critical risk factors business plan

What is business risk?

You know about death and taxes. What about risk? Yes, risk is just as much a part of life as the other two inevitabilities. This became all the more apparent during COVID-19, as each of us had to assess and reassess our personal risk calculations as each new wave of the pandemic— and pandemic-related disruptions —washed over us. It’s the same in business: executives and organizations have different comfort levels with risk and ways to prepare against it.

Where does business risk come from? To start with, external factors can wreak havoc on an organization’s best-laid plans. These can include things like inflation , supply chain  disruptions, geopolitical upheavals , unpredictable force majeure events like a global pandemic or climate disaster, competitors, reputational  issues, or even cyberattacks .

But sometimes, the call is coming from inside the house. Companies can be imperiled by their own executives’ decisions or by leaks of privileged information, but most damaging of all, perhaps, is the risk of missed opportunities. We’ve seen it often: when companies choose not to adopt disruptive innovation, they risk losing out to more nimble competitors.

The modern era is rife with increasingly frequent sociopolitical, economic, and climate-related shocks. In 2019 alone, for example, 40 weather disasters caused damages exceeding $1 billion each . To stay competitive, organizations should develop dynamic approaches to risk and resilience. That means predicting new threats, perceiving changes in existing threats, and developing comprehensive response plans. There’s no magic formula that can guarantee safe passage through a crisis. But in situations of threat, sometimes only a robust risk-management plan can protect an organization from interruptions to critical business processes. For more on how to assess and prepare for the inevitability of risk, read on.

Learn more about McKinsey’s Risk and Resilience  Practice.

What is risk control?

Risk controls are measures taken to identify, manage, and eliminate threats. Companies can create these controls through a range of risk management strategies and exercises. Once a risk is identified and analyzed, risk controls can be designed to reduce the potential consequences. Eliminating a risk—always the preferable solution—is one method of risk control. Loss prevention and reduction are other risk controls that accept the risk but seek to minimize the potential loss (insurance is one method of loss prevention). A final method of risk control is duplication (also called redundancy). Backup servers or generators are a common example of duplication, ensuring that if a power outage occurs no data or productivity is lost.

But in order to develop appropriate risk controls, an organization should first understand the potential threats.

What are the three components to a robust risk management strategy?

A dynamic risk management plan can be broken down into three components : detecting potential new risks and weaknesses in existing risk controls, determining the organization’s appetite for risk taking, and deciding on the appropriate risk management approach. Here’s more information about each step and how to undertake them.

1. Detecting risks and controlling weaknesses

A static approach to risk is not an option, since an organization can be caught unprepared when an unlikely event, like a pandemic, strikes. So it pays to always be proactive. To keep pace with changing environments, companies should answer the following three questions for each of the risks that are relevant to their business.

• How will a risk play out over time? Risks can be slow moving or fast moving. They can be cyclical or permanent. Companies should analyze how known risks are likely to play out and reevaluate them on a regular basis.
• Are we prepared to respond to systemic risks? Increasingly, risks have longer-term reputational or regulatory consequences, with broad implications for an industry, the economy, or society at large. A risk management strategy should incorporate all risks, including systemic ones.
• What new risks lurk in the future? Organizations should develop new methods of identifying future risks. Traditional approaches that rely on reviews and assessments of historical realities are no longer sufficient.

2. Assessing risk appetite

How can companies develop a systematic way of deciding which risks to accept and which to avoid? Companies should set appetites for risk that align with their own values, strategies, capabilities, and competitive environments—as well as those of society as a whole. To that end, here are three questions companies should consider.

• How much risk should we take on? Companies should reevaluate their risk profiles frequently according to shifting customer behaviors, digital capabilities, competitive landscapes, and global trends.
• Are there any risks we should avoid entirely? Some risks are clear: companies should not tolerate criminal activity or sexual harassment. Others are murkier. How companies respond to risks like economic turmoil and climate change depend on their particular business, industry, and levels of risk tolerance.
• Does our risk appetite adequately reflect the effectiveness of our controls? Companies are typically more comfortable taking risks for which they have strong controls in place. But the increased threat of severe risks challenges traditional assumptions about risk control effectiveness. For instance, many businesses have relied on automation to increase speed and reduce manual error. But increased data breaches and privacy concerns can increase the risk of large-scale failures. Organizations, therefore, should evolve their risk profiles accordingly.

3. Deciding on a risk management approach

Finally, organizations should decide how they will respond when a new risk is identified. This decision-making  process should be flexible and fast, actively engaging leaders from across the organization and honestly assessing what has and hasn’t worked in past scenarios. Here are three questions organizations should be able to answer.

• How should we mitigate the risks we are taking? Ultimately, people need to make these decisions and assess how their controls are working. But automated control systems should buttress human efforts. Controls guided, for example, by advanced analytics can help guard against quantifiable risks and minimize false positives.
• How would we respond if a risk event or control breakdown happens? If (or more likely, when) a threat occurs, companies should be able to switch to crisis management mode quickly, guided by an established playbook. Companies with well-rehearsed crisis management capabilities weather shocks better, as we saw with the COVID-19 pandemic.
• How can we build true resilience? Resilient companies not only better withstand threats—they emerge stronger. The most resilient firms can turn fallout from crises into a competitive advantage. True resilience stems from a diversity of skills and experience, innovation, creative problem solving, and the basic psychological safety that enables peak performance.

Change is constant. Just because a risk control plan made sense last year doesn’t mean it will next year. In addition to the above points, a good risk management strategy involves not only developing plans based on potential risk scenarios but also evaluating those plans on a regular basis.

Learn more about McKinsey’s  Risk and Resilience  Practice.

What are five actions organizations can take to build dynamic risk management?

In the past, some organizations have viewed risk management as a dull, dreary topic, uninteresting for the executive looking to create competitive advantage. But when the risk is particularly severe or sudden, a good risk strategy is about more than competitiveness—it can mean survival. Here are five actions leaders can take to establish risk management capabilities .

• Reset the aspiration for risk management.  This requires clear objectives and clarity on risk levels and appetite. Risk managers should establish dialogues with business leaders to understand how people across the business think about risk, and share possible strategies to nurture informed risk-versus-return decision making—as well as the capabilities available for implementation.
• Establish agile  risk management practices.  As the risk environment becomes more unpredictable, the need for agile risk management grows. In practice, that means putting in place cross-functional teams empowered to make quick decisions about innovating and managing risk.
• Harness the power of data and analytics.  The tools of the digital revolution  can help companies improve risk management. Data streams from traditional and nontraditional sources can broaden and deepen companies’ understandings of risk, and algorithms can boost error detection and drive more accurate predictions.
• Develop risk talent for the future.  Risk managers who are equipped to meet the challenges of the future will need new capabilities and expanded domain knowledge in model risk management , data, analytics, and technology. This will help support a true understanding of the changing risk landscape , which risk leaders can use to effectively counsel their organizations.
• Fortify risk culture.  Risk culture includes the mindsets and behavioral norms that determine an organization’s relationship with risk. A good risk culture allows an organization to respond quickly when threats emerge.

How do scenarios help business leaders understand uncertainty?

Done properly, scenario planning prompts business leaders to convert abstract hypotheses about uncertainties into narratives about realistic visions of the future. Good scenario planning can help decision makers experience new realities  in ways that are intellectual and sensory, as well as rational and emotional. Scenarios have four main features  that can help organizations navigate uncertain times.

• Scenarios expand your thinking.  By developing a range of possible outcomes, each backed with a sequence of events that could lead to them, it’s possible to broaden our thinking. This helps us become ready for the range of possibilities the future might hold—and accept the possibility that change might come more quickly than we expect.
• Scenarios uncover inevitable or likely futures.  A broad scenario-building effort can also point to powerful drivers of change, which can help to predict potential outcomes. In other words, by illuminating critical events from the past, scenario building can point to outcomes that are very likely to happen in the future.
• Scenarios protect against groupthink.  In some large corporations, employees can feel unsafe offering contrarian points of view for fear that they’ll be penalized by management. Scenarios can help companies break out of this trap by providing a “safe haven” for opinions that differ from those of senior leadership and that may run counter to established strategy.
• Scenarios allow people to challenge conventional wisdom.  In large corporations in particular, there’s frequently a strong bias toward the status quo. Scenarios are a nonthreatening way to lay out alternative futures in which assumptions underpinning today’s strategy can be challenged.

Learn more about McKinsey’s Strategy & Corporate Finance  Practice.

What’s the latest thinking on risk for financial institutions?

In late 2021, McKinsey conducted survey-based research with more than 30 chief risk officers (CROs), asking about the current banking environment, risk management practices, and priorities for the future.

According to CROs, banks in the current environment are especially exposed to accelerating market dynamics, climate change, and cybercrime . Sixty-seven percent of CROs surveyed cited the pandemic as having significant impact on employees and in the area of nonfinancial risk. Most believed that these effects would diminish in three years’ time.

Introducing McKinsey Explainers : Direct answers to complex questions

Climate change, on the other hand, is expected to become a larger issue over time. Nearly all respondents cited climate regulation as one of the five most important forces in the financial industry in the coming three years. And 75 percent were concerned about climate-related transition risk: financial and other risks arising from the transformation away from carbon-based energy systems.

And finally, cybercrime was assessed as one of the top risks by most executives, both now and in the future.

Learn more about the risk priorities of banking CROs here .

What is cyber risk?

Cyber risk is a form of business risk. More specifically, it’s the potential for business losses of all kinds  in the digital domain—financial, reputational, operational, productivity related, and regulatory related. While cyber risk originates from threats in the digital realm, it can also cause losses in the physical world, such as damage to operational equipment.

Cyber risk is not the same as a cyberthreat. Cyberthreats are the particular dangers that create the potential for cyber risk. These include privilege escalation (the exploitation of a flaw in a system for the purpose of gaining unauthorized access to resources), vulnerability exploitation (an attack that uses detected vulnerabilities to exploit the host system), or phishing. The risk impact of cyberthreats includes loss of confidentiality, integrity, and availability of digital assets, as well as fraud, financial crime, data loss, or loss of system availability.

In the past, organizations have relied on maturity-based cybersecurity approaches to manage cyber risk. These approaches focus on achieving a particular level of cybersecurity maturity by building capabilities, like establishing a security operations center or implementing multifactor authentication across the organization. A maturity-based approach can still be helpful in some situations, such as for brand-new organizations. But for most institutions, a maturity-based approach can turn into an unmanageably large project, demanding that all aspects of an organization be monitored and analyzed. The reality is that, since some applications are more vulnerable than others, organizations would do better to measure and manage only their most critical vulnerabilities.

What is a risk-based cybersecurity approach?

A risk-based approach is a distinct evolution from a maturity-based approach. For one thing, a risk-based approach identifies risk reduction as the primary goal. This means an organization prioritizes investment based on a cybersecurity program’s effectiveness in reducing risk. Also, a risk-based approach breaks down risk-reduction targets into precise implementation programs with clear alignment all the way up and down an organization. Rather than building controls everywhere, a company can focus on building controls for the worst vulnerabilities.

Here are eight actions that comprise a best practice for developing  a risk-based cybersecurity approach:

• fully embed cybersecurity in the enterprise-risk-management framework
• define the sources of enterprise value across teams, processes, and technologies
• understand the organization’s enterprise-wide vulnerabilities—among people, processes, and technology—internally and for third parties
• understand the relevant “threat actors,” their capabilities, and their intent
• link the controls in “run” activities and “change” programs to the vulnerabilities that they address and determine what new efforts are needed
• map the enterprise risks from the enterprise-risk-management framework, accounting for the threat actors and their capabilities, the enterprise vulnerabilities they seek to exploit, and the security controls of the organization’s cybersecurity run activities and change program
• plot risks against the enterprise-risk appetite; report on how cyber efforts have reduced enterprise risk
• monitor risks and cyber efforts against risk appetite, key cyber risk indicators, and key performance indicators

How can leaders make the right investments in risk management?

Ignoring high-consequence, low-likelihood risks can be catastrophic to an organization—but preparing for everything is too costly. In the case of the COVID-19 crisis, the danger of a global pandemic on this scale was foreseeable, if unexpected. Nevertheless, the vast majority of companies were unprepared: among billion-dollar companies in the United States, more than 50 filed for bankruptcy in 2020.

