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MGT603 - Strategic Management - Lecture Handout 11

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The EFE Matrix and five-force model can help strategists evaluate the market and industry, but these tools must be accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective external-audit system because external forces among foreign countries vary so greatly. This lecture provides you complete details of EFE matrix as a component of SWOT analysis.

Competitive Intelligence Programs and competitive analysis:

Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals.

competitive analysis

The central point lays the stress on rivalry of the competing firm. This relates to the intensity of the rivalry. How the firms compete with each other and to what extent? That should be taken into account very carefully.
Potential entry for new competitors shows a balance between different firms competing in a market. It also refers whenever a new partner enter into a market he may become threat for one and opportunity for other competing partners. As all the new entries and existing firms are competing with each other so the new entry will definitely make an effect on every one transacting in the market.
A potential development of substitute products also develops an environment of competition in the market among the competing partners. As all firms want to compete in term of quality and substitute will lasts for longer in the market if the quality of the substitute will be greater than the existing alternate. Other factors also have a major impact on the substitutes.
Collective bargaining power of suppliers and consumers: if vendors are less in the market and the organizations that have to purchase from those vendors are more then the demand for those suppliers will be more as the firms have to purchase from that less suppliers. The reverse is the case if suppliers are more and buyers are less. Then the demand for those suppliers will be less. Such circumstances create difficulties in bargaining.
These above five components constitute the basics elements for the competitive analysis.

Global challenge:

International Challenge faced by Pakistani firms:

  • How to gain and maintain exports to other nations
  • How to defend domestic markets against imported goods

The first challenge is the much bigger in the sense that we have to search for new market and retain in that market as the competition goes on increasing with every passing second. For this, we have to make a research in the market that how to retain in that market.
Second challenge is also depends upon the research that how we can retain in that market through competition and how to defend our market with violation of exports laws.

Industry Analysis: The External Factor Evaluation (EFE) Matrix

We can prepare EFE matrix after evaluating the key external factors discuss in the later lectures. There are all key factors which are needed to be summarized in order to make EFE matrix.
An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. The EFE matrix consists of five steps process.

Five-Step process:

  • List key external factors (10-20)
    • Opportunities & threats
  • You have to prepare a list of all external factors which will affect the EFE matrix. These factors should be two points to be kept in mind these are opportunities and threats.

  • Assign weight to each (0 to 1.0)
    • Sum of all weights = 1.0
  • Now you have to arrange them according to their weight age that which factor is most important. It should be weight age in % ages. The sum of the total of all the factors should always be one.

  • Assign 1-4 rating to each factor
    • Firm’s current strategies response to the factor: how well firms response to these factors.
  • Multiply each factor’s weight by its rating
    • Produces a weighted score
  • How the firm will respond to these factors external factors. Such criteria are known as rating.

  • Sum the weighted scores for each
    • Determines the total weighted score for the organization.
  • Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

Illustrated in Table 3-11, the EFE Matrix can be developed in five steps:

  1. List key external factors as identified in the external-audit process. Include a total of from ten to twenty factors, including both opportunities and threats affecting the firm and its industry. List the opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible.
  2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm's industry. Opportunities often receive higher weights than threats, but threats too can receive high weights if they are especially severe or threatening. Appropriate weights can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all weights assigned to the factors must equal 1.0.
  3. Assign a 1-to-4 rating to each key external factor to indicate how effectively the firm's current strategies respond to the factor, where = 5 the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are based on effectiveness of the firm's strategies. Ratings are, thus, company based, whereas the weights in Step 2 are industry based. It is important to note that both threats and opportunities can receive a 1, 2, 3, or 4.
  4. Multiply each factor's weight by its rating to determine a weighted score.
  5. Sum the weighted scores for each variable to determine the total weighted score for the organization.
An Example External Factor Evaluation Matrix for UST, Inc.
1. Global markets are practically untapped by
smokeless tobacco market
.15 1 .15
2. Increased demand caused by public banning of
.05 3 .15
3. Astronomical Internet advertising growth .05 1 .05
4. Pinkerton is leader in discount tobacco market .15 4 .60
5. More social pressure to quit smoking, thus
leading users to switch to alternatives
.10 3 .30
1. Legislation against the tobacco industry .10 2 .20
2. Production limits on tobacco increases
competition for production
.05 3 .15
3. Smokeless tobacco market is concentrated in
southeast region of United States
.05 2 .10
4. Bad media exposure from the FDA .10 2 .20
5. Clinton administration .20 1 .20
TOTAL 1.00   2.10

Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest possible total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that an organization is responding in an outstanding way to existing opportunities and threats in its industry. In other words, the firm's strategies effectively take advantage of existing opportunities and minimize the potential adverse effect of external threats. A total score of 1.0 indicates that the firm's strategies are not capitalizing on opportunities or avoiding external threats.
An example of an EFE Matrix is provided in Table for UST, Inc., the manufacturer of Skoal and Copenhagen smokeless tobacco. Note that the Clinton administration was considered to be the most important factor affecting this industry, as indicated by the weight of 0.20. UST was not pursuing strategies that effectively capitalize on this opportunity, as indicated by the rating of 1.01. The total weighted score of 2.10 indicates that UST is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats. It is important to note here that a thorough understanding of the factors being used in the EFE Matrix is more important than the actual weights and ratings assigned.

Total weighted score of 4.0 =
Organization response is outstanding to threats & weaknesses
Total weighted score of 1.0 =
Firm’s strategies not capitalizing on opportunities or avoiding threats
UST (in the previous example), has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats.
Note: Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.

This is important to understand the factors for which you are preparing the EFE matrix than the weight age given to the each factors.

The Competitive Profile Matrix (CPM)

The Competitive Profile Matrix (CPM) identifies a firm's major competitors and their particular strengths and weaknesses in relation to a sample firm's strategic position.
The weights and total weighted scores in both a CPM and EFE have the same meaning. However, the factors in a CPM include both internal and external issues; therefore, the ratings refer to strengths and weaknesses, where 4 5 major strength, 3 5 minor strength, 2 5 minor weakness, and 1 5 major weakness. There are some important differences between the EFE and CPM. First of all, the critical success factors in a CPM are broader; they do not include specific or factual data and even may focus on internal issues. The critical success factors in a CPM also are not grouped into opportunities and threats as they are in an EFE. In a CPM the ratings and total weighted scores for rival firms can be compared to the sample firm. This comparative analysis provides important internal strategic information.
A sample Competitive Profile Matrix is provided in Table. In this example, advertising and global expansion are the most important critical success factors, as indicated by a weight of 0.20. Avon's and L'Oreal's product quality is superior, as evidenced by a rating of 4; L'Oreal's "financial position" is good, as indicated by a rating of 3; Procter & Gamble is the weakest firm overall, as indicated by a total weighted score of 2.80.

A Competitive Profile Matrix
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 4 0.40 3 0.30
Price Competitiveness 0.10 3 0.30 3 0.30 4 0.40
Management 0.10 4 0.40 3 0.30 3 0.30
Financial Position 0.15 4 0.60 3 0.45 3 0.45
Customer Loyalty 0.10 4 0.40 4 0.40 2 0.20
Global Expansion 0.20 4 0.80 2 0.40 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
TOTAL 1.00   3.15   3.25   2.80
Note: (1) The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 =
major strength. (2) As indicated by the total weighted score of 2.8, Competitor 3 is weakest. (3) Only eight
critical success factors are included for simplicity; this is too few in actuality.

Other than the critical success factors listed in the example CPM, other factors often included in this analysis include breadth of product line, effectiveness of sales distribution, proprietary or patent advantages, location of facilities, production capacity and efficiency, experience, union relations, technological advantages, and e-commerce expertise.
A word on interpretation: Just because one firm receives a 3.2 rating and another receives a 2.8 rating in a Competitive Profile Matrix, it does not follow that the first firm is 20 percent better than the second. Numbers reveal the relative strength of firms, but their implied precision is an illusion. Numbers are not magic. The aim is not to arrive at a single number but rather to assimilate and evaluate information in a meaningful way that aids in decision making.

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