Analysing business risks:

Macro-environment

from

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In the macro-environment, new risk

factors are constantly appearing and

they are much more difficult to

identify, both for the managers of the business as well as for bankers.

The major changes or developments in the macro-environment are usually outside the business’ control.

It’s essential that the

managers of the

business are able to

anticipate the impact

of these changes on either the

business itself or on its market before

they actually happen, so as to be

able to adjust the business’ products or processes accordingly.

As part of our credit risk assessment we

must ensure that the management of the

business is aware of possible changes in

its macro-environment

Failure to do so may

result in the business

losing any competitive

advantage that it might

have had and

compromising its very

existence.

Note that when the

business is operating

across-borders and

revenues and cash

flows come from

foreign sources you

would need to

consider these factors

in those countries as

well as in your home

country.

The acronym PESTEL is used to describe

the components of the business’ macro-

environment. Each of these components

comprises a number of

factors that can positively

or negatively affect

businesses of

all sizes……….

……although it should be noted that

most businesses and/or industries

will not be affected by all the factors

simultaneously or to the same

degree as others.

The idea is to consider each of these

factors in turn and the changes that are

taking place in these environments and to

determine whether, and to what extent,

the business that we are assessing will

be affected by the changes.

PESTEL

Political

Economic

Social

Technological

Ecological

Legal

Political; In this

environment we

consider political, but

not legislative, issues.

We are not only

concerned with local

and foreign

governmental activity

here…..

…..but also the

activities of

organisations

(such as NGO’s)

and special-

interest groups

and the

pressure they

bring to bear on

government policy.

We should also consider the government’s

general policies, plans and attitudes

towards economic development in the country over the medium to long-term.

Also, consider the

possibility of

elections and the

possible outcome,

whether peaceful

and whether a

political transition may take place.

Economic; This

environment, perhaps

more than any of the

others, is the one that

most influences

business decisions,

especially in developing

economies that are

prone to sudden and

significant economic

shocks from external

sources.

Businesses can be affected directly by some

economic changes (e.g. interest rate

changes on a business that borrows

significant amounts) or indirectly (e.g.

interest rate changes affecting the

disposable income of the consumer).

Social; In this environment

we consider the business’

broader market, i.e. its

customers and their changing

attitudes and values and the

general trends that affect the

way the market buys products

and services.

Technology; The way in which

technology has become more

influential in all our lives is well known.

However, how has it influenced the

way in which businesses connect with

their customers?

Obviously, the rise of

the Internet has

changed the way many

businesses deliver their

products to the end-

user and, indeed, there

are many businesses

that only now exist

because of the

presence of an enabling

technology like the Internet.

In this technological

environment we should

also consider the impact

that the possible changes

in technology will have

directly on the business –

perhaps in the way it

manufactures its products……

…….and in the level of

competition that it might

encounter from

businesses that were

not in the same market

in the recent past.

Ecological; There are

two aspects to this

environment. Firstly,

the ecological issues

have to be considered

and, of course, not

all businesses are

affected by these

concerns.

In this part of the

analysis we should

consider the ecological

impact of the business’

operations,

remembering that

negative public

perceptions can have a

significant impact on a

business’ reputation

and, ultimately, its level of sales.

Secondly, there are some issues regarding

the way in which the business treats its

physical environment – not in an

ecological sense – but in the way in which,

for example, it plans its operations so that

disturbance and noise are minimised.

Legal; This

environment is similar to

the political environment

which we discussed

earlier but analysis is

restricted to only

legislative issues,

especially focusing

on the effect that up-

coming legislation may

have on the business.

This would include both

changes to existing

legislation and

completely new

legislation. Mostly,

changes in this

environment would

have a direct impact on the business.

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