McKinsey has described the decisions to act on these high-consequence, low-likelihood risks as “ big bets .” The number of these risks is far too large for decision makers to make big bets on all of them. To narrow the list down, the first thing a company can do is to determine which risks could hurt the business versus the risks that could destroy the company. Decision makers should prioritize the potential threats that would cause an existential crisis  for their organization.

To identify these risks, McKinsey recommends using a two-by-two risk grid, situating the potential impact of an event on the whole company against the level of certainty about the impact. This way, risks can be measured against each other, rather than on an absolute scale.

Organizations sometimes survive existential crises. But it can’t be ignored that crises—and missed opportunities—can cause organizations to fail. By measuring the impact of high-impact, low-likelihood risks on core business, leaders can identify and mitigate risks that could imperil the company. What’s more, investing in protecting their value propositions can improve an organization’s overall resilience.

Articles referenced:

• “ Seizing the momentum to build resilience for a future of sustainable inclusive growth ,” February 23, 2023, Børge Brende and Bob Sternfels
• “ Data and analytics innovations to address emerging challenges in credit portfolio management ,” December 23, 2022, Abhishek Anand , Arvind Govindarajan , Luis Nario  and Kirtiman Pathak
• “ Risk and resilience priorities, as told by chief risk officers ,” December 8, 2022, Marc Chiapolino , Filippo Mazzetto, Thomas Poppensieker , Cécile Prinsen, and Dan Williams
• “ What matters most? Six priorities for CEOs in turbulent times ,” November 17, 2022, Homayoun Hatami  and Liz Hilton Segel
• “ Model risk management 2.0 evolves to address continued uncertainty of risk-related events ,” March 9, 2022, Pankaj Kumar, Marie-Paule Laurent, Christophe Rougeaux, and Maribel Tejada
• “ The disaster you could have stopped: Preparing for extraordinary risks ,” December 15, 2020, Fritz Nauck , Ophelia Usher, and Leigh Weiss
• “ Meeting the future: Dynamic risk management for uncertain times ,” November 17, 2020, Ritesh Jain, Fritz Nauck , Thomas Poppensieker , and Olivia White
• “ Risk, resilience, and rebalancing in global value chains ,” August 6, 2020, Susan Lund, James Manyika , Jonathan Woetzel , Edward Barriball , Mekala Krishnan , Knut Alicke , Michael Birshan , Katy George , Sven Smit , Daniel Swan , and Kyle Hutzler
• “ The risk-based approach to cybersecurity ,” October 8, 2019, Jim Boehm , Nick Curcio, Peter Merrath, Lucy Shenton, and Tobias Stähle
• “ Value and resilience through better risk management ,” October 1, 2018, Daniela Gius, Jean-Christophe Mieszala , Ernestos Panayiotou, and Thomas Poppensieker

Want to know more about business risk?

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How to Highlight Risks in Your Business Plan

Tallat Mahmood

5 min. read

Updated October 25, 2023

One of the areas constantly dismissed by business owners in their business plan is an articulation of the risks in the business.

This either suggests you don’t believe there to be any risks in your business (not true), or are intentionally avoiding disclosing them.

Either way, it is not the best start to have with a potential funding partner. In fact, by dismissing the risks in your business, you actually make the job of a lender or investor that much more difficult.

Why a funder needs to understand your business’s risks:

Funding businesses is all about risk and reward.

Whether it’s a lender or an investor, their key concern will be trying to balance the risks inherent in your business, versus the likelihood of a reward, typically increasing business value. An imbalance occurs when entrepreneurs talk extensively about the opportunities inherent in their business, but ignore the risks.

The fact is, all funders understand that risks exist in every business. This is just a fact of running a business. There are risks that exist with your products, customers, suppliers, and your team. From a funder’s perspective, it is important to understand the nature and size of risks that exist.

• There are two main reasons why funders want to understand business risks:

Firstly, they want to understand whether or not the key risks in your business are so fundamental to the investment proposition that it would prevent them from funding you.

Some businesses are not at  the right stage to receive external funding  and placate funder concerns. These businesses are best off dealing with key risk factors prior to seeking funding.

The second reason why lenders and investors want to understand the risk in your business is so that they can structure a funding package that works best overall, despite the risk.

In my experience, this is an opportunity that many business owners are wasting, as they are not giving funders an opportunity to structure deals suitable for them.

Here’s an example:

Assume your business is  seeking equity funding,  but has a key management role that needs to be filled. This could be a key business risk for a funder.

Highlighting this risk shows that you are aware of the appointment need, and are putting plans in place to help with this key recruit. An investor may reasonably decide to proceed with funding, but the funding will be released in stages. Some will be released immediately and the remainder will be after the key position has been filled.

The benefit of highlighting your risks is that it demonstrates to investors that you understand the danger the risks pose to your company, and are aware that it needs to be dealt with. This allows for a frank discussion to take place, which is more difficult to do if you don’t acknowledge this as a problem in the first place.

Ultimately, the starting point for most funders is that they  want  to invest in you, and  want  to validate their initial interest in you.

Highlighting your business risks will allow the funder to get to the nub of the problem, and give them a better idea of how they may structure their investment in order to make it work for both parties. If they are unsure of the risks or cannot get clear explanations from the team, it is unlikely they will be forthcoming when it comes to finding ways to make a potential deal work.

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• The right way to address business risks:

The main reason many business owners don’t talk about business risks with potential funders is because they don’t want to highlight the weaknesses in their business.

This is a fair concern to have. However, there is a right way to address business risk with funders, without turning lenders and investors off.

The solution is to focus on how you  mitigate the risks.  

In other words, what are the steps you are taking in your business as a direct reaction to the risks that you have identified? This is very powerful in easing funder fears, and in positioning you as someone who has a handle on their business.

For example, if a business risk you had identified was a high level of customer concentration, then a suitable mitigation plan would be to market your products or services targeting new clients, as opposed to focusing all efforts on one client.

Having net profit margins that are lower than average for your market would raise eyebrows and be considered a risk. In this instance, you could demonstrate to funders the steps you are putting in place over a period of time to help increase those margins to at least market norms for your niche.

The process of highlighting risks—and, more importantly, outlining key mitigating actions—not only demonstrates honesty, but also a leadership quality in solving the problems in your business. Lenders and investors want to see both traits.

• The impact on your credibility:

Any lender or investor  backs the leadership team  of a business first, and the business itself second.

This is because they realize that it is you, the management team, who will ultimately deliver value and grow the business for the benefit for all. As such, it is imperative that they have the right impression about you.

The consequence of highlighting business risks in your business plan with mitigations is that it provides funders a real insight into you as a business leader. It demonstrates that not only do you have an understanding of their need to understand risk in your business, but you also appreciate that minimizing that risk is your job.

This will have a massive impact on your credibility as a business owner and management team. This impact is more acute when compared to the hundreds of businesses they will meet that omit discussing the risks in their business.

The fact is, funders have seen enough businesses and business plans in all sectors to instinctively know what risks to expect. It’s just more telling if they hear it from you first.

• What does this mean for you going forward?

Funders rely on you to deliver on your inherent promise to add value to your business for all stakeholders. The weight of this promise becomes much stronger if they can believe in the character of the team, and that comes from your credibility.

A business plan that discusses business risks and mitigations is a much more complete plan, and will increase your chances of securing funding.

Not only that, but highlighting the risks your business faces also has a long-term impact on your character and credibility as a business leader.

Tallat Mahmood is founder of The Smart Business Plan Academy, his flagship online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked for over 10 years as a small and medium-sized business advisor and investor, and in this period has helped dozens of businesses raise hundreds of millions of dollars for growth. He has also worked as an investor and sat on boards of companies.

Table of Contents

• Why a funder needs to understand your business’s risks:

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12 Types of Business Risks and How to Manage Them

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90% of startups fail .

Thanks to the explosion of the digital economy, business founders have plenty of opportunities that they can tap into to build a winning business.

Unfortunately, there is a myriad of challenges your new business has to navigate through. These risks are inevitable, and they are a part of life in the business world.

However, without the right plan, strategy, and instruments, your business might be drowned by these challenges.

Therefore, we have created this guide to show you how can your business utilize risk management to succeed in 2022.

There are many types of startup and business risks that entrepreneurs can expect to encounter in 2022. Most of these threats are prevalent in the infancy stages of a business.

To know what you’ll be up against, here is a breakdown of the 12 most common threats.

12 Business Risks to Plan For

1) economic risks.

Failure to acquire adequate funding for your business can damage the chances of your business succeeding.

Before a new business starts making profits, it needs to be kept afloat with money. Bills will pile up, suppliers will need payments, and your employees will be expecting their salaries.

To avoid running into financial problems sooner or later, you need to acquire enough funds to shore up your business until it can support itself.

On the side, world and business country's economic situation can change either positively or negatively, leading to a boom in purchases and opportunities or to a reduction in sales and growth.

If your business is up and running, a great way to limit the effect of negative economic changes is to maintain steady cash flow and operate under the lean business method.

Here's an article from a founder explaining how he set up a lean budget on his $400k/year online business.

2) Market Risks

Misjudging market demand is one of the primary reasons businesses fail .

To avoid falling into this trap, conduct detailed research to understand whether you will find a ready market for what you want to sell at the price you have set.

Ensure your business has a unique selling point, and make sure what you offer brings value to the buyers.

To know whether your product will suit the market, do a survey, or get opinions from friends and potential customers.

Building a Minimum Viable Product of that business idea you've had is the recommendations made by most entrepreneurs.

This site, for example, was built in just 3 weeks and launched into the market to see if there was any interest in the type of content we offered.

The site was ugly, had little content and lacked many features. Yet, +7,700 users visited it within the first week, which made us realize we should keep working on this.

90% of startups fail. Learn how to not to with our weekly guides and stories. Join 40,000+ founders.

3) Competitive Risks

Competition is a major business killer that you should be wary of.

Before you even start planning, ask yourself whether you are venturing into an oversaturated market.

Are there gaps in the market that you can exploit and make good money?

If you have an idea that can give you an edge, register it. This will prevent others from copying your product, re-innovating it, and locking you out of what you started.

Competitive risks are also those actions made by competitors that prevent a business from earning more revenue or having higher margins.

4) Execution Risks

Having an idea, a business plan, and an eager market isn’t enough to make your startup successful.

Most new companies put a lot of effort into the initial preparation and forget that the execution phase is equally important.

First, test whether you can develop your products within budget and on time. Also, check whether your product will function as intended and whether it’s possible to distribute it without taking losses.

5) Strategic Risks

Business strategies can lead to the growth or decline of a company.

Every strategy involves some risk, as time & resources are generally involved to put them into practice.

Strategic risk in the chance that an implemented strategy, therefore, results in losses.

If, for example, the Marketing Department of a company implements a content marketing strategy and a lot of months, time & money later the business doesn't see any ROI, this becomes a strategic risk.

6) Compliance Risks

Compliance risks are those losses and penalties that a business suffers for not complying with countries' and states' regulations & laws.

There are some industries that are highly-regulated so the compliance risks of businesses within them are super high.

For example, in May 2018, the EU Commission implemented the General Data Protection Regulation (GDPR), a law in privacy and data protection in the EU, which affected millions of websites.

Those websites that weren't adapted to comply with this new rule, were fined.

7) Operational Risks

Operational risks arise when the day-to-day running of a company fail to perform.

When processes fail or are insufficient, businesses lose customers and revenue and their reputation gets ruined.

One example can be customer service processes. Customers are becoming every day less willing to wait for support (not to mention, receive bad quality one).

If a business customer service team fails or delays to solve customer's issues, these might find their solution in the business competitors.

8) Reputational Risks

Reputational risks arise when a business acts in an immoral and discourteous way.

This led to customer complaints and distrust towards the business, which means for the company a big loss of sales and revenue.

With the rise of social networks, reputational risks have become one of the main concerns for businesses.

Virality is super easy among Twitter so a simple unhappy customer can lead to a huge bad press movement for the company.

A recent example is the Away issue with their toxic work environment, as a former employee reported in The Verge .

The issue brought lots of critics within social networks which eventually led the CEO, Steph Korey, to step aside from the startup ( she seems to be back, anyway 🤷‍♂️! ).

