Strategic risk is the risk that failed business decisions may pose to a company. Strategic risk is often a major factor in determining a company’s worth, particularly observable if the company experiences a sharp decline in a short period of time. Due to this and its influence on compliance risk, it is a leading factor in modern risk management.
In 2004, James Lam Associates researched the main cause for financial distress at companies that publicly traded. The research question was: when a company faces a major market value decline which is a 30 percent relative decline, what was the main cause? The research team found that 76 S&P 500 companies had suffered a dramatic decline in market value in a month, after analyzing the market value data of S&P 500 companies from 1982 to 2003. The JLA research team determined the root cause of their market value decline by reviewing news reports, regulatory filings, and company statements. These 76 companies worked with a cross major industries such as energy, materials, industrials, telecommunications, consumer products, health care, utilities, and financials. Overall, the JLA’s study found that 61 percent of occurrences were due to strategic risks (i.e. consumer demand, M&A, competitive threats), 30 percent were caused by operational risks, and 9 percent were due to financial risks. Yet, in practice, a lot of Enterprise Risk Management (ERM) programs downplay or ignore strategic risks.
The importance of strategic risk has risen along with both “regulatory and stakeholder expectations”. In 2005, the Corporate Executive Board—now under Gartner—published a study on Fortune 1000 companies between the years 1998 and 2002, and the types of risks that affected them the most. These companies comprised the top 20% who faced the most drastic “market value declines”, and the number one risk they had in common was strategic risk (the second and third being operational and financial risk, respectively).
There are many possible kinds of strategic risk. For example, according to a different study by CEB, published 2010, companies whose cultures do not put a strong emphasis on integrity, have been found to be 10 times more likely to commit unethical acts than those who do. CEB’s Dan Currell states that such a factor may seem obvious, but is difficult to enforce in reality. A firm must establish an environment in which employees feel comfortable in communicating with each other, both managers and subordinates alike. Not addressing the strategic risk—or simply changing one’s corporate culture—is much more likely to incur compliance and other business risks. CEB’s Matthew Dixon states several factors that are not wrong, but ineffective in today’s most common customer service strategies—chiefly, the idea that a customer service worker should do everything they can to please the customer, or what many call “going the extra mile”. Instead, Dixon claims a defensive approach, where the customer service worker is instead responsive, would be much less costly and require generally less resources, including “burn[ing] out” one’s employees and improved concentration.