During a recent workshop, the role of strategic planning in managing upside and downside risk emerged. During the discussion, examples of companies that went into decline despite having well designed strategic plans as well as those that had excelled without strategic planning were given. In addition, examples of companies that could attribute their success to strategy execution and well as those whose decline or below average performance was attributable to lack of strategic direction were also given.
To fuel the discussion, I brought the attention of the group to an article titled “Success borne out of execution” (read here) where I concluded that planning alone does not guarantee success since good planning coupled by poor implementation can easily yield poor results while poor or no planning coupled with good execution of ideas can easily yield better than good planning coupled with poor execution. This article contained illustrations about two Kenyan banks with one having succeeded in both planning and execution while the other failed in execution despite good planning. The bank that succeeded in both planning and execution had outperformed the competitor on all parameters for over 10 consecutive years.
This discussion however brought about different perspectives to strategy development and execution. First, strategic risk is a complex phenomenon encompassing issues such as market dynamics, technological disruptions, regulatory changes, competitive pressures, and geopolitical uncertainties amongst others. Consequently, unlike operational risks, which can be managed through standard protocols and procedures, strategic risks are often complex, interconnected, difficult to predict and at times outside the control of an organization.
Secondly, the volatility, uncertainty, complexity, and ambiguity inherent in the external business environment has the ability to render any forecasts, projections and assumptions developed during strategic planning redundant. In addition, internal factors such as poor decision-making, management overconfidence, groupthink, lack of flexibility and poor risk management can also reduce the effectiveness of strategy development and implementation in mitigation of strategic risk.
Strategic risk is also interconnected and interdependent with other risks. However, management can easily overlook or oversimplify these interdependencies and focus on isolated variables rather than holistic systemic risks. Rare and unpredictable occurrences such as natural disasters, geopolitical crises or technological breakthroughs can worsen a bad situation emanating from an oversimplified strategy thereby negating the positive impact of a strategy in strategic risk management. This can be well illustrated using the impact of COVID 19 which shook even the most comprehensive, well-developed and executed strategies leave alone the oversimplified ones.
In conclusion, though strategic planning is an essential risk mitigation tool, it cannot solve all strategic risk issues. Its inherent limitations, including but not limited to uncertainty, susceptibility to cognitive biases, inflexibility, complexity of interdependencies and execution challenges underscore the need for a multifaceted approach to risk management. Organizations must therefore complement strategic planning with robust risk identification, monitoring, and response mechanisms to navigate the complexities of the modern business landscape effectively.
Dr. Weru Mwangi is the CEO & Lead Consultant at Ultimate Management Solutions, a firm specializing in training & consultancy in Finance, Governance, Strategy, Risk Management and Leadership Development. He can be contacted on weru@umslgroup.com
