While strategy tends to focus on long-term goals and designing a new vision for the firm, risk management is a useful tool for strategic planning. Competitive threats to a business need to be recognized and acted upon in order to successfully implement strategic decisions.
Strategy may be defined as the mission, vision, and values of a firm. Strategic planning involves a roadmap to deliver competitive products and services, new technologies, and improvements to markets and customers over a three to five year period. Risks are identified as unknown events or uncertainties that can negatively impact the firm.
For example, Russell Walker, author of “Winning with Risk Management,” identifies two categories of risk: explicit or implicit, and finite or persistent. In the former case, explicit risks are known and recognized as part of the business strategy. Implicit risks are unknown but are typically accepted as part of the cost of doing business. A finite risk is represented by a bank loan, for instance, in which a maximum loss is known in advance. Persistent risks have long-term impacts and may be quite complex in nature.
As further examples, an implicit risk is one that cannot truly be separated from the act of implementing the business strategy and conducting the business of the company. For instance, accepting the uncertainty of shipments during periods of bad weather is an implicit risk since the shipments must go on yet the direct cost to the business of delayed delivery is difficult to calculate.
Finite risks, like the category of explicit risks, are known and capped with a maximum investment. If a company goes bankrupt, a stockholder’s loss is finite and limited to the amount s/he has invested. The investment itself was considered strategic while the downside is restricted within a range of the investment. The finite risk can be managed by the amount of the investment, for example.
Perhaps most troubling from a strategic standpoint are the persistent uncertainties. These risks can linger for years and can have impacts over a very long period of time. Often, persistent risks are manifested through liabilities, such as environmental or regulatory impacts. Consider examples of asbestos and silicone implants that were strategically important innovations, but left persistent risks with companies long after production was halted.
Strategic planning should be an endeavor to find the best market path forward. However, the most competitive firms will continually analyze the markets, technologies, and customer data to manage potential risks.