strategic risk management

War and Strategic Risk Management

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Author: Manu Steens

In this text I write my own opinion, not that of any organization.

By now everyone has an idea of what war means, which is why I start from a different starting point for this blog, strategic risk management.
Most people understand the concept of risk and understand mainly the operational risks, such as human error and system errors, but what is meant by strategic risks?

A strategic risk is a risk associated with an organization’s strategic decisions. A strategic decision can be any decision that determines the long-term survival of the organization. Such decisions are made within the framework of the mission and vision of each organization and have some consequences for the concept of risk.

A specific strategic decision is usually unique. Singular, so not frequently repeated throughout the history of the organization. The associated risks are therefore exceptional in nature and have no prior history. Determining the probability (‘p’) of occurrence of such risks (‘R’) is therefore always a perilous undertaking. They are pure unknowns and pure uncertainties. But, on the basis of rigorous thinking, one can indeed determine its impact (‘i’). The definition of risk as a product of opportunity and impact (R=p.i) therefore, in my opinion, does not apply to (most) strategic risks. As a result, they have a gap in their evaluation compared to traditional (often operational) risk management. This gap manifests itself in uncertainty.

Starting a war is such a strategic decision. The chance of success (with success as an event) is a priori unknown. So winning the war is an uncertainty.

What happens to uncertainties? People can’t handle that very well. We prefer certainties, even if the associated chances of risks are small. People want to know their chances and look for remedies. One such means is ‘uncertainty absorption’. This has a lot to do with systematically explaining away uncertainties, and replacing them with (personal) certainties.

Uncertainty causes stress and stress reduces the capacity of reasoning and deciding. Some even feel anger rising and we all know that making decisions in such a state is not optimal. That is precisely why we use a different phenomenon. We do a lot of mental gymnastics to replace uncertainty with an illusion of what we consider to be a credible certainty. This replaces a series of possible future outcomes with a single estimate.

To make that assessment, we use the past. We scan our history for similar situations and then we state that the past predicts the future. We use broad estimates of similar situations. This is necessary because the strategic decision is so unique. People start to cherish analogous reasoning and pay too little attention to the differences with the present. When the past gives that false sense of certainty, we eliminate any perception of unpredictability.

Uncertainty absorption can thus be defined as “The search for inferences in a large body of evidence. Then we communicate similar cases instead of the actual evidence from that body of evidence.”

A phenomenon that takes place at every layer of an organization.

One reason uncertainty absorption happens, even in warfare, is because many leaders don’t stand with their bones in the mire of the trenches. That way they don’t want to know what could happen, they do want to base their decision on a single possibility. Illusion goes through similar things to interpretations to move on to possibilities, probabilities and certainties. A wide spectrum of possibilities is thus reduced to a single one. As a result, the decision-maker in the C-suite is severely limited in his judgment as well as the correctness of his view of the future.

An important consequence is that strategy is determined by people with a adjusted version of reality. The further away the leader is from everyday reality, the greater the gap between strategic objectives and the actions to carry them out. As a result, it is difficult to answer the four important questions of strategic management correctly:

  • A: What unique value do we want to deliver to our customer (in a war: ‘our’ citizen)?
  • B: How do we create that value?
  • C: Where do we create that value?
  • D: How do we secure that value from disruption (in the future)?

If we take as a case the situation of the Russian population in Ukraine, before the start of the invasion, then there are some reservations to be made on the basis of these four questions.

  • A: It seems ok to me to want security for the Russian citizens in Ukraine.
  • B: Putin chose war. (The question is whether this makes sense with question D.)
  • C: He wants to create that security in Ukraine.
  • D: Securing the safety of one group can never succeed with a war against another. There was already a lot of resentment through the past and that resentment is only increasing with this war. In the long term, he thus creates a more unsafe situation.

This strategic decision (waging war in Ukraine) therefore entails the risk that the insecurity for the Russian population in the future Ukraine may be greater than before.

Unless the ‘trick with the pigeon would work’, as he applied it to the Chechens at the time, which made them obedient partners. In short, the strategy in the war in Chechnya was: hit them, don’t kill them, reach out to them and then rebuild their country. That this can work here, however, is uncertain because many Ukrainians have fled the country, and that in numbers that the Chechens could not. In my opinion, this ‘trick with the pigeon’ will not work here, with the main reason being that the leader is too far removed from the actual situation.

(for your information: https://historianet.nl/maatschappij/geschiedenis-van-rusland/tsjetsjenie-van-ruslands-zorgenkind-tot-poetins-jaknikker)

Strategic Risk Management: the fox and the hedgehog.

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Author: Manu Steens

In this article I write my own opinion, not that of any organization.

Last week, during my vacation, I read a kind of history book. The title is ‘On Grand Strategy’ by John Lewis Gaddis.  It is about figures such as Xerxes, Napoleon, Machiavelli, Lincoln, Adams, Washington, Elisabeth, Philip II, Franklin D. Roosevelt, Von Clausewitz, … .  The great key figure, however, was a relatively unknown person, Isaiah Berlin. He was lucky enough to read ancient texts and to come up with the idea of the duality of the fox and the hedgehog in strategic thinking and acting.  In strategic leadership.

What is this two-unit, and is it always there?

The pure hedgehog is the leader who sets the goals. ‘There we go’. But he doesn’t see the obstacles.  Sometimes he is the ‘man who is always right’.  The pure fox is the man who sees the obstacles everywhere on the track, but does not naturally set goals. He does set achievable milestones however.

Often, leaders think they need to be concerned with goals, and then leave the road to them to the organization’s employees. A typical example of this was Xerxes who crossed the hellespont with a large army, while his advisor left him because he realized that the army was going to get into logistical trouble because of his gigantic magnitude.  Xerxes’ troops were eventually stopped by the Greeks.

An example of someone who did achieve his goal was Lincoln. He was a strategist at heart, in the sense that he set his goal like a hedgehog, which was to abolish slavery. He achieved that goal through devious detours, including bribery, like a fox. The following words are attributed to him:

“A compass […] will show you the geographical north from where you are, but no advice about swamps and deserts and abysses that you encounter along the way. If you run headlong forward on the way to your destination without paying attention to the obstacles and eventually sink into a swamp […] what good is it then to know where the geographic north is?”

So he knew when to consult the compass like the hedgehog, and to bypass the swamp like a fox.

This comes with an important consequence: one has to adapt the goals to the means at one’s disposal.  Because in times of scarcity, the lack of (people and) resources is one of the biggest swamps in which a hedgehog can sink.

After all, this means for risk management that this has an important place in top management.  No good hedgehog survives without a good fox by its side.  Since these two characteristics belong to a single function of strategic leadership, it can be said that there is no well-functioning organization without sound risk management.

The fox, however, is what I call strategic risk management. He will naturally maintain intense contact with the relevant operational risk management, which in itself is in direct contact with (a part of) the environment.  The fox in the strategic leader must therefore be aware of what is going on in operational risk management.

It is for this reason that we can say that an organization in which top management is involved in the risk analysis, makes an important leap in terms of risk maturity at the moment that it actively engages in it.