9) Country Risks

When a business invests in a new country, there is a high probability it won't work.

A product that is successful in one market won't necessarily be in another one, especially when people within them are so different in cultures, climates, tastes backgrounds, etc.

Country risk is the existing failure probability businesses investing in new countries have to deal with.

Changes in exchange rates, unstable economic situations and moving politics are three factors that make these country risks be even more delicate.

10) Quality Risks

When a business develops a product or service that fails to meet customers' needs and quality expectations, the chance these customers will ever buy again is low.

In this way, the business loses future sales and revenue. Not to mention that some customers will ask for refunds, increasing business costs, as well as publicly criticize the company's products, leading to bad reputation (and a viral cycle that means even less $$ for the business).

11) Human Risk

Hiring has its benefits but also its risks.

Employees themselves involve a huge risk for a business, as they become to represent the company through how they work, mistakes committed, the public says and interactions with customers & suppliers,

A way to deal with human risk is to train employees and keep a motivated workforce. Yet, the risk will continue to exist.

12) Technology Risk

Security attacks, power outrage, discontinued hardware, and software, among other technology issues, are the events that form part of the technology risk.

These issues can lead to a loss of money, time and data, which has many connections with the previously mentioned risks.

Back-ups, antivirus, control processes, and data breach plans are some of the ways to deal with this risk.

How Businesses Can Use Risk Management To Grow Business

To mitigate any future threats, you need to prepare a comprehensive risk management plan.

This plan should detail the strategy you will use to deal with the specific challenges your business will encounter. Here’s what to do.

1) Identify Risks

Every business encounters a different set of challenges.

Before mapping the risks, analyze your business and note down its key components such as critical resources, important services or products, and top talent.

2) Record Risks

Once risks have been identified, you need to assess and document the threats that can affect each component.

Identify any warning signs or triggers of that recorded risk, also.

3) Anticipate

The best way to beat a threat is to detect and prepare for it in advance.

Once you know your business can be affected by a certain scenario, develop steps that you will take to stop the risk or to blunt its effects.

4) Prioritize Risks

Not all types of business risk have the same effect. Some can bring your startup to its knees, while others will only cause minimal effects.

To keep your business alive, start by putting in place measures that protect the vital functions from the most severe and most probable risks.

5) Have a Backup Plan

For every risk scenario, have at least two plans for countering the threat before it arrives.

The strategy you put in place should be in line with the current technology and trends.

Ensure your communicate these measures with all your team members.

6) Assign Responsibilities

When communicating measures with the team, assign responsibilities for each member in case any of the recorded risks affect the business.

These members should also be responsible for controlling the risks every certain time and maintaining records about them.

What is a Business Risk?

The term "business risk" refers to the exposure businesses have to factors that can prevent them from achieving their set financial goals.

This exposure can come from a variety of situations, but they can be classified into two:

• Internal factors: The risk comes from sources within the company, and they tend to be related to human, technological, physical or operational factors, among others.
• External factors: The risk comes from regulations/changes affecting the whole country/economy.

Any of these factors led to the business being unable to return investors and stakeholders the adequate amounts.

What Is Risk Management?

Risk management is a practice where an entrepreneur looks for potential risks that their business may face, analyzes them, and takes action to counter them.

The steps you take can eliminate the threat, control it, or limit the effects.

A risk is any scenario that harms your business. Risks can emanate from a wide variety of sources such as financial problems, management errors, lawsuits, data loss, cyber-attacks, natural calamities, and theft.

The risk landscape changes constantly, therefore you need to know the latest threats.

By setting up a risk management plan, your business can save money and time, which in some cases can be the determinant to keep your startup in business.

Not to mention, on the side, that risk management plans tend to make managers feel more confident to carry out business decisions, especially the risky ones, which can put their startups in a huge competitive advantage.

Wrapping Up

Becoming your own boss is one of the most rewarding things you can do.

However, launching a business is not a walk in the park; risks and challenges lurk around every corner.

If you are planning to establish a new business come 2022, make sure you secure its future by creating a broad risk management plan.

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Strategic planning: managing assumptions, risks and impediments

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While no one likes the idea of having one foot on the brake while doing strategic planning, there are very good reasons to take the time required to be cautious. We are speaking to the undeniable link between the business assumptions we make and the risks we introduce to the organization during strategic planning. In fact, the assumptions we base strategies upon can mushroom into grave risks and show-stopper impediments down the line – appearing out of nowhere when the business attempts to execute to a seemingly well-laid plan. Twelve to eighteen months into strategy implementation is too late to go back and ask, “What were we assuming…?” Given that time will always be of the essence, what kind of strategic assumption vetting and risk management is warranted? How much is enough?

Assumptions Introduce Risk

At a minimum, the planning process must involve an evaluation of the impacts that the strategy will have on the business to determine if it will actually help accomplish the outcomes intended. That is the absolute minimum requirement.

The strategic planing process is the one key point to get in front of idle supposition and truly manage assumptions, risks and impediments. When strategy is well developed, there will be an actual plan for implementation associated with the strategy. A holistic plan defines goals that support the strategy and addresses the operational tactics that will accomplish the goals. No business possesses a crystal ball to know exactly what will happen in the economy, financial markets or competitors next bold moves. That means that business assumptions are a necessary evil.

Given that we must rely upon certain assumptions to put strategic plans together and that risk will always be present (as will natural impediments to execution of strategy), the following sections will explore each of these factors at the planning level…beginning with a definition of terms and ending with approaches to better manage process.

What is an assumption in strategic planning?

The dictionary defines an assumption as follows: “ something taken for granted; a supposition ”.

Assumptions form the basis of strategies, and those underlying assumptions must all be fully vetted. Testing strategic assumptions requires allowing those involved with planning to back away from the “givens” and challenge them to ensure the team is not assuming the rosiest of scenarios on which to base strategy.

Considering that the synonyms for the word “assumption” includes words like “hypothesis”, “conjecture”, “guess”, “postulate” and “theory” the concept takes on a more weighty meaning in the  strategic planning process. Yes, assumptions are beliefs we take for granted, but they can be no better than guesses in many cases.

Assumptions are not always justifiable. Defending an assumption may be difficult, as facts are not always available to support the belief. That does not mean that they are incorrect, but it does underscore the challenge assumptions present in planning. In fact, assumptions are particularly difficult to even identify because they are usually unconscious beliefs.

An assumption about assumptions:

One can safely assume that if an assumption is sound, the inferences and conclusions associated with the assumption will also be sound. Unfortunately, the reverse is also safe to assume.

What is a risk in strategic planning?

As a noun, risk means something that may cause injury or harm or the chance of loss or the perils to the subject matter. As a transitive verb, risk means to “expose to hazard or danger” or “to incur the risk or danger of”.

In strategic planning, the definitions applying to both the noun and the transitive verb usage are relevant. A risk might be an event or condition that might occur in the future. Likewise, we may risk financial losses if we bet on an assumption that is incorrect.

An unmitigated risk can become an impediment, so risks must be evaluated in terms of the likelihood they will occur and the impact they will have if they do occur. If the impact/likelihood of a risk is high “enough”, we should identify a mitigation path – as an unmitigated risk can become an impediment later on.

All risk can never be removed from a strategic plan, therefore business planning teams must approach risk management from a Cost / Benefit perspective. Business risk mitigation in planning can cost speed, but if risks are addressed early the organization can avoid future impediments.

What is an impediment in strategic planning?

An impediment is something that makes movement or progress difficult. It differs from being a risk in that risks are future-based and an impediment is something that is occurring now.

During the strategic planning process, impediments might be grouped into macro or micro categories. Macro impediments might include: poor culture, business process inefficiencies, lack of job descriptions, no performance metrics and many other general types of issues. Micro impediments might include: core competency gaps, having people in the wrong roles, lack of sufficient tools to support business functions and technology / infrastructure issues.

Knowing business impediments and factoring them into the planning process adds realism to the strategy being developed and the operational tactics needed to implement it.

How should risks, assumptions and impediments be identified?

Identification of assumptions.

Strategic planning is a team sport, so working in teams is a great way to approach the identification of assumptions. In small groups, conduct a “round robin” to identify the assumptions within each strategic theme of the plan. Review the assumptions compiled by each team and discuss. This same approach can be used to identify impediments and risks.

The following are questions that assist to identify assumptions:

• Is there anything being taken for granted?
• Are there beliefs that we are ignoring that we shouldn’t?
• What beliefs are leading us to this conclusion?
• What is… (this project, strategy, explanation) assuming?
• Why are we assuming…?

Identification of Risks

Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. Remember, risk sources may be internal or external to the organization. Examples of risk sources are: external stakeholders, employees, finance, political and even weather.

Risks are related to the identified threats from SWOT analysis, so that is another valuable reference during the identification process. For example: the threat of losing money, the threat of a major planned product launch being delayed or the threat of a labor strike disrupting critical manufacturing operations. The threats may exist with various entities, most importantly with shareholders, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: banks withdrawing funding support for expansion; confidential information may be stolen by employees; weather delaying construction projects, etc.

Additionally, other methods of risk identification may be applied, dependent upon culture, industry practice and compliance. For instance, objectives-based risk identification can focus on any potential threats to achieving strategic objectives. Any event that may endanger achieving an objective partly or completely can be identified as risk. Scenario-based risk identification – In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. As a final example, a taxonomy-based risk identification can be utilized, where the taxonomy is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire can be compiled and the answers to the questions used to reveal risks.

How should risks, assumptions and impediments be dealt with?

Dealing with identified assumptions essentially becomes a task of translating the assumption to a risk. Once all risks have been identified, they must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence.

The assessment of risk is critical to make the best educated decisions in order to mitigate known risks properly. Once risks have been identified and assessed, the strategies to manage them typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

Taking the time and caution to identify, asses and deal with the risks and other factors will always be a worthy investment, even when time is of the essence. The vetting of these factors will pay off in smooth implementation of the strategic plan down the line. Your plan can proceed, free of the potholes and other roadblocks that, with a little planning, might well have derailed the best-laid plans.

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Category : Business Growth & Strategy

Topics :   risk management , Strategic Planning

Since 2006, Joe Evans has been President & CEO of Method Frameworks, one of the world's leading strategy and operational planning management consultancies. The firm provides services for a diverse field of clients, ranging …

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Managing Risks: A New Framework

• Robert S. Kaplan
• Anette Mikes

Risk management is too often treated as a compliance issue that can be solved by drawing up lots of rules and making sure that all employees follow them. Many such rules, of course, are sensible and do reduce some risks that could severely damage a company. But rules-based risk management will not diminish either the likelihood or the impact of a disaster such as Deepwater Horizon, just as it did not prevent the failure of many financial institutions during the 2007–2008 credit crisis.

In this article, Robert S. Kaplan and Anette Mikes present a categorization of risk that allows executives to understand the qualitative distinctions between the types of risks that organizations face. Preventable risks, arising from within the organization, are controllable and ought to be eliminated or avoided. Examples are the risks from employees’ and managers’ unauthorized, unethical, or inappropriate actions and the risks from breakdowns in routine operational processes. Strategy risks are those a company voluntarily assumes in order to generate superior returns from its strategy. External risks arise from events outside the company and are beyond its influence or control. Sources of these risks include natural and political disasters and major macroeconomic shifts. Risk events from any category can be fatal to a company’s strategy and even to its survival.

Companies should tailor their risk management processes to these different risk categories. A rules-based approach is effective for managing preventable risks, whereas strategy risks require a fundamentally different approach based on open and explicit risk discussions. To anticipate and mitigate the impact of major external risks, companies can call on tools such as war-gaming and scenario analysis.

Smart companies match their approach to the nature of the threats they face.

Editors’ note: Since this issue of HBR went to press, JP Morgan, whose risk management practices are highlighted in this article, revealed significant trading losses at one of its units. The authors provide their commentary on this turn of events in their contribution to HBR’s Insight Center on Managing Risky Behavior.

• Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “ Accounting for Climate Change ” (November–December 2021).
• Anette Mikes is a fellow at Hertford College, Oxford University, and an associate professor at Oxford’s Saïd Business School.

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Strategic Risk Management: Complete Overview (With Examples)

As businesses continue to operate in an increasingly competitive and uncertain environment exacerbated by threats to their operations, such as cyberattacks, supply chain disruptions, and climate catastrophes, strategic risk management has become a key factor in ensuring an organization's success.

