Quick and Easy Market Risk Analysis

Risk-Analysis

Risk analysis is a project selection model that helps us in the decision making
process by describing ambiguity. To illustrate an application in which a risk
analysis can be used I will address a simplified hypothetical situation in
which a company is looking to involve themselves in one of two markets.

Screen Printing Inc, a small printing shop, is looking at entering into a
new market and needs to determine which one of two markets would be a larger
change from the current state of operation. In some cases a large change could
be a good thing; in others a large change would not be desirable. What we want
to do is gather a better understanding of which option is most like the way
things are currently being done. Change is not bad but if the profile of a
new market more closely matches the current profile of Screen Printing Inc‘s
current market segment there is a larger possibility of succeeding with a new
line.

The first option is the Home décor market in which they would supply
printed wood products to the general consumer. The second option is to enter
the Municipal Sign market in which they would supply road signs in a business
to business manor. Both options are in vastly different markets and will both
require a few changes of the current shop and personnel.

To compare the two markets a numeric method was developed in order to score
each option. Areas of interest and variables that need to be addressed are;
market stability, market size, personnel requirements, equipment requirements,
and meeting required standards. Each area will be given a rating between 1
and 10 with 10 representing a large change from the current operation and 1 representing
a small change from the current operation.

Here are the results:

     
After the evaluation it is easy to see that with respect to these areas Home
décor in most like what Screen Printing Inc is currently doing. To say it another
way the amount of change required to supply the municipal sigs is greater
then the change required to supply printed home décor.

This data is only one piece of the pie and should be used along with other
analysis in order to create a more comprehensive understanding of the situation.
A complimentary analysis to the one above would be one that indicates the expected
financial returns of the options. If Screen Printing Inc knew the expected
financial returns for the given markets along with how much of a stretch it
would be to enter each market they could make more of an informed decision
as to which one to pursue.