Question

Describe the different types of risk in the market. Do a full risk analysis of an industry include porters 5 forces model in the analysis. This is an essay question.

Answer 1

Answers

Risk:Risk is the potential possibility of profit/gain or loss. This is the fear factor involved in a decision.

It is said, "Higher the risk higher is the return"

Types of risk:

The risk is broadly categorised into two parts:

1. Systematic Risk

This type of risk is common for the whole industry. It is uncontrollable because it is not specific to the organisation. It is of macro nature.

2. Unsystematic Risk

This risk is because of internal factors within the organisation. This is specific for the organisation and can be controlled using risk management techniques. It is of Micro nature.

A brief introduction of the subparts of these types of Risk:

1. Systematic Risk:

a. Interest Rate Risk: This risk is related to the volatility of interest rate in the market. It affects the debt securities because they carry a fixed rate of interest.

b. Market Risk: Market risk is associated with the fluctuations in the price of a security while trading in the stock markets.

c. Purchasing Power Risk: This risk is related to the risk of inflation. Inflation affects the purchasing power in negative way.

2. Unsystematic Risk:

a. Business Risk

It is also known as liquidity risk. This risk is associated with low profits than the expected amount of profits.

b. Financial Risk

This risk is related to the financial structure of the company. Eg. Risk of repayment to the bondholders.

c. Operational Risk

This risk is related to the operations in the organisation. This is risk of failure due organisational operations incompetency.

Potters 5 forces model:

Analysis of Indian E Commerce Industry using Porter's 5 forces model:

1. Threat of New Entrants:

This is high because Indian market is very attractive market so anyone can enter into this business as we can see many companies have emerged in past 5 years such as TATA, Paytm etc. Recently Walmart also bought stake in Flipkart.

2.Threat of Substitutes:

This is also high because there number of online websites available. So if a player miss a single opportunity, it may lead to a huge loss of customers.

3.Bargaining Power of Buyers: This could be said to be low.

The buyers don't have right to directly bargain.

4. Bargaining power of suppliers:

This can be said to be high because there are many clients for suppliers. Eg. Xiaomi sells its phones through Flipkart so the deal is very important for Flipkart either Xiaomi may go to Amazon, Snapdeal etc.

5.Rivalry Among existing firms:

This is also high.

As we can see aggressive branding by two major players who are Amazon and Flipkart. They are doing marketing efforts very aggressively. It shows high rivalry.