PESTEL
Who belongs to a company’s environment?
STAKEHOLDERS:
• State
• Banks
• Shareholders
• Customers
• Suppliers
• Competitors
• Trade unions
• Consumer advocacy group
• Local communities/authorities
• Social agencies
The three levels of external diagnosis
Macro-environment:
• Global factors
• Political, economic, social… dimensions
Industry:
• Organizations that produce the same product/service
• And associated organizations
Competition environment:
• Set of competing organizations from the same industry
• Strategic positioning among competitors
Macro-environment
Political: democracy/dictatorship; governmental stability and social protection
Economic: cycles, trends, evolution of GDP, monetary policy, inflation, unemployment,
disposable income
Social: demography, social mobility, social habits, consumption habits, level of
education, leisure
Technological: R&D budgets, private investment on technology and patents, innovation
ability
Environmental: protection on flaura and fauna; reprocessing, energy consumption and
policies
Legal: laws on monopoly, employment laws, security norms
How to use the PESTEL framework?
Step 1: Identifies all the factors in the PESTEL framework
Dimensions Components
Political Political 1
Political 2
Economic Economic 1
Economic 2
Social Social 1
Social 2
Technological Technological 1
Technological 2
Environmental Environmental 1
Environmental 2
Legal Legal 1
Legal 2
Step 2: Analyses the identified factors → Objective: key drivers for change
Dimensions Components Impacts over strategy
1 2 3 4 5
Political Political 1
Political 2
Economic Economic 1
Economic 2
Social Social 1
Social 2
Technological Technological 1
Technological 2
Environmental Environmental 1
Environmental 2
Legal Legal 1
Legal 2
The finality of the PESTEL models: identify key drivers for change (practices likely
to have a high impact in company’s strategy and industry)
Industry: group of firms producing products or services that are essentially the same.
Associated organizations that can impact the production of these industries.
Porter’s 5 forces: industry is composed by several profiles of organizations
General idea: understand the attractiveness of an industry
Rivalry between competitors (Easyjet vs. Ryanair)
Direct competitors of the industry = producers of similar products or services, aimed at
the same customer group
Key question : Is the competition soft of not?
Potential answers to answer to the key question:
▪ Concentration / number of competitors
▪ Diversity
▪ Barriers to entry (elements that company need to assort before entering a
market)
▪ Value or price battle (know which factor competitors compete on)
Less competitive industries tend to have one dominant company
Bargaining power of buyers
Buyers are the organization’s immediate customers, not necessarily the ultimate
consumers, they can be distributers
Key question: Can customers impose their will to competitors? (demand low prices or
service improvement)
Possible answers:
▪ Concentration (buyer power is increased if the concentration is higher)
▪ Switching costs (buyers can easily switch between suppliersn if they
have a high bargaining power)
Bargaining power of suppliers
Suppliers are those who supply the organization with what it needs to produce the
product or service (fuel, raw material, …)
Key question: Can suppliers impose their will to the competitors?
Possible answers:
• Concentration
• Switching costs
Threats of new entrants
Threat of potential new competitors in the industry
Key questions: How easy is it to enter the industry?
• Are there companies that can become direct competitors?
• Are there barriers of entry? (an attractive industry has high barriers of entry to
reduce the threat of new competitors)
Possible answers: barriers of entry:
• Experience
• Access to distribution channels
• Differentiation
• Patents or technological course
Threats of substitutes
Substitutes are products or services that offer a similar benefit to an industry’s products
or services, but by a different process
Example: Trains are substitutes for cars or planes to go from point A to point B
Key question: Are there perfect substitutes for the product / service we sell?
Possible answer:
• The price / performance ratio
• Switching costs
Explaining the forces at play
• Bargaining power
Bargaining power corresponds to the pressure customers and suppliers can have on
competitors to get what they want (higher quality products, better services, lower
prices…)
It influences the producers’ ability to reach profitability
What matters: concentration, switching costs, sensitivity regarding the price…
• Threat
Threat corresponds to the pressure posed by new entrants and substitutes to existing
competitors. They can decrease the market share and profitability of existing
competitors.
What matters: entry barriers, switching costs, prices, quality, …
Identify the Key Success Factors to survive and succeed in the industry
Key Success Factors = Strategic elements that a firm should be able to manage in order
not only to survive in the industry, but to beat competitors
Examples: a critical size, a performing distribution system, innovation …
Answer the company’s objective: Competitive advantage
Being unique compared to competitors
Competitive advantage = A superiority gained by an organization over its
competitors when:
• It can provide the same value as its competitors but at a lower price, or
• It can charge higher prices by providing greater value through differentiation
Limitations of the Porter’s model
• Every industry does not have clear boundaries (it’s difficult to access the
boundaries of emerging industries)
→ What about emerging industries?
• Categories of actors may be a bit too simplistic (we need to categorize
organizations in one category, in reality it is more difficult as a company can be
a supplier and a producer)
• Lack of dynamism -> what about evolutions? (doesn’t consider the evolution of
the industry
→Need to adapt the model to the industry under study
Competition environment
Strategic groups
• A strategic group is a set of organizations that share similar characteristics,
evolve in the same environment and follow relatively close strategies
• A few examples:
Grocery: Aldi and Lidl are in the same strategic group
Restaurant industry: McDonalds and Quick are in the same strategic group
Education industry: HEC, ESCP and ESSEC are in the same strategic group – that of
the “Grandes Parisiennes”
• Organizations that belong to the same strategic group are said to be frontally
competitive
Example: Strategic group mapping in the automobile industry
Steps to create a strategic group mapping
Step 1 – Identify Competitors in the Industry (Porter’s 5 forces is assessed)
Step 2 – Identify two key variables that differentiate firms
Step 3 – Plot firms in a 2-variable map
Step 4 – Assign companies that fall into the same strategic space the same strategic
group (you can draw circles around each group)
External diagnosis by analyzing the three levels of the environment
Macro-environment: PESTEL analysis
Industry: Porter’s 5 forces
Competition environment: strategic group mapping
Final goal: identify opportunities and treats in this environment (positive and
negative elements that can impact your companies activity)
