Avoid Being Blindsided by Risks: Focus on Key Assumptions

December 1, 2010 ERM Initiative Staff 2-min. read

Leaders today are well aware of the need to manage risks and opportunities affecting their chosen strategies. Many boards and executives have put significant effort into identifying potential threats that could prevent their strategies from being achieved successfully. However, these same boards and executives commonly fall victim to a blind spot with respect to strategic risk that can be very difficult to recognize in advance of their occurrence. This paper, published by Deloitte, notes that often this blind spot is the result of a failure to consider the possibility that the strategy itself may be flawed, due to the fact that it is based on assumptions that may no longer be valid.

The Risks Inherent in Assumptions

Leaders often rely on their own experiences when determining strategic assumptions. This practice can lead to the problem that experience is not always a reliable guide to action or predictor of the future. The environment is constantly changing, and the lessons that have been learned under one set of circumstances may be completely invalid under a different set of circumstances.

History is rich with examples of failures due to false assumptions, which were supposedly “known for sure”. However, there are also many examples of successes for those who were able to effectively challenge those false assumptions. Challenging assumptions can allow organizations to seize competitive advantage opportunities.

Circumstances are constantly changing in the business environment, even more so in today’s environment. Unpredictable, sudden, and violent shifts are increasing in this turbulent setting. Therefore, understanding strategic risk requires systematical and regular challenging of fundamental assumptions that underlie strategy.

A risk intelligent strategy can assist leaders in challenging their own assumptions, ultimately helping leaders implement a successful strategy. Below are steps developed by Deloitte to implement a Risk Intelligent Strategy:

Use a “Thesis-Antithesis-Sythesis” framework to identify and challenge assumptions
Identify signals that may indicate the occurrence or emergence of unexpected events
Determine if the unexpected event is “friend or foe”