Please note that this article is aimed at providing a simplified, high-level example of how to apply the Porter"s Five Forces and PESTEL frameworks. These analyses can (and should) be undertaken in much greater detail.
Porters Five Forces
- High exit barriers as a result of: costly assets (such as power plants) which would need to be sold in case of exit; companies sell a commoditised product (a unit of electricity from EDF Energy is not different from a unit of electricity from British Gas); and low brand loyalty (when it comes to electricity, customers tend to care only about price and not about which supplier they use).
Threat of substitutes
- Low due to the fact that electricity is essential for the entire population.
Bargaining power of buyers
- Low level of bargaining power due to buyers being highly dependent on the product, but the product is commoditised which increases the bargaining power of buyers.
Bargaining power of suppliers
- Key suppliers for the electricity retail industry include electricity generators and providers of electricity transmission throughout the country. National Grid has complete monopoly over electricity transmission and as such is a supplier with high bargaining power. Electricity retailers who also produce their own electricity (i.e. have their own power plants) will face lower supplier bargaining power as they have integrated into the supply chain.
Threat of new entrants
- Lack of switching cost and an undifferentiated product creates a favourable environment for new companies to enter the market, as little innovation is required and customers are generally not loyal to a specific brand. However, the level of fixed costs can be very high if potential entrants wish to choose a business model based on both generation and retail, as power plants are very expensive to acquire and operate.
A PESTLE analysis outlines the impact political (P), economical (E), socio-cultural (S) technological (T), legal (L) and environmental (E) factors have on an industry. It is a useful tool to help candidates understand how macro-level elements impact on an industry and deepen their appreciation of how being part of a specific industry affects a company.
- The electricity market is highly regulated in order to ensure fair competition and acceptable electricity prices for the consumers. Energy policies are controversial and tend to vary between political parties. Government policies, such as electricity price freezes, have a negative impact on the profit potential of the industry.
- The demand of electricity is relatively unaffected by recession or a decrease in income levels (low income elasticity) as electricity is a necessity for almost everyone regardless of level of income.
- The increasing awareness of environmental implications of excessive energy use not only means consumers might demand less electricity, but they may also demand that their electricity comes from a green source. Companies who do not offer green alternatives may thus suffer. The social trend in technology ownership and an increase in the number of appliances owned by domestic households, however, acts to increase the demand for electricity and hence the industry's profitability.
- Technological advancement may create opportunities to increase efficiency of current power plants but also for future developments in finding new ways of generating electricity.
- Analyses laws and potential legal developments that may affect the industry. This could include, for instance, health and safety standards, consumer laws and employment laws.
- Energy derived from sources such as photovoltaic and wind are exposed to the fluctuating weather. The finite nature of fossil fuels such as gas, oil and coal threatens the industry, as they are all important sources of electricity today.