Difference between strategic risk and operational risk

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Risk management is a very important topic in both Strategic Management and Operations Management. A business may face different types of risk. Not all risks will have an equal impact on the business. Therefore, it is important for managers to understand different types of risk.

Definition of risk

A risk usually refers to a situation that could be dangerous or have a bad outcome. It can also be defined as the possibility that something unpleasant will happen (Soanes, 2001). According to Canadian Centre for Occupational Health and Safety (2009), risk is the chance or probability that a person will be harmed or experience an adverse health effect if exposed to a hazard.

Some risks are operational in nature, while others are strategic in nature. According to Weller (n.d), strategic risks are those that arise from the fundamental decisions that directors take concerning an organisation’s objectives. Essentially, strategic risks are the risks of failing to achieve these business objectives.

Strategic risk

Strategic risks are determined by board decisions concerning the objectives and direction of the organisation. Examples include but not limited to corporate governance risk, merger & acquisition risk, change management risk, market stagnation risk, and financial risk. Strategic decision makers need to carry out detailed situation analysis and apply best corporate governance practices in order to reduce strategic risks.

Operational risk

Operational risks emanate from day-to-day operations of the business. Sources of operational risks include but not limited to internal resources, system, procedures and internal customers (employees) of the organisation. Losing data, break-down of machineries, and staff turnover due to de-motivation are some of the examples of operational risks. Organisations need to avoid operational risks as best as they can since operational risk may impact on the implementation of strategic decisions.

It is virtually impossible to run a business risk-free. However, an awareness of both operational risks and strategic risks help business bosses manage them effectively. Business bosses must decide on how to reduce potential risks and the impact of those risks on their businesses should they occur.

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The article publication date: 07 November 2016

Further reading/references

Canadian Centre for Occupational Health and Safety (2009) Hazard and Risk, available from http://www.ccohs.ca/oshanswers/hsprograms/hazard_risk.html (Accessed 10 October 2014)

Soanes, C. (2011) Pocket Oxford English Dictionary, 9th edition, New York: Oxford University Press

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Author: M Rahman

M Rahman writes extensively online with an emphasis on business management and marketing. He is a graduate of both Leeds Metropolitan University and London South Bank University.