Our market is facing changes every day. Many new things develop over time and the whole scenario can alter in only a few seconds. Such changes occur constantly, and any organization that fails to identify and respond to them runs the risk of encountering business problems or even the failure of the entire enterprise.
Environmental analysis is a strategic tool. It is a process to identify all the external and internal elements, which can affect the organization’s performance. Two techniques are used to examine the business environment within which an organization is operating: PESTLE analysis and Porter’s Five Forces analysis.
The analysis of the external environment should be an ongoing process for senior management, since the factors identified may provide insights into problems for the future or opportunities for new successes. Thus, senior management should carry out regular monitoring of the business environment to identify any influences that may require action.
Understanding the business environment is critical for companies to develop effective strategies. Two useful analytical frameworks are PESTLE analysis and Porter’s Five Forces. But these tools have distinct differences in their approach, focus, and applications
In this comprehensive guide, we’ll explore how PESTLE and Five Forces analyses work, their unique purposes, and when to apply each method
Overview of PESTLE and Five Forces
PESTLE and Porter’s Five Forces are complementary analytical tools used to evaluate different aspects of a company’s external business environment:
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PESTLE examines the political, economic, sociocultural, technological, legal, and environmental landscape to identify external factors that may impact an organization.
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Porter’s Five Forces analyzes the competitive dynamics within an industry to help determine a company’s potential profitability.
While PESTLE focuses on the broader macro-environment, Five Forces zeros in on competition within a particular market. Together, they provide a big picture view to inform strategic planning.
Key Elements of PESTLE Analysis
PESTLE considers various external factors that define the broader context for a company’s operations:
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Political – Government policies, tax policies, trade restrictions, political stability, etc.
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Economic – Business cycles, economic growth, interest rates, exchange rates, inflation, disposable income, etc.
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Sociocultural – Population demographics, cultural trends, consumer lifestyles, brand preferences, etc.
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Technological – Emerging technologies, access to technology, R&D activity, automation, tech regulations, etc.
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Legal – Discrimination laws, consumer laws, antitrust laws, intellectual property, health and safety regulations, etc.
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Environmental – Climate, weather, environmental policies, attitudes toward green issues, etc.
PESTLE helps identify risks and opportunities tied to external forces that can impact an organization’s success.
Main Components of Porter’s Five Forces
Porter’s Five Forces focuses on the competitive landscape within an industry itself:
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Competitive rivalry – Number and strength of competitors, industry growth, fixed vs variable cost structure, product differences, switching costs for customers, etc.
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Threat of new entrants – Barriers to entry like start-up costs, brand loyalty, access to distribution, learning curve advantages, regulation, etc.
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Threat of substitutes – Availability of product alternatives, buyer inclination to substitute, relative price of substitutes, etc.
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Buyer power – Number of buyers, buyer volume, product differentiation, buyer information availability, ability to switch suppliers, etc.
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Supplier power – Number of suppliers, uniqueness of service, supplier’s cost to switch, availability of substitutes, etc.
Analyzing these forces indicates how profitable an industry is and what positions companies to better withstand competitive pressures.
Comparing the Purpose of Each Framework
While both PESTLE and Five Forces analyze the business environment, they serve distinct purposes:
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PESTLE helps identify external opportunities and threats – things that can’t be controlled but require strategic response.
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Five Forces helps pinpoint internal strengths and weaknesses – things that can be influenced to improve competitiveness.
PESTLE takes an outside-in perspective to spot potential external impacts on plans and performance.
Five Forces takes an inside-out view to understand inherent industry dynamics and how to strengthen competitive advantage.
PESTLE Analysis Process and Usage
Conducting a PESTLE analysis involves several steps:
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List influential factors for each of the six categories: Political, Economic, Sociocultural, Technological, Legal, Environmental.
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Assess the potential opportunities and threats created by each factor.
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Determine which factors require immediate response vs. just monitoring.
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Develop strategies to effectively respond to the key opportunities and threats.
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Continue to review and update analysis as external factors shift over time.
PESTLE helps companies strategically respond to external changes in the macro-environment. It is especially useful during expansion into new markets or industries.
Five Forces Analysis Process and Application
Applying Porter’s Five Forces involves these steps:
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Analyze the five forces driving competition – rivalry, new entrants, substitutes, buyer power, supplier power.
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Assess the strength and overall competitiveness of each force within the industry.
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Determine the most influential forces and relative strengths/weaknesses.
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Craft strategies to improve competitiveness by shoring up weaknesses and maximizing strengths.
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Monitor shifts in the five forces over time as industry dynamics evolve.
Five Forces helps identify favorable industries and strategically position companies to better withstand competitive forces. It is especially beneficial for new market entry decisions.
PESTLE vs. Five Forces: When to Use Each Framework
Although PESTLE and Five Forces methodologies differ in approach, they can be used together to enrich strategic planning:
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New market entry evaluation – Use PESTLE to assess overall attractiveness and risks of a new country or industry. Apply Five Forces to determine competitive dynamics within that specific market.
