Porter's 5 Forces vs. PESTLE Analysis: An Overview
Porter's 5 Forces and PESTLE are tools companies can use to improve their competitive positions in the market. Porter's 5 Forces examines where power lies in a competitive situation. PESTLE identifies how various macro-environmental factors may affect an organization and its competitive standing.
Porter's Five Forces
Porter's 5 Forces is an analytical model used to help identify the structure of an industry and to help companies determine their competitive strategies. The model was developed by Harvard Business School professor Michael E. Porter as part of his book "Competitive Strategy: Techniques for Analyzing Industries and Competitors," published in 1980.
The model can be applied to any segment of the economy. It helps explain why various industries maintain different degrees of profitability.
As the name suggests, there are five factors that make up Porter's 5 Forces. They are all external, so they have little to do with the internal structure of a corporation:
- Industry competition. A higher degree of competition means the power of competing companies decreases. When competition is low, companies can do whatever they need to in order to increase their profits.
- New players in the industry. New (and more) entrants into the market means a company's power also decreases. Most companies prefer to operate in a market or industry where there are fewer players.
- Supplier (seller) power. This factor examines how suppliers can use their power to increase the price of goods and services. The fewer suppliers there are in the market means they have more power.
- Buyer (customer) power. When consumers have more bargaining power, they may be able to affect the price of goods and services, driving them down.
- Threat of substitutes. Products and services by a rival that can easily be substituted are also a threat to a business' profitability.
When a company's management uses the five forces, it can create ways to take better advantage of a situation of strength, overcome a situation of weakness, and avoid making mistakes that would provide someone else a competitive edge. Managers can brainstorm various factors associated with each of the five forces. For example, they may examine the number of suppliers, use of suppliers, uniqueness of service, ability to substitute suppliers, and cost of changing suppliers.
This, in turn, can lead to a boost in profits, thereby increasing earnings for a company's investors.
PESTLE stands for political, economic, sociocultural, technological, legal, and environmental. It is an analytical tool available to companies to determine how external factors influence their operations and make them more competitive in the market.
This method looks at the factors in a nation or marketplace, and examines how those factors affect the consumer:
- Political factors include government policy and legislative changes that affect the economy, such as tax and employment laws.
- Economic factors such as inflation, exchange rates, recessions, and supply and demand make up this category.
- Sociocultural factors including consumer demographics, culture, and lifestyle.
- Technology includes factors like changes in technology, how technology is used in different sectors and industries, and research.
- Legal factors that affect business such as consumer law, copyright law, and health and safety law.
- Environmental factors have little to do with the actual business, including climate, pollution, weather, and environment-related laws.
PESTLE analysis allows managers, marketing, and financial experts to examine factors (outside of money) when making decisions about the company's services or products. So the manager of a company who uses PESTLE analysis may focus on the social aspects of consumer behavior. This may include examining customer demographics, culture, and buying patterns. Or she may choose to look at the environment and how it plays into consumer reach. Adverse weather conditions, how the customer views sustainability, and even environmental policies at the local or national level can affect the future of the brand.
Results from PESTLE analysis allow the company to make specific choices when planning the company's future, from how the brand should be presented, to any changes within the structure of the company's organization, to the development of new products.
- Porter's 5 Forces examines the five forces that make a company competitive while helping identify its strengths and weaknesses.
- 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.
- PESTLE examines political, economic, sociocultural, technological, legal, and environmental factors.