What distinguishes operational risks from strategic risks?

Operational risks are fundamentally tied to the routine functions and activities of an organization. They emerge from the day-to-day operations, including processes, systems, and the workforce, and can affect the organization's ability to operate effectively. Examples of operational risks include system failures, fraud, or employee errors. These risks are often managed through standard operating procedures, training, and internal controls.

On the other hand, strategic risks are associated with the long-term goals and objectives of an organization. These risks are linked to the potential events that could impact the organization's strategy, such as market competition, changes in consumer preferences, regulatory shifts, or economic conditions. Strategic risks can lead to significant changes in how a company operates, potentially requiring a reevaluation of its business model or market approach.

This distinction is crucial for organizations as it allows them to develop tailored risk management strategies. By understanding that operational risks stem from daily activities, while strategic risks pertain to overarching goals, businesses can allocate resources effectively to mitigate these different types of risks, enhancing both operational efficiency and strategic resilience.