Navigating the Future: The Imperative Role of Strategic Risk Management in Sustaining Business Excellence

Nikolay Stoichkov, Head of Strategic Risk Management Unit, First Investment Bank

Nikolay Stoichkov, Head of Strategic Risk Management Unit, First Investment Bank

Strategic risk management is generally defined as managing a business and keeping it sustainable in the long run by avoiding loss of competitive advantage and ensuring sufficient capacity to implement the strategy.

It is important to invest in strategic risk management because of the huge impact of potential disruptive events, which could threaten the stability of the company's business model.

History remembers many examples of companies in the financial and IT industries that failed due to strategic risk, like Lehman Brothers, which had an inadequate growth strategy, and Nokia, which had a lagging technology. The technological progress made photographic tape to be replaced by digital pictures, video libraries by pay-per-view (Netflix, Amazon Prime), and music cassettes and CDs by music content platforms (Spotify, YouTube).

Let’s assume you are producing devices. If you do not implement the latest technologies as soon as possible, you will start losing clients, incomes, market share, and finally, your business.

Strategic threats and risks are related to:

● External environment (like unexpected changes in the market environment affecting participants)

● Competitors actions lead to a serious negative impact on the company's business

● Inadequate planning of strategic priorities and goals.

● Lack of capabilities or resources to implement the company strategy

Qualitative and quantitative assessment tools are used for measuring and managing strategic risk. The introduction of early quantitative warning indicators is helpful, but prominent strategic risks caused by disruptive events for business innovation and new technologies cannot be tracked by traditional risk indicators; they have to be anticipated. The disruptive patterns of environmental changes could be tracked using scanning and scenario planning simulations based on cognitive analytics and machine learning. Scenario analysis aims to produce alternative outcomes with effects on market share, income, assets, capital, etc. The assumptions underlying the strategy can be tested in terms of their feasibility given the human, operational, and financial resources and alternative economic forecasts.

"The active participation of the Board and company management plays a key role in ensuring that strategic risk management has a strong and sustainable impact on the organization."

Qualitative instruments for identifying and assessing strategic risks include news, workshops, working sessions, and questionnaires. Discovering emerging risks requires deep industry knowledge, specialization by risk type, and a wide network of contacts inside and outside the organization.

Usually, it is the strategic risk management function within the company that maintains a list of strategic threats and risks with regular updates, including the probability of their occurrence and their effect. The risk management function must regularly interact with internal counterparties, external experts, and market participants.

Another aspect of strategic risk management is the development of a mitigation plan with risk owners. The mitigation plan includes stages and detailed actions to be undertaken to decrease and cover strategic risk.

The role of the strategic risk management function is to identify, anticipate, and quantify strategic risks and to inform the Board of the company in order to make sustainable decisions for the future development of the business. Significant challenges could lead to a change in the company's development direction. Risk appetite and business strategic planning have to be integrated and interconnected. The risk appetite is the level of risk established for each risk category that the company is willing to accept, considering the established risk strategy and business conditions.

Therefore, the risk appetite framework is the tool that sets and limits the level of overall risk the institution is willing and able to take on to achieve its strategic and business goals. The relationship between risk appetite framework and strategic planning is an interactive process. Thus, it is ensured that the risk appetite framework fully accounts for and reflects the strategy. On the other hand, it is also important for strategic planning to include discussions on the risk appetite and the risk profile.

The active participation of the Board and company management plays a key role in ensuring that strategic risk management has a strong and sustainable impact on the organization.