According to Racounteur , 85% of business leaders feel they are operating in a moderate to high-risk environment, and 79% of boards believe that improved risk management will be critical in enabling their organization to protect and build value in the next five years.

It's clear that organizations need to be prepared for the different types of strategic risk coming their way and have strong strategic risk management in place to not only reduce the impact on their operations but even take advantage of the context and transform it into an opportunity.

In this article, we'll dive into the world of strategic risk, the different types of strategic risks, and how to manage them to reduce the chances of disruption. We'll also give you real-life examples and a ready-to-use, free Risk Management Template to help your business be in strategic control and start your journey toward effective strategic risk management.

What Is Strategic Risk?

Strategic risk is the probability of the organization’s strategy failing. It is an estimation of the future success of the chosen strategy. Since strategy is a set of clear decisions, strategic risk reflects the aggregate of the risks of those decisions.

At its core, strategic risks affect an organization's overall strategy . It can sometimes be difficult to spot and manage.

This means that particularly at an executive level, leaders and teams need to be able to look for strategic risks and, instead of categorizing them as things to hedge or mitigate, develop the acumen to ask the appropriate questions:

• Are we going to resist this, avoid it, or maybe push it away?
• Or do we embrace it, use it as an indicator for the market and take it as an opportunity for a strategic change?

🤓Want to learn more? Download our FREE Strategic Risk Guide (PDF) with examples, definitions, and a clear framework to help you and your organization better manage strategic risk.

What Is Strategic Risk Management?

Strategic risk management is the process of recognizing risks, identifying their causes and effects, and taking the relevant actions to mitigate them. Risks arise from inside and outside factors such as manufacturing failures, economic changes, shifts in consumer tastes, etc. 

Strategic risk can disrupt a business’s ability to accomplish its goals , break out in the market or even survive. Effective, efficient management puts the power in leaders’ hands to avoid potential obstacles to success and maximize their performance.

Why Is Strategic Risk Management Important?

Organizations that fail to do proper risk management face significant threats. At times, they face existential threats. Kodak was a pioneer in the photography space (they actually filed a patent for one of the first digital cameras), but they lost the digital camera race . Blockbuster made $6 billion in revenue at its peak, but there is only one store left in the world ! MySpace was once one of the dominant social networks until Facebook came along . 

You could argue that these companies failed to innovate. Maybe, but they also failed to evaluate the threat properly and the risk involved in not dealing with it.

Every great company takes risks.

Smartphones, eReaders, car-sharing services, even natural cleaning products — so much of what we as consumers now take for granted was a brave step, once upon a time. But Apple , Amazon , Zipcar, and Method didn’t launch their category-defining products overnight.

These organizations safeguarded their success with a strong risk management strategy. They knew what success would look like, which factors could cause them to fail, what failure could cost them, and how they would respond to obstacles in their path.

Managing strategic risk is an essential activity for all businesses, whether you’re launching an innovative solution to market or just trying to stay ahead of the competition.

Understanding the dangers (however small) and their potential impact (however minor) empowers leaders at different levels to make smart, well-informed decisions. 

But that’s easier said than done. Risk management is a dynamic process - it shifts focus as internal and external influences change. It also requires joined-up thinking and communication across an organization. 

If you’re tasked with strategic planning and execution within your business, it can seem like an insurmountable task. Yet, armed with the right information, you can help ensure that your organization achieves its goals.

The Two Kinds Of Strategic Risk Factors

One of the first things you need to do to better manage risks is learn to identify them. There are mainly 2 kinds of strategic risk factors that you should look out for.

1. Internal strategic risk factors

Every business has strategic objectives and established routines.

Strategic risk relates to the dangers companies face in trying to accomplish their strategic objectives. Even though your plan might seem viable and on track for success, analyzing the strategic risks involved can help organizations identify obstacles (or opportunities)—and address them before it’s too late.

Strategic risks relate to a business’s internal choices, such as product development routines, advertising, communication tools, sales processes, investments in cutting-edge technologies, and more. These examples all directly impact function, performance, and overall results.

2. External strategic risk factors

Some strategic risks originate outside the company.

These could apply to the current or projected environment into which products will be released. 

It’s often easier to understand strategic risk through real-world examples. For instance, a new type of smartphone might be in high demand today, but economic changes could lead to a drop in commercial interest, leaving the business in a totally different position than it might have expected. 

Or a competitor may release a groundbreaking product or innovative service that fills the gap first, creating significant risk to the success of a strategy.

And let’s not forget that technology’s swift evolution could cause a new product to become obsolete within a few months—I’m sure that the manufacturers of wired headphones felt their stomachs drop when they saw Apple had cut the headphone jack.

These types of risks pose a real danger to companies. Investing in a business model with little chance of achieving the envisioned success can lead to severe financial strain, loss of revenue, and damage to reputation.

And none of these are easy to recover from.

Strategic Risk Assessment: How To Identify Strategic Risks?

Recognizing and taking action on strategic risks is vital to mitigate costly problems.

In your strategic risk management toolkit, you’ll need two essentials:

• An in-depth understanding of where your organization stands . This includes your target audience, market sector, competitors, and the environment in which your business operates.
• A clear awareness of your organization’s core strategic goals , from conception to proposed execution .

Gathering data on both areas can take time and investment, but it’s worthwhile to achieve accurate insights into strategic risks.

The more information you have to draw upon, the more likely it is that you’ll be able to implement processes and safeguards that facilitate organizational success.

Teams have a choice of different approaches when identifying strategic risks. 

Initiate “What if” discussions

Gather employees from across the business to explore ‘what-if’ scenarios .

By mind mapping risk factors collaboratively —with a mix of perspectives and experiences from different departments—Heads of Strategy, Change Managers, and Business Analysts may discover risks they wouldn’t have thought of on their own.

All potential risks are worth considering, no matter how unlikely they may seem at first. That’s why participants should be encouraged to let their minds wander and suggest virtually any viable risk that occurs to them.

It’s best to have a long list that can be reduced through elimination: underestimating risks can lead to businesses being unprepared down the line.

📚 Recommended reading: Risk Matrix: How To Use It In Strategic Planning

Gather input from all stakeholders

Speak with the whole range of stakeholders and consider their views on strategic risks.

If you consult a wide enough group, you’ll gather expanded perspectives about your organization or issues and not just the ones from your core employees.

Collecting a wide range of perspectives creates a holistic view of risk factors which can prove hugely beneficial when trying to understand the dangers the organization faces.

Their broad awareness of how the company operates can raise unexpected possibilities that need to be factored in.

Strategic Risk Examples

The specific strategic risks relevant to your business will largely depend on your industry, sector, product range, consumer base, and many other factors. That being said, there are some broad types of strategic risk, each of which should be on your radar.

Regulatory risks

Let’s demonstrate the importance of regulatory risks with an example.

Imagine an organization working on a new product or planning a fresh service set to transform the market. Perhaps it spots a gap in the industry and finds a way to fill it, yet needs years to bring it to fruition.

However, in this time, regulations change and the product or service suddenly becomes unacceptable. The company can’t deliver the result of its hard work to the target audience, risking a substantial loss of revenue.

Fortunately, the organization had prepared for unexpected regulatory change. Now, elements of the completed project can be incorporated into another or adapted to offer a slightly different solution.

The lesson here? 

It’s vital for companies to stay updated on all regulations relevant to their market and be aware of upcoming changes as early as possible. 

Competitor risks

Most industries are fiercely competitive. Companies can lose ground if their market rivals release a similar product at a similar or lower cost. Pricing may even be irrelevant if the product is suitably superior. 

Competitor analysis can help mitigate this strategic risk: businesses should never operate in a vacuum.

📚 Recommended read: 6 Competitive Analysis Frameworks: How to Leave Your Competition In the Dust

Economic risks

Economic risks are harder to predict, but they pose a real danger to even the most well-realized strategy. For example, economic changes can lead a business’s target audience to lose much of its disposable income or scale back on perceived luxuries.

Customer research is imperative to stay aware of what target audiences desire, their spending habits, lifestyles, financial situations, and more. 

Change risks

Change risks refer to the challenges that arise from changes in technology, market trends, consumer preferences, or industry standards. 

For instance, a company heavily invested in a particular technology may face significant risks if a disruptive innovation renders their current technology obsolete. Having a strong change management strategy to adapt to change and embracing innovation are key strategies to mitigate this risk.

Reputational risks

Reputational risks arise when a company's actions or associations damage its brand image and public perception. Negative publicity, customer dissatisfaction, product recalls, or ethical controversies can all contribute to reputational risks. 

Safeguarding the company's reputation through transparent communication, ethical practices, and proactive crisis management is crucial.

Governance risks

Governance risks refer to the effectiveness and integrity of a company's management and decision-making processes. Weak corporate governance, lack of oversight, non-compliance with regulations, or unethical behavior by key executives can lead to significant strategic risks. 

Establishing robust governance frameworks, maintaining transparency, and fostering a culture of accountability are essential to mitigate these risks.

Political risks

Political risks stem from changes in government policies, regulations, or geopolitical events. These risks can impact businesses operating domestically or internationally. Political instability, trade restrictions, sanctions, or changes in tax policies can disrupt operations and affect profitability. 

Companies must closely monitor political developments and have contingency plans to navigate such risks effectively.

Financial risks

Financial risks involve challenges related to capital management, funding, cash flow, and financial stability. Factors such as market volatility, credit risks, liquidity constraints, or inadequate financial planning can expose a company to strategic risks. 

Implementing sound financial strategies, conducting risk assessments, and maintaining a healthy balance sheet are crucial in managing these risks effectively.

Operational risks

Operational risks are inherent in day-to-day business activities and processes. These risks encompass issues such as supply chain disruptions, equipment failures, cybersecurity breaches, human errors, or natural disasters. 

Ensuring robust operational processes, implementing contingency plans, and investing in risk mitigation measures can help minimize the impact of operational risks.

Managing Strategic Risk Vs. Operational Risk

Strategic risks and operational risks are two distinct kinds. While strategic risks originate from both internal and external forces, operational risks stem solely from the internal processes within a business and they stand to disrupt workflow. 

However, the biggest difference between them is the level of the decisions they reflect.

Strategic risks reflect the risk of the decisions at a higher level, where the overall strategic plan is considered. The operational risks reflect the risk of the decisions at a lower level, the operational level, where the execution of the strategic plan is outlined.

Simply put, strategic risk is about what you do, and operational risk is how you do it.

Operational risks examples

Operational risks are critical to consider and must be dealt with as soon as possible. They directly impact a business’s work and can tie in with strategic risks, as the resources, processes, or staff available may be unable to achieve the established goals. 

One example of operational risk is outdated machinery. They can cause a slowdown in production, delay completion, and ultimately damage employee morale. In this case, the operational risk might stem from what appears to be a non-critical problem but has the potential to drag productivity down to rock bottom. So the decision of whether to upgrade the machinery should be considered.

Another example of operational risk is a company’s current payroll system. Let’s say they outsource to a small team with a weak reputation purely because it’s a cheaper alternative to working with a more reliable payroll solution . But this option could create a higher risk of late payments, processing errors, or other issues with the potential to frustrate the company’s most valuable asset: its employees.

Risk Mitigation Strategies

Implementing effective risk mitigation strategies is essential for businesses to navigate uncertainties and protect their long-term success. By identifying potential risks and proactively addressing them, companies can minimize the impact of adverse events and capitalize on opportunities for growth.

Discuss opportunities and risks separately

This is something that needs to happen before the risk identification process. Mixing in the same conversation potential opportunities and their risks handicaps the opportunity conversation.

You want your people to free their minds, brainstorm ideas, and locate all possible growth and incremental opportunities. Don’t allow that process to shrink and miss out on great opportunities. Discuss risks in a different meeting on a different day.

Distribute resources at the operational level

Once you have decided on your company’s strategy, you’ll have to align every department and person with it.

Allocate your resources in a way that serves your overall strategy to succeed. That means starving certain departments or regions to feed the ones that contribute the most to your strategic objectives.

Mitigating strategic risks is often nothing more than focusing on a great execution of your strategic plan.

Align your incentive structure

Focus on execution takes another form besides resource redistribution.

