110 PART 2 • STRATEGY FORMuLATION

TABLE 3-9 An Actual EFE Matrix for Kroger Co.

Weighted
Opportunities Weight Rating Score

1. Organic & natural food sales in the United States totaled $47 billion, an increase of 0.09 4 0.36
nearly $3.7 billion from the previous year.
2. Online grocery spending is forecasted to grow from 4.3% of the total U.S. food and 0.07 3 0.21
beverage sales to 20% by 2025.
3. Sales growth in the grocery industry is 3.8% annually. 0.07 4 0.28
4. Organic food sales increased 8.8% to $55 billion. 0.05 2 0.1
5. Convenience store lunch and dinner services contribute 21.7% of in-store sales. 0.05 2 0.1
6. The National Retail Federation estimates an 8% to 12% U.S. e-commerce growth in 0.05 1 0.05
2019.
7. Global food retail sales are about $4 trillion annually, led by supermarkets/ 0.04 2 0.08
hypermarkets.
8. GDP of United States increased from 2.2% to 3.1%. 0.04 2 0.08
9. The Private Label Manufacturer’s Association notes that private label products are 25% 0.03 1 0.03
to 50% cheaper than national brands, appealing to customers who value affordability.
10. Studies show that 51.2% of Internet users make online purchases using mobile apps. 0.01 3 0.03
Weighted
Threats Weight Rating Score

1. Amazon spent $13.7 billion to acquire 460 brick-and-mortar Whole Foods Market 0.10 2 0.2
stores.
2. Target is investing $7 billion to update and downsize its stores and develop new exclu- 0.08 1 0.08
sive brands between 2018 and 2020.
3. Walmart’s fiscal 2017 revenue was $485.8 billion, up $9.4 billion, or 0.78%. Kroger’s 0.07 3 0.21
total revenue is $115.3 billion.
4. Fast-food revenue exceeds $600 billion annually; it is rising 15% annually. 0.05 2 0.1
5. E-commerce sales as percentage of total retail sales is nearly 10%, and rising 3% 0.05 1 0.05
annually.
6. Walmart groceries cost about 4% less than Kroger’s. 0.04 2 0.8
7. Walmart.com now offers more than 67 million products, a 30% increase this year. 0.03 1 0.03
8. Walmart created its own “designer” cantaloupe that “tastes as sweet in winter as it does 0.03 2 0.06
in summer,” and a more flavorful tomato is in the works.
9. Publix Supermarket is growing 12% a year. 0.03 4 0.12
10. Aldi’s U.S. grocery market is growing 15% a year. 0.02 3 0.06

Total 1.00 3.03

LO 3.7 The Competitive Profile Matrix

The Competitive Profile Matrix (CPM) reveals how a focal firm compares to major competitors
across a range of key factors. This comparative analysis provides important strategic information
regarding a firm’s competitive advantages or disadvantages in a given industry. In determining
what factors to include in a CPM, tailor the factors to the particular industry. For example, in the
airline industry, such factors as on-time arrival, leg room in planes, and routes served are far better
factors to include than merely including “quality of service” or “financial condition” as factors.
Similar to an EFE, a CPM uses weights and total weighted scores, which quantify the
importance of a given factor to the industry, as well as total weighted scores, which quantify
how well a given firm is doing relative to the other two firms evaluated in the CPM. The key
difference between a CPM and EFE is that a CPM compares firms and an EFE Matrix analyzes
how a firm internally is responding to key external issues. Critical success factors include points
CHAPTER 3 • THE ExTERNAL ASSESSMENT 111

of competitive advantage within an industry, as well as other factors that are crucial for a firm
to succeed within a given industry; critical success factors in a CPM can include both internal
and external issues. List critical success factors from highest weight to lowest weight in a CPM.
Weights in a CPM are industry-based and sum to 1.0. Ratings in a CPM are assigned to
quantify how well a firm and its key competitors are performing on each critical success factor;
ratings reveal the degree of effectiveness of the firm’s strategies. Assign a rating between 1 and
4 to each key factor to indicate how effectively the firm’s current strategies respond to the fac-
tor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is
average, and 1 = the response is poor. Ratings are company-based; weights are industry-based.
A sample CPM is provided in Table 3-10. In this example, the two most important factors
to being successful in the industry are “advertising” and “global expansion,” as indicated by
weights of 0.20. If there were no weight column in this analysis, note that each factor then would
be equally important. Thus, including a weight column yields a more robust analysis because it
enables the analyst to capture perceived or actual levels of importance. Note in Table 3-10 that
Company 1’s strategies are responding in a superior fashion to “product quality,” as indicated
by a rating of 4, whereas Company 2’s strategies are superior regarding “advertising.” Overall,
Company 1’s strategies are responding best, as indicated by the total weighted score of 3.15 and
Company 3 is responding worst. Never duplicate ratings in a row in a CPM; go ahead and make
judgments or decisions as to appropriate ratings based on your research and knowledge of the
focal firm and rival companies. (Note: The point of this example is to illustrate the mechanics of
developing a CPM rather than having industry-specific factors.)
Other than the critical success factors listed in the sample CPM, 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. In generating the list of critical
success factors, strive to include factors that differentiate firms within the industry (i.e., factors
that determine competitive advantages).
Just because one firm receives a 3.20 overall total weighted score and another receives a 2.80
in a CPM, it does not necessarily follow that the first firm is precisely 14.3 percent better than
the second, but it does suggest that the first firm is performing better on the variables included in
the CPM. Regarding weights in a CPM or EFE Matrix, be mindful that 0.08 is mathematically
33 percent higher than 0.06, so even small differences can reveal important perceptions regarding
the relative importance of various factors. The aim with numbers is to assimilate and evaluate
information in a meaningful way that aids in decision making.

