Relationship Between Risk and Strategy in Risk Management

This article critically examines the relationship between risk and strategy in risk management and explains how adaptation can enable an organization to achieve its strategic objectives. It provides research-based insights and real examples to justify the importance of risk management in business strategy.

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Critically examine the relationship between risk and strategy and explain how
adaptation can enable an organisation to achieve its strategic objectives and win despite
the risks it may face. Justify your answer with research and provide real examples.
Strategic planning of an organization that sets the framework for the business
planning, mostly considers the long term mission and vision of the organization (Steiss,
2019). The time period of every strategic planning cycle mostly depends upon the goals or
objectives of the organization, where as the objective of business planning is to achieve the
intended outcome within the given time frame. There is a very close relationship between
strategy and all the risk factors that the business might be exposed to. Wressell et al. (2018)
mentioned that the strategy of the business can be considered to be efficient only when it can
not only identify the future opportunities but also understand the major weaknesses of the
organization. Crawford and Nilsson (2017) added the risk management strategies come into
place which helps in identifying the risks beforehand and take necessary steps in order to
minimize the effects of these risks. This study is going to discuss in details about the
relationship between risk management and business strategy. According to Wiengarten et al.
(2016), the ideal business strategy is based on the government framework which ensures the
smooth running of the business by maintaining fair practices with the help of leadership and
control. Soltanizadeh et al. (2016) further argued that it is the duty of the business strategies
to maintain the business by taking into consideration the probable risks that can affect the
business. Risk management is very much effective when each employee of the organization
play a balanced role, in times of any kind of risk they need to analyse the situation and bring
it to the manager’s attention (Punt et al. 2016). The overcoming of the risks or obstacles
offers opportunities of growth and prosperity of the employees of the organization. From the
discussion of Martinez-Simarro (2015), it can be very well understood that strategic planning
and risk management should not be considered as different activities. There is a constant need
in developing plans in order to manage risks and opportunities are needed to be developed as
well as incorporated. Auditing the key activities are also a part of the strategic planning cycle.
Risk management helps in identifying the key activities and also helps in determining the
efficiency of the current controls. Booth (2015) opined that risk management helps to enable
new ideas for strategic planning that can be implemented in case of necessity. The nature of
globalization loads in an industry and how much an organizations points of interest are
transferable all around can oversee essential thinking. If globalization loads are weak, and an
association's very own advantages are not transferable, by then, organization needs to

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concentrate on securing its turf against overall assaul (Steiss, 2019). If globalization loads are
feeble yet the association's advantages can be traded, by then the organization have the
likelihood to extend its thriving at modern business environment to a capture number of
various markets.
According to Parry and Lind (2016), there are various steps that are involved in
strategic risk management and each have the consequences of giving importance to the risk
management. This also helps in explaining the importance of the risk management in the
business strategy of any organization. Wiengarten et al. (2016) elaborately describes the
benefits that the managers can have by focussing on the risk management and how it helps to
guide the organization. To understand properly, the strategic risks are needed to be identified
by the managers. Strategic risks can be defined as those types of risks that can undermine the
business model of an organization and affect their competitive advantage (Punt et al. 2016).
These risks may come from within the organization as well as from the external environment
of the business. Crawford and Nilsson (2017) added that strategic risks can be of various
types such as the risks in economy such as financial crisis or shift in the preferences of the
customers. Although strategic risks are hard to identify but each organization has to deal with
these risks every time a new strategy is applied to the business model. When these strategic
risks are accessed properly then the organizations can preserve their values and have an
advantage over their competitors (Booth, 2015). The main reasons why strategic risks are
very difficult to handle are mentioned in the following points:
 Strategic risks are very difficult to measure and quantify.
 It is a very common phenomenon of these risks that they qualify over the period of
time and making it difficult for the managers to get accustomed to evaluate.
 In order to correctly evaluate the strategic risks the managers needs to downsize the
business strategies which they are very much optimistic about.
These kind of risks are normally generated out of significant uncertainty as a result
the managers needs to give proper attention to identify and monitor these strategic risks (Sull
et al. 2015). It is very important to understand the risk factors before hand as the success of
any strategy is closely linked to understanding of the organization as well as the command of
risks. However the best way to improve the command of risks is by directly approaching to
the strategy and taking the following perspectives.

