The different types of strategic risks in business may involve upstart competitors, new product failures, or new technology suddenly replacing existing technology in a marketplace. At various times, a sudden shift in consumer buying behavior may pose a serious strategic risk to manufacturers and retailers. Growth of a company’s sales base may also stagnate for a variety of reasons, and this might pose a challenge to a company’s continued profitability.
One of the more common scenarios that can expose a company to strategic risks is the upstart competitor that experiences a mercurial rise in sales. For example, a company may have experienced decades-long market dominance in selling a type of software. A competitor then comes along with an innovative software product that consumers prefer over the first company's product. The resulting market erosion experienced by the first company may force that firm to invest heavily in innovation, in an effort to stay competitive with the newer firm.
Strength of brand may be a factor in how a company manages strategic risks. A company that has a strong brand among consumers is often better positioned to withstand intrusion from competition because it can continue to bring new products to the market that strategically make use of the brand’s reputation. If a company experiences a scandalous failure in a product launch that damages the brand’s reputation, for example, that type of strategic risk can affect its reputation for years.
At times, a competitor may grow large enough to upend typical marketplace dynamics. Once a firm reaches a very large scale of operations, it often achieves competitive advantages called "economies of scale." For example, a company with multinational facilities may possess strategic advantage over smaller competitors through its ability to outsource labor to places where wages are much lower.
Strategic risks also may occur when a company’s market expansion plans fail, which may leave it overextended and competitively weakened. Some companies respond to this situation by cutting losses and reverting back to the firm’s core competencies. Various strategic measures may be undertaken to remedy this situation, such as hiring a new CEO with a successful record of turning around a languishing company.
Product manufacturing firms frequently recognize the strategic risks of seeing a company's outdated technology quickly replaced with new, innovative solutions sold by competitors. This is why it is common for successful manufacturers to strategically invest in continuous product research and development. In the intensely competitive arenas of consumer and business technology, product manufacturers may be the victims of corporate espionage. This can be a significant strategic risk, unless the company has safeguards in place to prevent loss of corporate secrets.
