A deep-dive explanation about the main categories of strategic risk (Governance, Operational, Competitive, Financial, Reputational), and the 4-step process you can use to evaluate them.
WWB 010: The 5 Areas Where Your Company is Most at Risk [Podcast]
06/18/2020 – 24 minutes 29 seconds
Highlights and Take-Aways
A business is a living thing. It is constantly evolving in order to provide the most value to customers. In order to see continued success, it is really important that you identify all possible ways your business could suffer harm along the way. You could face challenges with:
- Internal processes going wrong
- Waste and inefficiencies
- External pressure from outside forces (such as competition)
- Inability to adequately serve customers
- Decreased profitability
There are several ways to identify these risks and create a plan that will help you get more control in your business. In past episodes, I talked about ideas for adapting your business in response to changes (episode 3: Ideas for Adapting Your Business)
I explained the business models that take advantage of people, and how you can avoid them (episode 5: Which Business Models are Predatory).
And in episode 7 (Honeybee, Scorpion, and Nuclear Employees), I shared how you can respond to frustrated employees before things get worse.
Today’s topic centers around the 5 types of strategic risks that occur in every company, but which most owners don’t take the time to fully analyze. By understanding each of these 5 areas of risk, you’ll be able to develop a really good plan for avoiding problems.
What is Strategic Risk?
Strategic risk is a perspective on the vulnerabilities in a company that keep it from achieving success: flaws, potential problems, or unresolved issues; as well as untapped opportunities for additional success. So it’s both a risk evaluation of what’s going wrong or what could go wrong, and a strategic examination of how to get even more value and growth. When you combine these two things, you can not just avoid problems but also find opportunities that competitors aren’t doing.
We can use strategic risk to help a company achieve its ultimate goals: the long-term vision for how you want to change the world, help people, or make a difference. With a dual purpose—looking for flaws and finding options that others cannot see—is extremely powerful.
If you read the research on risk management or strategic planning, you’ll find there are quite a lot of categories in which risks could fall. From my point of view, I determined that all potential vulnerabilities can be divided into 5 categories.
I’ll describe each of these, as well as ways you can identify problems in your company and to mitigate them.
The five categories of strategic risks are: Governance, Operational, Competitive, Financial, and Reputational.
1. Governance Risks
Control, Planning, and Monitoring
This includes the structure that allows the organization to get results; it includes strategic planning and developing policies (answering “why” and “what”) and procedures (“what” should happen). But too many rules can work against you (Who are Your Devil’s Advocates?). So a balance between a Yang approach with strong controls, and a Yin approach with welcoming and openness is the key to effective Governance.
Even if you like flexibility, it’s important to maintain standards and find ways to increase efficiency, not allowing flaws to occur, and oversee the process for high quality results.
2. Operational Risks
Internal Processes for Efficiency and Waste Reduction
This is the identification of defects and variability: What are you expecting to happen, and what is happening instead? Customers are more likely to complain or go to a competitor if they don’t get an experience and results they were expecting. Due to the high cost of acquisition, it’s worth your time to reduce the variabilities and create a feedback loop to make continuous improvements.
Inefficiency is also common in handoffs—wasted time and resources between steps in a process. You can do a workflow evaluation
- When you sign up a new customer
- When a customer books an appointment
- Before, during, and after services are rendered or products are delivered
- Follow-up after the sale is complete
- Handling returns and exchanges
Every time a new person handles the next step in a process, there is a possibility of wasted or duplicated tasks. Or automation could replace human contact; this speeds up the process, increases efficiency, reduces waste and errors, and guarantees that a positive customer experience. You can standardize your methods, as well as the procedures (steps taken to accomplish a task). This works best when you gather information from employees who are already doing these tasks to find out where they can be streamlined and improved.
Cross-training, mentoring, and reducing the chance of turnover are also ways to reduce operational risks.
3. Competitive Risks
Customer acquisition, customer management, and Market Drivers
If you have a marketing plan, you’ve likely already considered risks in this category. Consider whether your vision and mission are driving your marketing decisions. Marketing should not be driven by market changes alone; it’s also important to stay true to the original goals you set for the business.
Solid communication is important both with internal customers (employees, management) and external customers (buyers, vendors, community members).
4. Financial Risks
Revenue Generation and Cost Control
You want to make sure that your financial decisions are based on the vision and mission, and that you’re protecting your stakeholders and maximizing profitability. Creeping costs and expenses will affect your profits as well. “Right-sizing” a company—choosing to eliminate staff in order to reduce costs—is not something I would recommend as a first course of action. There is so much value in the contributions of trained employees, and all of this will disappear once they are no longer at a company.
Read more: Analyzing Profit Margins FAQs
5. Reputational Risks
Public & Customer Perception and Employee Engagement
This includes public relations, the reflection of your marketing plan to the public, social media and online presence, and the response to feedback. It also includes the involvement of stakeholders when developing strategic objectives, and how employees are invited to engage in the company’s growth.
By creating a method where all stakeholders—employees, managers, customers, investors, and the community—can contribute ideas for strategic growth, you will collect information that is more valuable than what your leadership team can do alone.
Welcoming bad news is another area of reputational risk. Are you aware of what people are saying about your company online? What is your process for customers or employees offboarding (exiting) your company, and how do you respond to this feedback? This is a great source of risk intelligence.
Healthy feedback loops can help you respond to “bad news” and minimize public relations damage.
We’ve reviewed the 5 areas of strategic risks:
- Financial, and
Find out more about this topic — check out my Overview of the 5 Types of Strategic Risk
Do you have a question you’d like answered on an upcoming show? Record your message at https://anchor.fm/laconteconsulting/message
If you want to reverse staff turnover and want help, find out more here.
Grace LaConte is a business strategist, writer, and workplace equity advocate whose risk management graphics are used around the globe. She specializes in finding hidden threats and opportunities in organizations that employ working parents. Grace is the host of the What’s Wrong with Your Business? Podcast, which provides tools to adapt in a rapidly changing market.