Porter's Five Forces and PESTLE analysis are two sets of business tools for analyzing situations and helping companies to improve their competitive positions. Porter's Five Forces looks at where the power lies in a competitive situation. An industry with high profits is a difficult environment for new competitors to enter. Suppliers and buyers both have few options available, and therefore, weak bargaining power. PESTLE, on the other hand, identifies how various macro environmental factors might affect an organization and its competitive standing.
Porter's Five Forces
Porter's Five Forces is designed to help financial professionals and other managers explore how the following five forces determine the balance of power in a situation: supplier power, buyer power, competitive rivalry, threat of substitution and threat of new entry. Beyond the identification of macro environmental forces, Porter's Five Forces analysis is targeted at creating ways to take better advantage of a situation of strength, overcome a situation of weakness, and avoid making mistakes that would provide a competitive edge. Anyone who makes decisions about a company's bottom line can implement Porter's Five Forces analysis, and most often, those making the decision are financial executives within the company or upper level management.
In examining how Porter's Five Forces apply to specific business situations, managers brainstorm about various factors associated with each of the five forces. For supplier power, examples of these factors include the number of suppliers, use of suppliers, uniqueness of service, ability to substitute suppliers and cost of changing suppliers. (For related reading, see: The 5 Forces That Shape Competition in an Industry.)
Similarly, in using Porter's Five Forces, managers apply each of the five forces to specific situations. For example, a business with operations in New York, Virginia, Colorado and California would need to study state, local, and county laws in all four states regarding employment, business partnerships, competition and taxation.
An international corporation would also need to study international laws about international trade, labor, competition, foreign markets and taxation.
In contrast, PESTLE is aimed at determining how an organization is affected by these six forces: political, economic, sociocultural, technological, legal and environmental.
PESTLE looks at the factors taking place in a nation or marketplace and examines how those factors affect the consumer. For example, a manager or executive using PESTLE analysis may focus on the social aspects of the company's customers. These may include customer demographics, culture and buying patterns. The environment may also play a role in customer 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.
PESTLE analysis allows marketing and financial experts to examine more factors than money alone when making decisions about the company's services or products. PESTLE also examines the political, economical and social environment that enables a company to thrive, as well as any environmental, legal or technological changes that may eventually affect its profits.
Results from PESTLE analysis allow the company to make specific choices in planning for 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. Political factors often come into play when using PESTLE analysis. Current political strife, changes in governmental policies and funding from the government all may affect the buyer's decision. (For related reading, see: Money and Politics.)