Porters Five Forces Versus Pestel Framework

According to the Harvard Business Review, a strategy is a set of guiding principles for the people in the organization to make decisions and allocate resources to accomplish their stated objectives (Watkins, 2007). Creating effective strategies requires a strong understanding of the external and internal competitive environment along with the effectivity in implementing it which determines the firm’s success or failure (De Kluyver & Pearce, 2015). Hence, analysis tools are implemented to gain a deeper insight of the industry as a whole which would aid managers in creating a suitable strategy for the organization. The two tools that will be discussed in this paper are PESTEL and Porter’s five forces framework which can be implemented based on the suitability of the tools in the Tourism and Hospitality industry.

The PESTEL framework is an acronym of political, economy, sociocultural, technology, environment, and legal. However, there are many iterations of the PESTEL framework like STEEPLE and LEPEST that are used in different contexts based on the nature of the business (Makos, 2014). According to Yuksel, PESTEL analysis has two strengths, which are, being able to determine the environment that the firm is currently operating in, and also being able to forecast situations and circumstances which the organization might face in the future (2012). Although the PESTEL analysis is one of the most frequently used tool (Makos,2014), there are a few weaknesses that are present when using this framework (Yuksel, 2012). This framework is expensive and provides excessive information for risk management due to the broad analysis nature of PESTEL (Van Wyk, Dahmer, & Custy, 2004)). Further, PESTEL analysis factors are qualitative and not quantitative (Yuksel, 2012). This poses a significant problem when evaluating the external environmental factors because qualitative factors cannot be compared and analyzed rationally or objectively. (Yuksel, 2012).  Also, the types of risks identified through PESTEL are not specified (Van Wyk, Dahmer, & Custy, 2004). With the qualitative factors being paired up with unspecified risks, the risk managers would not be able to come up with an accurate result and may even make mistakes due to the fact that they might over or under estimate the levels of risks present and are unable to compare factors relatively.

According to Porter, the five competitive forces which are, threat of new entrants, supply side bargaining power, demand side bargaining power, threat of industry and product substitutes, and rivalry among existing companies in the industry shapes the structure and the nature of competition in an industry (Porter, 2008).Through the use of Porter’s five forces, the key factors that influences the industry can be identified and exploited by managers to structure their strategies to their advantage (Porter, 2008). Defining these forces also aids in the development of a business strategy and also to set boundaries to the business (Porter,2008). However, there are some pitfalls with using this framework as well. The first being the lack of depth. Because most people only have a superficial understanding on this framework, misanalysis is prone to occur and would lead to making bad decisions and inaccurate analysis (Dobbs, 2014). Further, most of the data that is retrieved from doing a five forces analysis is mostly qualitative and only a few variables can be quantified (Porter,2008). According to Miles, qualitative data researchers have very few guidelines to ensure that the conclusions made are reliable and valid as compared to quantitative analysis (1979). Hence, the qualitative results retrieved from doing the Porter’s five forces analysis may be arbitrary. Lastly, the biggest issue that Dobbs has stated in his research in Porter’s five forces framework is that it is often used to analyze the attractiveness of entering the industry rather than gaining insights as to how companies’ can gain a competitive advantage in the industry which defeats its main purpose (Dobbs, 2014).