Enterprise Risk Management, 2nd Edition

CHAPTER 18Risk Appetite and Tolerance in Competitive Strategy

 

JAMES DARROCHAND

CIT Chair in Financial Services, Schulich School of Business, York University

 

DAVID FINNIE

Founder and President, Marshall, Griffith & Woods Ltd.

 

INTRODUCTION

Frank Knight,¹ the well-known Chicago School economist, first noted that uncertainty is the source of corporate profits. It is uncertainty that provides opportunity for organizations to pursue strategies and tactical plans to create and capture profits. It follows, therefore, that organizations need to effectively manage themselves within their environment to leave only uncertainty that results in opportunity and profits or that is impractical to remove or expected to be immaterial to results. The goal of risk management is to lessen the downside possibilities and enhance the opportunity for gain. This chapter fully endorses that view and considers effective risk management as a source of sustainable competitive advantage—the holy grail of strategic planning.

Risk management creates a more robust competitive strategy through a thorough understanding of the risks in the business, and, through the intelligent management of those risks, to ensure the corporation only takes risks that:

• Support its purpose and strategy.
• It understands.
• It has the capability of managing.
• It has the resilience to recover from risks that materialize.

The articulation of the corporation's ability and willingness to take risk is captured in its risk appetite ...