MODUL PERKULIAHAN
Distinctive
Management
Strategic
Key external forces
Industrial Organzation (I/O) view
Economic, social and technological forces
External Factor Evaluation (EFE) Matrix
Fakultas
Program Studi
Tatap Muka
Ekonomi & Bisnis
Magister
Manajemen
04
Kode MK
Disusun Oleh
35009
Dr. Baruna Hadibrata, SE., MM
Abstract
Kompetensi
This module illustrates Key external
forces
Industrial Organzation (I/O) view
Economic, social and technological
forces
External Factor Evaluation (EFE)
Matrix
Understanding Key external forces
Industrial Organzation (I/O) view
Economic, social and technological
forces
External Factor Evaluation (EFE)
Matrix
Pembahasan
An organization must have the ability to examine and make changes based on internal and
external environmental factors that affect its performance. The use of tools to analyze these
environmental factors is the key to a successful organization.
External forces can be divided into five broad categories: Economic forces; Social, cultural,
demographic, and environmental forces; Political, governmental, and legal forces;
Technological forces; and Competitive forces. Relationships among these forces and an
organization are depicted in Figure External trends and events significantly affect all
products, services, markets, and organizations in the world
Figure 1. Key External Forces
Relationships between Key External Forces and an Organization are shown in the above
figure. Changes in external forces translate into changes in consumer demand for both
industrial and consumer products and services. External forces affect the types of products
developed, the nature of positioning and market segmentation strategies, the types of
services offered, and the choice of businesses to acquire or sell. External forces directly
affect both suppliers and distributors. Identifying and evaluating external opportunities and
threats enables organizations to develop a clear mission, to design strategies to
achievelong-term objectives, and to develop policies to achieve annual objectives .
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Your company is affected by many forces, which have to be observed in order to optimize
your business strategy. Customers and their aggregation in the form of markets are defined
as the demand side of business transactions. From a seller´s perspective a market is the
group of customers who are either actual or potential buyers of a respective product or
service. Customers are the central stakeholders, and hence you should carry out a detailed
analysis on them.
Suppliers on the other hand provide your company with raw materials, products and
services, which are necessary for you to produce your goods. Suppliers influence the
profitability of a sector / business, due to the fact that the products and services they sell,
are used as input for the value creation process of a sector / business. Technology is the
driving force behind a great number of processes in a company. You need technology not
only in your production processes, but also for communication procedures, logistics, etc.
The labour market functions through the interaction between workers and employers.
Newer models of the labour market focus on the bargaining power of both sides.
Competitors are also an important part in the analysis of the supply side of the market.
Competitors can be found in similar sectors - e.g. transport - a bike can be a substitute for a
car - and in the same strategic group.
Another opportunity to strengthen your competitive position is to perform a search for
potential synergies. The whole process of performance creation - the so called value chain must be observed with regards to cost and differentiation advantages. Sometimes the
advantage of the combination of value chains is contradicted by the increase of complexity
of the process and accordingly higher coordination efforts and a loss of insight into every
company parts.
In economics, industrial organization is a field that builds on the theory of the firm by
examining the structure of (and, therefore, the boundaries between) firms and markets.
Industrial organization adds real-world complications to the perfectly competitive model,
complications such as transaction costs, limited information, and barriers to entry of new
firms that may be associated with imperfect competition. It analyzes determinants of firm
and market organization and behavior as between competition and monopoly, including
from government actions.
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There are different approaches to the subject. One approach is descriptive in providing an
overview of industrial organization, such as measures of competition and the sizeconcentration of firms in an industry. A second approach uses microeconomic models to
explain internal firm organization and market strategy, which includes internal research and
development along with issues of internal reorganization and renewal. A third aspect is
oriented to public policy as to economic regulation, antitrust law, and, more generally, the
economic governance of law in defining property rights, enforcing contracts, and providing
organizational infrastructure.
The subject has a theoretical side and a practical side. According to one textbook: "On one
plane the field is abstract, a set of analytical concepts about competition and monopoly. On
a second plane the topic is about real markets, teeming with the excitement and drama of
struggles among real firms" (Shepherd, W.; 1985; 1).
The extensive use of game theory in industrial economics has led to the export of this tool
to other branches of microeconomics, such as behavioral economics and corporate finance.
Industrial organization has also had significant practical impacts on antitrust law and
competition policy.
The development of industrial organization as a separate field owes much to Edward
Chamberlin, Edward S. Mason, and particularly Joe S. Bain among others.
Assessments of the subject have differed over time. The preface to a related research
volume in 1972 remarked on Whither industrial organization?: "That all is not well with this
in this once flourishing field is readily apparent." A response came 15 years later: " Today's
verdict is that industrial organization is alive and well and the queen of applied
microeconomics."
