Business Environment Analysis: PESTEL and Porter's Five Forces

Analysis of Business Environment

Companies and organizations are open systems that are in continuous interaction with the environment. Therefore, we must consider external factors (the environment) that may affect our business. The company does not control the environmental factors. Those are considered strategic factors that can have a significant impact (positive or negative) on the results of the company.

There are two types of environment:

• The general environment (common to all firms operating in the same social, economic, political, and technological context - PESTEL analysis)
• The competitive or specific environment (different for each sector - Porter's Five Competitive Forces analysis).

1. Analysis of the General Environment (PESTEL)

Political environmental factors: They include the country's institutional framework (type of political system, transparency, stability of the government, etc.).

Economic environmental factors: They include macroeconomic variables that assess a country's economic situation (GDP, consumption growth, inflation, unemployment, etc.).

Sociocultural environmental factors: Demographic variables, cultural changes, population pyramids, and so on. They are a very wide range of factors.

Technological environmental factors: They include the whole infrastructure of a country (internet usage, level of technological development, use of ICT by businesses, etc.).

Ecological/Environmental factors: Includes the degree of environmentalism and the tendency towards sustainability of a country (recycling, renewable energy, etc.).

Legal environmental factors: Includes the legislative development of a country and what to expect (labor laws, fiscal, environmental, etc.).

*** Note that there is always talk of the contemporary and of what may be in the future ***

Previously it was PEST analysis, but now it is PESTEL.

Steps to Conduct a PESTEL Analysis

1. Delimit the strategic factors of the environment.
2. Describe the evolution of the strategic factors of the environment.
3. Enhance and prioritize the opportunities and threats.

The purpose of a PESTEL analysis is not to analyze the country but to understand the opportunities and threats that may mean the survival of a particular company.

2. Specific Environmental Analysis (Porter's Five Competitive Forces)

It depends on the economic activity undertaken by the company, i.e., its industrial sector (this consists of all those companies that are engaged in one activity or business).

The Five Competitive Forces Are:

1. Threat of new entrants (competitors): Evaluate the possibility that new firms can enter and compete in a sector because the benefits may be reduced.

The factors on which this threat depends are:

• The reaction of existing competitors to the emergence of a new company.
• The barriers to entry are obstacles to be overcome by companies not operating in a sector and wishing to do so (the existence of highly differentiated products to which customers are very loyal, high initial investment, legal barriers, etc.).

2. The bargaining power of suppliers: Assess the possibility that suppliers may set the rules on relations with the company; this may modify the conditions of sale of products/services in terms of appreciation and quality. The number of suppliers, the existence of substitute products, etc., should be taken into account.

3. Bargaining power of customers: Assess the possibility that customers can set the rules on relations with the company; this may modify the conditions of sale of products/services in terms of price and quality. We will see the number of customers, the existence of substitute products, the information available to the client, and so on.

4. The threat of substitutes: Assess the threat of alternative technologies to meet the same or similar needs. If there are many substitutes, that limits the price at which they can sell. The degree of substitution and relative prices should be taken into account.

5. Rivalry among existing competitors: Assess the rivalry among competitors that are installed in the sector. If this is high, we will have to improve the position by reducing costs and prices, differentiating our product, or both at the same time. The number of competitors, the growth of the industrial sector, etc., should be taken into account.