External Environment

The PESTEL framework (1)

The PESTEL framework categorises
environmental factors into six key types:
Political Economic
Social Technological
Ecological Legal

PESTEL helps to provide a list of potentially

important issues influencing strategy. It is
important to assess the impact of each factor.
The PESTEL framework (2)
• Political factors: The role of the state e.g. as
an owner, customer or supplier of businesses.
Other political factors include government
policies, taxation changes, foreign trade
regulations, political risk in foreign markets,
changes in trade blocks (e.g. expansion of EU).

• Economic factors: The role of macro-economic

factors. This includes business cycles, interest
rates, personal disposable income, exchange
rates, unemployment rates, differential growth
rates around the world.
The PESTEL framework (4)
• Social factors: Including changing cultures and
demographics. Examples are the ageing
population in Western societies, income
distribution, lifestyle changes, consumerism,
changes in culture and fashion.

• Technological factors: New discoveries and

technology developments. Examples include
developments on the internet, nano-technology or
the rise of new composite materials.
 The PESTEL framework (5)

• Ecological factors: This refers to ‘green’

environmental issues, such as pollution waste
and climate change. Examples are environmental
protection regulations, energy problems, global
warming, waste disposal and re-cycling.
• Legal factors: Legislative and regulatory
constraints or changes. Examples are IPR,
competition law, health and safety law,
employment law, liberalisation of trade law.
Using the PESTEL framework
• Apply selectively – identify specific factors which
impact on the industry, market and organisation in
question.
• Identify factors which are important currently but
also consider which will become more important
in the next few years.
• Use data to support the points and analyse trends
using up-to-date information.
• Identify opportunities and threats – the main
point of the exercise!
 Scenario Planning

An understanding of the big picture and a

plan to manage uncertainty

6 Assess the strategic implications of

each scenario

5 Specify indicators that can signal which scenario

is unfolding

4 Flesh out the picture

3 Develop the framework by defining two specific axes

2 Brainstorm key drivers, decision factors, and possible scenario departure or divergence
points

1 Define target issue, time frame, and scope for scenarios

The Five Forces of Competition Model
Threat of New Entrants: Barriers to Entry
• Supply-side Economies of scale
• Demand-side benefits of scale
• Customer Switching costs
• Capital requirements
• Incumbents advantage independent of size
• Unequal Access to distribution channels
• Restrictive Government policy
• Expected retaliation
Barriers to Entry (cont’d)
• Switching Costs
• One-time costs customers incur
• Product differentiation when they buy from a different
• Unique products supplier
• Customer loyalty • New equipment
• Products at competitive prices • Retraining employees
• Psychic costs of ending a
• Capital Requirements relationship
• Physical facilities
• Inventories
• Access to Distribution Channels
• Marketing activities • Stocking or shelf space
• Availability of capital • Price breaks
• Cooperative advertising
allowances
Barriers to Entry (cont’d)
• Cost Disadvantages Independent of • Expected retaliation
Scale • Responses by existing competitors may
• Proprietary product technology depend on a firm’s present stake in the
• Favorable access to raw materials industry (available business options)
• Desirable locations
• Government policy
• Licensing and permit requirements
• Deregulation of industries
Bargaining Power of Suppliers
• Supplier power increases when:
• Suppliers are large and few in number (More concentrated than industry it
sells to)
• Supplier group does not depend heavily on the industries for revenues
(Individual buyers are not large customers of suppliers and there are many of
them)
• Suppliers’ products create high switching costs.
• Suppliers’ goods are critical to the buyers’ marketplace success (Highly
differentiated)
• Suitable substitute products are not available.
• Suppliers pose a threat to integrate forward into buyers’ industry.
Bargaining Power of Buyers
• Buyer power increases when:
• Buyers are large and few in number.
• Buyers purchase a large portion of an industry’s total output (Industry
products are standardized or undifferentiated)
• Buyers’ switching costs are low.
• Buyers’ purchases are a significant portion of a supplier’s annual revenues.
• Buyers can pose threat to integrate backward into the sellers’ industry.
Threat of Substitute Products
• The threat of substitute products increases when:
• Buyers face few switching costs.
• Substitute product’s quality and performance are equal to or greater than the
existing product.
• The substitute product’s price is lower.
• Differentiated industry products that are valued by customers reduce
this threat.
Intensity of Rivalry Among Competitors
• Industry rivalry increases when:
• There are numerous or equally balanced competitors.
• Industry growth slows or declines.
• When high exit barriers prevent competitors from leaving the industry.
• There are high fixed costs or high storage costs.
• There is a lack of differentiation opportunities or low switching costs.
• When the strategic stakes are high.
Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors
Interpreting Industry Analyses (cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
High profit potential
among competitors