Skip to content
Analytica > Blogs > Strategic risk management

Strategic risk management

What lies behind those three words – Strategic Risk Management? It’s a question worth asking because a) SRM is a relatively new field, and b) there is still confusion between SRM and ERM (Enterprise Risk Management). RIMS (Risk and Insurance Management Society) says that it spotted strategic risk management as an emerging field among its practitioners. In Darwinian terms, SRM is the next stage in ERM as a whole, says RIMS. The concept that separates one from the other is simple, though: it’s ‘upside’. Risk management matrix Image source: wikimedia.org

Accentuate the positive

The working definition of SRM can be taken to be ‘a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect an organization’s strategy and strategy execution’. The emphasis is on strategy and its implementation, and the upside of risks. Examples of strategic decisions might include moving a production site, undertaking a new product research program, or vertical integration. SRM is then the management of risk for positive gain in such situations.

ERM stakes its claim

That leaves ERM on the other hand with operational or everyday risk: in other words, the downside. Except that organizations like the Casualty Actuarial Society (CAS) also lumps in strategic risk along with hazard risk, financial risk and operational risk in its definition of ERM, as does COSO (Committee of Sponsoring Organizations of the Treadway Commission). Enterprise risk management model Image source: ucop.edu

Getting the balance right

Dan Borge, former director of Bankers Trust, has an interesting take on risk in general; ‘Many people think that the goal of risk management is to eliminate risk – to be as cautious as possible, not so. The goal of risk management is to achieve the best possible balance of opportunity and risk. Sometimes, achieving this balance means exposing yourself to new risks in order to take advantage of attractive opportunities.’ In other words, both the upside and the downside need to be taken into consideration, but without confusing or excluding either one.

SRM as part of your score sheet

Organizations are now increasingly being assessed for their strategic risk management as part of their rating by agencies such as Standard & Poor’s. You can score (or drop) points according to the point of view (probability, impact) of management vis-à-vis the major risks faced by an enterprise, the way risk identification is carried out, assessment of risk sensitivity, and how risk management affects strategic decision making. Risk management process Image source: dnbafrica.com

Strategic risk modeling

If management in an enterprise is to produce any documented evidence of how it is identifying, considering and handling strategic risk, a reproducible model can go a long way to help. Whether it’s written down or held in a software program, the ability to run such models on a regular basis, refining them as new information comes to light, is not only reassuring to external analysts and regulators, but it’s also an invaluable focal point for the overall strategic risk management process inside the firm. If you’d like to know how Analytica, the modeling software from Lumina, can help you to model strategic risk probabilities and impacts in your own organization, then try Analytica for free to see what it can do for you.

Share now   

See also

Building electrification: heat pump technology

Lumina set out to build a useful tool to assess the benefits of heat pumps. Learn more about heat pumps and their impact.

More…

Decision making when there is little historic precedent

Learn how to make decisions and strategic plans in uncertain situations, where historical data is not available. See how to model this in Analytica with clarity and insight.

More…

Does GPT-4 pass the Turing test?

UCSD researchers conducted an online Turing test of GPT-4 with 652 human participants. Humans were not fooled ~60% of the time.

More…

What is Analytica software?

Analytica is a decision analysis tool that helps you generate clearer and more justified results through modeling.

More…

Download the free edition of Analytica

The free version of Analytica lets you create and edit models with up to 101 variables, which is pretty substantial since each variable can be a multidimensional array. It also lets you run larger modes in ‘browse mode.’ Learn more about the free edition.

While Analytica doesn’t run on macOS, it does work with Parallels or VMWare through Windows.


    Analytica Cubes Pattern

    Download the free edition of Analytica

    The free version of Analytica lets you create and edit models with up to 101 variables, which is pretty substantial since each variable can be a multidimensional array. It also lets you run larger modes in ‘browse mode.’ Learn more about the free edition.

    While Analytica doesn’t run on macOS, it does work with Parallels or VMWare through Windows.


      Analytica Cubes Pattern