PESTLE & Porters 5 Forces
Impact of external influences
Pestle Analysis: This identifies the external factors a business might face and their impact on business idiosyncrasy
- Political: Some parts of the world are politically volatile and special attention must be paid if business venture into politically unstable countries. However political factors can also influence business in stable and democratic countries.
- Members joining or leaving trading blocs such as the EU
- Issue of national security, some security measures may restrict the movement of goods and services, people and capital
- Pressure groups can lead to legislation and taxes which affects sales and demand
- Changes in government a government maybe pro-business and this may serve as an opportunity for firms, where as another government may impose high business rates
- Economic: The general state of the economic can have a huge impact on business activity. Since the financial crisis in 2008 several countries have suffered a recession which has made trading conditions very difficult for many businesses. However, some specific examples may include:
- Falling unemployment – negative multiplier effect
- Stable prices
- Stronger exchange rates
- Lower interest rates
- YED products are likely to suffer greatly during economic downturns
- Social: Over time there is likely going to be changes in the way society operates. Although social and cultural changes tend to be gradual, they can still have an impact:
- Increase in people going to uni – improved quality of human resources
- Ageing Populations
- Increased migration – greater available labour forces and consumer market
- Increase focus on health
- Technological: Business often welcome technological change as it allows for greater productivity and efficiency allowing them to generate larger profit margins
- Can shorten product life cycles
- Replace labour with capital – New tech allows for lower cost per unit
- Improved communication between seller and buyer as well as advertisement and promotion opportunities – social media
- Legal: The government provides the legal framework in which business operate. However, it also directs legislation at business to protect vulnerable groups that might otherwise get exploited
- Advertisement bans
- Consumer health bans on sugar and salt
- Reduction of red tapes
- Environmental: People are increasingly protective of the environment because of the threats posed by global warming. People are also concerned about the threat to wildlife and natural habitats that business sometimes pose.
- People want to buy sustainable and green goods
- Generation of power via renewable resources
- Recycling – use of such can reduce business costs
Impact on businesses of changing competitive environment: Many markets are dynamic, and businesses need to be aware of the changes that are taking place. They may have to react to certain changes when they occur.
- New Entrants – Consider position and adapt to anything new the entrants bring
- New Products – Business must innovate and stay in touch with current demand and new products in order to stay competitive
- Consolidation – This may shift the power dynamic of the market towards leaders which will cause a business to have to diversify complete their own takeovers or accept lower profit margins
Porter’s Five Forces
The 5 forces are a model which was devised by Michael Porter; it is basically a framework for analysing the nature of competition in an industry. Every industry is extremely diverse to the next and therefore they can achieve such different profit margins. (e.g. The soft drinks industry has very high profit margins)
High profit margins are associated with;
- Weak suppliers
- Weak consumers
- Low opportunities for substitutes
- High entry barriers
- Little competitive rivalry
Low profit margins are associated with;
- Strong suppliers
- Strong consumers
- High opportunities for substitutes
- Low entry barriers
- Intense competitive rivalry
Porters 5 forces
The threat of new entrants to a market; if new businesses enter a market, they can quickly gain market share and so rivalry will intensify. If barriers of entry are low (to an industry this generally means that the threat of new entrants will be high), the barriers to entry include; initial investment cost, the economies of scale already achieved by established firms in the industry, the difficulty it is to access suppliers or distribution channels, the regulatory or legal restrictions imposed on an industry, the existing products in the market and the strength of their USP’s, the potential retaliation which could occur from existing businesses.
The bargaining power of suppliers; if suppliers have bargaining power then they will exercise power, by increasing prices, this will squeeze profit margins from an industry (or force firms to pass on the increased price to the customer). Whether a supplier is powerful, or not, depends on the uniqueness of the input which they supply, the number of other firms which would be available to supply the resource, the demand for the input from other businesses (may even be from another industry), the cost of switching to an alternative supplier (if this is very high then suppliers basically have a captive audience), the potential which the supplier has to vertically integrate, and the extent to which substitute resources are available.
The bargaining power of customers; if customers are powerful then they will exert pressure on a business to drive down prices, the extent of their power depends on the number of customers and the volume in which they place their orders, (same as economies of scale but for customers trying to achieve a lower unit price), the number of other firms supplying the same or a substitute product, the threat they pose of integrating backwards (buying the raw materials and producing it themselves), again the cost of switching.
The threat of a substitute product, a substitute product can be regarded as something which meets the same need but is produced in a different industry (e.g. A games console company may be a substitute product to a leisure centre). The extent of this threat depends on the price and performance of the substitute (compared to the initial product), how does it match the initial product? The willingness of customers to switch (dependent on customer loyalty), the cost of switching. If there is a threat from a rival the firm will have to improve the performance of their products by either reducing prices or adding USP’s.
The degree of competitive rivalry, if there is intense rivalry in an industry it will encourage firms to engage in price wars, invest in R&D & innovation, and intensely promote their product (all of which are beneficial to customers but increase costs and reduce profits for the firm). Determinants include; the number of competitors in the market; the market size and the growth prospects, variation of product differentiation, the extent of customer loyalty in an industry, the power of buyers and the availability of substitutes, cost structure of the industry and the exit barriers (where it is difficult/ expensive to leave an industry, firms tend not to).