As a major risk classification, the application requires risks to be defined as either Strategic or Operational.
Strategic Risks
Strategic risks are high-level risks that can affect an organisation’s ability to achieve its long-term goals and sustain its overall business strategy. These risks typically involve uncertainties and potential threats arising from external and internal factors that impact the organisation’s strategic objectives.
Characteristics
Scope: They are broad and can affect the entire organisation’s direction and success.
Decision-Making: Managed by the executive board or senior leadership due to their significant impact on the organization’s future.
Examples: Risk of Market competition, regulatory changes, technological disruption, mergers and acquisitions, shifts in consumer behaviour, global economic conditions.
Management
Strategic risks are monitored and managed at the highest level of the organisation. Involves setting long-term goals, strategic planning, and making decisions that align with the organisation’s vision and mission.
Operational Risks
Operational risks pertain to the potential for losses or disruptions arising from the day-to-day operations of the business. These risks are related to internal processes, people, systems, and external events that can affect the efficiency and effectiveness of the organisation’s daily functions.
Characteristics
Scope: They are more specific and impact the day-to-day operations and processes within individual business units.
Decision-Making: Managed by operational managers and staff who handle the business's routine activities in business units.
Examples: Risk of system failures, employee errors, fraud, supply chain disruptions, regulatory compliance issues, and natural disasters.
Management
Operational risks are managed through detailed procedures, internal controls, and ongoing monitoring at the departmental or functional level. Involves implementing risk management processes, ensuring effective controls, and addressing issues that arise in daily operations.
Relationship Between Strategic and Operational Risks
Operational risks can influence strategic risks. For example, a failure in operational processes could affect the organisation’s ability to execute its strategy effectively, leading to strategic setbacks.
Effective management of operational risks supports the achievement of strategic objectives. For instance, ensuring reliable IT systems (an operational risk) can be crucial for the success of a digital transformation strategy (a strategic risk).
Insights gained from managing operational risks can provide valuable information for identifying and addressing strategic risks. For example, recurring operational issues might highlight weaknesses in the strategic plan or execution.
In summary, while strategic risks are concerned with long-term objectives and are overseen by the executive board, operational risks focus on the day-to-day functioning of the organisation and are managed by operational staff. Both types of risks are interconnected, with effective operational risk management being essential to achieving strategic goals.
How is this implemented in the system?
Operational risks can be linked to a 'parent' Strategic Risk in the Related Records tab:
In turn, for a Strategic Risk all associated Operational Risks can be viewed in the Related Records tab,. This is particularly useful when it is time to carry out a risk assessment against the Strategic risk - this should consider the status of related operational risks.