Strategy & Risk: Two sides of the same coin!
As we gradually approach the end of another year, it is a season of strategy formulation as many firms take stock of their performance and rethink their strategy for 2020 and beyond. Although it is the appropriate thing to do given the importance of strategy to the failure or success of a firm, there are concerns at the approach being used: the absence of risk disposition and limited inclusiveness in the strategy formulation of Nigerian firms.
While the absence of risk disposition leads to ineffective execution of strategies due to the inability to effectively mitigate the emerging and unknown risks that arise during strategy execution, the top-down approach mostly used in formulating strategies causes limited understanding and a lack of sense of ownership and responsibility during strategy execution.
Once the vision of a firm is defined, strategy comes in to help achieve the vision. Strategy is therefore, a set of plans that help a firm manage or mitigate the challenges or risks that might restrain it from achieving its vision. With this definition, the question then is: what kind of risks do firms normally try to address in their strategy formulation? To answer the question, it is important to note that the risks faced by firms can be broadly divided into three; Known Risks, Emerging Risks and Unknown Risks.
In formulating a 3 or 5-year strategy plan for instance, firms are normally expected to scan the business/economic environment through a SWOT (strengths, weaknesses, opportunities and threats) analysis. With the SWOT analysis, a firm is able to better understand its strengths and how these strengths can be used to exploit the identified opportunities and address its weaknesses and threats. It provides good insights on the state of the firm in relation to factors that are central to its survival or failure.
From a risk perspective, the problem with SWOT or other frameworks such as PESTLE (Political, Economic, Social, Technological, Legal and Environmental) for scanning the business environment is that they focus and help in identifying more of known risks and a few emerging risks during strategy formulation. While this is fine and expected, there is a problem deriving from the differences in the types of risks identified and planned for in strategy formulation and those that the firm is confronted with during strategy execution.
To reiterate, while firms focus on mainly known risks and a few emerging risks in strategy formulation, the major risks that firms are confronted with during strategy execution are mainly emerging and unknown risks. Interestingly, this is just a part of the dilemma of firms in their strategy formulation and execution process. Another part of the dilemma is with the differences in the people that formulate the strategy and the ones that execute it.
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From my wide engagement with Nigerian firms, it is very clear that of the three methods of strategy formulation (top-down, bottom-up and hybrid), many firms use the top-down approach. While they maintain that it is the most feasible method, which is a valid reason, but there is a problem with that. It creates a wide gap between those that formulate the strategy and those that execute the strategy especially customer interfacing employees.
Even though firms maintain that the formulated strategy is normally cascaded down to other employees including the customer-facing employees, research has shown that what is cascaded down is normally significantly diluted and lacks the required understanding, ownership and responsibility for effective execution of the strategy. In as much as this is the case, the question therefore is: what method should be used to ensure a better understanding and mitigation of risks on one hand and then effective execution of the strategy?
Of the three methods identified above, the most inclusive and effective is the hybrid approach. While it can be difficult and rigorous, it creates a better opportunity for a more robust understanding and involvement in the strategy formulation. The focus is on how to ensure that every head feels utilised and every voice feels heard.
Encouragingly, this is possible irrespective of the size or complexity of the firm especially in a business environment like Nigeria where the average level of engagement of private sector employees is discouragingly very low at only 12 percent. With about 23 percent of the employees actively disengaged and 65 percent disengaged, the most effective option to ensure a reasonable level of understanding and involvement of the employees in the strategy of a firm is therefore the hybrid approach.
When properly applied, it leads to a higher sense of ownership and responsibility during the strategy formulation and execution period and beyond. With the hybrid approach, the earlier identified differences in the risks addressed in strategy formulation and the ones faced by firms during strategy execution are better managed or mitigated.
While firms focus on mainly known risks and a few emerging risks in strategy formulation, the major risks that firms are confronted with during strategy execution are mainly emerging and unknown risks
At the moment, this is not the case as most employees are completely ignorant of the risks faced by their firm. In a survey we conducted with a focus on the financial sector, most employees scored on the average about 1.5 over 5 in terms of risk awareness and practice. For the hybrid approach to work as an effective method of creating the required synergy between strategy and risk, certain steps must be taken.
First, every employee must be trained at least to be aware of the key risks faced by the firm and to see themselves as risk owners and managers.
Second, firms need to appreciate the benefit of approaching and formulating their strategy from a risk perspective. Once this is achieved, the use of the hybrid approach will provide the opportunity for everybody, especially those significantly involved in both the strategy formulation and execution, to appreciate and understand better the inherent known and emerging risks confronting their firm.
With such risk knowledge, they are better informed on how to plan and mitigate both emerging and unknown risks that might occur during the strategy execution period.
Franklin Nnaemeka Ngwu
Dr. Ngwu is a Senior Lecturer in Strategy, Finance and Risk Management, Lagos Business School and a Member, Expert Network, World Economic Forum.