Countering the biggest risk of all.

Abstract

Corporate treasurers and chief financial officers have become adept at quantifying and managing a wide variety of risks: financial (for example, currency fluctuations), hazard (chemical spills), and operational (computer system failures). To defend themselves, they use tried-and-true tools such as hedging, insurance, and backup systems. Some companies have even adopted the concept of enterprise risk management, integrating available risk management techniques in a comprehensive, organization-wide approach. But most managers have not addressed in a systematic way the greatest threat of all--strategic risks, the array of external events and trends that can devastate a company's growth trajectory and shareholder value. Strategic risks go beyond such familiar challenges as the possible failure of an acquisition or a product launch. A new technology may overtake your product. Gradual shifts in the market may slowly erode one of your brands beyond the point of viability. Or rapidly shifting customer priorities may suddenly change your industry. The key to surviving these strategic risks, the authors say, is knowing how to assess and respond to them. In this article, they lay out a method for identifying and responding to strategic threats. They categorize the risks into seven major classes (industry, technology, brand, competitor, customer, project, and stagnation) and describe a particularly dangerous example within each category. The authors also offer countermeasures to take against these risks and describe how individual companies (American Express, Coach, and Air Liquide, among them) have deployed them to neutralize a threat and, in many cases, capitalize on it. Besides limiting the downside of risk, strategic-risk management forces executives to think more systematically about the future, thus helping them identify opportunities for growth.

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