Porter’s 5 Forces vs. PESTLE Analysis: What’s the Difference?

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.

Key Takeaways

• 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.
• PESTLE analysis allows managers, marketing, and financial experts to examine specific factors (outside of 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 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:

1. 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.
2. New players in the industry: New (and more) entrants into the market mean a company’s power also decreases. Most companies prefer to operate in a market or industry where there are fewer players.
3. 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.
4. Buyer (customer) power: When consumers have more bargaining power, they may be able to affect the price of goods and services, driving them down.
5. The threat of substitutes: Products and services by a rival that can easily be substituted are also a threat to a business’s 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, the use of suppliers, the uniqueness of service, the ability to substitute suppliers, and the cost of changing suppliers. This, in turn, can lead to a boost in profits, thereby increasing earnings for a company’s investors.

Porter’s 5 Forces Example

Let’s use Porter’s 5 Forces to quickly analyze the competitive environment of athletic apparel giant Nike (NKE).

1. Industry competition (high): The global athletic apparel market is extremely competitive, with constant market share threats coming from established players like Adidas, Puma, Under Armour, and even Lululemon Athletica.
2. New players in the industry (low): It takes quite a bit of capital and resources to create a popular brand in the athletic apparel space.
3. Supplier power (low): Nike has a large base of suppliers in several overseas countries, including Vietnam, China, Indonesia.
4. Buyer power (medium): Nike has an established premium brand that large wholesale buyers and end-customers are willing to pay up for. That said, it’s very easy to switch to different brands and lower-cost alternatives given the amount of competition in the space.
5. The threat of substitutes (low): There really is no substitute for athletic apparel and the industry, as a whole, should continue to grow.

PESTLE Analysis

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.

Important

PESTLE is a variation of PEST, which takes only the first four factors into account.

This method looks at the factors in a nation or marketplace, and examines how those factors affect the consumer:

• Political factors: Includes government policy and legislative changes that affect the economy, such as tax and employment 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 like changes in technology, how 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 the actual business, including climate, pollution, weather, and environment-related laws.

PESTLE analysis allows managers, marketing, and financial experts to examine specific factors (outside of money) when making decisions about the company’s services or products.

So the manager of a company that uses PESTLE analysis may focus on the social aspects of consumer behavior. This may include examining customer demographics, culture, and buying patterns. Or they 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.

PESTLE Analysis Example

Let’s take another look at Nike, but this time through the lens of PESTLE:

• Political: Nike is domiciled in the U.S., which generally has pro-growth policies. As a global manufacturer, though, Nike is always subject to changes in taxes, manufacturing laws, and trade policies.
• Economic: Nike sells well-respected shoes and apparel, so it is less susceptible to economic downturns. That said, it’s relatively simple for consumers to switch to lower-end alternatives.
• Social: The overall message of living an active and healthy lifestyle continues to grow worldwide, so Nike remains in a good position socially. Nike has also taken an active stance on social justice issues.
• Technological: Nike has used social media well to connect with customers. And the company has always used manufacturing advancements to its advantage.
• Legal: There aren’t too many legal issues that impact Nike.
• Environmental: Nike’s environmental issues largely center around its manufacturing carbon footprint. In 2019, Nike announced its Move to Zero initiative which aims to completely eliminate carbon emissions and waste as a result of its operations.

What Is PESTLE Analysis and What Is Its Purpose?

PESTLE analysis is a tool to analyze an organization’s business environment. It’s primarily used to identify both threats and opportunities due to external influences.

What Are the Six Elements of PESTLE Analysis?

The six elements of PESTLE analysis are:

1. Political
2. Economic
3. Sociological
4. Technological
5. Legal
6. Environmental

What Are Porter’s 5 Forces?

Porter’s 5 Forces is a tool to analyze an organization’s competitive environment. The five forces are:

1. Industry competition
2. The potential threat of new entrants
3. Power of suppliers
4. Power of customers
5. Threat of substitutes

Who Invented Porter’s 5 Forces and PESTLE Analysis?

Michael E Porter of Harvard Business School developed Porter’s 5 Forces in 1979. Francis Aguilar of Harvard Business school is often credited as the founder of PESTLE analysis, which initially started out as ETPS, in 1967.

The Bottom Line

Porter’s 5 forces and PESTLE are analytical frameworks used in business strategy. The main difference is that Porter’s 5 forces assess a company’s position in the market, while PESTLE analysis focuses on where it stands in the social and political environment.

Read the original article on Investopedia.