Class 3 FIVE FORCES MODEL EFE MATRIX
Five Forces Model of Industry Competition
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characteristics of an industry that influence firms’ profitability
*Should remember at least 4 of each
High Threat
Numerous competitors
Equally balanced competitors
Diverse competitors
No differentiation or no switching costs
Large capacity increments required
Threat of Rivalry
Low Threat
Few competitors
One or a few strong competitors
Similar competitors
Significant
Minimal
Threat of Potential Entrants
High Threat
Low Threat
No or low economies of scale
Significant economies of scale
No other potential cost disadvantages
Cost disadvantages from other aspects
Weak product differentiation
Strong product differentiation
Minimal capital requirements
Huge capital requirements
Open access to distribution channels
Controlled access to distribution channels
No government policy protection
Government policy protection
Substitute Products
High Threat
Low Threat
There are many good substitutes
There are few good substitutes
High improvement of substitute product
low improvement of substitute product
Large scale commercialization of substitute
small scale commercialization of substitute
industries
industries
High sideways competition
low sideways competition
Bargaining Power of Suppliers
High Threat
Low Threat
Supplying industry has few companies
Supplying industry has many companies
Supplier's products are differentiated
Supplier's products aren't differentiated
Industry isn’t an important customer
Industry is an important customer
Supplier's product is an important input
Supplier's product isn’t an important input
Significant switching costs
Minimal switching costs in supplier's products
Supplier has ability to do
Supplier doesn't have ability to do
Bargaining Power of Buyers
High Threat
Low Threat
Buyer purchases large volumes
Buyer purchases small volumes
Purchases are significant part
Purchases aren't significant part of buyer's costs
Purchases standard or undifferentiated
Purchases highly differentiated and unique
Buyer faces few switching costs
Buyer faces significant switching costs
Buyer's profits are low
Buyer's profits are strong
Buyers have full information
Buyers have limited information
Five Forces Analysis: Key Questions and Implications
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What are the key forces at work in the competitive environment?
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Are there underlying forces driving competitive forces?
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Will competitive forces change?
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What are the strengths and weaknesses of competitors in relation to the competitive forces?
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Can competitive strategy influence competitive forces (eg by building barriers to entry or reducing
competitive rivalry)?
EFE Matrix
Purpose of External Audit Identify


Opportunities
Threats
Industry Analysis EFE
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Weight = how important is each factor = 0.00 to 1.00 scale (or 1 to 100)
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Rating = indicates how effective the firm’s current strategies respond to the factor
= can be 1 to 4 (1) poor, (2) below average, (3) average, (4) satisfactory
 Total weighted score of 4.0
Firm’s response is outstanding to threats and opportunities
 Total weighted score of 1.0
Firm’s strategies not capitalizing on opportunities or avoiding threats
Rating: (1) poor, (2) below average, (3) average, (4) satisfactory
External Factor Evaluation Matrix (EFE) Interpretation?
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score 1-2 = business has slightly less than average ability to respond to external factors
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score 2-3 = business has the average ability to respond to external factors
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socre 3-4 = business has ability to respond to external factors
**Industry Analysis EFE
Important -- Understanding the factor used in the EFE Matrix is more important than the actual weights and
ratings assigned.
** When analyze to give recommendations should analyze at point high in Weigh that our company
cannot respond to opportunities and threats.