Industry environment – Porter’s Five Forces Model

Macro environment – PEST analysis

Industry Environment

Porter’s Model of Five Forces is one of the most versatile frameworks for analyzing the industry (or operating) external environment. Employed by a variety of academics and business practitioners for more than three decades, the Five Forces Model has proved its usefulness in a variety of arenas. The Porter model helps the user get a handle on the competitive and market characteristics of a specific industry. The factors covered by the Five Forces Model are:

Threat of new entrants
Bargaining power of suppliers
Bargaining power of customers
Availability of substitutes
Degree of rivalry among competitors

Macro Environment

While the Porter analysis looks at the conditions in a specific industry, the PEST analysis looks at factors that affect the greater business environment. The sub-environments addressed by this model include:

Political (including regulatory)
Economic
Socio-cultural
Technical

Required Reading

For a general introduction to the Five Forces Model, the following video interview with Michael Porter is helpful for putting the external analysis into perspective:

The five competitive forces that shape strategy. (2008). Harvard Business Publishing. Podcast retrieved on August 28, 2014, from https://www.youtube.com/watch?v=mYF2_FBCvXw

The following site is an excellent introduction to the industry (operating) and remote (macro) environments. This site is a very good overview of Porter’s Five Forces and PEST: https://web.missouri.edu/cookml/AE4972/Industry%20Analysis.pdf

Connelley, D. (2005). Strategy for the External Environment. Power Point Presentation.

PEST analysis. (2009). Retrieved on August 28, 2014, from https://www.valuebasedmanagement.net/methods_PEST_analysis.html

Porter’s Five Forces: A model for industry analysis. (2007). Retrieved on August 28, 2014, from https://www.quickmba.com/strategy/porter.shtml

SWOT analysis: Lesson. (2009). Marketing Teacher. Retrieved from https://www.marketingteacher.com/swot-analysis-marketing-tools-from-marketing-teacher/
Optional Material

Carrying out a PEST analysis. (2005). The Free Library. Retrieved on August 28, 2014, from https://www.thefreelibrary.com/Carrying+out+a+PEST+analysis-a0141751272

PEST analysis. (2007). Quick MBA. Retrieved on August 28, 2014, from https://www.quickmba.com/strategy/pest/

Porter’s Five Forces. (2009). Mind Tools. Retrieved on August 28, 2014, from https://www.mindtools.com/pages/article/newTMC_08.htm

Porter’s Five Forces (2007). The Manager. Retrieved on August 28, 2014, from https://www.themanager.org/Models/p5f.htm

Zahorsky, D. (2009). A business owner’s secret weapon: SWOT analysis. Retrieved on August 28, 2014, from https://sbinformation.about.com/cs/bestpractices/a/swot.htm
Part 2: Internal Analysis

One of the criticisms of Porter’s Five Forces Model (and external analyses in general) is that while Five Forces can certainly help in the identification of problems and difficulties that firms are likely to encounter in a given industry, the model does not provide insight into what a particular company can do to manipulate those forces in its favor, thus gaining a competitive advantage.

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