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The term risk can be defined as the probability or threat of injury, damage, loss, liability or any other negative occurrence which is caused as a result of internal or external vulnerabilities and which can be avoided with the help of preemptive action. In the context of businesses, risk is the possibility that a company will have less than anticipated profits or that the company will experience a loss rather than making profits. For this purpose, the businesses undergo the process of risk management in order to manage the risks faced by them. Risk management can be defined as the processes which involve the identification, analysis and mitigation or acceptance of uncertainty in making investment decisions (Hopkin, 2018).
This report is based on the conceptual framework relating to risk and explains the relationship between risk and strategy. It further examines he way in which adaptation can enable an organization to achieve its strategic objectives and win despite the risks it may face.
The term strategy can be defined as the scope and direction of the business or organization over the long term. Strategy covers a numbers of perspectives such as the objectives of the business over the long term, market for the products of the business, activities involved in such markets, environmental and external factors affecting the competing abilities of the business. Strategy further covers the expectations and power of those who have power in and around the company, i.e. the stakeholders. On the other hand, the term risk can be defined as less than expected returns or quantifiable likelihood of loss. Examples of risk include inflation risk, currency risk, country risk, principal risk, liquidity risk, market risk, mortgage risk, interest rate risk, opportunity risk, etc. (Agarwal and Ansell, 2016)
It is important for the companies to integrate their business plan strategies and goals with the risk management programs. The conceptual framework used features an enterprise resource management (ERM) implementation model having hypothesized casual relationships to firm value. The conceptual framework provides that the adoption of ERM model in the form of an independent variable the implementation of which will have a positive impact on the value of the firm and therefore it is the dependent variable. The ERM model has dimensions consisting of fourteen elements. The dimensions are governance, structure and process. Corresponding implementation elements are used for the purpose of operationalizing each of the dimensions (Bromiley, McShane, Nair and Rustambekov, 2015).
Definition of Risk and Risk Management
The relation between risk and strategy can be analyzed through the difference between ‘managing risk strategically’ and ‘managing strategic risks’. Both concepts play a critical part in integrating the concept of risk and strategy and are often considered as the two sides of the same coin. When risks and strategy are integrated, it becomes strategic risks which are the highest subset of the occurrences or events which have the capability of causing loss or creating opportunities of a frequency or magnitude that can significantly impact the business plans greater than the other risks affecting the business. In the financial context, the identification of strategic risks are made in terms of prospective or current impact on the capital or earnings arising from improper implementation of decisions, adverse business decisions or lack of responsiveness to the changes taking place in the industry. Certain amount of risks is assumed by the companies that a failure will be faced by the business in terms of meeting its strategic and financial business goals, provided a higher rate of return on the investment is obtained by the business for taking such risk. The expectations of return payments of rewards can be higher only when the level of risk assumed is higher (Relph and Parker, 2014).
Therefore, the management of strategic risks involves making identification of risks that can be classified as strategic and then having a look at them separately from other risks. Such analysis is generally made by dedicated team of advisors involving strategy or audit committee of the board or other grouping of risks experts or managers. Furthermore, it involves identification of related controls and allocation of resources for the purpose of mitigating such risks. The continuous evaluation of the strategic risks as the operating environment change and business goals is needed for managing strategic risks (Calandro, 2015).
On the other hand, ‘managing risk strategically’ relates to the process of decision making which is utilized for the purpose of aligning the risks with the business plans. The factors involved in the strategic management of risks are adoption of a systematic or formal framework and process in order to appraise complex issues. Moreover, it requires breaking down of ‘big picture’ options into segments that are manageable such that measuring, weighing, prioritizing and pushing of the individuals decisions can be more clear. Furthermore, it considers and gathers all the valuable information and presents the important data in a manner such hat it impacts different levels and categories of decision making participants (Wolke, 2017).
Conceptual Framework of Risk and Strategy
Three perspectives on risk can be provided from the eyes of strategy i.e. risk coming from strategy, risk coming towards the strategy and risk of the strategy itself. The first is related to the risk profile of the strategy and of all the alternatives. The second refers to the execution of risks that rises to the strategic level consideration levels. The third and the last is the risk of the strategy itself which provides not moving the organization in order to realize the reason for its existence (Slagmulder and Devoldere, 2018).
Risks to executing the strategy- there is an integral relation between the risk and strategy. Most of the processes relating to strategy selection do not appropriately consider the risks. However, the consideration of those risks is made in the context of their probable impact on the ability in the execution of the strategy. Many times, the significance of the risks found in execution increase to the extent that it threatens the strategy itself (Schroeder, 2014).
The implications of the strategy- there is a risk profile of every potential strategy. The risk profile covers the set of risks that originate from the strategy or can also be referred to as implications from the strategy. It I the responsibility of the board of directors and the managers to consider how alternate strategy maps to the risk appetite of the organization and how each and every alternative will make efforts for the organization for the purpose of setting business objectives, developing distinctive, coherent capabilities and allocating resources. The selection and approval of the strategy from the various alternatives should be performed only after this consideration (Andersen, 2015).
The possibility of strategy not aligning- the important aspect in the selection of the strategy is the possibility that the strategy does not aligns with the vision and mission of the organization. The core values, vision and mission of every organization performs the function of defining its purpose which implies the manner in which it wants to conduct its business and the targets it is trying to achieve. Therefore, the mission and vision of the organization must be supported by the strategy (Raupp, 2014). A misaligned strategy increases the chances that the mission and vision of the organization will not be realized. For example, a number of lives might be saved by a hospital by way of building a medical tourism business. But in case of a community hospital whose mission is to serve the disadvantaged of the community, then in such as case the medical tourism service has been mis- aligned with the mission. There can be a serious damage caused to the reputation of the hospital if a preferential treatment is given to an overseas patient over an indigent senior belonging to the neighborhood. This is an example of non- aligning of the risk of strategy (Julian and Grove, 2018).
