Strategic risk management generally is defined as the process of managing a business and keeping it sustainable in the long run by avoiding loss of competitive advantage and ensuring sufficient capacity to implement the strategy.

It is important to invest in strategic risk management because of the huge impact of potentially disruptive events which could threaten the stability of the business model of the company. 

History remembers many examples of companies in the financial and IT industries which failed due to strategic risks like Lehman Brothers – inadequate growth strategy, and Nokia – technology lagging. The technological progress made photographic tape to be replaced by digital pictures, video libraries by pay-per-view (Netflix, Amazon prime), and music cassettes and CDs by music content platforms(Spotify, YouTube).

Let’s assume you are producing devices. If you do not implement the latest technologies as soon as possible, you will start losing clients, incomes, market share, and finally your business.  

Strategic threats and risks are related to - the external environment(like unexpected changes in the market environment affecting participants); competitors' actions with a serious negative impact on the company business; inadequate planning of strategic priorities and goals; and lack of capabilities or resources to implement the company strategy.

“It is important to invest in strategic risk management because of the huge impact of potentially disruptive events which could threaten the stability of the business model of the company.”

Qualitative and quantitative assessment tools are used for measuring and managing strategic risk. The introduction of early quantitative warning indicators is helpful but prominent strategic risks caused by disruptive events for traditional risk indicators cannot track the business, like innovation and new technologies, - they have to be anticipated. The disruptive patterns of environmental changes could be tracked using scanning and scenario planning simulations based on cognitive analytics and machine learning. Scenario analysis aims to produce alternative outcomes with effects on market share, income, assets, capital, etc. The assumptions underlying the strategy can be tested in terms of their feasibility given the human, operational, financial resources, and alternative economic forecasts.

Qualitative instruments for the identification and assessment of strategic risk include news, workshops, working sessions, and questionnaires. Discovering emerging risks requires deep industry knowledge, specialization by risk type, and a wide network of contacts inside and outside the organization.

Usually, it is the strategic risk management function within the company that maintains a list of strategic threats and risks with regular updates including the probability of their occurrence and their effect. The risk management function has to regularly interact with both internal counterparties and external experts and market participants. Another aspect of strategic risk management is the development of a mitigation plan with risk owners. The mitigation plan includes stages and detailed actions to be undertaken to decrease and cover the strategic risk.

The role of the strategic risk management function is to identify, anticipate, quantify strategic risks, and inform the Board of the company to take sustainable decisions for the future development of the business. Significant challenges could lead to a change in the development direction of the company. Risk appetite and business strategic planning have to be integrated and interconnected. The risk appetite is the level of risk established for each risk category that the company is willing to accept, taking into account the established risk strategy and business conditions.

Therefore, the risk appetite framework is the tool that sets and limits the level of overall risk the institution is willing and able to take on, to achieve its strategic and business goals. The relationship between risk appetite framework and strategic planning is an interactive process. Thus, it is ensured that the risk appetite framework takes full account of and reflects the strategy. Vice versa, it is also important for the process of strategic planning to include discussions on the risk appetite and the risk profile.

The active participation of the Board and management of the company plays a key role in ensuring that strategic risk management has a strong and sustainable impact on the organization.