Use this guide to sharpen your credit and risk write-ups.
Replace cognitive shortcuts with structured thinking using 1st- and 2nd-order risk logic.
This post builds on the Generic Risk Map, providing Before-and-After examples per risk to help bankers shift from rationalizing risks (often with biases) to articulating clear, monitorable conditions. Each reframe replaces vague “mitigation” language with a structured, forward-looking view.
⚡ Porter’s Five Forces as a Forward-Looking Risk Framework
Porter’s Five Forces is one of the most powerful first-principles tools to understand how industry structure influences the sustainability of cash flow. It breaks down the competitive dynamics that determine whether a company can defend its margin, grow profitably, and resist threats.
The Five Forces and How They Influence Risk:
- Competitive Rivalry
- Signals the intensity of price wars, innovation races, and customer churn.
- High rivalry erodes margins and raises capex/R&D pressure.
- ⚡ Watch for: Falling gross margin, high marketing spend, aggressive promotions.
- Threat of New Entrants
- Indicates how easy it is for newcomers to capture share.
- Low barriers (tech, capex, regulation) = fragile incumbents.
- ⚡ Watch for: DTC startups, digital-first challengers, or VC-backed disruptors.
- Bargaining Power of Suppliers
- Drives cost structure risk. Concentrated suppliers or rare materials = margin squeeze.
- ⚡ Watch for: Single-source reliance, index-linked price escalation clauses.
- Bargaining Power of Buyers
- Reveals vulnerability to price discounts, contract renegotiation, or switching.
- ⚡ Watch for: Large buyer concentration, commoditized offerings, short contracts.
- Threat of Substitutes
- Tests how easily a customer can solve their problem another way.
- Disruption usually enters via substitutes, not direct rivals.
- ⚡ Watch for: Non-industry alternatives, new technology or process replacements.
Why It’s Forward-Looking:
- The forces are dynamic, not static — regulatory changes, technological shifts, and consumer trends alter them over time.
- Paired with tools like PESTEL or Scenario Planning, it helps predict industry transformation risk.
Pro tip: Map how each of the Five Forces is changing. Is one strengthening (e.g., supplier power due to geopolitical tensions)? Is one weakening (e.g., threat of entry falling due to consolidation)?
Use this to inform 1st-order cash flow risks and link them to 2nd-order catalysts.
⚡ Reframing Passive Mitigation to Proactive Monitoring
Move beyond rationalization. Replace “risk is mitigated by…” with a structured, proactive monitoring approach using 4 elements:
- Risk Identification – What is the specific 1st-order or 2nd-order risk?
- Trigger Benchmark – What observable metric signals a shift?
- Proposed Response Plan – What action should be taken? Avoid generic “review” steps.
- Time Lens – Is the risk near-term (12 months), far-term (beyond 12 months), or an unknown emergence?
🔎 Before-and-After Risk Reframes (Side-by-Side Comparison)
| Risks | BEFORE (Passive Rationalization) | AFTER (Proactive Monitoring & Action) | Time Lens |
|---|---|---|---|
| Bargaining Power of Buyers | |||
| Risk: Customer concentration and renegotiation risk. | “Customer risk is mitigated by strong relationships and long-term contracts.” | Trigger: Reduction in order volume >10% or request for price discount. Response: Propose AR insurance or factoring to reduce receivable risk exposure. Advise client to diversify customer base. | Near horizon (next 12 months). |
| Risk: Loss of pricing power due to customer alternatives. | “The client has a loyal customer base, so switching risk is low.” | Trigger: Competitor discounting >5% below current client price. Response: Recommend forward hedging of revenues and margin lock-in structures. Support client in loyalty or contract extension programs. | Near horizon. |
| Risk: Over-reliance on top buyers increases cash flow volatility risk. | “There’s no sign of customer churn so far.” | Trigger: Single customer exposure >30% sustained over 2 quarters. Response: Offer working capital solutions linked to AR quality. Advise client to establish early warning KPI dashboards for order flow. | Near horizon. |
| Risks | BEFORE (Passive Rationalization) | AFTER (Proactive Monitoring & Action) | Time Lens |
|---|---|---|---|
| Bargaining Power of Suppliers | |||
| Risk: Supplier dependency and cost escalation. | “The client has long-standing relationships with key suppliers, risk is managed.””The client has long-standing relationships with key suppliers, risk is managed.” | Trigger: Input price index rises >10% YOY. Response: Propose supply chain finance solutions. Advise dual sourcing or negotiate price locks. | Near horizon. |
| Risk: Supply disruption risk from concentrated vendor reliance. | “The supplier is a global leader, unlikely to cause issues.” | Trigger: Supplier delivery delays >2 occurrences per quarter. Response: Provide inventory financing or buffer stock support. Client to develop alternative vendor qualification pipeline. | Near horizon. |
| Risk: Despite multiple suppliers, 80% of inputs come from top 2 suppliers. | “The client has multiple suppliers, so concentration is low.” | Trigger: Top supplier signals capacity constraints or price revision. Response: Propose early payment program for supplier negotiation leverage. Support client in diversifying procurement. | Near horizon. |
| “The client has multiple suppliers, so concentration is low.” | Risk: Despite multiple suppliers, 80% of inputs come from top 2 suppliers.Trigger: Top supplier signals capacity constraints or price revision.Response: Propose early payment program for supplier negotiation leverage. Support client in diversifying procurement.Time Lens: Near horizon. |
| Risks | BEFORE (Passive Rationalization) | AFTER (Proactive Monitoring & Action) | Time Lens |
|---|---|---|---|
| Competitors / Competitive Rivalry | |||
| Risk: Price wars or market share erosion. | “Client competes well; they are the market leader.” | Trigger: Gross margin drops >3% vs prior quarter. Response: Advise on margin-protecting derivative structures or cost management financing. Support in customer segmentation pivot. | Near horizon. |
