The Role of Risk Management in Strategic Decision Making and Organizational Performance

Abstract

Risk management has transformed from being merely an activity of reacting to requirements into a strategic process whose decisions impact the organization’s business strategy and competitive position. The current study analyzes the role played by risk management in the decision-making process at the strategic level, as well as how it impacts the performance of the organization. In this study, the researcher uses risk management models to conduct quantitative research through the administration of questionnaires to a sample of 215 senior managers. The Structural Equation Model (SEM) was applied to analyze the direct and indirect effect of ERM implementation and strategic alignment on organizational performance (financial performance, operational effectiveness, and growth). As shown in the results, effective risk management activities lead to better strategic decisions and organizational performance. Organizational performances of companies with advanced ERM programs tend to outperform organizations using separate risk management practices. In addition, the current study proves that the strategic alignment serves as an important mediator between the ERM and performance, emphasizing that the organization must consider the importance of risks while formulating strategies. Contributions made by the study include providing a theoretical model and policy guidelines for governance bodies looking to make decisions based on risk. In terms of academic contribution, the present study contributes towards the ERM-strategy-performance relationship, which is a subject widely discussed by researchers in recent years.