TABLE 3-10 An Example Competitive Profile Matrix

Company 1 Company 2 Company 3

Critical Success Factors Weight Rating Score Rating Score Rating Score

Advertising 0.20 1 0.20 4 0.80 3 0.60

Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Management 0.10 4 0.40 3 0.20 1 0.10
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Market Share 0.05 1 0.05 4 0.20 3 0.15

Total 1.00 3.15 2.50 2.20

Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3 = response is
above average, 4 = response is superior. As indicated by the total weighted score of 2.20, Company 3
is performing worst. Only 8 critical success factors are included for simplicity; in actuality, however,
this is too few. The template asks that 12 factors be included and to tailor factors to a given industry.
112 PART 2 • STRATEGY FORMuLATION

TABLE 3-11 An Actual CPM for Kroger Company

Kroger Company Walmart Inc. Amazom.com Inc.
Critical Success Factors Weight Rating Score Rating Score Rating Score

Price Competitiveness 0.17 3 0.51 4 0.68 2 0.34

Product Quality 0.13 2 0.26 3 0.39 1 0.13
Multiple Formats 0.10 4 0.40 3 0.30 1 0.10
Market Penetration 0.09 4 0.36 3 0.27 2 0.18
Customer Loyalty 0.08 2 0.16 4 0.32 3 0.24
Name Recognition 0.08 1 0.08 4 0.32 3 0.24
Store Locations 0.07 2 0.14 4 0.28 1 0.07
Customer Service 0.07 2 0.14 3 0.21 4 0.28
Market Share 0.06 2 0.12 4 0.24 1 0.06
Financial Profit 0.05 2 0.10 4 0.20 3 0.15
Distribution System 0.05 2 0.10 3 0.15 4 0.20
Advertising 0.05 1 0.05 4 0.20 2 0.10

Total 1.00 2.42 3.56 2.09

An actual CPM is provided in Table 3-11, again for Kroger Company. Note that the two rival
firms, Walmart and Amazon, receive higher ratings than Kroger on several critical success fac-
tors, including distribution system, advertising, and customer service, for example. Also note the
factors are listed beginning with the most important (highest weight). Note there is no duplica-
tion of ratings across a row and that Kroger is responding worse than Walmart and Amazon on
“name recognition” and “advertising.”

IMPLICATIONS FOR STRATEGISTS

Figure 3-4 reveals that to gain and sustain competitive advantages, competitive intelligence and information across the 10 forces dis-
strategists must collect, analyze, and prioritize information regard- cussed in this chapter is to ask various managers to monitor particu-
ing the firm’s competitors, as well as identify and consider relevant lar sources of information, such as key magazines, trade journals,
social, demographic, economic, and technology trends and events newspapers, and online sources. These persons can submit periodic
impacting the firm and its industry. It is not uncommon for there scanning reports to the person(s) who coordinate the external audit.
to be substantial discussing, perhaps even some cussing, in delib- This approach provides a continuous stream of timely strategic infor-
erating what external factors should be included in an EFE Matrix, mation and involves many individuals in the external-audit process.
because factors included ultimately impact the firm’s strategies and Suppliers, distributors, salespersons, customers, and competitors
direction. An engineering hunt for external facts is essential because represent other sources of vital information.
resultant strategies can be expensive and sometimes irreversible. After external-audit information is gathered, it should be assimi-
Survival of the firm can hinge on an effective, thorough external as- lated into an EFE Matrix and CPM as described herein. To accomplish
sessment being performed. this task, some firms conduct a meeting or series of meetings to
This chapter reveals that actionable, quantitative, comparative, collectively determine the most important opportunities and threats
divisional (AQCD) information is a key ingredient for making strategic facing the firm. A prioritized list of these factors can be obtained
decisions. The EFE Matrix and Competitive Profile Matrix presented in by requesting all managers to individually rank the factors identi-
this chapter are excellent strategic-planning tools for assimilating and fied, from 1 (for the most important opportunity/threat) to 20 (for
prioritizing information to enhance decision-making. the least important opportunity/threat). Then, by summing the rank-
ings, a prioritized list of factors is revealed. Prioritization is absolutely
The Process of Performing an External Audit essential in strategic planning because no organization can do ev-
In performing an external audit, involve as many managers and em- erything that would benefit the firm; tough choices among good
ployees as possible because involvement leads to understanding and options have to be made; in both an EFE Matrix and CPM factors
commitment; individuals appreciate having the opportunity to con- are listed from most important (highest weight) to least important.
tribute ideas and to gain a better understanding of their firm’s indus- Even a full list of more than 50 factors can be distilled to the 20 most
try, competitors, markets, and strategies. An effective way to gather important in the manner described.