Summary of ‘’Performance Measurement and Control Systems for Implementing

Strategy’’
(Robert Simons)

Chapter 11: Identifying Strategic Risk

Strategic risk: an unexpected event or set of conductions that significantly reduces the ability
of managey operations or impair important assets. ers to implement their intended business
strategy.
Sources of strategic risk:
1. Operations risk
2. Asset impairment risk
3. Competitive risk

Ad 1) Operations risk
Results from the consequences of a breakdown in a core operating, manufacturing, or
processing capability.

Applying the inputs->process->outputs model is critical for identifying and controlling operations
risk, especially when technology failure can lead to inefficiencies and breakdowns. This model
should be used in all critical parts of the value chain to identify points where system errors could
damage key operations or impair important assets.

Ad 2) Asset impairment risk

An assets becomes impaired when it loses a significant portion of its current value because of a
reduction in the likelihood of receiving those future cash flows.
Financial impairment -> future cashflows are no longer sufficient to support the asset’s
balance sheet valuation
Impairment of Intellectual Property Rights
 Physical impairment -> destruction of key processing or production facilities due to fire,
flood or other catastrophe.

Ad 3) Competitive risk
Results from changes in the competitive environment that could impair the business’s ability to
successfully create value and differentiate its products or services.
Customers -> what employee actions could drive customers away?
Suppliers -> what employee actions could cause important suppliers to stop supplying
the firm?
Substitute Products -> what employee actions could cause customers to switch to
competing products or services?
New Entrants -> what employee actions could cause new competitors to enter the
industry?

Franchise risk (reputation risk) -> occurs when the value of the entire business erodes due to
a loss in confidence by critical constituents.

Assessing internal risk

The risk exposure calculator analyses the pressure points inside a business that can cause
strategic risks to ‘blow up’ into a crisis. These pressures are due to:
Growth
Culture
Information management

Misrepresentation and fraud

Individual employees may sometimes create risk by engaging in wrongful acts- either
misrepresentation or fraud. This is most likely if three conditions exist:
Pressure to bend the rules
Opportunity to access valuable assets and/or manipulate accounting records
Rationalization that these actions are ‘not really wrong’.