Difference between strategic risk and operational risk

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Difference between strategic risk and operational risk

This article aims to identify the difference between strategic risk and operational risk. 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 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 Cambridge Dictionary (2021) risk refers to the possibility of something bad happening.

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.

Difference between strategic risk and operational risk

The discussion that follows includes definitions of strategic risk and operational risk, and some examples of both to demonstrate the differences between both.

What is strategic risk?

Strategic risks are determined by board decisions concerning the objectives and direction of an organisation. According to Kaplan and Mikes (2012) strategies with high expectations on return generally require a company to take on significant risks, and managing those risks is a key driver in capturing the potential gains.

Examples of strategic risk

Examples of strategic risks 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. Otherwise, something drastic may happen and affect their organisations very badly.

For instance, Morrisons (One of the biggest supermarket chains in the UK) bought Kiddicare in 2011 for £70; however, sold it to an equity group within three years for just £2 million incurring a loss of £68 million. However, the opposite may happen as well.  For example, Google bought YouTube in 2006 for $1.65 billion. How much is it making now from YouTube? Likewise, Facebook bought WhatsApp in 2014 for $19 billion and Instagram in 2012 for $1 billion (Shead, 2019).

What is operational risk?

According to Basel Committee on Banking Supervision (2004) operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Operational risks emanate from day-to-day operations of a business. Sources of operational risks include but not limited to internal resources, system, procedures and internal customers (employees) of the organisation.

Examples of operational risk

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 these 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 helps business bosses manage them effectively. They must decide on how to reduce potential risks and the impact of those risks on their businesses should they occur.

We hope this article on the ‘Difference between strategic risk and operational risk’ has been useful. You may also like reading ‘Strategic planning process’ and ‘Strategic alliance – definition and types of strategic alliance’. If you liked this article, feel free to share it by clicking on the icons below. Other relevant articles for you are:

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Last update: 13 March 2021

Further reading/references:

Cambridge Dictionary (2021) Risk, available at: https://dictionary.cambridge.org/dictionary/english/risk (accessed 12 March 2021)

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)

Kaplan, R. and Mikes, A. (2012) Managing risks: a new framework, available at:  https://hbr.org/2012/06/managing-risks-a-new-framework (accessed 12 March 2021)

Shead, S. (2019) Facebook owns the four most downloaded apps of the decade, available at: https://www.bbc.co.uk/news/technology-50838013 (accessed 12 March 2021)

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

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.