PESTEL (Political, Economic, Social, Technological, Environmental, and Legal) analysis and Porter’s Five Forces Model are two crucial analytical tools for businesses that help organizations increase their industrial competitiveness. The Porter Five Forces Model examines the power and influence of rivals, customers, suppliers, and substitutes in a market that is competitive. In contrast, PESTEL analyzes how various macro-level environmental factors may affect an organization and its ability to compete in the market by categorizing the factors into six groups and examining each group’s impact on the organization separately.
The Porter Five Forces Model assists management and other decision-makers in an organization by identifying the industry structure and profit margins through the use of the model’s five forces. These five forces are rivalry among established players in the market, threat of a substitute, threat of new entrants, and negotiating power of suppliers and buyers. An organization can conduct this analysis at any point in time to ascertain its position. It will give valuable insight into the various forces influencing the industry, where the industry is currently, which suppliers and customers are currently having the biggest influence, the industry’s strongest competitors for the organization, and any potential substitutes that could endanger its goods or services. Similar to how it can be used by an organization to assess the level of competition and profits in an industry before entering it. A company can also benefit from using the Porter Five Forces Model to understand the various entry barriers that exist and make it challenging for new organizations to enter and survive in an industry.
In contrast, PESTEL analysis seeks to ascertain how the six environmental forces—political, economic, social, technological, environmental, and legal—affect an organization. It helps businesses create strategies to take advantage of opportunities and assess the potential of new markets. PESTEL is a tool for both national and international analysis. E. g. A PESTEL analysis of the new market should be conducted by a company looking to expand into new international markets that are not currently its home country. It will assist it in determining what political factors or how the political situation in the new market or country may directly affect its business, the economic state of the new market to support the organization’s goods and services, the social and cultural values of the new market and how they would react to the organization’s offerings, the availability of cutting-edge technology in the new market, and the environmental conditions of the new market. Before entering a new market, a company must carefully examine all the factors to ascertain whether they will ultimately be favorable to the company or not and whether or not it will be profitable there (Abdullah, 2011). PESTEL analysis is typically performed prior to entering a market.
Managers can use the Porter Five Forces analysis for any particular business situation by closely examining numerous factors connected to each of the five forces. E. g. A manager can consider factors such as the quantity of customers, the product differentiation, the cost of switching customers, and others when assessing the bargaining power of the market. It will aid management in better comprehending all industry participants. The six forces can also be used by managers to conduct PESTEL analysis to examine a particular circumstance. E. g. A company with operations in Sydney, Melbourne, and Queensland would have to research local, county, and state laws for every location pertaining to partnerships, employments, the environment, auditing, and other matters. PESTEL and the Porter Five Forces Model are both excellent resources for conducting industrial analyses, but they have different purposes and ranges of application.
What Is Porter’s Five Forces?
An analytical framework called Porter’s Five Forces is used to comprehend a company’s competitive environment. Developed by Michael E. Porter, it helps identify the industry structure of any company. Companies frequently employ this technique to direct and decide on their business strategies in order to strengthen their competitive advantages.
It identifies five factors that influence how each industry and market on the planet is structured. Porters Five Forces include the following factors:
Buyer power
This element relates to how much consumers can influence the cost of goods. It is impacted by a company’s customer base, including the total number of customers and the significance of each customer. Customers have more sway over a business when it has a smaller customer base. When competitors offer lower costs of goods, buyers may reduce the price of goods or switch to those competitors. A business that has a larger customer base has more power than the consumer and can set the price of the goods.
Supplier power
This element takes into account the way suppliers use their clout to raise the cost of goods. This suggests that suppliers have more power the fewer there are. Supplier power in the U. S. is comparatively low as a result of the numerous domestic and international suppliers
Industry competition
This aspect has to do with an organization’s competitors in the market and their capacity to steal business. The ability of a company to maintain market share increases with the number of competitors and the number of comparable products and services they provide. When competitors’ products or services are less readily available, producers have more power than consumers and can raise the price of their products.
Threat of new entrants
An industry’s competitiveness is boosted by the ease with which new businesses can enter it. Businesses prefer to operate in sectors with high entry barriers and few competitors. Because of the market’s stability, producers can gain more influence and market share.
Threat of substitute products
This factor relates to competition from substitute products. When there are direct substitutes for an organization’s goods and services, that organization has less power. Businesses that have developed brand loyalty over time attract more customers than rivals.
What Is PESTLE Analysis?
