Managers in different companies choose to focus on enterprise risk management (ERM) to predict and address possible risks that may be associated with companies’ operations and activities. ERM can cover a range of risks potentially faced by organizations (McShane, Nair, and Rustambekov 642). In addition to managing risks associated with problems in operations, deliveries, and interactions with suppliers or customers, leaders need to focus on more significant risks that might influence the strategic course of the organization and its further development (Tonello par. 3).
These are known as strategic risks, and managers concentrate on specific activities to predict and overcome these threats to the organization’s progress in the context of strategic risk management (SRM) (Frigo and Anderson 21). The purpose of this paper is to introduce the concept of SRM, discuss its definition and role, describe its principles, analyze activities that are available to assess and manage risks, and focus on the link of SRM to ERM.
Definition of SRM and Its Role
Strategic risks belong to a specific group of threats directly connected with companies’ strategic objectives. From this point, strategic risks can prevent an organization from achieving its business objectives (Wade par. 2). These risks include problems that cause a decrease in the company’s value and prospects for further growth.
Definition of SRM
In this context, strategic risk management or SRM is defined as a process of determining, evaluating, and addressing risks that are directly associated with the company’s strategy and can lead to the business or strategic failure (Tonello par. 3). Therefore, the manager’s task is to identify possible risks, assess their impact on the strategic development of an organization, and formulate a plan of action to manage risk or overcome a problem (Gandini, Gennari, and Cassano 2). With this in mind, SRM is a complex of techniques utilized by managers to increase the value for shareholders and the overall profitability of the business while reducing the number of potential risks.
The Role of SRM
However, it is important to note that strategic risk management cannot be discussed only as a group of certain actions developed to identify and address negative tendencies, processes, or risks. SRM is also significant in understanding how risks can be overcome to increase the competitive advantage of the firm (Risk and Insurance Management Society 3). It is possible to state that SRM covers “strategic planning, risk management and strategy execution in managing risks and seizing opportunities not only for protection against losses but for reducing uncertainties and seizing opportunities” (Risk and Insurance Management Society 3).
As a result, it is possible to guarantee “better performance in achieving the organization’s objectives and greater resilience in an uncertain environment” (Risk and Insurance Management Society 3). Thus, SRM is important for predicting strategic risks and contributing to the business’s value.
Principles of SRM
Researchers and managers have identified six main principles of SRM:
- this process is oriented toward determining and assessing risks that are internal and external;
- the main focus is on determining the possible shareholders’ value;
- SRM is a component of ERM;
- managers who are responsible for realizing ERM are also responsible for SRM activities;
- the focus is on the assessment of risks from a strategic perspective;
- SRM is a continual and systematic process (Frigo and Anderson 22).
Thus, according to the first principle, it is important to refer to and assess both internal and external factors to guarantee the realization of strategic objectives without obstacles. Furthermore, SRM is developed to address the needs of shareholders who expect to overcome risks and increase value.
Also, SRM should be viewed as a part of ERM, and this aspect influences the roles of managers who become responsible not only for predicting potential threats and barriers to daily operations but also for identifying factors that affect the strategic progress of an organization (Tonello par. 10). The strategic perspective is very important in this case because managers evaluate how observed contingencies and other internal and external factors can be related to the set objectives as a part of a company’s strategy (Frigo and Anderson 22). Finally, the sixth principle of strategic risk management accentuates that this process cannot be disorganized or irregular because managers need to routinely evaluate the company’s course of actions and possible risks according to set strategic objectives since SRM is a systematic process.
SRM Activities to Manage Risks
The SRM process is based on a range of activities that include identifying, assessing, and managing risks.
SRM for Identifying and Assessing Risks
At the first stage, it is important to determine or predict risks that can affect strategic objectives in an organization (Frigo and Anderson 22). The second step is assessing these risks and classifying them according to the level of their severity. The reason is that managers need to understand what risks they can face on the path to achieving strategic objectives and how these risks can influence the overall working process (Tonello par. 10). Furthermore, assessment of risks is necessary to develop an appropriate plan of action that can be used to address the identified threats. As stated by researchers, this process is systematic, and the assessment is to be conducted at each stage of the work on completing the set strategic tasks (Frigo and Anderson 22; Tonello par. 10).
