Advanced Credit Risk Analysis and Management

6

Industry Risks

During the 1950s and 1960s, the clicking sound of typewriters was the hallmark of any office. Nowadays, you may find a traditional typewriter in very few offices. Let us look at a few industries that have vanished:

• The typewriter industry, which once prospered, is eclipsed by the computer industry.
• The pager industry, once hailed as a path-breaking new technology, is now almost non-existent, with the advent of more versatile mobile phones.
• Gramophone record players were pushed out by cassette players. Now they are giving way to compact disc players. Similarly the video cassette industry has also waned significantly.
• The dominance of US railroads dropped with the emergence of a new aviation industry in the last century.

Even within a given industry, different patterns of domination and paradigm shifts are observed, especially in technology. For example the traditional mobile phone segment faces severe challenges from the smart phones segment.

Industries decline and vanish, along with the participants in them. Hence, industry analysis is an indispensable part of credit risk analysis. The life stage, composition, nature, characteristics and structure of an industry are to be studied which will answer the following questions:

1. Why does the profitability differ among various industries?

2. What are the reasons for consistency in profitability in certain industries while others show wide fluctuations?

3. How do the operating risks differ from one industry to another? ...