Strategy risk refers to the potential for losses resulting from the implementation of a particular strategy. All strategies carry some level of risk, which can be estimated as part of the strategy planning process. Risk is an inherent part of any strategy and is not necessarily a result of a flawed strategy. Instead, the goal of strategic planning is often to optimize the risk-reward ratio by balancing the potential risks and rewards of different strategies.
In risk management, it is important to consider strategy risk as part of the overall risk management process. This can involve identifying and assessing the risks associated with different strategies, as well as implementing measures to mitigate or prevent those risks. By effectively managing strategy risk, organizations can ensure that they are able to pursue their goals while minimizing the potential impacts of losses. The following are a few examples of strategy risks.
A concert promoter develops a strategy for a summer music festival that they expect to attract sizable crowds. They identify the risk of legal liability if anyone is injured at the event. The promoter decides to reduce the risk by engaging local public safety agencies such as the fire department. They also establish a budget for health, safety and security services.
A record label signs an unknown act and commits to a marketing spend to promote the artist. There is a risk that the artist won’t be popular and the marketing spend will result in a loss. However, the record label sees a large potential market for the music and views the risk-reward as acceptable.
A company plans a complete reorganization of its departments but anticipates the risk that employees will resist the change resulting in process disruptions and employee turnover. They mitigate the risk by engaging employees early on in the planning process.
A large retail bank plans to found an investment bank. The strategy involves a large scale program with dozens of projects that have interdependencies. Due to its overall complexity, the program has a large risk of failures such as cost overruns and schedule misses. The bank reduces the risk by hiring an accomplished program management team.
A luxury yacht manufacturer has a strategy to improve their sales processes by implementing a new sales system. They document the risk that the implementation project will run late, experience cost overruns or disrupt the sales process. They transfer the risk by outsourcing the project with contractual penalties for project failures.
A software company establishes a conservative strategy that makes minimal changes to its products. The strategy represents a risk because competitors are quickly improving their products. As competitors innovate, the company risks losing market share due to its conservative approach. This is an example of a risk that results from inaction as opposed to action.
An automobile manufacturer aggressively innovates adding new technologies to their cars twice as fast as the competition. They dramatically change the dashboard of their vehicles to have a cutting edge user interface. In the rush to change things as quickly as possible they face increased risks of quality problems. The company also risks alienating their loyal customers who expect a consistent driving experience from one model year to the next.
Merger & Acquisition Risk
A robotics company is threatened by innovative small competitors that are entering the market. They establish a strategy to acquire a number of these innovative companies. The company identifies a number of risks related to these acquisitions such as failed integration of technology platforms. They accept the risks because they believe the risk/reward ratio is attractive as they seek to dominate the market.
A telecom company plans layoffs in their customer service department as part of a cost cutting strategy. The strategy risks serious disruptions to their customer service processes as employee morale drops at the same time that wait times for customers increase. As both employees and customers are put under increased stresses, the potential for heated exchanges becomes a risk. Potential negative outcomes include bad publicity and a customer exodus.
A bank plans a new international money transfer service. They identify a number of security vulnerabilities and threats related to the service. The bank plans to reduce these risks by implementing innovative new security infrastructure and services.
An investment bank develops a strategy to launch an innovative new financial instrument. Executive management consider the risk that regulators may deem the product out of compliance with existing financial regulations. They reduce the risk by engaging regulators to ask for an interpretation of the rules.
A home builder decides to build an additional 1,000 homes in its annual strategy plan. The builder considers the risk that the economy will go into recession dampening demand for new homes. The company decides to reduce the risk by closely monitoring economic data and changing their plans if they see signs of economic weakness.
A solar panel company plans to launch an innovative design with improved efficiency. As the design is new they identify a risk that the panels will experience failures in real world conditions such as harsh climate conditions. The company reduces the risk by limiting the launch to a handful of pilot projects.
An automobile manufacturer develops a strategy to reduce input costs by switching suppliers for key parts. Some of the new suppliers are smaller companies that have a high debt load. The company documents the risk that these small suppliers with fail to deliver or go bankrupt. The manufacturer decides to reduce the risk by establishing a supplier qualification process that ensures that all suppliers are able to deliver and have a healthy financial condition.
Exchange Rate Risk
A luxury brand plans to open retail locations in eight Asian countries. The company makes revenue and profit projections based on assumptions about future exchange rates. The company identifies exchange rates as a risk and plans to reduce the risk with foreign exchange derivatives.
A company decides to build a new building for its headquarters using cash. The strategy represents a liquidity risk because buildings can take months or years to sell. In other words, the capital invested in the building isn’t easily converted into cash. The company avoids the risk by arranging a line of credit with the building as collateral.
A food manufacturer has a strategy to launch a new line of ice cream. Initial plans are to use ingredients that are controversial and therefore may face future regulations due to studies that suggest they are unhealthy. Such regulations might essentially ban the product, resulting in a costly disruption in sales. The company decides to avoid the risk by choosing ingredients that are recognized as healthy.
A company has a strategy to open a new office in a suburban location. The primary location being considered is only serviced by a single telecom provider that is known to be somewhat unreliable. This is deemed an unacceptable risk because any disruption to internet services would be extremely costly for the firm. The company puts the strategy on hold and commissions a study to research more acceptable locations.