their people, by keeping them on the path to success, like a good sports coach knowing where and when to speak is as important as what they say. 

Great transformational leaders focus on just on why they are driving their organisation somewhere new like Arthur Fry but also know that for transformation to succeed people have to see the benefits, no matter how small to know they are going in the right direction with the support of transformation leaders to enable them to fully fulfil their true potential.

Like to know more about Leadership and Change, then click this link: Leadership and change 

Like to know how to develop and grow your strategy skills as a leader then? 

Then read more blog by Richard Gourlay or buy the book Strategy: The Leader's Role by Richard Gourlay, 160 pages of advice and expertise in strategy and leadership skills; including models and examples of how to build your strategic skills for your business, your leadership skills in leading your organisation to success.   

• Paperback: 160 pages
• Publisher: CreateSpace Independent Publishing Platform; 1 edition (July 13, 2015)
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