INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)

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Strategic Management MGT603

Lesson 11

INDUSTRY ANALYSIS

Objectives:

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: Porter's Five-

Forces Model

Potential development

of substitute products

Rivalry among

Bargaining power

Competing firms

of suppliers

of consumers

Potential entry of new

competitors

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.

Strategic Management MGT603

Global challenge:

International Challenge faced by Pakistani firms:

o How to gain and maintain exports to other nations

o 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 4 5 the response is superior, 3 5 the response is above average, 2 5 the

response is average, and 1 5 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.

Strategic Management MGT603

An Example External Factor Evaluation Matrix for UST, Inc.

WEIGHTED

KEY EXTERNAL FACTORS

WEIGHT RATING

SCORE

Opportunities

1. Global markets are practically untapped by

.15

smokeless tobacco market

2. Increased demand caused by public banning of

.05

.15

smoking

3. Astronomical Internet advertising growth

.05

4. Pinkerton is leader in discount tobacco market

.15

.60

5. More social pressure to quit smoking, thus

.10

.30

leading users to switch to alternatives

Threats

1. Legislation against the tobacco industry

.10

.20

2. Production limits on

tobacco

increases

.05

.15

competition for production

3. Smokeless tobacco market is concentrated in

.05

.10

southeast region of United States

4. Bad media exposure from the FDA

.10

.20

5. Clinton administration

.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.

Strategic Management MGT603

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

AVON

L'OREAL

PROCTER&GAMBLE

CRITICAL SUCCESS

WEIGHT RATING SCORE RATING SCORE RATING

SCORE

FACTORS

Advertising

0.20

0.80

0.60

Product Quality

0.10

0.40

0.30

Price Competitiveness

0.10

0.30

0.40

Management

0.10

0.40

0.30

Financial Position

0.15

0.60

0.45

Customer Loyalty

0.10

0.40

0.20

Global Expansion

0.20

0.80

0.40

Market Share

0.05

0.20

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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