Framework library · Competitive and market analysis
External analysis: PESTLE and Five Forces
PESTLE covers the political, economic, social, technological, legal and environmental changes that no single company controls. Porter's Five Forces covers the structure of the industry, which decides how much profit is left. Run together, the first shows what is changing and the second shows who gains from the change, which is what turns a list of trends into opportunities and threats.
Use it when
- You are deciding whether to enter, invest in or leave an industry, and need both the trends around it and its profit structure.
- A plan rests on assumptions about regulation, demand or technology that should be written down and tested.
- You are preparing the opportunities and threats for a SWOT and want them to come from analysis rather than opinion.
Avoid it when
- The question is about one company's capabilities. Use VRIO or value chain analysis for the inside view.
- The industry boundary is not settled. Define product and geography first, or the forces will describe a different business.
- The future is uncertain in a few ways that would each change the answer. Take those factors into scenario planning instead of rating today's position.
How to run it
Define the industry and the decision
Product, geography and the decision the analysis serves. "Wholesale capacity on one subsea route" is an industry; "connectivity" is not.
Scan the six PESTLE areas
List the changes that will matter over the decision's horizon, each with a source. Drop anything that could not change the decision.
Rate the five forces with evidence
Score each statement for the industry as it is today and note the evidence. The strongest force usually sets the ceiling on profit.
Read the two together
For each important PESTLE change, ask which force it strengthens or weakens. A rule that lowers switching costs raises buyer power; a new technology may let substitutes in.
Write opportunities, threats and implications
Opportunities and threats are external and would happen whatever you do. Implications say what they mean for the decision on the table.
Work through it
Answer the questions below, or load the worked example to see a finished one. The drawing updates as you type. Export the result as a PowerPoint deck, a Word document, an Excel workbook, a PDF or plain text.
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Mistakes to avoid
- Producing a long PESTLE list with no link to the decision. Every line should be able to change the answer.
- Rating the forces from your own company's position rather than the industry's. The forces describe the industry; your position comes after.
- Treating the two analyses as separate chapters. The value is in reading the trends through the forces.
- Listing internal facts as opportunities, such as a new system the company has bought.
Where it comes from
PESTLE descends from Francis J. Aguilar's Scanning the Business Environment (Macmillan, 1967), which grouped the environment into economic, technical, political and social factors; legal and environmental factors were added later. The five forces are Michael E. Porter's, from "How Competitive Forces Shape Strategy", Harvard Business Review, March to April 1979, restated in "The Five Competitive Forces That Shape Strategy", Harvard Business Review, January 2008. Running the two together is common practice rather than a published model. Source.
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