Porter's 5 Forces vs. PESTLE Analysis: An Overview
Porter's 5 forcesand PESTLE are tools that companies can use to improve their competitive position in the market. Porter's 5 Forces explores where the power lies in a competitive situation. PESTLE identifies how various macro-environmental factors can affect an organization and its competitive position.
The central theses
- Porter's 5 Forces examines the five forces that make a company competitive and helps identify its strengths and weaknesses.
- PESTLE is an analysis tool that identifies how different factors can affect an organization and its competitive position.
- Porter's 5 Forces identifies competition, new entrants to the industry, supplier power, buyer power and the threat of substitute products and services in the marketplace.
- PESTLE examines political, economic, sociocultural, technological, legal and environmental factors.
- PESTLE analysis allows managers, marketing and finance professionals to examine specific factors (other than money) when making decisions about the company's services or products.
Porter's 5 forces
Porter's 5 Forces is an analytical model used to identify the structure of an industry and to help companies determine their competitive strategies. The model was developed by Professor Michael E. Porter of Harvard Business School as part of his book "Competitive Strategy: Techniques for analyzing industries and competitors", published in 1980.
The model can be applied to all sectors of the economy. It helps explain why different industries have different levels of profitability.
As the name suggests, there are five factors that make up Porter's 5 Forces. They are all external, so have little to do with the internal structure of a company:
- Industry competition:A higher level of competition means that the power of competing companies decreases. When competition is low, companies can do anything to increase profits.
- New players in the industry:New (and more) entrants also mean that a company's power is diminishing. Most companies prefer to operate in a market or industry where there are fewer players.
- Supplier (Seller) Power:This factor examines how vendors can use their power to increase the price of goods and services. The fewer vendors there are in the market, the more power they have.
- Power of the buyer (customer):If consumers have more bargaining power, they may be able to influence and push down the prices of goods and services.
- The threat of substitutes:A competitor's products and services that can be easily substituted also threaten a company's profitability.
When a company's management harnesses the five forces, it can create ways to take better advantage of a situation of strength, overcome a situation of weakness, and avoid mistakes that would give someone else an advantageCompetitive advantage.
Managers can compile various factors associated with each of the five forces.
For example, they can examine the number of suppliers, the use of suppliers, the uniqueness of the service, the ability to substitute suppliers, and the cost of switching suppliers. This, in turn, can lead to an increase in profits, thereby increasing returns for a company's investors.
Porter's 5 forces example
Let's use Porter's 5 Forces to quickly analyze the competitive landscape of sportswear giant Nike (NKE).
- Industry competition (high):The global athletic apparel market is extremely competitive, with incumbents such as Adidas, Puma, Under Armor and even Lululemon Athletica constantly threatening market share.
- New players in the industry (low):It takes quite a bit of capital and resources to create a popular sportswear brand.
- Supplier performance (low):Nike has a large base of suppliers in several overseas countries including Vietnam, China, Indonesia.
- Purchasing power (medium):Nike has an established premium brand that large wholesale buyers and consumers are willing to pay for. However, given the intense competition in the space, it is very easy to switch to other brands and cheaper alternatives.
- The threat of substitutes (low):There really is no substitute for sportswear and the industry as a whole should continue to grow.
PESTLE-Analyse
STUFFstands for political, economic, sociocultural, technological, legal and ecological.
It is an analytical tool available to companies to see how external factors affect their operations and make them more competitive in the market.
PESTLE is a variation ofPEST, which only considers the first four factors.
This method looks at the factors in a nation or market and examines how these factors affect the consumer:
- Political Factors:Includes changes in government policies and legislation affecting the economy, such as B. Tax and Labor Laws.
- Economic factors:These are inflation, exchange rates, recessions, and supply and demand.
- Sociocultural Factors:Includes consumer demographics, culture and lifestyle.
- Technology:These are factors such as technological changes, the way technology is used in different sectors and industries, and research.
- Legal Factors:These are legal aspects that affect businesses, such as consumer law, copyright law and health and safety law.
- environmental factors:These have little to do with actual business, including climate, pollution, weather and environmental laws.
PESTLE analysis allows managers, marketing and finance professionals to examine specific factors (other than money) when making decisions about the company's services or products.
Therefore, the manager of a company using PESTLE analysis can focus on the social aspects of consumer behavior. This may include checking the customerdemographics, culture and purchasing behavior. Or they look at the environment and how it affects consumer reach.
Adverse weather conditions, customer attitudes towards sustainability and even environmental policies at local or national level can affect the future of the brand.
The results of the PESTLE analysis allow the company to make specific decisions when planning the future of the company, from the way the brand should be presented to changes in the structure of the company organization and the development of new products.
Example of a PESTLE analysis
Let's take another look at Nike, but this time through the lens of PESTLE:
- Politically:Nike is based in the US, which generally has pro-growth policies. However, as a global manufacturer, Nike is constantly exposed to changes in taxes, manufacturing laws and trade policies.
