Strategic Analysis PEST Porter’s Approach to industry

Strategic Analysis – PEST, Porter’s Approach to industry

Strategic analysis involves assessing a company’s internal and external environments to identify opportunities and threats, formulate strategies, and gain a competitive advantage.

Two widely used frameworks in strategic analysis are PEST analysis and Porter’s Five Forces model.

PEST Analysis:

PEST analysis examines the external macro-environmental factors that can influence a business’s operations and decision-making. The acronym stands for:

1. Political Factors:- These include government policies, regulations, stability, and political trends that can impact business operations. For example, changes in taxation policies or trade regulations can significantly affect businesses.
2. Economic Factors:- Economic factors encompass economic growth, inflation, exchange rates, interest rates, and other economic indicators that can affect consumer purchasing power, demand for goods and services, and overall business performance.
3. Social Factors:- Social factors refer to demographic trends, cultural norms, lifestyle changes, and societal values that can influence consumer behaviour and market demand.
4. Technological Factors:- Technological factors pertain to advancements in technology, innovation, automation, and digitalization that can disrupt industries, create new opportunities, or render existing business models.

Porter’s Five Forces Analysis:-

Porter’s Five Forces model analyses the competitive forces within an industry to determine its attractiveness and profitability. The five forces are:

1. Threat of New Entrants:- This force assesses the ease with which new competitors can enter the market. Barriers to entry such as economies of scale, capital requirements, and government regulations can influence the threat of new entrants.
2. Bargaining Power of Suppliers:- Suppliers’ bargaining power refers to their ability to influence prices or terms of supply. Factors such as the concentration of suppliers, availability of substitutes, and switching costs can affect their bargaining power.
3. Bargaining Power of Buyers:- Buyers’ bargaining power measures the influence customers have over prices and quality. Factors such as the number of buyers, their price sensitivity, and the availability of substitutes can impact their bargaining power.
4. Threat of Substitute Products or Services:- This force assesses the likelihood of customers switching to alternative products or services. The availability of substitutes, their quality, and their prices influence the threat posed by substitutes.
5. Intensity of Competitive Rivalry:- Competitive rivalry reflects the degree of competition among existing firms in the industry. Factors such as the number of competitors, industry growth rate, and differentiation of products or services can affect competitive intensity.

Example:

Let’s consider the automotive industry and conduct a PEST analysis and Porter’s Five Forces analysis.

PEST Analysis:

1. Political: Government regulations on emissions standards and safety requirements can impact the automotive industry’s operations.
2. Economic: Economic downturns can affect consumer spending on cars, while fluctuations in exchange rates can impact production costs for multinational automakers.
3. Social: Trends towards sustainability and electric vehicles influence consumer preferences and demand for environmentally friendly cars.
4. Technological: Advances in electric vehicle technology, autonomous driving systems, and connectivity are reshaping the automotive industry.

Porter’s Five Forces Analysis:

1. Threat of New Entrants: High capital requirements, economies of scale, and established brand identities create significant barriers to entry in the automotive industry.
2. Bargaining Power of Suppliers: Suppliers of key components such as steel, electronics, and tires may have moderate bargaining power due to their importance to automakers.
3. Bargaining Power of Buyers: Buyers’ bargaining power is relatively high due to the availability of information, numerous options, and low switching costs.
4. Threat of Substitute Products or Services: The threat of substitutes is moderate, with alternatives such as public transportation, biking, and ride-sharing services competing with traditional car ownership.
5. Intensity of Competitive Rivalry: Competitive rivalry is intense in the automotive industry, with numerous global and regional players competing on price, quality, and innovation.