Relationship Between Risk and Strategy
The businesses are required to survive in the era of instability and risk. New technologies, globalization and greater transparency have combined to overturn the environment of the business and have resulted in uneasiness for the management. In other words, risks are faced by every business, but the one who succeed has the capability of acting on the signals on timely basis. The signals from the external environment require the companies to refine and reinvent its business model along with reshaping the information landscape of the industry. For the purpose of achieving the strategic objectives, risk adaptation is important for the businesses. Lots of difficulties are involved in becoming an adaptive competitor. These companies are focused towards the management of efficiency and scale along with their hierarchical structures in order to search the flexibility that is needed for the purpose of rapid learning and change. Adaptation can be possible by the organization only when the following process is followed by the business (Hillson and Murray- Webster, 2017).
Look at the mavericks- disruptive mavericks are present in the fast changing industries which provides that new players keeps on entering the market from time to time. The risk of the failure of the strategy and business can be significantly reduced when the business will shift their focus from the traditional competitors to the new entrants and new competitors. The basic motive of the strategy is to insure the company from the competitive actions undertaken by the new entrants. Due consideration should be given to the happenings in the analogous or adjacent industries and markets. It is difficult to make pattern recognition in an uncertain and risky environment but has tremendous competitive value (Burtonshaw- Gunn, 2017).
Identify and address the uncertainties- the managers are required to forecast and examine the uncertainties and risks that have the capability of affecting the company. This is the extension of the long- range strategy exercise that can insist people in realizing the facts that are unknown and will take action for the purpose of addressing it. ‘False knowns’ are also required to be distinguished by the organization from the ‘underexploited knowns’ and ‘unknown unknowns’. Here false knowns means firmly held assumptions that are questionable, underexploited knowns means megatrends recognized by the organization on which action has also been taken but without sufficient emphasis an speed, and unknown unknowns means the intrinsic uncertainties that can prepare the organization only by hedging the bets (McNeil, Frey and Embrechts, 2015).
Managing Strategic Risks
Put an initiative on every risk- a portfolio of strategic initiatives is possessed by most of the companies. It should act as the engine that has the capability of driving the organization into adaptability with the help of some enhancements. Firstly, the organization should address every important source of uncertainty with an initiative (McConnell, 2016). Based on the nature of the uncertainty, the objective of uncertainty may be creation of options for responding to the business trend down the line, responding to the neglected business trend or simply gaining more knowledge regarding it. Discipline with the metrics should be followed by the organization while managing these initiatives along with disciplines with regard to the responsibilities and time frame as it would be for the operating plan or the product portfolio (Chance and Brooks, 2015).
Examine multiple alternatives- when the business environment is stable, it is sufficient to improve and examine the existing change proposals. However, every change proposals should be accompanies by a number of alternatives. Such alternatives should not only be the powerful set of moves but also be such which fosters and legitimates organizational flexibility and cognitive diversity (Sadgrove, 2016).
Increase the clock speed- the adaptation speed plays an important role in the cycle time of decision making. In a dynamic environment, change needs to be accelerated by the companies by way of making annual planning processes (Harris, 2017).
In this way, the adaptation will create awareness regarding the risks on constant basis and the companies will be able to deal with them on timely basis. Risks taking is an important aspect of every business otherwise they will not be able to achieve success in the marketplace. When the above process will be followed, the companies will be able to achieve a winning position in the market despite the risks it may face. This is due to the fact that the demands of the customers keeps on changing from time to time so the relative changes are required to be brought in the business processes in order to meet their demands. The businesses that are afraid of the repercussions are those who avoid taking risks. This threat holds them back and results in less competition for the businesses that makes efforts and takes risks. This, in turn, puts such businesses in the favorable position in the market (Cole, Giné and Vickery, 2017). For example, big businesses like that of Google and Microsoft have become successful only due to their adaptation to win in the market. The iconic gaming console: the Xbox is considered to be the forefront of the gaming industry which has been brought by Microsoft. When Playstation dominated the gaming console market, Microsoft formulated its risk strategy and came up with Xbox. The risk was not only related with the failure of the product but also with the double amount spent on its marketing. With the passage of time, Xbox attained the position of staple for gaming console and sold more than 24 million units up to the year 2016. Similarly, Google makes the identification of every type of risks associated with their business such as political risks, economic, social and cultural risks, technological risks and major unidentified risks in order to deal with them on time. It further adopts risk management strategies for managing such risks as Google is the major search engine of the world (Aven, 2016).
Managing Risk Strategically
Therefore, it can be concluded that risk is the possibility that a company will have less than anticipated profits or that the company will experience a loss rather than making profits. For this purpose, the businesses undergo the process of risk management in order to manage the risks faced by them. This report focused on the conceptual framework relating to risk and explains the relationship between risk and strategy. It further examines he way in which adaptation can enable an organization to achieve its strategic objectives and win despite the risks it may face. Three perspectives on risk can be provided from the eyes of strategy i.e. risk coming from strategy, risk coming towards the strategy and risk of the strategy itself. For the purpose of achieving the strategic objectives, risk adaptation is important for the businesses.
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