How do you manage strategic risk?

Managing strategic risk requires the opposite approach to managing financial risk.

The techniques to manage financial risk have become familiar to anyone who does their own personal finance or read the FT. Invest in a portfolio of unrelated assets, maintain liquidity, make multiple bets, limit your exposure to any one position or variable. The concepts are well proven and applied in business too.

Approaches that work for finance are like poison for managing strategic risk however. Strategic risk can be defined as the chance of becoming undifferentiated, with no clear competitive advantage. Then business becomes a hard commoditised struggle.

Defined like this, the peril is clearer. The danger is of a “portfolio” approach to strategy, where we choose some of this and some of that, never burn our bridges, never commit to one direction.

The problem with this “prudent” approach is that in today’s increasingly competitive world, achieving competitive advantage is hard – not just matching the competition, but carving new ground. Half measures and hedged bets will increase strategic risk, not mitigate it.

Strategic risk can be minimised by a bold choice. And to be bold without being naïve, the strategy has to be well-thought through with the organised contribution of the whole of the management team. As Warren Buffet said “Put all your eggs in one basket – and watch that basket carefully!”

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