Chapter 12 – Identifying Strategic Risk
-In the business setting, managers must be sensitive to conditions that can cause specific categories of risk to become dangerous.
-To effectively manage their business, all managers must assess strategic risk, which is an unexpected event or set of conditions that significantly reduces
the ability of managers to implement their intended business strategy.
-Results from the consequences of a breakdown in a core operating, manufacturing, or processing capability. Any operational error that impedes the flow
of high quality products and services has the potential to expose the firm to loss and liability
-Operations risk becomes a strategic risk in the event of critical product or process failures.
-Applying the inputs process outputs model is critical for identifying and controlling operations risk, especially when technology failure can lead to
inefficiencies and breakdowns. Analyzing operations according to this model provides guidance about what key processes should be standardized and controlled
tightly to assure safety and quality.
Asset Impairment Risk
-An asset becomes impaired when it loses a significant portion of its current value because of a reduction in the likelihood of receiving those future cash
-Asset impairment can become a strategic risk if there is deterioration in the financial value, intellectual property rights, or the physical condition of assets
that are important for the implementation of strategy.
-Financial impairment results from a decline in the market value of a significant balance sheet asset held for resale or as collateral.
-Credit risk occurs when a creditor becomes bankrupt or insolvent and is unable to pay contractual obligations as they become due.
-Sovereign risk is a business exposed to risk at a national level when a foreign government becomes unable or unwilling to repay its debts.
-Counterparty risk is the risk that the other party to the agreement may be unable to honour its contractual obligations due to solvency or inability to
deliver what was promised.
-Results from changes in the competitive environment that could impair the business’s ability to successfully create value and differentiate its products or
-Competitive risk is faced by all businesses that compete in dynamic markets.
oIntense rivalry from existing competitors can change the basis of value creation
oDemanding customers may choose to switch suppliers
oSuppliers may choose to limit availability or increase the cost of critical inputs
oNew competitors may enter the industry with new technologies and products
oSubstitute products or services may become available with superior costs/attribute
-Interactive control systems are essential to monitor competitive risks in a culture that could potentially create bar riers to impede the free flow of
information about emerging threats and opportunities
Franchise Risk (Reputation Risk)
-Franchise risk is not a source of risk, but a consequence of excessive risk in any of the 3 basic risk dimensions. It occurs when the value of the entire
business erodes dues to a loss in confidence by critical constituents. It occurs when a problem or set of problems threatens the viability of the entire enterprise.
ASSESSING INTERNAL RISK PRESSURES
-Managers must assess their exposure to these risks based on their specific business strategy
-The risk exposure calculator analyzes the pressure points inside a business that can cause strategic risks to blow up into a crisis. Some of these pressures
are due to growth, others to management culture, or infor mation management. The risk exposure calculator is a diagnostic tool to estimate the magnitude and
type of pressures that might lead to a substantial failure or breakdown.
Risk Pressures Due to Growth
-Success in achieving market driven growth can br ing risks for three reasons:
(1) Unrelenting pressure for performance – engage in behaviours that invi te risk
(2) Rapidly expanding scale of operations – strained resources
(3) Decreasing experience and shared values – rush to hire people
-These risks increase when a business lacks consistent values
-An error of omission occurs when an employee inadvertently omits to perform an action that is necessary to protec t the franchise and or assets of the