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New product development – PESTLE helps surface external factors that could impact customer demand and adoption. Five Forces analyzes whether the competitive landscape is favorable for the offering.
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Market expansion evaluation – PESTLE identifies macro-level opportunities to target new customer segments and geographies. Five Forces indicates how to competitively position within those new segments/areas.
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Risk management – PESTLE highlights external risks to monitor. Five Forces reveals internal vulnerabilities to shore up.
When to Use PESTLE vs. Five Forces
General guidelines on when to utilize PESTLE vs. Five Forces include:
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Use PESTLE when you need to understand the bigger picture macro-environment.
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Apply Five Forces when you want to analyze a particular industry and competitive outlook.
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Leverage PESTLE to identify market opportunities.
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Use Five Forces to pinpoint potential competitive advantages.
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PESTLE offers a wide lens to spot upcoming external changes in the environment.
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Five Forces provides a narrow lens on a specific industry’s competitive structure.
Getting Started with PESTLE and Five Forces
Both PESTLE and Porter’s Five Forces provide critical insights to help craft strategic plans:
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PESTLE – Create a template outlining the 6 factors. Research and list relevant forces under each then assess their impact.
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Five Forces – Make a chart for the 5 forces. Use industry research to rate the strength of each. Identify the most impactful forces.
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Apply regularly – Revisit analyses quarterly to check for changes in the business environment.
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Be comprehensive – The more thorough the assessment, the greater the strategic insights.
With practice, application of these tools becomes second nature for strategic planning and decision making.
Performing PESTLE and Five Forces analyses equip leaders to capitalize on external opportunities and combat threats. PESTLE provides broad environmental awareness while Five Forces delivers insights on competing in a particular industry. Used together, these frameworks offer comprehensive intelligence to craft robust strategic plans that leverage opportunities and strengths while navigating risks and weaknesses.
PEST and PESTEL Analysis
The basic PEST analysis includes four factors:
Political factors relate to how the government intervenes in the economy. Specifically, political factors have areas including tax policy, labor law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government aims to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have a high impact on the health, education, and infrastructure of a nation.
Economic factors include economic growth, exchange rates, inflation rate, and interest rates. These factors greatly affect how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates can affect the costs of exporting goods and the supply and price of imported goods in an economy.
Social factors include the cultural aspects and health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. High trends in social factors affect the demand for a company’s products and how that company operates. For example, the aging population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to social trends caused by this (such as recruiting older workers).
Technological factors include technological aspects like R&D activity, automation, technology incentives and the rate of technological change. These can determine barriers to entry, minimum efficient production level and influence the outsourcing decisions. Furthermore, technological shifts would affect costs, quality, and lead to innovation.
The figure below shows a PEST Analysis example of the new energy vehicles industry.
Expanding the analysis to PESTLE To Cater the External Factors:
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.
Environmental factors include ecological and environmental aspects such as weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer, both creating new markets and diminishing or destroying existing ones.
PESTLE and Porter’s Five Forces Analysis
Using the PESTLE and five forces techniques together help to provide a detailed picture of the situation facing an organization. Just using one technique may leave gaps in knowledge and understanding.
- The PESTLE Analysis enables you to create a list of the potential issues within your macro-environment that have or could have implications for your organization.
- Whilst understanding the macro-environment is essential for developing your strategy it only gives you half of the picture. You also need to have a thorough understanding of your competitors and the impact they can have on your organization. To gain this knowledge you need to conduct Porter’s Five Forces Analysis.
The figure below shows a PESTLE Analysis example of a pharmaceutical company. PESTLE is a varied form of PEST. It has two additional columns L and E for listing the Legal and Environmental factors.
Porter’s 5 Forces EXPLAINED | B2U | Business To You
What is pestle & Porter’s 5 forces?
PESTLE is an analytical tool that identifies how various factors may affect an organization and its competitive standing. Porter’s 5 Forces identifies competition, new entrants into the industry, supplier power, buyer power, and the threat of substitute products and services in the market.
What is Porter’s 5 forces analysis?
Porter’s 5 Forces Analysis is a strategic framework to evaluate the competitive landscape of an industry. It examines five key factors: the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products or services, and the intensity of competitive rivalry.
When should you use Porter’s five forces?
However, some general guidelines are: use Porter’s five forces when you want to analyze the competitive forces and attractiveness of an industry, and use PESTEL analysis when you want to scan the external factors and trends that affect an industry.
How does Porter’s 5 forces stack up against other models?
Each model has its unique focus and applications. Here’s how Porter’s 5 Forces stacks up against other popular models: Porter’s 5 Forces: Focuses on industry competition and analyzes external factors that determine the competitive landscape. It identifies threats and opportunities within the industry structure.