| Risk: Competitor launches substitute product or cheaper option. | “Their brand is strong so competition is not a problem.” | Trigger: Competitor marketing spend increases >15% or new product launch. Response: Recommend R&D financing, or digital marketing capex funding. Client to respond with loyalty programs or faster time-to-market. | Near and far horizon |
| Risk: New competitor entering with aggressive pricing. | “They are in a consolidated industry, rivalry is low.” | Trigger:Price undercutting observed in >2 deals. Response: Offer defensive working capital buffer facilities. Client to evaluate contract renewal clauses and minimum volume guarantees. | Near horizon. |
| Competitive Rivalry | |
| “Client competes well; they are the market leader.” | Risk: Price wars or market share erosion.Trigger: Gross margin drops >3% vs prior quarter.Response: Advise on margin-protecting derivative structures or cost management financing. Support in customer segmentation pivot.Time Lens: Near horizon. |
| “Their brand is strong so competition is not a problem.” | Risk: Competitor launches substitute product or cheaper option.Trigger: Competitor marketing spend increases >15% or new product launch.Response: Recommend R&D financing, or digital marketing capex funding. Client to respond with loyalty programs or faster time-to-market.Time Lens: Near and far horizon. |
| “They are in a consolidated industry, rivalry is low.” | Risk: New competitor entering with aggressive pricing.Trigger:Price undercutting observed in >2 deals.Response: Offer defensive working capital buffer facilities. Client to evaluate contract renewal clauses and minimum volume guarantees.Time Lens: Near horizon. |
| Risks | BEFORE (Passive Rationalization) | AFTER (Proactive Monitoring & Action) | Time Lens |
|---|---|---|---|
| Barriers to Entry / New Entrants | |||
| Risk: Tech disintermediation lowers entry barriers. | “New entry is unlikely because of industry complexity.” | Trigger: New entrants gain >5% share in adjacent markets. Response: Propose strategic acquisition financing. Support client in tech capex or defensive innovation. | Far horizon. |
| Risk: Digital platforms scaling faster with less capex. | “The client’s size is a barrier to entry for others.” | Trigger: VC funding rounds in competitor startups exceed $50m. Response: Advise client on balance sheet optimization for M&A or partnerships. | Far horizon. |
| Risk: Regulatory sandbox allows fintech or disruptors to test without full license. | “High regulation protects incumbents.” | Trigger: Regulator announces new sandbox entrants. Response: Recommend strategic partnerships with fintechs or investment in regulatory tech. | Far horizon. |
| Barriers to Entry / New Entrants | |
| “New entry is unlikely because of industry complexity.” | Risk: Tech disintermediation lowers entry barriers.Trigger:New entrants gain >5% share in adjacent markets.Response: Propose strategic acquisition financing. Support client in tech capex or defensive innovation.Time Lens: Far horizon. |
| “The client’s size is a barrier to entry for others.” | Risk: Digital platforms scaling faster with less capex.Trigger: VC funding rounds in competitor startups exceed $50m.Response: Advise client on balance sheet optimization for M&A or partnerships.Time Lens: Far horizon. |
| “High regulation protects incumbents.” | Risk: Regulatory sandbox allows fintech or disruptors to test without full license.Trigger: Regulator announces new sandbox entrants.Response: Recommend strategic partnerships with fintechs or investment in regulatory tech.Time Lens: Far horizon. |
| Risks | BEFORE (Passive Rationalization) | AFTER (Proactive Monitoring & Action) | Time Lens |
|---|---|---|---|
| Threat of Substitutes / Disruption | |||
| Risk: Emerging tech creates alternative solutions. | “Our client’s product is unique; substitution risk is low.” | Trigger: Patent filings or tech trials in substitute space increase >20% YOY. Response: Propose innovation funding or strategic equity investments. Client to monitor IP landscape actively. | Far horizon. |
| Risk: Changing consumer preferences shift demand to new formats. | “Their customers need the product, no substitute exists.” | Trigger: Consumer surveys show >15% preference shift. Response: Offer advisory on product pivot funding or market research support. | Far horizon / unknown. |
| Risk: Process innovation reduces switching costs. | “Their process is embedded, switching is too costly.” | Trigger: New competitor launches lower-cost implementation pilot. Response: Propose client-led pilot or discount programs to lock-in customers. Support capex for customer-side integration. | Near horizon. |
| Threat of Substitutes / Disruption | |
| “Our client’s product is unique; substitution risk is low.” | Risk: Emerging tech creates alternative solutions.Trigger:Patent filings or tech trials in substitute space increase >20% YOY.Response: Propose innovation funding or strategic equity investments. Client to monitor IP landscape actively.Time Lens: Far horizon. |
| “Their customers need the product, no substitute exists.” | Risk: Changing consumer preferences shift demand to new formats.Trigger: Consumer surveys show >15% preference shift.Response: Offer advisory on product pivot funding or market research support.Time Lens: Far horizon / unknown. |
| “Their process is embedded, switching is too costly.” | Risk: Process innovation reduces switching costs.Trigger: New competitor launches lower-cost implementation pilot.Response: Propose client-led pilot or discount programs to lock-in customers. Support capex for customer-side integration.Time Lens: Near horizon. |
Final Tip: Use the 4-Part Monitoring Model
- Risk – Define it clearly based on first principles (Porter’s Five Forces)
- Trigger Benchmark – Make it observable and measurable
- Proposed Response Plan – Align actions with bank solutions or strategic client actions
- Time Lens – Classify as near horizon, far horizon, or unknown emergence
This drives proactive, advisory-led banking rather than passive credit rationalization.
