The late Sir Winston Churchill once stated, “However beautiful the strategy, you should occasionally look at the results.” He was, of course, spot on with that observation. The aim of any strategy is to accomplish a stated goal. Anything that can derail accomplishing a company’s stated goal is a strategic risk. As Henry Mintzberg, the Cleghorn Professor of Management Studies at McGill University in Montreal, has pointed out, “The real challenge in crafting strategy lies in detecting subtle discontinuities that may undermine a business in the future. And for that there is no technique, no program, just a sharp mind in touch with the situation.”[1] Professor Mintzberg made that statement in 1987, decades before the rise of artificial intelligence (AI) techniques and programs. Today, AI can help sharp minds deal with strategic risks. Nevertheless, the availability of these new ways to assess strategic risk may instill a false confidence in business leaders. Boston Consulting Group (BCG) analysts report, “A recent BCG survey found that nearly three-quarters of senior executives have confidence in their company’s strategic risk management capabilities. At the same time, however, most have experienced impacts from increasingly frequent and severe disruptions, such as cybercrime, technological changes, or various industry-specific events.”[2]

What is the Difference Between Strategic and Operational Risks?

The staff at ZenGRC explain the difference between strategic risks and operational risks this way: “Strategic risks threaten an organization’s ability to deliver expected outcomes, which can harm the organization’s ability to grow and prosper. Such risks can arise from technological change, an evolving competitive landscape, poor management, or changes in customer demands. Operational risks stem from inadequate or failed internal procedures, employee errors, cybersecurity events, or external events such as weather disasters.”[3] The staff at MasterClass has identified half-a-dozen different kinds of strategic risk.[4] They are:

1. Change risk: “Launching new products or initiatives, or changing organizational structures comes with inherent risks that must be accounted for in the planning process.”

2. Competitive risk: “Competitive risk is the possibility of losing traction because your competitors develop new technologies or introduce new products before you.”

3. Regulatory risk: “Regulations are being changed and added to all the time in the business sector. This provides an inherent risk as any failure to comply with a change in regulation could disrupt day-to-day operations or require the implementation of expensive new technologies.”

4. Economic risk: “Economic risk refers to potential fallouts from a change in the economic landscape or legal framework within which a business operates. For example, lower government barriers to entry may allow new entrants to flood into the market, or high inflation may lead to a change in consumer behavior.”

5. Management risk: “This is the risk that poor strategic planning or communication may lead to unclear directives, or a poorly planned decision such as a merger or acquisition may fall through.”

6. Reputational Risk: “This is the possibility of a company damaging its reputation, whether due to the quality of a product or service, regulatory compliance breaches, or shareholder activism.”

Over a decade ago, analysts from Deloitte wrote, “Managing risk effectively has always been a touchstone of the most successful companies. But in today’s risk-filled business environment, it can be hard for executives to have confidence that their plans and strategies will play out as expected. A big reason is that strategic risks — those that either affect or are created by business strategy decisions — can strike more quickly than ever before, hastened along by rapid-fire business trends and technological innovations such as social media, mobile and big data. Companies that fall behind on the innovation curve may quickly fall prey to innovation’s evil twin — disruption. That is just one of the reasons managing strategic risk has become a high priority for many executives.”[5] That conclusion is as true today as it was then.

Dealing with Strategic Risk

According to author Abbie Glossop, strategic risk can be managed using the same 5-step process of identifying, assessing, treating, monitoring, and reporting that you would when handling other types of risk.[6] She explains, “Your strategic risk management framework may therefore look something like this: 1. Identify the strategic risks your organization could come up against; 2. Conduct a strategic risk assessment to determine the likelihood of risks occurring, and the impact they might have; 3. Choose a strategy for dealing with each risk; 4. Monitor each risk over time to keep on top of any changes; and, 5. Report at each stage of the strategic risk management process. When it comes to managing strategic risk, make sure you pay close attention to organizational strategy and objectives, have a broad oversight of the strategic risks you could face, and be proactive by adapting to changes and responding effectively.” Sounds straight forward; however, actually managing strategic risk is complex.

As I noted earlier, AI solutions can help. AI systems can simultaneously deal with many more variables than the human mind. To help companies deal with strategic risk, Enterra Solutions® has developed the Enterra System of Intelligence®. This System ushers in a new era of AI-enabled management science. It merges cutting-edge analytical techniques with a business’ data and knowledge to Sense, Think, Act, and Learn® so that organizations can meet the changing needs of the market. The Enterra® system acts as a central “brain” within an organization — ingesting diverse datasets, business logic and practices, and strategy — to uncover unique insights and generate autonomous recommendations across the enterprise at market speed. Insights and recommendations generated by the Enterra System of Intelligence are acted upon through deep integrations with an organization’s established systems of record and engagement, akin to how the brain and the central nervous system interact within the human body.

Enterra’s system uniquely learns the environmental reasons that recommendations are successful or not and persists that learning in its Ontologies and Generative AI knowledge bases to improve future insights and recommendations. The business application modules included in the Enterra System of Intelligence are:

● Enterra Consumer Insights Intelligence System™. This System allows clients to quantitatively uncover and logically understand the inter-relationships that lead to heightened consumer understanding, hyper-personalized product recommendations, and new product innovation.

● Enterra Revenue Growth Intelligence System™ (ERGIS™). ERGIS systemically performs holistic revenue growth optimization (including optimizing strategic and tactical pricing, trade promotion, trade architecture, price pack architecture, media mix, customer segmentation, and assortment).

● Enterra Demand and Supply Chain Intelligence System™. This System concurrently performs non-linear demand and supply planning optimization.

● Enterra Business WarGaming™. Business WarGaming enables organizations to leverage their data to make strategic decisions by anticipating the moves of their competitors and taking direct action to beat the competition, mitigate risk, navigate uncertainty, and maximize market opportunity. Part of the Enterra Business WarGaming capability is the Enterra Global Insights and Decision Superiority System™ (EGIDS™) — powered by the Enterra Autonomous Decision Science™ platform — which can help business leaders rapidly explore a multitude of options and scenarios.

As Professor Mintzberg insisted decades ago, sharp minds are still required; however, AI-assisted strategic risk management can help companies set a future course with much greater confidence.

Footnotes
[1] Henry Mintzberg, “Crafting Strategy,” Harvard Business Review, July 1987.
[2] Nick D’Intino, Elton Parker, Alan Iny, Tad Roselund, Ankita Srivastava, and Nikita Dalmia, “Are Leaders as Prepared for Strategic Risks as They Think They Are?” Boston Consulting Group, 1 October 2024.
[3] Staff, “The Difference Between Strategic and Operational Risk,” ZenGRC Blog, 29 July 2024.
[4] Staff, “What Is Strategic Risk? 6 Types of Strategic Risk,” MasterClass, 4 August 2022.
[5] Staff, “Exploring Strategic Risk,” Deloitte, 2013.
[6] Abbie Glossop, “Strategic risk: a quick guide,” Ideagen Blog, 11 June 2021.