Comparing by fit
Two ways of thinking, side by side. There is no winner here — read across each row and choose the one that fits your situation.
Strategy
Explain why an industry is profitable — or isn't — before you commit to competing in it.
By 6days
Strategy
Scan the six external forces that will shape your market whether or not you act.
By 6days
When to use — Porter's Five Forces
Use it before entering an industry, before a major capital commitment, or when strong execution is somehow producing weak margins and you need to know whether the problem is you or the structure you are operating inside.
When to use — PESTEL Analysis
Use it when entering an unfamiliar market or geography, when setting strategy over a multi-year horizon, or when a business is heavily exposed to regulation, commodity prices, or public sentiment. It pairs naturally with a competitive analysis, which handles the forces PESTEL deliberately ignores.
When not to use — Porter's Five Forces
Avoid it for short-term or tactical calls — it describes structure, which moves over years. It fits industries with recognisable boundaries better than fluid ecosystems and platforms, where roles blur and today's supplier is next year's competitor. It also says nothing about your own capabilities, and it is a snapshot of a structure that will keep moving after you present it.
When not to use — PESTEL Analysis
Avoid it for operational or short-horizon decisions, where macro forces move too slowly to matter and the exercise becomes theatre. It also has no opinion about your competitors, your customers, or your own capabilities — mistaking a completed PESTEL for a strategy is the standard failure.
Teams evaluate a market by looking at direct rivals and market growth, then are surprised when a fast-growing market turns out to make nobody any money. Profitability is structural. If suppliers can raise prices at will, or customers can switch on a whim, or anyone with modest capital can enter, then competence will not save you — the structure will take the margin regardless of how well you execute.
Organisations are fluent about competitors and customers and largely silent about the wider environment those competitors and customers live in. Then a regulation lands, a currency moves, or a social expectation shifts, and a strategy that looked sound is suddenly answering last year's question. The failure is rarely analytical ability; it is that nobody was assigned to look outward in a systematic way.
The five forces model explains industry profitability through the pressures that compete for its margin: rivalry among existing players, the threat of new entrants, the threat of substitutes, supplier power, and buyer power. Each force is a claim on the money the industry produces. Analysed together they answer a question growth rates cannot — whether there is profit available here structurally, and where it currently goes. Strong forces mean a hard industry no matter how good you are; weak forces mean margin is available to whoever can serve the customer.
PESTEL walks the macro-environment through six lenses: political, economic, social, technological, environmental, and legal. Each lens is a prompt to ask what is changing outside your control that could alter the value of what you are building. The point is not to fill six boxes but to force attention onto categories a team would otherwise skip — most groups are comfortable with technology and economics and quietly ignore the social and environmental columns until those columns produce a crisis.
State exactly which industry you are analysing, at what level, in what geography. Draw it too wide and every force reads as moderate and the analysis says nothing; too narrow and you will miss the substitute that eventually takes your customers.
Take the forces one at a time and argue each from evidence rather than impression. Supplier power is not 'high' because a supplier is large; it is high when few alternatives exist, switching is costly, or the supplier could plausibly do your job themselves.
Follow the money. In many industries the profit does not sit with the visible brand but with a component supplier, a distribution gatekeeper, or the buyer who plays everyone against each other. Naming who currently captures the margin is usually the analysis's most uncomfortable output.
Ask what would need to be true for the structure to shift in your favour — an entry barrier you could build, a supplier dependency you could break, a switching cost you could create. This turns a diagnosis into strategy. If nothing on the list is achievable, that is a finding.
Worked example — Porter's Five Forces
A hardware startup plans a premium smart-home speaker. Rivalry: intense, with entrenched players subsidising devices to win the ecosystem. Entrants: hardware is capital-heavy, but contract manufacturing lowers the wall considerably. Substitutes: the phone already in every pocket does most of the job adequately. Suppliers: one vendor controls the voice-processing chip. Buyers: retailers dictate shelf terms and switch brands without cost. Four of five forces are hostile and the margin sits with the chip vendor and the retailer. The conclusion is not 'execute harder' but that the device is only viable as an entry point to something with better structure — a service relationship the speaker creates rather than the speaker itself.
Worked example — PESTEL Analysis
A payments company assesses expansion into a new country. Political: a stable government with an explicit fintech agenda. Economic: high inflation compressing consumer spending. Social: rapid adoption of mobile wallets among under-35s. Technological: a national instant-payment rail launching next year. Environmental: negligible. Legal: a licensing regime requiring a local entity and capital reserves. The filter leaves two things that actually decide the question — the licensing cost and the payment rail's timing — and the expansion case is rebuilt around those rather than around the optimistic social trend that first attracted attention.
Introduced by economist Michael Porter in the late 1970s and developed in his subsequent writing on competitive strategy, the model applies industrial-organisation economics to firm-level decisions. Unlike many business frameworks its authorship is clear and undisputed. It has been extended by others since, most commonly with a sixth force covering complements.
The framework grew by accretion rather than invention. Environmental-scanning checklists circulated in strategic planning literature from the 1960s onward under several acronyms, with letters added over time as environmental and legal factors gained prominence. No single originator is credibly identified, and the six-letter form is best understood as a convention that settled through use.
Scope the scan to a specific market and period. Macro forces are only meaningful relative to a horizon: an interest-rate move matters enormously to an eighteen-month plan and barely registers against a ten-year one.
Under each of the six headings, record what is changing rather than what is true. 'Data protection law exists' is a condition and helps nobody. 'Enforcement of cross-border data transfer rules is tightening, with the first fines expected next year' is a change you can plan against.
Most of what you record will not matter to you. Keep only the forces that would plausibly change a decision you are about to make, and discard the rest without ceremony. An unfiltered PESTEL is a reading list, not an analysis.
For each surviving force, ask how likely it is within the horizon and how hard it would hit. This separates the genuinely urgent from the merely interesting, and it is the step that converts a scan into a prioritised watch list.
For each material force, name someone accountable for watching it and state the observable event that would make you act. A force nobody owns is a force nobody will notice moving.