Strategic Risk Assessment–1/6


/ July 20th, 2010/ Posted in How to do Risk Assessment / 2 Comments »

This is a revised series on the risk manager’s role in planning and strategic risk assessment. Here I discuss risk methodology and establishing the organizational context, including a review of mission statement examples.

Risk Methodology: Techniques to Meet High Uncertainty

Rational planning and risk forecasting are no good — this is the message that Nassim Taleb has recently reiterated. He seems to want to be highly risk-averse in the face of black swan (low frequency, catastrophic consequence) events. But I don’t think rational planning needs to be so extremely discredited, and excessive risk aversion is not the answer.

Despite inaccuracies in forecasts and unpredictable events, we can’t give up planning altogether. Risk managers can use several complementary methods to approach strategic risk assessment. Notice how each of them does require planning, but reduces reliance on a precise forecast of events:

1. Business continuity and emergency planning, of course, strive for preparedness against disaster risk. An all-hazards approach efficiently protects mission-critical functions.

2. Innovation. I believe in the role of the risk manager as innovator to lead a culture of invention, adaptability and flexibility. This is the pro-active identification of opportunity, and supports strategic objectives.

3. High Quality Risk Assessment. We need to check the assumptions underlying conventional forecasting, modeling and probability estimates. High quality risk assessment means identifying risk comprehensively and rigorously within a properly defined context

4. Future scenario planning contemplates extreme yet plausible futures: we can develop options, and improve strategic resilience.

All of these methods start with an exercise in establishing the organizational context, in terms of what I call Strategic Identity.

Strategic Identity

This is a diagram to help define the essence of an organization, as a preliminary step to planning and risk assessment. Notice that objectives do not appear in the model, because they are means to pursue the vision and will vary to suit circumstances.

Mission and Vision

Mission is the reason for being of an enterprise, public or private, describing how the organization is answering a need.

Consider the first few in this list of Fortune 500 mission statements examples.

Many mission statements use hyperbole and vague language (“the best…” “the most progressive…”). The mission statement for Aflac near the top of that page, for example, is a little too vague; it could almost apply to any business. It also states “aggressive strategic marketing” – which is a method towards an end, not the end itself, and so has no place in the mission.

Compare it with the one for Advanced Auto Parts, at the very top of that same page. That mission statement includes mention of the client group, the service staff and the nature of the products and services (“inspire, educate and problem-solve”) in terms that are recognizable and verifiable – without being actual performance measures, and without limiting the methods and delivery channels the firm might use to achieve those things. In other words, a good mission statement will galvanize and focus action, but not limit it.

Distinct from Mission is Vision, which is an eventual outcome, a picture of a future state towards which the organization is striving. If I were to invent one for Advanced Auto Parts, I could say: “A satisfied, diverse, extensive and well-informed clientele enthusiastically engaged with the firm as loyal clients, interested students, business partners and participants in our programs.” I just made this up on the spot, but I tried to make each element of the vision something fairly concrete to strive towards in one or another aspect of the business; it also describes a desired end state.

In the next post I’ll talk about the other elements of Strategic Identity.

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2Comments

  1. Edward
    2011/02/23 at 00:17:22

    Hi Rudrajeet,

    Thanks for your comment.

    As I understand it, “business resilience” is a codeword used in the Business Continuity and Emergency Planning world.

    I’m not sure which case study you mean, but the The Royal Dutch Shell methodology for Future Scenarios Planning is something I cover in my Special Topics in Risk Management course. Here is a discussion:
    http://internationalbusinessphd.com/risk-scenario-analysis/

    Yes, I take your point about responsiveness to the situation. On that account, you might find the wikipedia summary of contingency theory useful.

    Thanks again! ~Edward

  2. Rudrajeet Pal
    2011/02/04 at 11:42:21

    Hello,

    I believe the model proposed is particularly very interesting and holds true for organizational resilience as well.

    The Shell Case Study, some what, advocates similar agenda for meeting resilience.

    However, I think a dynamic entity must be incorporated into the model, to portray the situational ‘mindfulness’ of organizations. Somewhat decoupling the strategic and situational perspectives.

    I am also into research related to resilience in organizations, and think that this insight may be useful.

    regards//

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