- Economically:Nike sells well-respected shoes and apparel, making it less vulnerable to economic downturns. However, it is relatively easy for consumers to switch to cheaper alternatives.
- Social:The general message of living an active and healthy lifestyle continues to grow around the world, keeping Nike in a good position socially. Nike has also taken an active stance on social justice issues.
- Technical:Nike has made good use of social media to connect with customers. And the company has always usedmanufacturing advancesto his advantage.
- legal:There aren't too many legal issues affecting Nike.
- Environment:Nike's environmental concerns are mostly centered on the carbon footprint of manufacturing. In 2019, Nike announced its Move to Zero initiative, which aims to completely eliminate carbon emissions and waste as a result of its operations.
PESTLE vs. Porter's 5 Forces FAQs
What is the PESTLE analysis and what is it for?
The PESTLE analysis is a tool for analyzing an organization's business environment. It is mainly used to identify both threats and opportunities due to external influences.
What are the six elements of the PESTLE analysis?
The six elements of the PESTLE analysis are:
- Politically
- Economically
- sociological
- Technological
- legal
- environment
What are Porter's 5 powers?
Porter's 5 Forces is a tool for analyzing a company's competitive environment. The five forces are:
- industry competition
- The potential threat of new entrants
- power of suppliers
- power of customers
- Danger from substitutes
Who invented Porter's 5 Forces and PESTLE Analysis?
Porter's 5 Forces was developed in 1979 by Michael E. Porter of Harvard Business School.Francis Aguilar of Harvard Business School is often credited as the originator of PESTLE analysis, which originally began as ETPS in 1967.
FAQs
How is the strategic groups analysis different from Porter's five forces analysis? ›
It was noted that Porter's Five Forces analysis assumes that the key objectives for any organisation is to gain competitive advantage over its rivals, while Strategic Groups were defined as groups of business that are likely to respond similarly to environmental changes.
What is the main difference between Porter's five forces model and SWOT analysis? ›Porter's 5 Forces is a comparative analysis strategy that analyzes competitive market forces within an industry. SWOT analysis looks at the strengths, weaknesses, opportunities, and threats of an individual or organization to analyze its internal potential.
What is the difference between Pestel and PESTLE analysis? ›PESTLE and PESTEL analysis are the same thing, only the last two letters are swapped. Both can be used interchangeably depending on the preference of the researcher. If you're searching for a specific PESTLE analysis but only find articles with “PESTEL”, don't worry. There's zero difference between the two.
What is the purpose of Porter's five forces analysis? ›Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is frequently used to identify an industry's structure to determine corporate strategy.
What is the purpose of Porter's five forces analysis in the business? ›A Five Forces analysis can help companies assess industry attractiveness, how trends will affect industry competition, which industries a company should compete in—and how companies can position themselves for success.
What is the difference between Pestel and SWOT analysis? ›What's the Difference Between a SWOT or PESTLE Analysis? The main differences between a SWOT or PESTLE analysis are that a SWOT analysis focuses on actions you can take INTERNAL to your business environment, a PESTLE analysis identifies EXTERNAL factors that are mainly outside of your control.
What is the difference between PEST and porter? ›PEST considers political, economic, socio-cultural and technological impacts. Sometimes called PESTLE analysis when legal and environmental impacts are also included. An example of Porters Five Forces is the Supplier power, Buyer power, Competitive rivalry, Threat of substitution, and Threat of new entry.
When would you use a PESTLE analysis? ›A PESTLE analysis helps understand the context for change, and is most effective when used in association with a SWOT analysis to understand opportunities and threats around labour changes, such as skills shortages or current workforce capabilities.
What is PESTLE analysis in simple words? ›What is PESTLE? A PESTLE analysis is a tool used to gain a macro picture of an industry environment. PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental factors. It allows a company to form an impression of the factors that might impact a new business or industry.
How do you summarize Porter's five forces analysis? ›Porter's five forces are supplier power, purchaser power, substitute products, new entrants to the market and existing industry rivals. These forces can be considered to operate across two dimensions, horizontal competition factors and vertical supply chain factors.
What is an example of Porter's five forces? ›
Examples: High barrier to entry and high exit barrier (for example, telecommunications, energy) High barrier to entry and low exit barrier (for example, consulting, education) Low barrier to entry and high exit barrier (for example, hotels, ironworks)
What is an example of a company using Porter's five forces? ›With Porter's Five Forces example Starbucks Coffee tracked the key characteristics of the industry competition. Starbucks faces stiff competition due to a large number of organizations in the market, moderate variety of products and high probability of customers switching.
What is the most important forces in the Porter's five forces? ›Regarded as the most expressive in Porter's 5 forces model, the rivalry between competitors is the major determining factor for market competitiveness.
What is the conclusion of Porter's five forces? ›In the conclusion, Porter's five forces is a simple model which helps to understand the strengths and weakness of the oriental buffet. By applying the porter's five forces model Oriental can run the business by improving their service towards the customer which creates more success in restaurant business.
