3 methods of strategic analysis that every risk manager should know

21 January 2023

4m 31s

Risk management

The key stage in risk management is risk identification. It is important to base it on proven and effective methods, as the whole risk management process depends on the proper identification of risks. In the article, we present three strategic analysis methods that every risk manager should know.

Risk management is an extremely important element of every organization’s activity. Without it, it is impossible to build a competitive advantage and it is difficult to navigate in situations of high unpredictability and instability. To manage risk properly, you need to start with the basics and identify the risks present in the organization, which means identifying the risk.

Definition of risk identification

For the sake of clarity, let us recall the definition:

Risk identification is the process of identifying potential risks, their causes and sources, determining possible consequences, and identifying entities affected by the risk.

In compiling a list of threats that may impact an organization, strategic analysis methods are helpful. Let’s take a closer look at the ones that we consider to be particularly effective.

SWOT analysis

The SWOT analysis is a well-known technique for strategic planning. It is used to analyze the internal and external environment of an organization. It helps to identify the strengths, weaknesses, opportunities, and threats of a given project or business solution. The SWOT analysis is also one of the most popular methods of risk identification.

SWOT is an acronym for the first letters of the English words:

S = Strengths – strong points, everything that is an asset, advantage, or benefit;
W = Weaknesses – weaknesses, everything that is a weakness, barrier, or flaw;
O = Opportunities – opportunities, everything that creates an opportunity for favorable change;
T = Threats – threats, everything that creates a danger of unfavorable change.

The SWOT matrix is divided into four quarters, and these into two separate categories. In strengths and weaknesses, specific factors for the organization are identified, while in opportunities and threats, factors specific to the external environment in which it operates are identified.

SWOT Analysis in risk management allows for a deep understanding of the organization, its internal and external context, and the goals it aims to achieve. This method leads to an easier recognition, determination, and description of the types of risks that occur in a company.

PESTEL Analysis

Another basis for strategic planning that can be used in risk identification is the PESTEL analysis (an extension of the PEST analysis). The general goal of this method is to create a comprehensive picture of operational and strategic conditions that have or may have a significant impact on the organization and its operation. This analysis allows for the organization of the process of monitoring the company’s environment.

PESTEL is an acronym for the first letters of the English words:

P = Political – means the analysis of political factors that intervene in the functioning of the organization;
E = Economic – means the analysis of economic factors that affect the company’s ability to generate revenue;
S = Social – means the analysis of sociocultural factors that determine the common beliefs and attitudes of geographical populations;
T = Technological – means the analysis of technological factors that affect the way products and services are produced, distributed, and marketed;
E = Environmental – means the analysis of factors related to the environment, i.e., whether products and services are delivered in an environmentally conscious manner;
L = Legal – means the analysis of legal factors that affect the way the organization operates in compliance with regulations governing its industry.

Porter’s Five Forces Analysis

Porter’s Five Forces Analysis (or Structural Analysis of the Industry) is also a model used to analyze an organization’s environment. It involves examining the competition, opportunities, and threats present in the economic or market sector.

In this method, the following areas are analyzed:

The intensity of competition within the sector / intra-industry rivalry – the market share of competition has a significant impact on the organization’s opportunities (this is the main area that influences the remaining four);
The threat of new entrants – the unexploited part of the market increases the risk of new industry players entering the market;
The threat of substitutes – the appearance of other products on the market is usually associated with the division of consumers among competitors;
The bargaining power of suppliers – the more choices of suppliers, the stronger the organization’s position against them;
The bargaining power of buyers – buyers can have a significant impact on the organization’s operations, especially if the company does not have a monopolistic position in a given sector.

Correct risk identification is the foundation of risk management

The methods described allow risk managers to better understand the organization and the environment in which it operates, and as a result, enable effective risk identification[1]. So if you are managing risk and have not tried the presented methods or any of them, change that! You will definitely not regret it!

Also, remember that properly conducted risk identification not only limits and eliminates risk, but also contributes to achieving strategic goals and taking advantage of opportunities that these threats may bring.

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Footnotes

[1] Other popular methods used for risk identification include: the SWIFT method, the 5x Why method, the Ishikawa diagram, analogy comparison, brainstorming, and expert surveys.