SRM for Managing Risks
The activities that are not related to the assessment stage involve the direct completion of tasks aimed at addressing, decreasing, or overcoming risks. Techniques that are used in strategic risk management to address possible risks and uncertainties are many, and managers choose among them depending on the needs of the firm that can be identified with the help of the SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and other similar approaches (Gandini, Gennari, and Cassano 2). Therefore, following a stage involving assessment, managers will choose strategic planning and the development of alternative scenarios to cope with barriers that were identified with the help of the assessment.
At this stage, the activities selected in the context of strategic risk management can be divided into those that are risk-taking and others that are risk-reducing. Risk-taking activities are associated with the idea that some types of risks are not threatening to the organization, and they can be assessed and viewed as providing opportunities for further sustainable or strategic growth (Risk and Insurance Management Society 7).
The organization chooses to take the identified risks to achieve strategic goals (Wade par. 3). The other activities are risk-reducing, and they are most often discussed in the context of SRM as directed toward overcoming identified threats. With this in mind, SRM activities at the stage of overcoming or taking a risk include making decisions regarding investments, mergers or acquisitions, and expansion in marketing efforts, as well as other strategic actions.
The Connection between SRM and ERM
According to the principles that are used to explain SRM and integrate it into processes developed in an organization, this complex of practices should be viewed as an important part of ERM (Frigo and Anderson 22). From this point, there is a direct link between planning and realizing ERM and SRM activities and techniques. While following the principles of SRM, those persons who are responsible for predicting and assessing threats to operations in an organization also work to identify risks that can influence the realization of the strategy that has been determined.
However, in contrast to ERM, which is oriented to resolving practical tasks, SRM is focused on addressing such tasks as the creation of value for the shareholders and the prediction of barriers to realizing the strategic objectives which have been set for the business. Therefore, if ERM is effective to administer daily issues related to general operations, the strategic risk management as a component of enterprise risk management is important for proposing approaches to address such issues as consequences of mergers and acquisitions, the financial crisis, and changes in domestic and global markets, among other things (Frigo and Anderson 23).
Researchers and managers are inclined to discuss ERM and SRM as closely connected concepts and processes that can influence the effectiveness of a business’s work (Tonello par. 14). Therefore, when executives focus on implementing the principles of SRM in their organization, the first challenge they may face is the necessity of integrating the approaches to working with strategic risks into the framework that is oriented to reducing practical risks. Still, it is important to note that SRM cannot work effectively if ERM processes are not systematized and regulated appropriately.
It is important to note that SRM as a process is aimed at increasing an organization’s competitive advantage and the potential for growth in the market. According to modern business tendencies, risk management should be directly connected with the business strategy, and at this stage, the focus is on SRM as an approach to address uncertainties associated with the strategic progress of the firm.
Taking this into consideration, while introducing the concept of SRM, it is important to focus on such specific aspects as the definition of strategic risk management, its role and importance, and the principles that regulate the use of SRM in organizations. Also, it is possible to identify six principles that allow for speaking about the clear connection between enterprise risk management and strategic risk management.
Furthermore, it is also important for managers to understand what practices associated with SRM can be used at different stages of dealing with risks. The practices can include the processes of predicting, identifying, evaluating, and addressing the determined threats that can affect the company’s strategy and its value. In conclusion, even though SRM is a comparably new concept, its principles and ideas are actively used in modern management to guarantee to achieve strategic goals.
Frigo, Mark, and Richard Anderson. “What Is Strategic Risk Management?”. Strategic Finance 92.10 (2011): 21-24. Web.
Gandini, Giuseppina, Francesca Gennari, and Raffaella Cassano. “Global Responsibility and Strategic Risk Management.” Journal of Business Management and Applied Economics 3.5 (2014): 1-17. Print.
McShane, Michael, Anil Nair, and Elzotbek Rustambekov. “Does Enterprise Risk Management Increase Firm Value?” Journal of Accounting, Auditing & Finance 26.4 (2011): 641-658. Print.
Risk and Insurance Management Society. Why Strategic Risk Management? 2011. Web.
Tonello, Matteo. Strategic Risk Management: A Primer for Directors. 2012. Web.
Wade, Jared. How Strategic Risk Management Improves a Company’s Competitive Standing. 2012. Web.