Strategic Risk Analysis and Evaluation: Sources, Techniques and Judgement
This domain tests your ability to identify and evaluate the risks that arise from the strategy itself and from the environment in which it is executed - not to list operational hazards. P3 scenarios often involve market entry, acquisition, product launch or supply-chain change, and ask for the risks, the appropriate techniques, and a judgement on whether the analysis supports the decision.
Sources of strategic risk
- Environmental: PESTEL scanning, regulatory change, technology substitution, exchange rates, commodity prices.
- Competitive: Porter's five forces; competitor response, new entrants, disintermediation.
- Internal and execution: flawed strategy formulation, capability gaps, key-person dependence, funding and liquidity.
- Portfolio: concentration and correlation - over-reliance on one product, customer, supplier or market.
Identification and analysis tools
Identification: structured workshops, interviews, SWOT/TOWS, Delphi (anonymous, iterative expert consensus, used where dominance or groupthink must be avoided), fishbone/Ishikawa root-cause analysis, fault tree and event tree, HAZOP and SWIFT for processes, and bow-tie analysis (threats → event → consequences, with barriers on both sides). Analysis: likelihood/impact matrix and heat map, expected value, single-variable sensitivity, scenario analysis, Monte Carlo simulation where variables are correlated, value at risk, and key risk indicators with trigger levels.
Worked example
A UK retailer is considering entering Germany. Three scenarios: base case (£80m NPV, probability 0.5), price war (£10m, 0.3), regulatory restriction on the store format (-£15m, 0.2). Probability-weighted NPV is £40m. Sensitivity shows the outcome is most sensitive to rental cost and planning approval. Reasoning: the expected value gives one number but conceals the -£15m tail; a risk-averse board must test the worst case against risk capacity, not just expected return. A real-options approach - two pilot stores, staged investment, an option to exit - cuts the downside while preserving upside, so the recommendation is the pilot rather than full rollout. Marks come from the reasoning chain, not the arithmetic alone.
Traps that cost marks
- Presenting PESTEL as the answer rather than as a prompt for specific risks.
- Rating likelihood and impact on undefined scales, making the matrix uninformative and unaggregatable.
- Applying expected values to one-off strategic decisions as if probabilities were reliable.
- Ignoring correlation: twenty individually low risks that fail together are one high risk.
- Confusing Delphi (consensus without confrontation) with brainstorming, or scenario analysis with sensitivity analysis.