You have to visit and align with your strategic objectives the incentive structure of your top and middle management. This is a crucial step in executing your strategy because it eradicates internal conflicts.

If your leadership team is rewarded according to an older strategic plan, don’t expect them to take care of your new plan’s risks. They simply won’t have the incentive to do so.

Strategy Risk Management Examples

Let’s examine two specific real-life examples of strategic risk. One that happened a little while ago, and one that is still happening now.

Complacency vs Disruption

Before Netflix, HBO Go, Amazon Prime, Disney + , and all the other streaming platforms, people used to go to Blockbuster.

In its prime, Blockbuster had over 9,000 locations around the world and became synonymous with movie rental. It had a huge slice of the market share and looked pretty peachy until the late nineties. Until 1997, when a little company called Netflix came knocking.

At the time, Netflix didn't stream. It simply delivered rentals in the mail for a set fee each month. There were no late fees (which was one of the biggest gripes from Blockbuster customers), and movie delivery was very convenient.

Netflix was a pretty obvious strategic risk to Blockbuster, which needed to manage it somehow. This could also be seen as a clear opportunity for Blockbuster since they were in a position to buy Netflix but refused to do so.

Yes, Blockbuster passed on the $50 Million deal with Netflix and sealed its fate in the process.

Regulatory complexity

This story is still in development, so who knows how it will end.

Uber is known as the company that shook the cab industry around the world, but things are still changing. Uber is a tech company and understands that change happens, and risk evolves faster than ever before.

This is why they began investing in self-driving technology early on. At first glance, this seems counter-intuitive since moving in this direction could really upset the thousands of Uber drivers out there, but Uber gets it.

They know that if they do nothing, someone else will sweep in and, soon enough, turn Uber into another Blockbuster story.

Uber is a great example of strategic risk management since they not only have to manage things like implementing self-driving cars, but they have also had to navigate through complex regulatory risks in multiple countries.

They have also faced issues around customer safety, assaults, and constant battles with all kinds of protests and regulatory issues.

How To Measure Strategic Risk

So now you know the strategic risks your organization faces, you need a quantifiable figure to measure them. We suggest the following metrics and tools:

Economic Capital

This relates to the amount of equity a business needs to cover any unplanned losses, according to a standard of solvency (based on the organization’s ideal debt rating). 

This metric allows businesses to quantify all types of risks related to launching new products, acquiring enterprises, expanding into different territories, or internal transformation . Then, it can take the necessary actions to mitigate against it.

RAROC: Risk-Adjusted Return On Capital

This applies to the expected after-tax return on a scheme once divided by the economic capital. 

Companies can leverage this metric to determine if a strategy is viable and offers value, helping to guide leaders’ decision-making process. Any initiative with a RAROC below the capital amount offers no value and should be scrapped (sorry!).

Decision trees

Businesses on all scales can utilize both metrics to measure strategic risk, but the stakes will be different for a small enterprise than for a global corporation. The former may never recover from a bad investment, while the latter has a higher chance of weathering the storm. 

As a result, companies may use a decision tree to map the possible outcomes of a decision. This enables teams to determine which choices yield which results and prepare for all eventualities. Specific turning points can be identified and handled appropriately. 

The 7-Step Strategic Risk Management Framework

Now you have all the information, you need to capture it in one place: the strategic risk management framework . This is where you bring together all the resources (employees, technologies, capital, etc.) required to mitigate losses caused by internal or external forces.

Exactly how your framework is structured is your choice, but the following is a great strategic risk management step-by-step approach:

• Understand where you are right now . You could use a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, for example. Here you need to know where your organization is, your vulnerabilities, and what threats you face in the market. 
• Define your strategy and goals . This is where you clearly outline the strategy for your organization. Check out our free, ready-to-use strategic planning templates to build or revisit your strategy.
• Choose your key performance indicators (KPIs) . These can be used to measure success, monitor changes, and explore improvement opportunities over time. 
• Identify risks that can affect productivity and performance in the future. These factors may not be as apparent as others. For example, consumers’ changing tastes can be hard to predict but still have the potential to knock plans off the rails. 
• Assess your risks and define priorities . You can use a Risk Assessment Matrix that will help you score potential risks based on the probability and the impact on the business. 
• Identify KRIs (key risk indicators) to gauge your business's tolerance to obstacles . Be sure to look ahead at issues that may lurk around the corner, and determine the right time to put mitigating actions into effect.  ‍
• Continually monitor KPIs, KRIs, and their internal processes to chart progress . Are problems being resolved fast enough? Are target customers’ needs being addressed? Are all essential programs and processes in place? The aim is to stay on track and adapt to ensure you achieve your objectives. 

Implement A Long-term Strategic Risk Management Strategy

Managing strategic risk is an ongoing process.

It enables organizations to minimize their danger of experiencing severe losses and, ultimately, failure. It doesn’t guarantee every project will be a success (far from it!), but it will provide all the necessary tools to make better decisions in the long run. 

Remember to take your time, even if there’s market pressure to act fast. Trying to rush this process could lead to missed threats or opportunities in your risk analysis. Stay on top of your strategic risk management well into the future, that’s the key to organizational success.

Execute An Effective Risk Management Strategy With Cascade 🚀

Cascade is the world’s #1 strategy execution platform, remediating the chaos of running a business to help you move forward. Cascade serves as your organization's brain, offering a unified platform that spans your entire ecosystem. With Cascade, you can gain a clear picture of potential threats and create a strong risk management strategy to proactively address them.

Signal risks before they happen

Once you've identified your risks, Cascade enables you to seamlessly incorporate them into your strategic plan, ensuring alignment throughout your organization.

Adding risks is very simple:

• Give the risk a meaningful title, and a description. 
• Define the likelihood (probability of the event to happen on a scale of 1 to 10)
• Define the impact (impact of the risk on the outcome on a scale of 1 to 10)

Based on these factors, Cascade automatically calculates and displays a Risk Score (Likelihood * Impact) to assess the severity of each risk, guiding your decision-making process.

Add mitigations

Cascade empowers you to take proactive measures by adding mitigations to each identified risk. Mitigations are steps that can be implemented to avoid or minimize the occurrence and impact of risks. With a few clicks, you can expand the risk and add relevant mitigations.

As you progress with each mitigation, you can mark its completion using the checkboxes. Cascade keeps track of the number of completed mitigations, providing visibility into your progress.

Report your risks’ progress

Cascade offers a comprehensive risk reporting functionality to ensure that you stay informed about the progress of your risk management strategy. You can easily create detailed risk reports containing essential information such as risk title, owners and collaborators, risk type, status, mitigation status, and risk score. These reports can be saved and shared with stakeholders, enabling effective communication and collaboration.

Create a risk dashboard

Leverage Cascade's Risk Distribution Scatter Plot widget , available in Dashboards or Reports, to visually represent the count of risks within specific entities (e.g., objectives, measures, projects, or actions). The widget provides valuable insights into likelihood, impact, and risk scores, enabling you to monitor and analyze risks effectively.

👉🏼For more detailed information on our Risk Management features, visit our Knowledge Base .

8 Free Strategic Risk Management Templates To Get You Started!

Don’t know where to start? Check out these free strategy templates built by our experts to kickstart your risk management journey:

• Risk Management Strategy Template
• Regulatory Risk Management Plan Template
• Financial Risk Management Plan Template
• Compliance Risk Management Plan Template
• Enterprise Risk Management Plan Template
• Risk Mitigation Plan Template
• Risk Assessment Plan Template
• Risk Response Plan Template

Ready to up your Risk Management Strategy? Get started with a free plan in Cascade or book a demo with one of our strategist experts to help you develop your strategy. 

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What Is Business Risk?

Understanding business risk, reducing business risk, the bottom line, what is business risk definition, factors, and examples.

Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company's ability to achieve its financial goals is considered a business risk . There are many factors that can converge to create business risk. Sometimes it is a company's top leadership or management that creates situations where a business may be exposed to a greater degree of risk.

However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with operating a business ; most companies accomplish this by adopting a risk management strategy.

Key Takeaways

• Business risk is any exposure a company or organization has to factor(s) that may lower its profits or cause it to go bankrupt.
• The sources of business risk are varied but include changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.
• Risk can be created by external factors that the business doesn't control, as well as by decisions made within the company's management or executive team.
• While companies may not be able to completely avoid business risk, they can take steps to mitigate its impact, including the development of a strategic risk plan.

Investopedia / Xiaojie Liu

When a company experiences a high degree of business risk, it may impair its ability to provide investors and stakeholders with adequate returns. For example, the CEO of a company may make certain decisions that affect its profits, or the CEO may not accurately anticipate certain events in the future, causing the business to incur losses or fail.

Business risk is influenced by a number of different factors including:

• Consumer preferences, demand, and sales volumes
• Per-unit price and input costs
• Competition
• The overall economic climate
• Government regulations

A company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times. With a low debt ratio, when revenues drop the company may not be able to service its debt (and this may lead to bankruptcy). On the other hand, when revenues increase, a company with a low debt ratio experiences larger profits and is able to keep up with its obligations.

To calculate risk, analysts use four ratios: contribution margin, operation leverage effect, financial leverage effect, and total leverage effect. For more complex calculations, analysts can incorporate statistical methods.

Business risk usually occurs in one of four ways: strategic risk, compliance risk, operational risk, and reputational risk .

Types of Business Risk

Strategic risk.

Strategic risk arises when a business does not operate according to its business model or plan. When a company does not operate according to its business model, its strategy becomes less effective over time, and the company may struggle to reach its defined goals.

For example, imagine ABC Store is a big box store that strategically positions itself as a low-cost provider for working-class shoppers. Its main competitor is XYZ Store, which is seen as a destination for more middle-class consumers. However, if XYZ decides to undercut ABC's prices, this becomes a strategic risk for ABC.

Compliance Risk

The second form of business risk is compliance risk, sometimes known as regulatory risk. Compliance risk primarily arises in industries and sectors that are highly regulated. For example, in the wine industry, there is a three-tier system of distribution that requires wholesalers in the U.S. to sell wine to a retailer, who then sells it to consumers. This system prohibits wineries from selling their products directly to retail stores in some states.

However, there are many U.S. states that do not have this type of distribution system; compliance risk arises when a brand fails to understand the individual requirements of the state in which it is operating. In this situation, a brand risks becoming non-compliant with state-specific distribution laws and may face fines or other legal action.

Operational Risk

The third type of business risk is operational risk . This risk arises from within the corporation, especially when the day-to-day operations of a company fail to perform. For example, in 2012, the multinational bank HSBC faced a high degree of operational risk and as a result, incurred a large fine from the U.S. Department of Justice when its internal anti-money laundering operations team was unable to adequately stop money laundering in Mexico.

Reputational Risk

Any time a company's reputation is ruined, either by an event that was the result of a previous business risk or by a different occurrence, it runs the risk of losing customers and its brand loyalty suffering. The reputation of HSBC faltered in the aftermath of the fine it was levied for poor anti-money laundering practices.

Business risk cannot be entirely avoided because it is unpredictable. However, there are many strategies that businesses employ to cut back the impact of all types of business risk, including strategic, compliance, operational, and reputational risk.

The first step that brands typically take is to identify all sources of risk in their business plan . These aren't just external risks—they may also come from within the business itself. Taking action to cut back the risks as soon as they present themselves is key. Management should come up with a plan in order to deal with any identifiable risks before they become too great.

Finally, most companies adopt a risk management strategy . This can be done either before the business begins operations or after it experiences a setback. Ideally, a risk management strategy will help the company be better prepared to deal with risks as they present themselves. The plan should have tested ideas and procedures in place in the event that risk presents itself.

Once the management of a company has come up with a plan to deal with the risk, it's important that they take the extra step of documenting everything in case the same situation arises again. After all, business risk isn't static—it tends to repeat itself during the business cycle. By recording what led to risk the first time, as well as the processes used to mitigate it, the business can implement those strategies a second time with greater ease. This reduces the timeframe in which unaddressed risk can impact the business, as well as lowering the cost of risk management.

What Are the 4 Main Types of Business Risk?

The four main types of risk that businesses encounter are strategic, compliance (regulatory), operational, and reputational risk. These risks can be caused by factors that are both external and internal to the company.

