▪Specifically, strategic analysis frameworks include:–Kaplan and Norton’s balanced scorecardto evaluate each initiative from different perspectives, including customers, internal processes, organizational capacity (knowledge and innovation), and financial performance.–Michael Porter’s Five Forces model, which analyses the effect on new initiatives of supplier power, buyer power, and competitive rivalry, threat of substitution, and threat of new entry. –Geoffrey Moore’s model for technology companies - The Four Zones to Win, in which strategic initiatives fall into one of four zones: incubation, transformation, productivity, and performance.▪Traditional strategic planning tools do notconsider the degree of uncertainty in the plan.
23COSO guidance on the process for evaluating the risk of strategies▪Implement due diligence in strategy setting. ▪Evaluate alternative strategies as part of its strategic planning process.▪When evaluating options the organisation should seek to identify and understand the potential risks of each option.–Create a risk profile for each option –Choose the best option considering the organisation’s risk appetite▪Supporting assumptions for each option should be transparent and have some assessment of confidence. Stressing assumptions is a way of testing the sensitivity of the strategy to uncertainty.▪Once the risk profile of the chosen strategy is understood, management is better able to understand what risks it faces and how best to allocate resources to support the strategy (including mitigation and controls).▪The amount of effort and level of precision required in evaluating alternative strategies should be scaled relative to the significance of the decision.
24Methods to include risk concerns in strategic planning▪Construct a risk profile for each strategic option. The CRO can provide second-line independence of opinion to the Board separate from first-line strategic planners.▪Increase transparency by stressing key assumptions (sensitivity and scenario analysis).▪For financial measures calculate economic capital and CFaR for each option performing simulations of key drivers.▪Choose the strategic option that best achieves desired goals for the level of risk in the risk profile and ensuring downside risks are within risk appetite.▪If two strategies offer the same expected outcome but one has less risk, or more certainty around its estimation and likely success of implementation, then it should be preferred.
25Risk appetiteIllustration of choosing best option using Economic Capital▪If only concerned with financial risks then we might consider the strategic option with the highest RAROC – maximise expected return per economic capital.▪In this example, Option 1 achieves most for its risk (highest gradient). If we can repeat this strategy many times then Option 1 is the best choice (small repeat investments).
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