Business Model Risk
From Open Risk Manual
Definition
Business Model Risk is a fundamental, high level Risk facing an organization that manifests in two distinct contexts:
- For new ventures, the risk that the fundamental blueprint of how the organization aims to deliver its value has material weaknesses and does not lead to sustainable operation
- For existing ventures, the risk that changing circumstances will invalidate a core aspect of how the organization delivers its value, e.g. competitors of a firm operating in a given Business Sector will develop alternative business models for delivering similar or equivalent goods or services.
Informally, this risk is denoted also as Disruption Risk especially when indicating an extreme risk that applies sector wise.
Business Model Risk is one of the components of Franchise Risk (along with Political Risk).
Regulatory Expectations
In the context of the financial services sector, supervisors do not look solely at capital adequacy at a single point in time, but rather they assess banks’ business models and whether or not their profitability is stable enough to support safety and soundness. To understand and analyse banks’ conditions, most supervisors conduct Business Model Analysis as part of their supervisory review process.
Issues and Challenges
- Business Model Risk might be confused with more concrete Operational Risk types
- Business model risk is frequently defined too narrowly (as earnings / Revenue Risk) which does not permit a deeper analysis of the relevant risk factors nor forms of value that are not expressed monetarily
- One challenge of defining business model risk more concretely stems from the lack of common definitions of what constitutes a Business Model but also the difficulty of characterizing the precise impact of market conditions and the competitive landscape.
- The above framework focuses on risks to an existing (established) model. A new venture based on a novel business model faces similar risks which are in addition entangled with a multitude of Business Execution and Funding Risk.
See Also
References