PESTLE analysis is a tool used to assess how external factors affect a company’s operations and increase its competitiveness. When evaluating business strategies, beginning a new business, or entering a new and foreign market, the analysis is frequently carried out. Its also useful in corporate strategy planning. To provide a thorough situational analysis, PESTLE analysis is frequently used in conjunction with other analytical tools, such as Porter’s Five Forces.
The acronym PESTLE categorizes an organization’s external environment’s opportunities and risks into six categories: political, economic, social, technological, legal, and environmental. Consider each of the following factors:
Political factors
These elements include decisions made by the government and the legislature that have an impact on the economy. This group may include trade prohibitions, employment laws, tax laws, and laws governing labor and the environment. This category also includes goods and services that the government seeks to provide.
Economic factors
Social factors
These factors involve changing demographics and social trends. Population growth rate, age distribution, health awareness, cultural norms, and career attitudes may all fall under this category. Social trends can have an impact on a company’s operations, such as its manufacturing, marketing, and distribution processes. For instance, if a company’s manufacturing is located in a region with a declining labor force, this may result in an increase in their labor costs.
Technological factors
This category includes technological advancements, research and development, and automation. These variables include technological advancements that can affect a company’s operations and the competitive landscape. They can identify entry barriers and have an impact on choices made regarding entering markets, launching products, or outsourcing possibilities.
Legal factors
These factors are the legal elements that affect businesses. They consist of copyright law, employment law, antitrust law, health and safety law, and consumer law. These laws’ implementation and enforcement have an impact on how a business operates and how much its products cost. It’s crucial for global organizations to remain cognizant of and compliant with each country’s regulations and evolving laws.
Environmental factors
These factors involve the ecological factors that influence companies. Climate, pollution, weather, climate change, and environmental laws may all fall under this category. These nonbusiness-related factors can influence tourism, agricultural and insurance sectors. A greater understanding of climate change has an impact on businesses’ operations and products.
PESTLE analysis vs. Porter’s Five Forces
Two different types of competitive market analysis are offered by PESTLE analysis and Porter’s Five Forces. Consider these comparisons between the two approaches to help you understand their specific differences:
Purposes
You can better understand industry environmental factors that have an impact on your organization by using PESTLE analysis. You can learn how each factor may affect your strategy, new business, or market by categorizing your opportunities and risks into the six categories. You can use it to better plan your industry strategy and your business decisions.
You can use Porter’s Five Forces to determine the business situation’s power structure. It can help identify a companys current competitive position. It can also aid in planning how to advance into positions that are more competitive.
Benefits
By learning the factors that influence your business environment, PESTLE analysis helps you better understand it. It challenges you to anticipate potential external threats and control or lessen their effects. It also allows you to identify opportunities for profitability.
In order to assess the market’s competitive environment using Porter’s Five Forces, you must look at specific market components. You can make more strategic decisions by understanding its potential sources of revenue and its potential obstacles to success. Additionally, you can assess the strengths and weaknesses of your business and learn how to adjust your strategy as a result.
Time of use
PESTLE analysis is frequently carried out by businesses before entering a new market or when evaluating their business strategies. It can also guide corporate strategy planning. It aids in the creation of plans for maximizing gains and controlling risks.
The Porters Five Forces model can be used at any time by business analysts to help an organization determine its competitive position. It can be useful before starting a business to assess the level of industry competition and the variables that might affect profitability. If applied in the workplace, it could serve as a strategic decision-making tool for enhancing competitiveness.
Scope of use
PESTLE analysis can be used by organizations at the national or international level. Often, conducting a PESTLE analysis of the new market is beneficial if you’re looking to enter a new global market. It can predict how the new markets’ outside influences might impact your company’s products and services.
You can use the Porter’s Five Forces model to determine the micro forces that affect an organization’s profitability. For instance, if you’re looking to analyze consumers’ bargaining power, you might take into account the number of consumers, the differences between the products, and how much it would cost a consumer to switch within their local market. By doing this, you can gain a deeper comprehension of the industry’s players.
Example of PESTLE analysis
As a case study using PESTLE analysis and its six factors, consider the external environment of Lionheart, a company that makes athletic apparel:
Porter’s Five Forces example
Using the same illustration, think about Lionheart’s competitive environment using Porter’s Five Forces:
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FAQ
Is Porter’s 5 forces a competitor analysis?
A comparative analysis method known as Porter’s Five Forces examines the competitive market forces that exist within an industry. SWOT analysis examines a person or organization’s strengths, weaknesses, opportunities, and threats to assess its internal potential.
Is Porters 5 Forces outdated?
What is it? Michael E. Porter of Harvard Business School created Porter’s Five Forces of Competitive Position Analysis in 1979 as a straightforward framework for determining the competitive strength and position of a business organization.
