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Executive Summary

Risk management is a relatively recent socially acquired concept, yet it has become a major focus for companies, regulators and stakeholders. It is surprising then, that with all this attention from business leaders and academics that the basic assessment and management of strategic risk has remained virtually unchanged for over thirty years. From the wide range of examples of loss of shareholder value and even corporate failure, it is clear that strategic risks are amongst the most complex and dynamic risks to manage and that something needs to be done differently.

The STRATrisk development process described here: the integration of experience, sense-making, idea formulation and feedback to create a holistic understanding, is essentially a ‘learning loop’ . This type of approach is advocated as an effective approach to developing a strategic risk management process in a learning organisation. The key findings of STRATrisk could simply be described as being fundamentally about Performance, People, Process, Patterns and Perception as described below:

• Performance – whilst many organisations recognise the need to improve their processes many struggle with understanding what the first stages of this change process are.
• People - Appropriate cultures need to be developed to allow integration of communication systems and organisational learning. The Board’s strategic intent and purpose needs to be clearly communicated to the whole organisation.
• Process - The classic event based, probabilistic view of strategic risk is inappropriate in complex, changing situations. Instead strategic risks need to be treated as dynamic, adaptive processes operating inside complex systems NOT as events
• Patterns - Strategic risks sometimes appear random, unpredictable and chaotic; but actually there are patterns, and the knowledge to detect them is nearly always available. There is a tendency for Boards to look for the wrong thing or the wrong way or at the wrong time.
• Perceptions - Key decision makers need a broader awareness of the dangers of ‘group- think’ and self bias. They need additional techniques to generate understanding and debate.

However, there is no ‘magic bullet’ or ‘secret recipe for success’, rather what is needed is a change process to shift the way Boards and senior executives think about risk and decisions: this is not easy.

Good Practice Model

Figure 1 Good Practice Model

The key feature of this model is that the communication about risks needs to be bottom up and also top down. It is vital that the Board understands what is happening in the organisation, and understands its culture and behaviour so as to make good decisions. Likewise the organisation with all its tentacles to the outside world needs to understand and communicate clearly its own strategic purpose and the factors that may impact upon it. Only then can people gather the information relevant to risk and opportunity in an intelligent manner.

A Paradigm Shift in the Management of Strategic Risk

Viewing strategic risks as dynamic processes in a system allow us to:

• Understand the interrelationships between things rather than simply view snapshots of events.
• Focus on areas of high leverage – small well focused actions can lead to lasting, significant improvement.
• Treat the underlying causes rather than the symptoms which is often done with quick fixes.
• See how the perceived emerging risk can be moved to a positive position by an appropriate intervention.

Figure 3 - A process model of STRATrisk

The figure below expands the view of the decision making process above and shows the relationships between uncertainty, risk, hazard and the other terms used in discussions of these issues. It can be seen that there exists an upside and downside in each part of the process. Together the diagrams provide our systems view of strategic risk and opportunity.

Figure 4 - Risk & Uncertainty: Attributes of the decision making process

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All rights, including translation, reserved. Except for fair copying, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise without the prior written permission of the authors. Contact the primary authors of this document for such permission are Neil Allan, University of Bath, School of Management, Bath BA2 7A, N.D.Allan@Bath.ac.uk