Why Is Risk Management Important In Business?

Businesses face a great deal of uncertainty in their operations, much of it outside their control. This uncertainty creates risk that can jeopardize not both a company's short-term profits and long-term existence. Because risk is unavoidable, risk management is an important part of running a business. When a business has a thorough and carefully created risk management plan in place, and when they are able to iterate on that plan to deal with new an unexpected risks, the business is more likely to survive the impact of both internal and external risk.

What Are Internal Risks That Can Impact a Business?

Internal risks that can impact a business often come from decisions made by the management or executive team in pursuit of growth. These decisions can create physical or tangible risks. For example, on-site risks such as fires, equipment malfunctions, or hazardous materials can jeopardize production, endanger employees, and lead to legal or financial penalties. Policies that guarantee a safe working environment would, in this instance, be an effective strategy for managing internal risks.

In business, risks are factors that an organization encounters that may lower its profits or cause it to go fail. Sources of risk can be external, such as changes in what consumers want, changes in competitor behavior, external economic factors, and government rules or regulations. They can also be internal such as decisions made by management or the executive team.

No company can completely avoid risks, especially because many risk factors are external. However, businesses can put risk management strategies into place. These strategies can be used both to reduce risk and to mitigate the impact of risks when they arise. By documenting the sources of risk and creating a strategic plan that can be repeated, businesses can reduce the overall impact of risk and deal with it more efficiently and effectively in the future.

United State Department of Justice. " HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement ."

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How to Identify Critical Risks

Home → Blog: Project Management and Project Risk Analysis → How to Identify Critical Risks

The goal of risk analysis is to identify critical risks: those risks that have the most potential to positively or negatively impact your project objectives. Identifying critical risks is a process of prioritization and this an output of qualitative or quantitative risk analysis. Risk prioritization facilitates project decisions, particularly with regards to risk mitigation and response planning. There are a number of tools which can help with risk prioritization, particularly the risk register and the risk matrix.

Why We Should Prioritize Risks

Let us assume that this summer you are planning a road trip from Boston to New York that will primarily travel along the I95. The weather forecast is promising, nothing spectacular, but good for travelling. Before embarking on your trip, you perform an-hoc risk assessment. Like a good project manager, you want to minimize the chance of delays and determine what you might require in case of an emergency. Here is an example of risks that you might encounter:

• You run out of gas and your trip could take a lot longer. This is could be especially concerning if you find yourself out of gas while on the I95 as this means that you will have increased probability of other risks occurring as you are stranded precariously on the side of the freeway. Mitigation plan: Start with a full tank of gas and, if you are extremely risk averse, you might choose to carry an extra gas caner or two.
• Your car breaks down. As with the above, this has the potential to seriously impact your schedule (as well as your budget). Mitigation plan: Perform all scheduled maintenance and perhaps ask your mechanic to inspect all major systems. However, even a well maintained vehicle can suffer a breakdown, so you may want to carry a few spare parts. For example, some light bulbs, spark plugs, a crankshaft, and an alternator, just in case.
• You get a flat tire. You already have a spare one, but you could get a second flat. Mitigation plan: Carry a second spare tire.
• In spite of the forecast, the weather is unpredictable and may turn for the worst. Mitigation plan: Pack some extra supplies, candles, warm blankets, rain gear, extra food and other items that will help you survive a couple days in case of a major hurricane and floods. Take a raft and life jacket.
• You could be robbed. Could it happen on your way to New York? Absolutely. Mitigation plan: Wear body armor and carry your stun gun, pepper spray, and horn with you. Just in case things get really ugly, you probably should have your machine gun and enough rounds of ammunition of survive a long siege – think the “Walking Dead”.
• The roads could be blocked. Think of what happened to the King of France, Henry the IV. Well travelling down a road, he found it blocked by several logs. When they stopped, an assassin jumped into the carriage and stabbed the king. Henry IV was not good in risk management, but you are. Mitigation plan: Take a chainsaw and, just in case, your mother-in-law can ride in the back as a body guard.
• You could get a speeding ticket. You could go the speed limit and eliminate the risk altogether, but your plan calls for a speed of 15% over the posted limit. It will get you to New York quicker, but close to a speed that will put you at risk for a ticket. Mitigation plan: You could buy some anti-radar devices, but better yet, you can install stealth technology and your car invisible to police radar.

You might be starting to see a problem here. If you try to avoid and/or mitigate all of the risks you have identified, this will result in two things. Your car will be so laden down with supplies it will be unable to move and the expense of all your mitigation efforts will mean that you won’t have any funds to enjoy the sites if you manage to get to New York. For example, though we haven’t checked, we believe stealth technology would take a considerable chunk out of your budget. The reality is that you must deal with constrained resources (budget, time, etc.) and it would be impossible to completely mitigate all of your risks. The solution is to prioritize your risks to determine which are the most important, so that given your limited resources you can minimize your risks in the most cost effective manner possible. Now, the question is, how do you determine what risks are the most important? This is where the risk register comes in as it is the key to prioritizing your risks.

Risk scores

We discussed risk registers when we talked about risk identification. Now, we can use the risk register as part of the risk analysis, including risk response planning, and risk monitoring and control. To prioritize risks, you need to assign each one a risk score. The risk score is calculated using a risk’s probability and impact.

Risk score = Risk Probability * Risk Impact

If a risk occurs, it will have varying impacts on different project objectives (such as duration, cost, and safety). For example, the risk “run out of gas” may have a significant impact on your trip duration, but very little on cost or safety. Therefore, the risk score should be calculated separately for each objective. If you calculate the all probabilities and impacts of a risk, you can calculate its overall risk score. Table 1 shows an example of the risk register with risk scores calculated based on overall probabilities and impacts. The bar on the right column is an easy way to present risk scores. To make the score easier to understand, you can multiply them by a certain value (e.g. 100). Please note that risks in the risk register are sorted based on risk score. As a result, Table 1 is a tornado diagram for risk scores.

Risk scores relatively simple and yet powerful indicator of the order in which we should prioritize our risk response planning activities. Done properly, it provides a realistic measure of the potential impact and it relative importance as compared to other project risks. There are many cases in projects where a risk’s impact is very significant but the probability of occurring are very small. Psychologically, people overestimate the “score” of risks very high because the impacts arouse emotions like fear and anxiety. The classic situation is the risk of a terrorist attack on an aircraft. Although the impact of the risk can be very significant, the probability is very small. The score of a risk “terrorist attack” is lower than many other risks related to the operation of aircraft, such as mechanical problems or a sleep deprived pilot. As a result, people often support greater expenditure towards the elimination of terrorist attacks as opposed to improving maintenance programs or monitoring sleep diaries of pilots. In our road trip example, though an armed robbery would have a significant impact on our project, the probability of it occurring is extremely low. Therefore, its overall risk score is lower compared to the other risks. If you have to make a choice between bringing extra rain gear or wearing body armor, rain gear should be your priority. In this way we can see how accurate risk scores are the key to prioritizing your risks and making the best use of your limited resources.

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Understanding Critical Success Factors (CSFs) in Strategic Planning

Every business needs a roadmap for success. Without one, distinguishing victories from setbacks becomes a daunting task, casting uncertainty over the attainment of goals. Delving into the realm of Critical Success Factors (CSFs) unveils their pivotal role in steering the course of businesses and projects toward triumph.These factors serve as the guiding lights, ensuring teams and departments are synchronized, and efforts are channeled towards common objectives.

What Are Critical Success Factors?

Critical Success Factors (CSFs) are the essential elements that must be achieved to ensure success for a company or project. Understanding these factors is crucial as they help focus efforts on the most impactful areas. CSFs are not just about identifying what to do but also clarifying what not to waste resources on. They are tailored to specific industries and business models, making them unique and vital for strategic alignment.

These factors are crucial for the success of a project, initiative, or business strategy. CSFs vary depending on the industry, organization, and specific objectives, but they generally encompass the following characteristics:

Key Goals and Objectives: CSFs are directly linked to the primary goals and objectives of an organization or project. They represent the most critical aspects that must be achieved to consider the endeavor successful.

Measurability: CSFs should be measurable so that progress can be tracked effectively. They often have associated key performance indicators (KPIs) or metrics that indicate whether the factors are being met.

Strategic Alignment: CSFs align with the overall strategy and vision of the organization. They reflect the areas where the organization must excel to fulfill its strategic objectives.

Criticality : CSFs are essential for success. Failure to achieve these factors significantly increases the risk of failure for the project or organization as a whole.

Focus: CSFs help prioritize resources and efforts by highlighting the most critical areas that require attention and investment.

The Role of CSFs in Strategic Success

CSFs play a pivotal role in strategic planning by providing a clear roadmap for success. They help organizations prioritize their goals and allocate resources effectively. By defining critical success factors, companies can:

• Ensure that all team members are aligned with the strategic objectives.
• Measure progress quantitatively, as each CSF can be associated with specific performance metrics.
• Adapt to changing market dynamics by regularly reviewing and updating the CSFs.

For instance, in a technology company, a CSF might be the development of a new patentable technology, whereas, in a retail business, a CSF could be customer satisfaction ratings. This specificity ensures that strategic efforts are concentrated on the most critical areas.

Moreover, tools like Visual Strategic Planning Tools can significantly enhance the ability to visualize and manage these critical success factors, ensuring that they are not just defined but actively monitored and achieved.

Types of Critical Success Factors:

In his seminal work, Rockart outlined four distinct categories of Critical Success Factors (CSFs), each serving as a cornerstone in the foundation of organizational triumph

Industry Factors: These stem from the unique dynamics of your industry, dictating the essential actions required to maintain competitiveness. For instance, in the realm of technology startups, innovation emerges as a pivotal CSF, driving evolution and differentiation amidst fierce competition.

Environmental Factors: Arising from broader macro-environmental forces, these factors encompass elements such as the business climate, economic fluctuations, competitor landscapes, and technological advancements. Conducting a thorough PEST Analysis unveils the intricacies of these factors, empowering organizations to navigate uncertainties with foresight and adaptability.

Strategic Factors : Tailored to the specific competitive strategy adopted by your organization, these factors delineate the strategic choices guiding positioning and marketing endeavors. Whether pursuing a strategy of high-volume, low-cost production or opting for a niche, high-value approach, strategic CSFs illuminate the pathway to sustained relevance and profitability.

Temporal Factors: Reflecting the internal flux and evolution within your organization, temporal CSFs are transient in nature, responding to short-lived barriers, challenges, and opportunities. For instance, amidst rapid expansion, a critical imperative might revolve around scaling international sales operations, highlighting the dynamic interplay between internal growth trajectories and external market demands.

Critical Success Factors (CSFs) VS Key Performance Indicators (KPIs)

Understanding the distinction between Critical Success Factors (CSFs) and Key Performance Indicators (KPIs) is crucial for effective strategic planning. While both are essential metrics in business strategy, they serve different purposes and are used in different contexts.

Critical Success Factors are the essential areas of activity that must be performed well to achieve the strategic goals of an organization. These are the elements that are critical for success in achieving the strategic objectives. On the other hand, Key Performance Indicators are quantifiable measurements that reflect the critical success factors of an organization. They are used to gauge the performance and success of an initiative, often linked directly to strategic objectives.

For instance, if a critical success factor for a tech company is ‘innovation,’ a corresponding KPI might be the number of new patents filed per year or the percentage of revenue from new products.

Using KPIs to Measure CSFs

Effectively measuring CSFs through KPIs requires a clear understanding of the strategic goals and the critical factors that drive them. Here are some ways KPIs can be used to measure the effectiveness of CSFs:

• Alignment of KPIs with strategic goals to ensure they reflect the critical success factors.
• Regular review and adjustment of KPIs to adapt to changing circumstances and ensure they remain relevant to the CSFs.
• Utilization of tools like Balanced Scorecard Templates to visualize and track these indicators effectively.
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It’s important to avoid the pitfall of confusing CSFs with KPIs. While KPIs are indicators of performance, CSFs are the areas that determine whether the organization will achieve its strategic goals. Understanding this distinction helps organizations focus on what truly matters and allocate resources accordingly.

Building an Organizational Strategy Around Critical Success Factors

Integrating critical success factors (CSFs) into your business planning isn’t just about identifying what’s important; it’s about embedding these factors into the very fabric of your organizational strategy. This integration ensures that every decision and action aligns with your overarching goals, propelling your business towards success.

