Supply Chain Risk Management

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4

Strategic Risk

If there is one item that is the lifeblood of chocolate producers, it is cocoa.

And if there is one item that presents a strategic risk to chocolate produc-

ers, it is cocoa. Around 70% of the world’s cocoa crop is concentrated in ve

African countries, in a region that is not known as the most stable place to

obtain raw materials. Furthermore, several years ago, a handful of traders

took possession of almost all the cocoa beans in certied warehouses in

Europe, raising legitimate concerns about commodity manipulation.

Even on a good day cocoa can be risky to grow as yields are lower com-

pared with other crops, access to fertilizer is limited, and the cocoa crop

is highly susceptible to pests. Not surprisingly, cocoa growers are increas-

ingly shiing to more protable crops such as rubber while younger farm-

ers are reluctant to become cocoa farmers in the rst place. None of this is

good news to chocolate companies.

Major chocolate companies have come to the conclusion that they must

work directly with farmers to introduce trees that increase crop yield,

to eradicate pests and disease, to provide training and education, and to

make sure farmers have access to fertilizer.

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ey are also working to make

the nancial model for growing cocoa beans more viable. ese compa-

nies are trying to be proactive in the face of a strategic risk that can aect

the success of a global industry.

is chapter addresses a specic category of risk called strategic risk.

While countless corporate- level actions, decisions, and random events

can create strategic risk, this chapter focuses on supply chain areas that

have clear strategic linkages when not managed or anticipated properly.

We will focus on strategic risk within three areas—strategic risk that

results from new product failures, the of intellectual property, and exter-

nal intelligence failures. We also provide advice about how to minimize

the strategic risk related to each area.

68 • Supply Chain Risk Management: An Emerging Discipline

WHAT IS STRATEGIC RISK?

Before discussing various supply chain areas that can elevate risk to the

strategic level, let’s be clear about what we mean here. A good place to

start is by understanding what is meant by strategic, a word that is one of

the most overused terms in business. In fact, it is so overused that it oen

becomes dicult to know when something truly is strategic.

Something is strategic if it is necessary to or important in the initia-

tion, conduct, or completion of a strategy or strategic plan.

2

Another per-

spective says that something is strategic if it relates to the identication of

long- term or overall aims and interests of an organization and the means

of achieving them.

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However, all of the denitions tie into the notion that

something is strategic if it has the ability or potential to aect the inte-

grated whole, which means aecting an entire business or its continuity.

Now that we understand the word strategic, let’s understand strategic

risk. One perspective views strategic risks as those risks that are most

consequential to an organization’s ability to execute its strategy, achieve

its business objectives, and build and protect value.

4

Another perspective

views strategic risk as the current and prospective impact on earnings or

capital arising from adverse business decisions, improper implementation

of decisions, or a lack of responsiveness to industry changes or forces.

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And

a third view denes strategic risk as an array of external events and trends

that can devastate a company’s growth trajectory and shareholder value.

is third view further categorizes strategic risks into seven major classes:

industry, technology, brand, competitor, customer, project, and stagna-

tion.

6

Consider the strategic risk to the producers of the lucrative Fast

and Furious franchise. When Paul Walker, a major star of this series, was

killed in an unrelated accident during the lming of Fast and Furious 7,

Universal decided to indenitely postpone the $200 million project, even

though the movie was well into lming. e death of a lm star during

production is perhaps the ultimate strategic risk for a movie company.

Strategic risks are those that capture the attention of the board of direc-

tors. And these are the risks that make their way onto the 10-K report as

enterprise risks. ese risks have the ability to aect business continu-

ity, erode a company’s brand image, and adversely impact market share.

As mentioned in Chapter1, supply chain risks are increasingly becoming

part of the enterprise risk listing, something that makes supply chain risk

management a growing concern to executive management. e following