That the weather will change is perfectly predictable--prepare for winter before it arrives.
Strategic risks are risks that arise through missteps at the highest level of a corporation's management. These can involve failure to anticipate or respond to changes in the environment; misconceived choices; and the sloppy implementation even of potentially sound choices.
History
Distinguishing among the different risks that a corporation, its investors and its counter-parties run is important for a number of reasons. Much of the systemic writing on the subject arises from the banking industry, because of the Basel Accords, a set of agreements among banking regulators that have been evolving since the late 1980s. These Accords set capital adequacy requirements for banks on the basis of risks of distinct types.
In interpreting the Basel II Accord (2004), the Committee of European Banking Supervisors (CEBS) defined strategic risk as "the current or prospective risk to earnings and capital arising from changes in the business environment and from adverse business decisions, improper implementation of decisions or lack of responsiveness to changes...."
Changes in the Environment
Tower Records, once a prominent and global presence in the retailing of music, failed to respond in a timely fashion to changes in the environment in the 1990s. These changes included a shift in the way people acquire music--a shift away from the acquisition of CDs at brick-and-mortar stores, to the acquisition of music via one's own desktop and internet connection. These downloads can be illegal, or they can be legitimate as through Apple's iTunes system. Either way, they undermined the Tower Records business model. Tower began retrenching by 2001 and entered liquidation in 2006.
Misconceived Choices
Under the category of what the CEBS called "adverse business decisions," one might include the decision of former energy-trading giant Enron to make itself an "asset lite" company. This meant a move away from the ownership of tangible properties such as pipelines or power plants, toward intellectual property and trading positions.
Many analysts of Enron's rapid collapse in the period 2000-2001 have pointed to this as a wrong turn. Paul Jorion, for example, in "Investing in a Post-Enron World," has written that tangible assets "act as a welcome buffer when hard times set in," and that Enron sealed its own fate by abandoning that buffer.
Sloppy Implementation
Even if the top managers in a corporate hierarchy understand the business environment and make the right choices about cope with it, a strategic risk arises if they are unable to implement those choices. For example, they might fail to persuade lower-level managers of the significance of their approach, so that the people who need to make the operational decisions have not bought into their premises. Or they could fail to communicate what their plan is, leaving key words and concepts undefined and misunderstood.
Tags: adverse business, adverse business decisions, away from, business decisions, business environment, risks that, strategic risk