Although Adrian J. Slywotzky and John Drzik of Mercer did not conceive
the terminology Strategic Risk Management (SRM), they deserve credit
for their excellent description of it in an article in the Harvard Business
Review of April 2005. SRM is a technique that can be used for devising and
deploying a systematic approach for managing strategic risk, the array of
external events and trends that can devastate a company's growth trajectory
and shareholder value.
The authors distinguish 7 Classes of Strategic Risk, with underlying
subcategories. (some typical countermeasures in italic):
Industry
Margin Squeeze - shift the compete / collaboration ratio
Rising R&D / capital expenditure costs
Overcapacity
Commoditization
Deregulation
Increased power among suppliers
Extreme business-cycle volatility
Technology
Shift in technology - double bet
Patent expiration
Process becomes obsolete
Brand
Erosion - redefine the scope of brand investment, reallocate your
brand investment
Collapse
Competitor
Emerging global rivals
Gradual market-share gainer
One-of-a-kind competitor - create a new, non overlapping business
design
Customer
Customer priority shift - create and analyze proprietary information,
conduct quick and cheap market experiments
Flat or declining volume - generate "demand innovation"
Volume up, price down
Weak pipeline
Note: Certain financial-, operational-, and hazardous risks can
potentially also be of strategic significance.
Origin of Strategic Risk Management. History
The first notion we could find of the term "Strategic Risk Management"
is in a paper called "A framework for integrated risk management in international
business", By: Miller, Kent D., Journal of International Business Studies,
00472506, 1992, Vol. 23, Issue 2.
Miller describes five "generic" responses to strategic environmental
uncertainties, being avoidance, control, cooperation, imitation, and flexibility:
Uncertainty avoidance occurs when management considers the risk
associated with operating in a given product or geographic market to be
unacceptable. For a firm already active in a highly uncertain market, uncertainty
avoidance involves exiting, through divesting the specialized assets committed
to serving the market. For firms not yet participating in a market, uncertainty
avoidance implies postponement of market entry until the industry uncertainties
decrease to acceptable levels.
Firms may seek to control important environmental contingencies
to reduce uncertainties. Managers are here predisposed to trying to control
uncertain variables rather than passively treat the uncertainties as constraints
within which they must operate. Examples of control strategies include:
political activities (e.g., lobbying for or against laws, regulations,
or trade restraints),
gaining market power, and
undertaking strategic moves that threaten competitors into more predictable
(and advantageous) behavior patterns.
Cooperative responses are different from control responses, because
they involve multilateral agreements, rather than unilateral control, as
the means for achieving uncertainty reduction. Uncertainty management through
coordination is resulting in increased behavioral interdependence and in
a reduction in the autonomy of the coordinating organizations. Cooperative
strategies for reducing uncertainty include:
long-term contractual agreements with suppliers or buyers,
voluntary restraint of competition,
alliances or joint ventures,
franchising agreements,
technology licensing agreements, and
participation in consortia.
Firms may resort to imitation of rival organizations' strategies
to cope with uncertainty. This behavior can result in coordination among
industry rivals. But the basis of this coordination is clearly distinct
from that under control or cooperation strategies. In this case, no direct
control or cooperative mechanism is used. Rather, an industry leader is
able to predict the response of rivals because their responses are merely
lagged imitations of its own strategic moves. Imitation strategies ("follow-the-leader-behavior")
involve pricing and product strategies that follow those of an industry
leader.
Imitation of product and process technologies may be a viable low-cost strategy
in some industries [Mansfield, Schwartz & Wagner 1981]. But uncertainty
about the underlying technology of competing firms may preclude such a strategy
[Lippman & Rumelt 1982].
A fifth general category of strategic responses to environmental uncertainties
involves managerial moves to increase organizational flexibility.
Unlike control and cooperation strategies which attempt to increase the
predictability of important environmental contingencies, flexibility responses
increase internal responsiveness. The predictability of external factors
is left unchanged. The most widely cited example of flexibility in the strategy
literature is product or geographic market diversification. Diversification
reduces company risk through involvement in various product lines and/or
geographic markets with returns that are less than perfectly correlated.
Helps companies to fend off additional regulatory and legislative assaults
on how they run their businesses.
Helps corporate executives to defend themselves against legal lawsuits
of the sort that have been filed against former Enron, Tyco and WorldCom
executives.
Limitations of Strategic Risk Management. Disadvantages
Strategic risks are just one of four categories of risks (Others are:
financial-, hazard, and operational risk).
Certain risks may occur and cause irreparable damage despite anticipation
and preparation ("Acts of God").
No company can anticipate all risk events.
SRM is not a box-checking exercise: there are substantial costs and
efforts involved to SRM.
A major potential issue in accomplishing progress with regards to SRM
is that in light of Sarbanes-Oxley and other post-Enron developments, companies
may likely view SRM as simply another regulation being imposed on them rather
than new "ground rules" that, if followed enthusiastically, have the potential
to provide global competitive advantage and enhance shareholder value.
Assumptions of Strategic Risk Management. Conditions
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Information Sources
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Enterprise Risk Management, Risk Management Extensive presentation related to risk management. The presentation includes the following sections:
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Risk Management, Decision-making Presentation that outlines a standard Risk Management Process in 7 main steps, with sections further detailing each ste...
Enterprise Risk Management, COSO ERM Framework This presentation elaborates on the concept of Enterprise Risk Management and the COSO ERM Framework, sections:
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Internal Controls, Risk Management Interesting presentation about internal controls in organizations. The presentation includes he following sections:
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Reputation Management, Risk Management This presentation focuses mainly on the importance of reputational risk and the necessity of reputational risk managemen...
Business Continuity Planning, Disaster Recovery Planning, Crisis Management, Organizational Absorption Presentation about Business Continuity Planning (BCP) and Disaster Recovery Planning (DRP). The presentation includes th...
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