Market Analysis: Importance Of PESTLE, SWOT, And Porter’s Five Forces Model

PESTLE Analysis

Market analysis may be defined as a study of the attractiveness as well as the dynamic of a specific market. Market analysis is considered to be a part of the industry analysis and is also termed as environmental analysis. With the help of environmental analysis, the managers of an organization are able to understand the internal as well as the external environment of the market (Pulver 2012). While internal analysis of market helps the managers to understand the strength, weaknesses, opportunities as well as threats of the organization with respect to the international market, external analysis assist the managers to understand the political, economic, social, technological, legal and environmental factors of the specific market in which the organization has been or is going to be established. In this essay, a brief discussion on the importance of three of the crucial market environment analyzing tools, namely, PESTLE, SWOT and Porter’s five forces model has been performed

 

Figure 1: PESTLE Analysis

Source (Gupta 2013)

PESTLE Analysis can be defined as an external business environment analyzing tool. This tool is used b the management of an organization to track the environment of the country they are operating in or are planning to launch their business. The term ‘PESTLE’ stands for Political, Economical, Social, Legal and Environmental. With the help of these tools, the above-mentioned factors of the target market are analyzed. The in-depth analyses of each of the mentioned factors have been discussed below:

Political Factor

This factor analyzes the extent to which the government of the target country influences the economy of the country. For instance, the government of a country may impose the tax on the product of an organization which may lead to enhancement of the overall production costs of an organization (Babatunde and Adebisi 2012). The political factor chiefly measures the fiscal and tax policies, trade traffics and other rules and regulations implemented by the government that may impose an impact on the organization.

Economic Factor

This factor analyzes the financial standpoint as well as the economic performance of a target market. Economic factor chiefly includes interest rates, inflation rate, economic growth pattern and the foreign exchange rate of the market. For instance, in case the country is experiencing inflation, it will impose a negative impact on the price and service o the company as well as on the purchasing power of the consumers.

Social Factor

Porter’s Five Forces Model

This factor analyzes the social environment of the country (Johnson 2016). The chief determinants include demographics, population analytics and cultural trend of the market. For instance, since the citizens of US are highly health conscious, the McDonald Company, being a fast food chain is suffering from immense loss in the market.

Technological Factor

This factor analyzes how advanced the market is on the basis of technological advances. More advanced a country is technological, more favorable is it for the organization. For instance, companies like Quantas always target countries which can provide them with high tech tools and facilities.

Legal Factor

Unlike the other factors, this factor includes both the external as well as the internal sides. Certain laws are there which are implemented by the target country on the organizations while there are policies which are implemented by the organization to maintain the revenue. Some of the examples of laws that fall under legal analysis include labour laws, consumer laws and safety laws (Gupta 2013).

Environmental Factor

This factor includes laws and regulations related to the environment, imposed by government of the target market on the organizations. The rules are generally imposed to prevent air and water pollution. This factor is crucial for industries like farming, agriculture and tourism. A few years ago legal action was taken against KFC for using Polystyrene packaging for it fast food items.

Like the PESTLE analysis tool, Porter’s five forces analysis tool is used as an external environment analysis tool. It chiefly identifies and analyzes the major five competitive forces namely that shapes the business and helps the organization to assess its strengths as well as weaknesses. The Porter’s five forces model is comprised of five factors that include the power of the buyers, the power of the Suppliers, the threat of substitute products, the power of existing competitors and finally potentiality of the new entrants.

This force analyzes how popular are the competitors of the organization in the target market. The larger is the number of competitors and equivalent products, lesser is the power of the organization (Dobbs 2014). For instance, considering the fact that in US, several globally well-known fast food chains like KFC and McDonald are present, the Burger King Company is facing issues to gain competitive advantage in the fast food market of US.

This force analyzes how easily the suppliers can enhance the prices of their service as well as the products supplied to the organization. Less is the number of suppliers in the market, more will be their demand (Gupta 2013). Along with this, the power of the suppliers in a specific market depends on their quality of products and services, unique aspects and the switching cost of the company from one supplier to other.

