Disruption is increasingly a top of mind issue for both senior management and the Board.  As a matter of fact, disruption is at the heart of the strategic risks and uncertainties that organisations face however, limited time is spent on considering disruption both as a risk but importantly also as a strategic opportunity. Therefore, many organisations are unable to leverage a deeper understanding of disruptive risks as a value-adding tool in managing the strategic and operational resilience of the firm.  There are a range of cultural, organisational and functional reasons for this internal inertia.  However, these should not be allowed to prevent the organisation from:

  • Understanding the potential sources of disruption and their impact on the viability of the business, i.e. value protection
  • Testing the resilience of the business model(s) and strategy to disruption, i.e. preparedness
  • Exploring how disruption can be used to generate strategic advantage and incremental value, i.e. value enhancement

It is clear from many both B2B and B2C examples (e.g. Amazon, Uber, AirBnB, just eat, 3D printing of aircraft parts, Ocado, FinTech, WeWork, Amazon marketplace, AI) that disruption is a business reality and not just a concept of interest to academics and management consultants. Equally, regulators (e.g. FRC / ARGA in the UK) are putting more emphasis on how emerging / disruptive risks are considered and disclosed.

Disruption can have many sources and paths of evolution:

  • Technology; digital access to content, product and fulfilment, AI, Robotic Process Automation
  • Innovation; new business models (often enabled by technology or data analytics)
  • Customer and consumer perception of value, be that ease of access, choice and/or fulfilment mechanism
  • Regulatory change; redefinition of the ‘rule book’
  • Economic shifts
  • Change of government leading to shifts in policy
  • Social movements (e.g. Greta Thunberg, Extinction Rebellion); shaping public perception and leading organisations to review and redefine their purpose to align with new expectations on e.g. sustainability and response to climate challenge

Organisations need to find ways to change both culture and mindset to enable an open and proactive discussion of disruption and potential mitigations.  This will require additional activity outside existing business-as-usual processes.  A joint approach, led by the Chief Risk Office and the Chief Strategy Officer, should enable a more fundamental conversation than ‘what are the key risks that might affect the delivery of our strategies and plans’.

However, many organisations are struggling to address disruptive risks and leverage the available insight because:

  • The discussion becomes focused on downside only without consideration of value creation from proactive use of disruption to generate incremental value
  • Senior team not stimulated to take an outside-in as well as inside-out perspective
  • Limited cross-functional input to the planning and execution of the disruptive risk discussion
  • Lack of willingness to consider the ‘raison d’etre of the core business:

o   The assumption is that more of the same is less risky than new product / service offerings

o   Testing the existing business model with disruptive risks can lead to very uncomfortable conclusions

o   Engagement and support from the CEO and the Executive team is not visible

o   Misalignment of the timing of strategy and risk processes, and in particular consideration of emerging and / or disruptive risks

In a previous article, I set out an experience-based description of the characteristics of a good Board or Executive discussion:

  • Outward focused and sensitive to early signals of potential disruptive change – be that from a technology, value proposition, pricing or delivery perspective
  • Include potential risks and root causes that are not well understood or have limited data available. As a consequence, there will be a lot of ambiguity to be worked through
  • Recognise highly uncertain timescales – the key is whether the organisation is able to pick up and interpret early warning signals
  • Include a broad range of inputs and experience
  • Acceptance that the business model(s) might be threatened, and the need for inclusion in the consideration of strategic and financial viability
  • Management recognition that their sense of strategic uncertainty might increase

In conclusion, disruptive risks are affecting businesses whether they recognise it or not – the only question is the severity and timing of the disruption.  Strategic choices therefore need to be stress-tested against risk appetite, principal risks and disruptive risks to enable better clarity, and indeed management action, on issues such as:

  • Value creation – Where and how do we compete and win?
  • Value protection – What are the disruptive risks that could prevent us from succeeding?
  • Preparedness – What are the financial / viability implications? How resilient is our current set up and footprint both from a strategic and operational perspective?

 

 

Hans-Kristian Bryn is a Senior Strategic Risk Management and Governance Advisor and an Associate at Headland

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