What is the criticism of Porter's five forces? ›Criticisms of the Five Forces Model
It assumes perfect competition in the market place, and does not take into account that some markets are highly regulated, creating imbalances and reduced competitive forces are at play.
Disadvantages: Some PESTLE analysis users oversimplify the amount of data used for decisions – it's easy to use insufficient data. The risk of capturing too much data may lead to 'paralysis by analysis'. The data used may be based on assumptions that later prove to be unfounded.
What is examples of Pestel analysis? ›Examples of political factors PESTEL
Corruption Level. Tax Policy. Defense spending. Trade Control.
If combined, PESTLE analysis is usually completed first to provide a context for the SWOT analysis.
Is Porter's 5 Forces macro or micro? ›Porter's Five Forces Analysis is a micro-environment framework that attempts to analyze the level of competition within an industry.
What are the 6 Pestel factors? ›PESTEL is an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal.
What is the difference between Porter's Diamond and five forces? ›
Still taught at the Harvard Business School today, Porter's "five forces" model shows the five forces that affect the competitive environment of a small business. Porter's "diamond" model shows the four factors that affect the competitiveness of a nation and its industries.
Is PESTLE analysis a strategy? ›PESTLE analysis is a strategic planning tool that is used to examine various factors that affect the market environment for a business or organization. The goal of PESTLE analysis is to develop a profound understanding of the external environment where the organization operates.
Is Porter's 5 forces internal or external? ›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.
Is PESTLE analysis still relevant? ›Scanning and scenario- and strategy planning – key aspects of PESTEL analysis – are still relevant.
Is there a difference between Porter's five forces framework and Porter's generic strategies framework? ›The key difference between the Five Forces and the Generic Strategies Frameworks are that the five forces framework is seeking to analyze industry profitability, while the generic strategies framework is seeking to explain different approaches to competing in an industry.
What is a strategic group analysis? ›Strategic group analysis is used to examine the competitive environment and the rivalry among competitors within an industry. It helps, Identify the strategic direction of the direct rivals in the industry. This will in turn help shape the strategic moves of your own organization.
How does a five forces analysis contribute to a strategic analysis? ›CorrectoThe five forces analysis provides an overview of the market structure and helpsstrategists understand the competitive climate and opportunities.It forecasts industry growth.It identifies the competitive position of a firm relative to rivalsIt reveals the attractiveness of a market and whether or not there are ...
What is the primary difference between strategies and tactics group of answer choices? ›While strategy is the action plan that takes you where you want to go, the tactics are the individual steps and actions that will get you there. In a business context, this means the specific actions teams take to implement the initiatives outlined in the strategy.
Is Porter's five force model is outdated or can be used today? ›Perhaps most significantly, Porter's Five Forces can only deliver insights from the recent past. These can become outdated very quickly, which can be a problem when an organization is carrying out several different analyzes, but still needs to act fast.
What is the Porter's five forces framework? ›Porter's Five Forces are Threat of new entrants, Bargaining power of buyers, Bargaining power of suppliers, Threat of new substitutes, and Competitive rivalry. This framework helps strategists understand what makes an industry profitable and provides insights needed to make strategic choices.
What are the two types of strategic analysis? ›
These include: SWOT (strengths, weaknesses, opportunities, threats) analysis. PESTLE (political, economic, social, technological, legal and environmental) analysis.
What is VRIO framework analysis? ›The VRIO framework is an internal analysis that helps businesses identify the advantages and resources that give them a competitive edge. The VRIO framework is an acronym for the various measurements of success that relate to your business. It includes value, rarity, imitability, and organization.
What are the two types of strategic analysis explain each? ›Types Of Strategic Analysis
Two of the most commonly used methods are SWOT and PESTLE. A SWOT analysis (which stands for strengths, weaknesses, opportunities, and threats) helps organizations identify where they're doing well and where they can improve, both from an internal and external perspective.
Porter's Five Forces framework is a valuable tool for analyzing an industry's competitiveness by examining the internal factors that influence the intensity of competition.
What is the most important force in Porter's five forces and why? ›Of Porter's Five Forces, competitive rivalry has the strongest influence on whether entering an industry would be profitable. When rivalry is high, there are many competitors, and those competitors have a high cost associated with exiting the industry.
What is the difference between strategy and tactics with examples? ›Tactics are the specific actions or steps you undertake to accomplish your strategy. For example, in a war, a nation's strategy might be to win the hearts and minds of the opponent's civilian population. To achieve this they could use tactics such as radio broadcasts or building hospitals.
What is difference between tactics and tools? ›Strategy is your overall approach/plan, tactics are the ways in which you execute that strategy and tools are quite simply what you use to get the job done.
What are the key differences between strategy and strategic planning? ›Strategy is about understanding your environment and making choices about what you will do. Think, if you like, of where and how to play. Planning is about making choices about how to use the resources you have and the actions you will take to achieve the choices made inside your strategy.