Lesson 6 of 7 · 13 min
External influences: PESTLE analysis
Five Forces looks inside an industry to explain profitability; PESTLE looks outside it, at political, economic, social, technological, legal and environmental influences, to understand growth and shifts in market share.
In short
- Five Forces → determinants of profitability; PESTLE → drivers of the growth rate and market share dynamics. PESTLE identifies themes or narratives investors want exposure to.
- External influences change slowly (though their size and direction can shift), so PESTLE need not be redone every quarter; usually a few influences dominate.
- Political: fiscal and monetary policy, government buying and selling, regulation, geopolitics (big for energy, healthcare, defence). Economic: GDP, income, inflation, interest rates, exchange rates, cyclical or structural.
- Social: culture, demographics, lifestyles; strongest for consumer-facing industries. Technological: sustaining innovations improve existing products; disruptive innovations offer a different value proposition, usually from new entrants.
- The innovator's dilemma: an incumbent either adopts the disruption (speeding its own decline but keeping share) or ignores it (keeping profits for now but losing share).
- Legal: laws and rulings that change business practices (tobacco, cannabis). Environmental: low-carbon transition, waste, land use; closely linked to legal influences.
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