Both Five Forces Model of Porter and PESTEL (Political, Economical, Social, Technological, Environmental and Legal) analysis are two very important analytical tools for businesses and aid companies in improving their industrial competitive position. Porter Five Forces Model analyses where the influence or the power lies in a competitive industry with regard to competitors, buyers, suppliers, and substitutes. On the other hand, PESTEL analyzes how different macro-level environment related factors may impact an organization and also its competitive position in the industry by dividing the factors into six categories and individually analyzing their effect on the organization.
Porter Five Forces Model helps the management and other decision makers in an organization by the five forces of the model determine the industry structure and the profit margins in an industry. These five forces are negotiating power of the suppliers and the buyers, threat of a substitute, the threat of new entrants and competitive rivalry amongst established players in the industry. An organization can carry out this analysis at any time during its life in order to determine where it stands. It will provide a valuable insight into the various forces that impact the industry, where the industry currently lies, which suppliers and buyers are most influential at the moment, the strongest competitors of the organization in the industry and what possible substitutes can threaten the products or services of the organization. Similarly, it can be used by an organization before entering into an industry in order to evaluate the level of competition and profits in the industry. Porter Five Forces Model will also help a company understand the various entry barriers that exist and make it difficult for a new organization to enter and survive in an industry.
On the other hand, PESTEL analysis is designed to determine in what ways an organization is impacted by the following six environmental forces: Political, Economical, Social, Technological, Environmental and Legal. It aids in developing strategies for businesses for maximizing opportunities, and determining the prospective of new markets. PESTEL can be used for analysis on a national or an international level. E.g. if a company already operating in one country wishes to enter into new international markets, it should carry out a PESTEL analysis of the new market. It will help it determine what political factors or how the political situation in the new country or market may directly affect its business, the economical condition of the new market to support the product and services of the organization, the social and cultural values of the new market and how they would respond to the offerings of the organization, the availability of state of the art technology in the new market, the environmental conditions of the new market are suitable for the organization or not and finally the legislative issues that the company might face while operating in that new market. An organization before entering into a new market closely needs to analyze all the factors and determine if they are ultimately in the favor of the organization or not and will it be profitable there or not (Abdullah, 2011). PESTEL analysis is mostly carried out before entering into a market.
In addition to identifying macro environmental forces, Five Forces Model aims at establishing ways to attain greater benefits of a position of strength, avoid or conquer the condition of weakness, and also keep away from mistakes that would create a competitive edge for the competition.
For any specific business situation, managers can apply Porter Five Forces analysis by looking at various factors in detail that are linked with each of the five forces. E.g. when analyzing bargaining power of the buyers, a manager can look at the number of buyers, product differentiation, the cost of switching for a buyer and so on. It will help the management understand all the players of the industry better. Similarly, for PESTEL analysis, managers can use the six forces to study a specific situation. E.g. a business with operations in Sydney, Melbourne and Queensland would be required to study local, county and state laws for all of the locations relating to partnerships, employments, environment, auditing & taxation, competition and at the same time cater for the social and cultural norms of the areas.
PESTEL and Porter Five Forces Model are both very useful industrial analysis tools but differ in their use and areas of applications.
References
Abdullah, F.S., 2011. PESTEL Framework and Porter’s Five Forces Model. [Online] Available at: https://www.scribd.com/doc/16171096/PESTEL-Framework-and-Porter-s-Five-Forces-Model [Accessed 5 June 2017].
Investopedia, 2015. What’s the difference between Porter’s 5 forces and PESTLE analysis? [Online] Available at: http://www.investopedia.com/ask/answers/041015/whats-difference-between-porters-5-forces-and-pestle-analysis.asp [Accessed 5 June 2017].