Integrating CSFs into Business Planning

Leadership plays a pivotal role in fostering a culture that prioritizes CSFs. It starts with a clear communication of what these factors are and how they tie into the daily operations and long-term objectives of the company. Here are some steps to effectively integrate CSFs into your business planning:

• Define and Align: Clearly define your CSFs and ensure they are in harmony with your organizational values and strategic goals. This alignment is crucial for maintaining focus and direction.
• Communicate: Use every opportunity to communicate the defined CSFs across all levels of the organization. This ensures everyone is on the same page and pulling in the same direction.
• Embed: Integrate CSFs into all planning documents and tools. Use frameworks like Impact Mapping Templates to visualize how individual actions and strategies connect back to these critical factors.
• Review: Regularly review and adjust CSFs to respond to changing market conditions or internal company shifts. This agility allows your business to remain relevant and competitive.

Identifying and Setting Critical Success Factors for Your Business

Identifying and setting the right critical success factors (CSFs) is pivotal for any business aiming to achieve its strategic goals. This process requires a structured approach and keen insight into both the market and internal capabilities. Here, we outline a five-step process to effectively pinpoint and refine CSFs that align with your business objectives.

• Step 1: Gather Stakeholder Input - Engage with key stakeholders from various departments to get a comprehensive view of the strategic needs and expectations. This collaborative approach ensures that the CSFs developed are inclusive and representative of the entire organization.
• Step 2: Conduct Market Analysis - Utilize resources like Scenario Planning Guide to understand market trends and competitor strategies. This analysis helps in setting CSFs that are not only relevant but also competitive.
• Step 3: Define CSFs - Based on the insights gathered, define clear and measurable CSFs. Ensure they are specific, achievable, and directly tied to strategic objectives.
• Step 4: Refine and Adjust - CSFs should not be static. Regularly review and refine them based on ongoing feedback and changing market conditions to keep them relevant and impactful.
• Step 5: Implement and Monitor - Implement the CSFs across the organization and monitor their progress. Use visual project management tools to track these factors and make adjustments as necessary.

By following these steps, businesses can ensure that their CSFs are not only defined but are also aligned with the overall strategic vision, thereby enhancing the likelihood of achieving desired outcomes. Remember, the key to successful strategic planning is not just identifying CSFs but continuously adapting them to fit the evolving business landscape.

Practical Tips for Creating Effective Critical Success Factors

Creating effective critical success factors (CSFs) is pivotal for any organization aiming to achieve its strategic objectives. Here are some practical tips to ensure your CSFs are clear, specific, and aligned with your business goals.

• Clarity and Specificity: Each CSF should be distinctly defined to avoid ambiguity. This clarity helps team members understand exactly what is expected and how it contributes to the organization’s success.
• Alignment with Strategic Objectives: CSFs should directly support the strategic goals of your organization. This alignment ensures that every effort contributes towards the overarching objectives.

Avoiding Common Pitfalls: One common mistake is setting too many CSFs, which can dilute focus and resources. Prioritize CSFs that have the most significant impact on your strategic goals.

Involving Cross-Functional Teams: CSFs should be developed with input from various departments to ensure they are comprehensive and inclusive. Engage teams through platforms that foster collaboration, such as Retrospective Meetings for Cross-Functional Teams to gather diverse insights and drive collective commitment.

Regular reviews and updates to CSFs are crucial. The business landscape is dynamic, and your CSFs should evolve to reflect changes in the market and internal business processes. Leveraging a centralized platform like Creately can facilitate the continuous monitoring and updating of CSFs, ensuring they remain relevant and impactful.

How Creately Supports Setting and Achieving Organizational Goals through CSFs

Setting and achieving organizational goals hinge significantly on identifying and leveraging critical success factors (CSFs). Creately, with its advanced visual collaboration platform, provides an array of tools designed to enhance strategic planning and execution. Here’s how Creately’s features align with the needs of organizations aiming to master their strategic objectives through effective use of CSFs.

Creately’s Tools for Strategic Planning

• Visual Canvas: Creately’s visual canvas offers a dynamic space for teams to brainstorm, map out strategies, and visualize the relationships between different CSFs. This is crucial for understanding how various factors interlink and influence overall strategic success.
• Multiple Visual Frameworks: With access to various frameworks such as Business Model Canvas Template and Strategic Planning Tools , teams can effectively define and align their organizational goals with the identified CSFs, ensuring that every action taken is strategically oriented.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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Chiraag George is a communication specialist here at Creately. He is a marketing junkie that is fascinated by how brands occupy consumer mind space. A lover of all things tech, he writes a lot about the intersection of technology, branding and culture at large.

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How to Identify Critical Business Processes

June 24, 2020

As part of an assessment of an operational resilience program, it’s imperative that organizations are capable of identifying and revalidating their most critical business processes.

Especially post-crisis, the ability to react, pivot, and surge forward can be the difference between a company that has a profitable future and one that either goes under or lingers in the margins. A business continuity plan that appropriately inventories and categorizes the organization’s critical business processes is a first step to ensuring operational resilience now and in the future.

Outlining the Essentials: Business Process Management

Critical business processes are those that are mandatory to the normal operation of the business. These are the critical applications, existing process flows, data, information technology architecture, and customer service apparatuses that drive the business.

Without these elements, a virtually guaranteed negative financial impact will occur to the organization, its shareholders, and its customers. Generally speaking, the key processes that animate a healthy, functional business operation are:

• Customer relationship, service, delivery, and strategy.
• Cyber, privacy, legal, and financial risk management .
• Human resources, human capital management , and employee development.
• Accounting, technology, and financial management.

While each business and industry might have varying levels of core processes they consider vital, the above shape some of the most common. Additionally, adherence to and improvement of these processes can drive competitive advantage in the marketplace. Organizations that do more than the bare minimum are also likelier to:

• Maintain a high or acceptable level of business activity despite expected or unexpected disruption.
• Have in place the process improvement, change management, and continuity planning governance that defrays collateral risk after the first shockwave of disruption.
• Carry forward and successfully execute the recovery strategy that’s vital to the information system , critical function, and operational capacity of business unit.

Evaluating the Accuracy of Critical Business Processes

Beyond the identification of the firm’s core processes necessary for normal operation, it’s also important to regularly validate the efficacy, accuracy, and priority of these processes. By conducting a thorough business process analysis (do we have what we need operationally?) weighed against a business impact analysis (does what we have add sustainable value and mitigate future risk?).

Include the following steps:

• Assess any critical changes to existing business processes required to stay operational throughout the disruption. Determine if this new way of working will be in place temporarily or permanently. If permanent, determine if it will require a reassessment and redefinition of the end-to-end process.
• Review incident logs arising from both internal (employees) and external (customers) complaints/issues and map these back to the critical business processes previously identified. Assess if any incidents could be traced back to business processes that were not previously identified as critical and identify the impact – financial or non-financial (e.g., reputational or loss of productivity).
• Examine the list of identified critical business processes that had very few or no incidents raised. Investigate if this was because the operational resilience plan mitigated the risks relating to these processes or if the business process was ultimately not critical.

Because each organizational silo’s operational resilience plan revolves around protecting and responding to threats to business processes and systems, having a firm and accurate understanding of which ones are the most critical underpins the operational resilience framework. Management must understand the internal critical processes and be able to assess if they operated effectively in a crisis environment.

For expert support with business continuity management and process improvement, contact CrossCountry Consulting .

Editor’s note: Updated September 2022

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Business Plan Risks How to present your business risks without scaring away investors

By Stever Robbins Dec 11, 2004

Opinions expressed by Entrepreneur contributors are their own.

Q: I would like to include a risk analysis in my business plan. I don't know how to show risks without sending investors into an anxious frenzy.

A: Any start-up idea will have enough risk to fill a dozen business plans. No investor expects a risk-free plan. Angels and VCs know start-ups are incredibly risky. If they don't, don't take their money--they don't know what they're doing! Most projects fail for reasons that could have been (and sometimes were) predicted far in advance. Since entrepreneurs are optimistic folks by nature: They tend to brush off predictions of doom and charge ahead assuming they will find a way to overcome. You can often avoid the most dire scenarios with intelligent upfront risk planning.

The risk analysis in your plan is to show that you've thought through risks, that you know how to plan for probable risks, and that your plan can survive when things go wrong.

Your plan can address several kinds of risk. You don't need to address every kind of risk in the book, but pick the risk categories that are most relevant to your company and include a paragraph or two about each:

• Product risk is the risk that the product can't be created. Biotech firms often have a high degree of product risk. They never know for sure they can produce the drug they are hoping to produce.
• Market risk is the risk that the market will develop differently than expected. Sometimes markets take too long to develop, and cash runs out while a company is waiting for customers.
• People risk is big in companies that depend on having certain employees or certain kinds of employees. I was with a company that had hired one of the world experts in a certain type of 3-D modeling. It was possible that without this man on board and happy, the company wouldn't be able to create their product.
• Financial risk is the risk that a company will run out of money or mismanage their money in some way. Finance companies may have huge financial risk, since bad lending policies combined with poor investment policies can sink them.
• Competitive risk is the risk that a competing product or service will be able to win. Many Web-based businesses have high competitive risk since they can be started with little money and have no way of locking in customers.

What investors want is to know that you are prepared to respond to risks. To the extent possible, outline what your response is to the risk you anticipate. After all, assuming you get funding, those risks may really come to pass. And you will really have to do something about it. By showing investors some of the alternatives you've thought through, you raise their confidence that you'll be able to deal if things don't go according to plan.

For example, consider the risk to a restaurant that people won't come back. What are the reasons you believe that would happen? What can you do to keep that from happening in the first place? It amazes me how many restaurants have a lousy menu selection or bad food and go under without ever asking customers, "Did you enjoy your meal? What could we do to make it better?" An at-the-table survey may be how you propose to avoid having the wrong menu. If things go wrong, you may decide to proactively invite critics to the restaurant for specific feedback on how to make the experience better.

The key is acknowledging that things can go wrong and demonstrating some creativity in finding a solution. You certainly needn't respond to every risk imaginable. Your goal is to provide enough to help your investors feel secure that you have anticipated and dealt with major risks, and they can count on you to handle things that come up once the business is under way.

Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author of It Takes a Lot More Than Attitude...to Lead a Stellar Organization , he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com .

This article originally appeared on Entrepreneur.com in 2002.

Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

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Infographic: 8 Key Success Factors for Effective Risk Management

Posted by PeterDeans | Jun 13, 2021 | 52 Risks Framework , Enterprise Risk Management |

What does good look like when it comes to Risk Management ? 

The infographic below outlines 8 key success features for effective risk management. 

• Board and executive ownership
• Clear governance, frameworks and objectives
• An established risk management rhythm and balance
• Alignment of risk management objectives and remuneration
• Full risk engagement in strategy and business planning
• A well-funded and resourced risk management function
• A willingness to learn from risk failures and mistakes
• Strong risk management skills across the organization

You can download the infographic in pdf format here .

About The Author

Strategy & Risk Adviser. Creator / Founder 52 Risks. Former Chief Risk Officer. Risk management, strategy, management and economics comments and articles.

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Types of business risks and ideas for managing them.

Published: July 06, 2023

There are several types of business risks that can threaten a company’s ability to achieve its goals. Learn some of the most common risks for businesses and ideas for how to manage them.

Business risks can include financial, cybersecurity, operational, and reputational risks, all of which can seriously impact a company’s strategic plans if business leaders don’t take action to mitigate them.

What’s most important is that business owners are aware of the risks that could shake up their operations. That way, they can take steps to prevent them or minimize their impact if they occur. Here’s a look at some common business risks. 

Financial Risks

Companies must generate sufficient  cash flow  to make interest payments on loans and to meet other debt-related obligations on time. Financial risk refers to the  flow of money  in the business and the possibility of a sudden financial loss. A company may be at  financial risk  if it doesn’t have enough cash to properly manage its debt payments and becomes delinquent on its loans.

