This document discusses factors an analyst would consider when analyzing a business's market environment, including products/services, location, seasonality, customers, suppliers, competitors, substitutes, and entry barriers. A business's place in the market is important to understand sustainability. Key questions are asked about demand, accessibility, distribution channels, customer/supplier size and locations, competitive advantages, and threats from substitutes or new entrants. Understanding these market dynamics provides insight for assessing risk.

1. Analysing Business Risks:
Market Environment
from
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2. When we analyse a business as
credit assessors, we want to
consider whether it’s sustainable
into the future……….

3. …………and so a vital aspect of
the business that we need to
understand is its place in the
market……….

4. ………that is, does it
sell something that
someone actually buys
and will continue to
buy?

5. We call this the market
environment and here
we take a look at the
semi-external
components of the
business – those
elements that are to
some extent within the
control of the business
itself.

6. Let’s take a look at what
is usually considered in
this environment and
some of the questions
that an analyst might
ask;

7. Product(s); what products or services
does the business sell? Is there a steady
or growing demand or is demand falling
due to changes in consumer behaviour?
Is the product ecologically sound?
Is the product perishable or can it
be safely stored
for a long period?

8. Location;
where is the
business
situated in
relation to its
customers and
its suppliers?
Different types of businesses have
different location needs………

9. For example, the retail type of
business needs to be close to its
customer and in a location that
is easily accessible.

10. On the other
hand,
manufacturers
need to be
nearer to the
supplier of the
raw material
so that
procurement
is easier and
lower stock
levels can be
held at any
one time.

11. As part of your
analysis of the
business’
location,
consider also it’s
distribution
channel, i.e. how
does it get its
goods to the
customer and
how secure is
that channel?

12. Seasonality; the bank needs to
understand the seasonality of the
business as it will have an impact
on its working capital requirements
during the year. This can be
demonstrated by a cash flow
forecast completed by the
managers of the business.

13. Pipeline business; what
business is in the pipeline for
the near future? This applies
to manufacturers,
contractors and distributors
as well as some service-type
businesses but not to
retailers. The bank wants to
know that the business can
be sustained with longer-
term orders and/or contracts.

14. Customers; the bank would want to
know who the customers are, how
many there are, where they are
situated, and what credit terms are
offered (if any).

15. Especially of concern
is the relative size of
the customer as
large corporates and
government
institutions tend to
take a long time to
pay their debts and
this impacts on the
client’s cash flow.

16. The bank also does not
want to see a small
number of customers as
this means that too
much of the client’s
business is
concentrated into a
small customer base.
There is obviously
danger here should
those customers decide
to obtain their supplies
from another company.

17. The location of the customer is important –
whether they are local or foreign, for example,
can affect cash flow, and can lead to other
concerns such as political and economic
changes in the customer’s country.

18. Suppliers; as with
the customers
element, the bank
would want to know
who the suppliers are,
how many there are,
where they are situated and what credit
terms are available (if any).

19. Also, it’s useful to know
whether there are any
alternative suppliers of
the necessary inputs
that the client needs to
run the business. The
bank would be
uncomfortable with only
one supplier of a key
input for the client’s
product.

20. Competitors; obviously
the bank cannot expect
the client to know all the
competitors in the
industry but the client
should be aware of the
key ones and what their
relative strengths are.

21. It would be useful to
know from the client
what he or she
considers to be their
competitive advantage
relative to their main
competitors.

22. Substitutes; these are
products/services that
are similar but not the
same……. but they are
sufficiently similar to
satisfy the needs of the
consumer.

23. Substitutes pose a
threat when the
switching costs are
low, when the
substitute has a
lower price or the
perceived quality and
performance of the
new product are
superior.

24. The bank
would need to be
satisfied that the
risk of this is
reasonably low
in the client’s
industry.

25. Entry barriers; low entry barriers into the
industry lead to higher levels of competition.
Obviously, if the client’s industry has high
entry barriers the bank is more comfortable
about the possible threats of new entrants.

26. We do hope that you enjoyed this presentation.
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