What Is Strategic Risk?

Strategic risk is a type of risk that can derail a business from its long-term objectives. These risks can stem from such issues as potential gaps in strategic planning, poor decision-making or external disruptions. Strategic risks have the potential to significantly impact the direction of a business and demand proactive management to safeguard the company’s future. 

Characteristics

• Link to strategic objectives: Strategic risk is directly tied to an organisation’s overarching goals and must be proactively handled to ensure long-term success.
• Forward-looking: It involves anticipating potential challenges or shifts in the business environment through predictive measures, such as Key Risk Indicators (KRIs).
• Cross-functional impact: It can have broad implications that affect multiple areas and functions within an organisation, requiring coordination across departments.

Sources of strategic risk

Internal

Internal strategic risk originates from within the organisation, often related to its structure, processes or leadership. It can reflect organisational shortcomings that hinder long-term objectives, such as:

• Poor leadership decisions: Strategic missteps from senior leaders, such as entering unviable markets or expanding into new industries too quickly.
• Resource misalignment: Allocating resources to non-priority areas, such as declining product lines, over new opportunities and emerging markets, weakening competitive advantage.
• Ineffective communication: Lack of transparency between departments and unclear direction from leadership, resulting in misaligned goals and inconsistent strategy execution.
• Innovation failures: Delays or failures in launching new products due to bureaucratic inefficiencies or improper testing, resulting in loss of market share.

External

External strategic risk stems from factors not within the organisation’s control, such as:

• Heightened competition: Mergers or strategic partnerships between competitors, or aggressive pricing strategies that undercut the market.
• Technological disruption: Emerging technologies disrupting existing business models and forcing companies to pivot or risk obsolescence.
• Cyberattacks: Criminals aim to disrupt a business’s operations or capture its data, demanding money to return access. 
• Regulatory changes: Evolving compliance requirements and laws that limit operations or require investing in costly systems.
• Global events: International events such as the COVID-19 pandemic, natural disasters or geopolitical conflicts that disrupt supply chains.

Importance of managing strategic risk

• Sustaining competitive advantage: A well-managed approach to strategic risk ensures that the organisation remains relevant and competitive in its industry.
• Achieving long-term goals: Mitigating strategic risk allows businesses to stay on track with their vision and mission.
• Protecting stakeholder value: Proactive management safeguards the interests of shareholders, employees and customers.

Strategic risk vs. operational risk

• Strategic risk affects long-term objectives, while operational risk is tied to day-to-day activities and may include equipment failures and data breaches.
• Strategic risk is often reviewed at executive committee meetings with input from the board of directors, while operational risk is addressed in operational meetings.
• Strategic risk stems from high-level decisions, external disruptions or gaps in planning, whereas operational risk arises from system issues or human error.
• The impact of strategic risk can alter an organisation’s course, while operational risk typically affects efficiency and short-term outputs.
• Managing strategic risk requires a big-picture approach, while operational risk management focuses on mitigating immediate threats to business continuity.