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Marketing and Finance: Creating Shareholder Value by Keith Ward, Brian Smith, Malcolm McDonald

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4

Assessing market risk

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Despite the loose use of the terms by some, markets and products are not the same thing. Markets are groups of people with related needs; products are bundles of benefits that might meet those needs. Market risk arises when a company attempts to match one to the other.

Market risk is the risk that the market size will not be as large as hoped for by the plan, as a result of which the intended shareholder value would not be created. It is distinct from, but aggregates with, share risk and profit risk. In short, market risk arises when the market projections turn out to be wrong. This happens for a number of reasons: the targeted market is very new; the product category is very new; the product enters a new stage in its life cycle; or the uncertainty arising from this ‘newness’ is not compensated for by effective research and analysis.

Market risk is the cumulative risk of five component risks:

  • Product category risk. This is the risk that the entire product category may be smaller than planned. It is higher if the product category is novel and lower if the product category is well established.
  • Market existence risk. This is the risk that the target segment may be smaller than planned. It is higher if it is a new segment and lower if the segment is well established.
  • Sales volumes risk. This is the risk that sales volumes will be lower than planned. It is higher if sales volumes are ‘guessed’ with little supporting evidence and lower if the sales ...

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