Businesses with relatively higher levels of debt financing are considered at higher financial risk, since lenders often see them as having a greater chance of not meeting payment obligations and becoming insolvent. Types of financial risk include:

• Credit risk:  When a company extends credit to customers, there is the possibility that those customers may stop making payments, which reduces revenue and earnings. A company also faces credit risk when a lender extends business credit to make purchases. If the company doesn’t have enough money to pay back those loans, it will default.
• Currency risk:  Currency risk, also known as exchange-rate risk, can arise from the change in price of one currency in relation to another. For example, if a U.S. company agrees to sell its products to a European company for a certain amount of euros, but the value of the euro rises suddenly at the time of delivery and payment, the U.S. business loses money because it takes more dollars to buy euros.
• Liquidity risk:  A company faces  liquidity  risk when it cannot convert its assets into cash. This type of business risk often occurs when a company suddenly needs a substantial amount of cash to meet its short-term debt obligations. For example, a manufacturing company may not be able to sell outdated machines to generate cash if no buyers come forward.

Cybersecurity Risks

As more businesses use online channels for  sales  and e-commerce payments, as well as for collecting and storing customer data, they are exposed to greater opportunities for hacking, creating security risks for companies and their stakeholders. Both employees and customers expect companies to protect their personal and financial information, but despite ongoing efforts to keep this information safe, companies have experienced data breaches, identity theft, and payment fraud incidents.

When these incidents happen, consumer confidence and trust in companies can take a dive.

Not only do security breaches threaten a company’s reputation, but the company is sometimes financially liable for damages.

Ideas for managing security risks: 

• Investing in fraud detection tools and software  security solutions .
• Educating employees about how they can do their part to keep the company’s data safe. Basic guidance includes not clicking suspicious links in emails or sharing sensitive data without encrypting it first.

Operational Risks

A business is considered to have operational risk when its day-to-day activities threaten to decrease profits. Operational risks can result from employee errors, such as undercharging customers. Additionally, a natural disaster like a tornado, hurricane, or flood might damage a company’s buildings or other physical assets, disrupting its daily operations.

Of course, one of the starkest examples of negative impacts to companies' production and supply chain operations is the Coronavirus pandemic. In an April 2022 Small Business Pulse Survey conducted by the U.S. Census Bureau, roughly 65 percent of respondents reported that the pandemic had either a moderate negative effect or a large negative effect on their business. 

• Making time for necessary employee training to minimize internal mistakes.
• Developing contingency plans to shield against external events that may impact operations. For example, a restaurant impacted by a natural disaster might be able to partner with another local restaurant, bar, or coffee shop to use their kitchen and sell to-go items.

Reputational Risks

Reputational risk  can include a product safety recall, negative publicity, and negative reviews online from customers. Companies that suffer reputational damage can even see an immediate loss of revenue, as customers take their business elsewhere. Companies may experience additional impacts, including losing employees, suppliers, and other partners.

Ideas for managing reputational risks: 

• Pay attention to what customers and employees say about the company both online and offline.
• Commit not only to providing a quality product or service, but also to ensuring that workers are trained to deliver excellent customer service and to resolve customer complaints, offer refunds, and issue apologies when necessary.

The Takeaway

Business owners face a variety of business risks, including financial, cybersecurity, operational, and reputational. However, they can take proactive measures to prevent or mitigate risk while continuing to  seize opportunities for growth . To learn more about the benefits of risk management planning read,  "5 Hidden Benefits of Risk Management."

Frequently Asked Questions

1. what are the main types of business risks.

There are several types of business risks: • Financial Risks • Cybersecurity Risks • Operational Risks • Reputational Risks

2. What are common examples of business risks?

• Financial risks can include cash flow problems, inability to meet financial obligations, or taking on too much debt. • Cybersecurity risks are risks associated with data breaches, hacks, or cyber-attacks. • Operational risks include supply chain disruptions, natural disasters, or IT failures. • Reputational risks can occur when a company's reputation is damaged by negative publicity, scandal, or other events.

3. How can you identify a business risk?

There are a few key ways to identify business risks:

• Reviewing financial statements and performance indicators: This can help you identify risks related to cash flow, profitability, or solvency. • Conducting a SWOT analysis: A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can also be a helpful tool for identifying risks and brainstorming ways to mitigate them. • Identifying key dependencies: Key dependencies are things that your business relies on to function, and if they were to fail or be disrupted, it could have a serious impact on your business. • Carrying out root cause analysis: Conducting root cause analysis can help you to identify what underlying factors could lead to a problem or issue.

A version of this article was originally published September 01, 2022.

Photo: Getty Images

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Enterprises are often defined by how they deal with events that are out of their control. For example, how you react to a disruptive technology or cope with a sudden change in the markets can be the difference between success and failure.

Contingency planning is the art of preparing for the unexpected. But where do you start and how do you separate the threats that could do real harm to your business from the ones that aren’t as critical?

Here are some important definitions, best practices and strong examples to help you build contingency plans for whatever your business faces.

What is a contingency plan?

Business contingency plans, also known as “business continuity plans” or “emergency response plans” are action plans to help organizations resume normal business operations after an unintended interruption. Organizations build contingency plans to help them face a variety of threats, including natural disasters, unplanned downtime, data loss, network breaches and sudden shifts in customer demand.

A good place to start is with a series of “what if” questions that propose various worst-case scenarios you’ll need to have a plan for. For example:

• What if a critical asset breaks down, causing delays in production?
• What if your top three engineers all quit at the same time?
• What if the country where your microprocessors are built was suddenly invaded?

Good contingency plans prioritize the risks an organization faces, delegate responsibility to members of the response teams and increase the likelihood that the company will make a full recovery after a negative event.

Five steps to build a strong contingency plan

1. make a list of risks and prioritize them according to likelihood and severity..

In the first stage of the contingency planning process, stakeholders brainstorm a list of potential risks the company faces and conduct risk analysis on each one. Team members discuss possible risks, analyze the risk impact of each one and propose courses of action to increase their overall preparedness. You don’t need to create a risk management plan for every threat your company faces, just the ones your decision-makers assess as both highly likely and with a potential impact on normal business processes.

2. Create a business impact analysis (BIA) report

Business impact analysis (BIA) is a crucial step in understanding how the different business functions of an enterprise will respond to unexpected events. One way to do this is to look at how much company revenue is being generated by the business unit at risk. If the BIA indicates that it’s a high percentage, the company will most likely want to prioritize creating a contingency plan for this business risk.

3. Make a plan

For each potential threat your company faces that has both a high likelihood of occurring and a high potential impact on business operations, you can follow these three simple steps to create a plan:

• Identify triggers that will set a plan into action: For example, if a hurricane is approaching, when does the storm trigger your course of action? When it’s 50 miles away? 100 miles? Your teams will need clear guidance so they will know when to start executing the actions they’ve been assigned.
• Design an appropriate response: The threat your organization prepared for has arrived and teams are springing into action. Everyone involved will need clear, accessible instructions, protocols that are easy to follow and a way to communicate with other stakeholders.
• Delegate responsibility clearly and fairly: Like any other initiative, contingency planning requires effective project management to succeed. One proven way to address this is to create a RACI chart . RACI stands for responsible, accountable, consulted and informed, and it is widely used in crisis management to help teams and individuals delegate responsibility and react to crises in real time.

4. Get buy-in from the entire organization—and be realistic about cost

Sometimes it can be hard to justify the importance of putting resources into preparing for something that might never happen. But if the events of these past few years have taught us anything, it’s that having strong contingency plans is invaluable.

Think of the supply chain problems and critical shortages wreaked by the pandemic or the chaos to global supply chains brought about by Russia’s invasion of Ukraine. When it comes to convincing business leaders of the value of having a strong Plan B in place, it’s important to look at the big picture—not just the cost of the plan but the potential costs incurred if no plan is put in place.

5. Test and reassess your plans regularly

Markets and industries are constantly shifting, so the reality that a contingency plan faces when it is triggered might be very different than the one it was created for. Plans should be tested at least once annually, and new risk assessments performed.

Contingency plan examples

Here are some model scenarios that demonstrate how different kinds of businesses would prepare to face risks. The three-step process outlined here can be used to create contingency plans templates for whatever threats your organization faces.

A network provider facing a massive outage

What if your core business was so critical to your customers that downtime of even just a few hours could result in millions of dollars in lost revenue? Many internet and cellular networks face this challenge every year. Here’s an example of a contingency plan that would help them prepare to face this problem:

• Assess the severity and likelihood of the risk: A recent study by Open Gear showed that only 9% of global organizations avoid network outages in an average quarter. Coupled with what is known about these attacks—that they can cause millions of dollars in damage and take an immeasurable toll on business reputation—this risk would have to be considered both highly likely and highly severe in terms of the potential damage it could do to the company.
• Identify the trigger that will set your plan in action: In this example, what signs should decision-makers have watched for to know when a likely outage was beginning? These might include security breaches, looming natural disasters or any other event that has preceded outages in the past.
• Create the right response: The organization’s leaders will want to determine a reasonable recovery time objective (RTO) and recovery point objective (RPO) for each service and data category their company faces. RTO is usually measured with a simple time metric, such as days, hours or minutes. RPO is a bit more complicated as it involves determining the minimum/maximum age of files that can be recovered quickly from backup systems in order to restore the network to normal operations.  

A food distribution company coping with an unexpected shortage

If your core business has complex supply chains that run through different regions and countries, monitoring geopolitical conditions in those places will be critical to maintaining the health of your business operations. In this example, we’ll look at a food distributor preparing to face a shortage of a much-needed ingredient due to volatility in a region that’s critical to its supply chain:

• Assess the severity and likelihood of the risk: The company’s leaders have been following the news in the region where they source the ingredient and are concerned about the possibility of political unrest. Since they need this ingredient to make one of their best-selling products, both the likelihood and potential severity of this risk are rated as high.
• Identify the trigger that will set your plan in action: War breaks out in the region, shutting down all ports of entry/exit and severely restricting transport within the country via air, roads and railroads. Transportation of their ingredient will be challenging until stability returns to the region.
• Create the right response: The company’s business leaders create a two-pronged contingency plan to help them face this problem. First, they proactively search for alternate suppliers of this ingredient in regions that aren’t so prone to volatility. These suppliers may cost more and take time to switch to, but when the overall cost of a general production disruption that would come about in the event of war is factored in, the cost is worth it. Second, they look for an alternative to this ingredient that they can use in their product.

A social network experiencing a customer data breach

The managers of a large social network know of a cybersecurity risk in their app that they are working to fix. In the event that they’re hacked before they fix it, they are likely to lose confidential customer data:

• Assess the severity and likelihood of risk: They rate the likelihood of this event as high , since, as a social network, they are a frequent target of attacks. They also rate the potential severity of damage to the company as high since any loss of confidential customer data will expose them to lawsuits.
• Identify the trigger that will set your plan in action: Engineers make the social network’s leadership aware that an attack has been detected and that their customer’s confidential information has been compromised.
• Create the right response: The network contracts with a special response team to come to their aid in the event of an attack and help them secure their information systems and restore app functionality. They also change their IT infrastructure to make customer data more secure. Lastly, they work with a reputable PR firm to prepare a plan for outreach and messaging to reassure customers in the event that their personal information is compromised.

The value of contingency planning 

When business operations are disrupted by a negative event, good contingency planning gives an organization’s response structure and discipline. During a crisis, decision-makers and employees often feel overwhelmed by the pile-up of events beyond their control, and having a thorough backup plan helps reestablish confidence and return operations to normal.  

Here are a few benefits organizations can expect from strong contingency plans:

• Improved recovery times: Businesses with good plans in place recover faster from a disruptive event than companies that haven’t prepared.  
• Reduced costs—financial and reputational: Good contingency plans minimize both financial and reputational damage to a company. For example, while a data breach at a social network that compromises customer information could result in lawsuits, it could also cause long-term damage if customers decide to leave the network because they no longer trust the company to keep their personal information safe.
• Greater confidence and morale: Many organizations use contingency plans to show employees, shareholders and customers that they’ve thought through every possible eventuality that might befall their company, giving them confidence that the company has their interests in mind.

Contingency plan solutions

IBM Maximo Application Suite is an integrated cloud-based solution that helps businesses respond quickly to changing conditions. By combining the power of artificial intelligence (AI) , Internet of Things (IoT) and advanced analytics, it enables organizations to maximize the performance of their most valuable assets, lengthen their lifespans and minimize costs and downtime.

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