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As per the COSO’s draft integrated risk and the strategy has been embedded in the
Enterprise Risk Management framework (Steiss, 2019). Considering the eyes of the strategy
mainly three perspectives on risks can be concluded and they are- potential risks coming to
the strategy, risks coming from the strategy and the risk of the strategy. The first step to
execute the risks rise at the strategic level of consideration, the second step is to understand
the risk profile of the strategy and the very last part is to consider the risks of the strategy
itself and take proper precautions for them (Ansoff et al. 2018). However it has been
observed that all these risks are not appreciated or given much attention by the majority of the
strategy functions. Wressell et al. (2018) on the other hand argued that focussing on the risks
it will become easier for the management to have better understanding about the relationship
between risk and strategy. As a result it will also help to enhance the strategy followed by the
organization and enhance the quality of work as well. The following perspectives actually
help the management to improve the strategy and also the performance:
 Risks related in executing strategy: The risk and the strategy has always been
interrelated as a result most strategies are made taken into consideration the various
risk factors (Martinez-Simarro et al. 2015). But there are many times when the risks
become so important that it may even jeopardize the strategy itself. Thus these risks
can have such impacts that it becomes necessary for the management to revisit and
consider them before applying it to the organization. For example in the recent few
years the treats of cybercrimes have grown many folds. Before cybersecurity was just
a part of the IT department but these days cyber-risks became an issue for the
managers. About 65% of the directors are likely to spend time on making strategies
for the cyber-risks (Booth, 2015). They even consider their strategies where these
cybercriminals can actually affect them. So organizations are developing and making
new strategies keeping an eye on the potential of cybercrimes.
 The second step is to consider the risks that can be associated with the strategy (Parry
and Lind, 2017). By considering any strategy that will help to meet the objectives of
the organization the management needs to have alternatives and compare the array of
risk factors associated with each of the strategies.
The strategy chosen for the organization has to align with the core principles of the
organization. Each organization has their own set of principles and these principles help the
organization to achieve their goals. As a result the strategy that doesn’t align with the
principles will directly affect the mission and vision of the organization.

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Further the COSO ERM framework are discussed to help in understanding the
relationship between strategy and risk. Punt et al. (2016) stated the Enterprise Risk
Management Integrated Framework employed by the Committee of Sponsoring
Organizations of Tradeway Commission (COSO), is the most commonly used risk
management framework in the world. It offers principle based approach in order to plan and
design strategies for risk management. With years of experience and development for the risk
management this framework has earned its value all around the world. COSO encouraged in
further developing the ERM framework by addressing the alignment of strategy, risk as well
as performance (Punt et al. 2016). Therefore this ERM framework has helped the
management of various organizations to understand the principles of risk management by
setting strategies through execution and also helping the organization to understand the
relationship between various strategies and the risks that can be associated with them.
However there are several theories also that are associated with the relationship
between strategy and risk and one of the most widely used theory is Project Risk
Management (PRM). This is basically a decision making process as making careless decision
can actually increase the amount of risks. Therefore managing risks asks for methodological
approach which consists of a set of decision making process. The first step is setting the
context before taking any kind of decisions. It is very important for the managers to
understand the business goals and objectives before applying any strategy. The next step is
very crucial and it involves identifying the risks associated with the decision making. It also
involves identifying the various potential causes of the risk and the significant ones that can
cause threat to the strategy or the whole business plan (Soltanizadeh et al. 2016). In general
these risks are mainly classified in two categories so that they can be identified easily. The
first type is classified as per the source of the risk. There can be various sources from which a
risk can come like political, economic, human behaviour etc. The next category is based on
the project life cycle (Morden, 2016).
Sull et al. (2015) opined that when it comes to adopting new strategies to gain
competitive advantages at an organization, this is the era of risk and instability. With the
emergence of new technologies, globalization and greater transparency, business
environment are going through a massive transformation. The volatility of business operating
margins have been largely static from 1950s to 1980s, however it has doubled since then and
size gap between the winners i.e. company with high operating margin and losers i.e.
company with low operating margin have also increased several folds (Steiss, 2019). The

