Porter’s 5 Forces Analysis

A firm’s leadership team will often combine PESTLE Analysis with Michael Porter’s 5 Forces Analysis to get a more rounded view of the immediate business operating environment before setting out the firm’s strategy.

As with PESTLE Analysis, Business people can apply Porter’s 5 Forces Analysis to gain a greater understanding of their customer’s world.

The following five forces combine to form the market environment that the firm must respond to and use its capabilities to create unique, sustainable value within if it is to succeed:

·         the firm’s customers

·         the firm’s suppliers

·         the threat from existing competition

·         the threat from (and of) new entrants

·         the threat from (and of) substitute products

Each of these forces have several determinants. Here are some examples:

The firm’s customers

·         bargaining

·         expectations

·         location and geographical distribution

·         price sensitivity

·         complexity and cost to service

The firm’s suppliers

·         importance of volume to supplier

·         location and geographical distribution

·         bargaining leverage

·         number of suppliers & alternatives

·         relationship with firm’s competitors

The threat from existing competition

·         number of competitors

·         rate of industry growth

·         exit barriers

·         Advertising expenses

The threat of (and from) new entrants

·         the existence of barriers to entry

·         capital requirements

·         learning curve advantage

·         existing competition

·         government policies

The threat of (and from) substitute products

·         New technical alternative

·         buyer propensity to substitute

·         relative price performance of substitutes

Pestel Analysis

In combination with a PESTLE Analysis, which reveals drivers for change in an industry, 5 Forces Analysis can reveal insights about the potential future attractiveness of a given industry and form an excellent basis for a strategic review by a firm’s leadership team. Expected political, economic, socio-demographic, technological, legal and environmental changes can influence the five competitive forces and thus have a significant impact on industry structures.

A PESTLE analysis considers a range of external trends and factors that can help business leaders make sense of their organisation’s external environment when devising strategic plans and reviews.

By conducting a PESTLE analysis, business leaders can ensure that their firm’s objectives are positively aligned with the powerful forces of change in the external environment.

By analysing changes to the external environment (and the opportunities and threats this represents), a company is much more likely to realise success as it will be encouraged to break free from existing assumptions and to adapt to the realities of a dynamic operating environment.

P – Political factors:

These are mainly current or potential influences that are politically driven and can include (amongst many others):

·         Import and export quotas and tariffs

·         War

·         Terrorism

E – Economic factors:

·          Taxation

·         Inflation

·         Foreign exchange rates

·         employment level

S – Social factors:

·         Changes in the tastes of the buying public

·         Changes in fashion

T – Technological factors:

·         Telecommunication and computing networks

·         New chemical opportunities

·         New methods and techniques of energy collection and storage

·         Innovations and inventions

L – Legal factors:

These might be laws that have actually been passed or are to be imminently passed, as well as decisions in courts that affect the interpretation of existing legislation, for example:

·         Health and safety

·         Working directives

·         Human rights

·         Environmental responsibilities

E – Environmental factors:

·         The impending effects of global warming and climate change

·         Pollution

·         Natural disasters