James L Darroch - The Two Headed Coin: Unifying Strategy and Risk in Pursuit of Performance

1. Chapter 1

1. Preface
2. Chapter 1
3. Chapter 3
4. Chapter 4
5. Chapter 5
6. Chapter 7
7. Chapter 8
8. Chapter 9
9. Chapter 10
10. Appendix II

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JAMES L. DARROCH AND DAVID WM. FINNIE

Copyright 2021 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Names: Darroch, James L. (James Lionel), 1951- author. | Finnie, David W., author.

Title: The two headed coin : unifying strategy and risk in pursuit of performance / James L. Darroch and David Wm. Finnie.

Description: Hoboken, New Jersey : Wiley, [2021] | Series: Wiley finance series | Includes index.

Identifiers: LCCN 2021000093 (print) | LCCN 2021000094 (ebook) | ISBN 9781119794202 (hardback) | ISBN 9781119794226 (adobe pdf) | ISBN 9781119794219 (epub)

Subjects: LCSH: Risk management.

Classification: LCC HD61 .D35 2021 (print) | LCC HD61 (ebook) | DDC 332.1068/1dc23

LC record available at https://lccn.loc.gov/2021000093

LC ebook record available at https://lccn.loc.gov/2021000094

Cover Design: Wiley

Cover Images: tokenphoto/Getty Images, iStock/Getty Images

To my wife, Brenda Blackstock, and our son, Daniel.

James

To my wife, Marilyn Finnie, and our growing familyGeoffrey Finnie and Sidita Zhabjaku; Gillian Finnie, Ilia Baranov, and their daughter, Alice; and Colin Finnie.

David

We have been working together now for well over a decade. Our journey started with designing a comprehensive risk management education program for the Risk Management Group at the Bank of Montreal (BMO). Following that we developed several strategy and risk programs for the Schulich Executive Education Centre (SEEC) and worked on a risk program for bank directors at the Global Risk Institute in Financial Services. We have learned much along the way from our professional colleagues and the participants. Although our backgrounds are in strategy and risk management for financial institutions, we have worked with people from many different industries, including not-for-profits.

We thought it was time to share what we have learned from financial institutions (FIs), which are among the leaders in integrating strategy and risk. This should be no surprise because that is their business. We believe that it is worthwhile to see what is at the leading edge of the integration so that other public and even private companies can reflect on the appropriateness of their integration. We also think our ideas will be useful for people starting their careers in risk at FIs. To that end, we try to balance the needs of a broad audience with the challenge of being relevant to risk professionals.

Here are the highlights we cover in this book:

• The elements of both strategy and risk management are common sense.
• Both strategy and risk management are broad in scope and inclusive.
• Achieving fit of the elements is complex.
• Bringing risk awareness into the conversation is the necessary complement needed to achieve fit in a dynamic world.
• Consequently, although the journey starts with strategy, recognizing risk and uncertainty is the flip side of the coin and the needed complement to ensure completeness and integration.

This of course raises the question, What is strategy? Strategy is an intentional activity: it is goal oriented. Porter provides a succinct summary of this position:

A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher unit prices; greater efficiency results in lower average unit costs.

There are several key points to the above. First, creating a difference or positioning is the key. Porter elaborates: The essence of strategy is choosing to perform activities differently than rivals do. Strategy is about being unique, and this requires a unique set of activities and, as we shall discuss later, a unique set of risks. The second fundamental point to notice is the focus is on profitability. Please note the focus on