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goal of the most strategies is for building an implicitly static competitive advantage by
establishing smart market positioning. Many companies are undertaking periodic strategic
reviews and setting direction for organizational structure to adopt with latest industry
standards and also forecast the way the market is going to evolve. Birkinshaw et al. (2016)
mentioned the most common challenges while procuring an adaptation within an organization
are setting the methods in which frameworks will be based upon, measuring position when
business environment trends ends and begin, applying traditional forecasting and analysis
within an unpredictable business environment. Further when an organization are made to face
with overwhelming changing information, there is an uncertainty of picking up the right
signals in order to understand and harness change and adapt to the most suitable business
environment.
Sustainable competitive advantages are no longer solely dependent upon scale,
position and first order capabilities for delivering or producing exceptional capabilities
(Morden, 2016). All are becoming essentially static and managers and leaders from leading
organization are finding organizational capabilities are enhanced through fostering rapid
adaptation. Ansoff et al. (2018) stated companies who are learning to do new things instead
of gaining greater competency at a particular thing are showing a promising growth in this
modern business environment. These kind of companies also thrives to react on signal of
change which is why they work out to experiment frequently, rapidly and economically.
Adaptation helps in attaining organizational capabilities building operations around scale and
efficiency that exists on an essentially stable business environment. The adaptive
organizations are more susceptible towards winning despite of the risks since they rely on the
sophisticated point-of-sale systems unlike complex and varying signals as
they help in acquiring the right information for applying in advanced data
mining technologies and then recognize the relevant patterns of change in
business environment. For instance, a leading media company was
suffering from high rate of customer decline where they revamped their
analytical approach towards customer data thereby applying neural
network technologies for understanding the patterns of loss of customers.
The company discovered discreet relationship among the variables that
were mainly responsible for driving customer loss and launched retention
campaigns targeting at-risk customers. The results showed a huge benefit
as the accuracy rate for predicting the customer churn was ranging from

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75% to 90% (Pearlson et al. 2016). This shows the efficiency of adaptation
without disrupting the present business operations can achieve their
strategic objectives.
Another real example is found from the leading UK based grocery
retailer, Tesco. Company like Tesco leveraging the signal reading
capabilities often intervene the business operations in real time, generally
bypassing the slow moving decision hierarchies. Tesco continually
performed detailed analysis of the purchase patterns of the customers
through loyalty card program of more than 13 million members (Steiss,
2019). These findings enable Tesco to produce customer segment and
customize product offerings for each distinctive stores and also helps in
providing warning shifts among the customer behaviour. In this way the
company are exposed to constant adaptation as per the consumer
purchase behaviour and the market needs. Similar like Tesco, it have
helped many other companies who uses algorithms to support the
development and growth of the company’s business model. Furthermore,
through experimentation companies are able to innovate and test new
products and services. Traditional approaches are often time and resource
consuming which saddle the organizational growth with unreasonable
burden of complexity (Pucciarelli and Kaplan, 2016). In order to overcome
these challenges, there are many adaptive companies who utilizes new
technologies and approaches specifically in virtual environments for
generating, testing and replicating large number for innovative ideas
faster at lower cost along with less risk as that of their competitors.
The variables of strategic planning, adaptation and risk
management within an organization operating modern business
environment sets the success height of an organization determines its
winning capability in long term. The timespan of each key arranging cycle
generally relies on the objectives or goals of the organization, whereas the
goal of business arranging is to accomplish the planned result inside the
given time span. There is a productive connection among strategic
planning and all the risks factors that the business may be presented to.

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Modern environment of the business further recognize the adaptation to
latest market trends for achieving its strategic objectives in long term and
open future doors for expanding the business and also comprehend the
significant shortcomings of an organization.

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