Analysing Business Risks:

Macro-environment
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We’ve discussed the
micro- and market
environment risks which
are, largely, known and
already in place and
are, to some degree
therefore, historical.
However, 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.
 Political

Legal Economic

PESTEL

Ecological Social

Technological
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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