SWOT Analysis

This force measures the ability of the consumers to lower the price of the products o services offered by the organization. The chief determinants of this force include the switching cost required to switch from one organization to another. More is the switching cost, less is the power of the consumers. For instance, since McDonalds ha numerous numbers of competitors in US, the power of the consumers is high.

The threat of the Substitutes

This force analyses the strength and popularity of the substitute products in the target market. Substitute products or service are products or services that consumers can use in the place of the organization’s products or services (Dobbs 2014). If consumers find out that the products or services offered by any other organizations are better than the company on the basis of costs or unique features, then consumers will definitely switch. This, in turn, will affect the company negatively. 

This force measures the chances of a new entry in the market. The less money and time is needed for the new entries to enter the market, more is the power of the new entrance. This, in turn, weakens the position of the company to a great extent (Wright, Paroutis and Blettner 2013). For instance, the treat of new entrance for the Nintendo Company is low due to high entry barriers in the US market.

This tool measures the internal environment of the company. SWOT analysis can be considered as one of the unique techniques for understanding the strength, weaknesses, opportunities and threats of the organization.

Strengths: 

Strengths can be determined by the characteristics of the organization that has the potential to provide competitive advantages to that organization. Generally, for a business organization, strengths include its brand equity, Consumer loyalty and others. For instance, the Strength of the CocaCola Company is its brand equity and huge consumer loyalty (Evangelopoulos, Zhang and Prybutok 2012).

Weaknesses:

Weaknesses of an organization refer to the factors that add disadvantages to the business. For instance, lesser amount technologies and consumer loyalty can be considered for two major weaknesses of business organizations (Agarwal, Grassl and Pahl 2012). More are the weaknesses, less is the competitive advantage of the company.

Opportunities:

This force determines the fields as well as the elements that the organization can use to enhance its competitive advantages. A company can enhance its competitive advantages by expanding its business in other markets.

Threats:

Threats can be defined as the elements that cause trouble in the way of gaining competitive advantages in the business of an organization (Kew and Stredwick 2017). One of the chief examples of threat includes the strength of the competitors and substitutes of the product or services offered by the organization.

Conclusion

From the above discussion, it can be concluded that the above-mentioned tools are highly crucial to understand the external as well as the internal condition of the organization. While PESTLE analysis helps the organization to have an in-depth picture of its target market, the porters five forces model helps the company to understand the potentiality of its competitors, suppliers and substitute products. The SWOT analysis, on the other hand, helps the company to understand its potentials, weakness, threats as well as opportunities. With the help of these three analysis tools, the company is able to understand and eradicate its loopholes and thus develops potential to expand its market.   

Reference List

Agarwal, R., Grassl, W. and Pahl, J., 2012. Meta-SWOT: introducing a new strategic planning tool. Journal of Business Strategy, 33(2), pp.12-21.

Babatunde, B.O. and Adebisi, A.O., 2012. Strategic Environmental Scanning and Organization Performance in a Competitive Business Environment. Economic Insights-Trends & Challenges, 64(1), pp. 23-28.

1. Dobbs, M., 2014. Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

Evangelopoulos, N., Zhang, X. and Prybutok, V.R., 2012. Latent semantic analysis: five methodological recommendations. European Journal of Information Systems, 21(1), pp.70-86.

Gupta, A., 2013. Environmental and pest analysis: An approach to external business environment. Merit Research Journal of Art, Social Science and Humanities, 1(2), pp.13-17.

Johnson, G., 2016. Exploring strategy: text and cases. Pearson Education, pp. 45-49.

Kew, J. and Stredwick, J., 2017. Business environment: managing in a strategic context. Kogan Page Publishers, pp. 12-16.

Wright, R.P., Paroutis, S.E. and Blettner, D.P., 2013. How useful are the strategic tools we teach in business schools?. Journal of Management Studies, 50(1), pp.92-125.