SWOT analysis aims to identify the key internal and external factors seen as important to
achieving an objective. SWOT analysis groups key pieces of information into two main
categories:
internal factors – the strengths and weaknesses internal to the organization
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external factors – the opportunities and threats presented by the environment external to
the organization
Analysis may view the internal factors as strengths or as weaknesses depending upon their
effect on the organization's objectives. What may represent strengths with respect to one
objective may be weaknesses (distractions, competition) for another objective. The factors
may include all of the 4Ps; as well as personnel, finance, manufacturing capabilities, and so
on.
The external factors may include macroeconomic matters, technological change, legislation,
and sociocultural changes, as well as changes in the marketplace or in competitive position.
The results are often presented in the form of a matrix.
SWOT analysis is just one method of categorization and has its own weaknesses. For
example, it may tend to persuade its users to compile lists rather than to think about actual
important factors in achieving objectives. It also presents the resulting lists uncritically and
without clear prioritization so that, for example, weak opportunities may appear to balance
strong threats.
It is prudent not to eliminate any candidate SWOT entry too quickly. The importance of
individual SWOTs will be revealed by the value of the strategies they generate. A SWOT item
that produces valuable strategies is important. A SWOT item that generates no strategies is
not important.
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT
analysis may be used in any decision-making situation when a desired end-state (objective)
is defined. Examples include: non-profit organizations, governmental units, and individuals.
SWOT analysis may also be used in pre-crisis planning and preventive crisis management.
SWOT analysis may also be used in creating a recommendation during a viability
study/survey.
SWOT analysis can be used effectively to build organization or personal strategy. Steps
necessary to execute strategy-oriented analysis involve: identification of internal and
external factors (using popular 2x2 matrix), selection and evaluation of the most important
factors and identification of relations existing between internal and external features.
For instance: strong relations between strengths and opportunities can suggest good
condition of the company and allow using aggressive strategy. On the other hand strong
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Pusat Bahan Ajar dan eLearning
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interaction between weaknesses and threats could be analyzed as potential warning and
advise for using defensive strategy.
The use of a SWOT analysis by a community organization are as follows: to organize
information, provide insight into barriers that may be present while engaging in social
change processes, and identify strengths available that can be activated to counteract these
barriers.
A SWOT analysis can be used to:
Explore new solutions to problems
Identify barriers that will limit goals/objectives
Decide on direction that will be most effective
Reveal possibilities and limitations for change
To revise plans to best navigate systems, communities, and organizations
As a brainstorming and recording device as a means of communication
To enhance “credibility of interpretation” to be utilized in presentation to leaders or key
supporters.
The SWOT analysis in Social Work practice framework is beneficial because it helps
organizations decide whether or not an objective is obtainable and therefore enables
organizations to set achievable goals, objectives, and steps to further the social change or
community development effort. It enables organizers to take visions and produce practical
and efficient outcomes in order to effect long-lasting change, and it helps organizations
gather meaningful information in order to maximize their potential. Completing a SWOT
analysis is a useful process regarding the consideration of key organizational priorities, such
as gender and cultural diversity, and fundraising objectives.
Critiques include the misuse of the SWOT analysis as a technique that can be quickly
designed without critical thought leading to a misrepresentation of Strengths, Weaknesses,
Opportunities and Threats within an organization's internal and external surroundings.
Another limitation includes the development of a SWOT analysis simply to defend previously
decided goals and objectives. This misuse leads to limitations on brainstorming possibilities
and "real" identification of barriers. This misuse also places the organization’s interest above
the well being of the community. Further, a SWOT analysis should be developed as a
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collaborative with a variety of contributions made by participants including community
members. The design of a SWOT analysis by one or two community workers is limiting to
the realities of the forces specifically external factors, and devalues the possible
contributions of community members.
Figure 2. SWOT Analysis
Porter five forces analysis is a framework to analyze level of competition within an industry
and business strategy development. It draws upon industrial organization (IO) economics to
derive five forces that determine the competitive intensity and therefore attractiveness of
an Industry. Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one in which the combination of these five forces acts to drive
down overall profitability. A very unattractive industry would be one approaching "pure
competition", in which available profits for all firms are driven to normal profit. This analysis
is associated with its principal innovator Michael E. Porter of Harvard University.
Porter referred to these forces as the micro environment, to contrast it with the more
general term macro environment. They consist of those forces close to a company that
affect its ability to serve its customers and make a profit. A change in any of the forces
normally requires a business unit to re-assess the marketplace given the overall change
in industry information. The overall industry attractiveness does not imply that every firm in
the industry will return the same profitability. Firms are able to apply their core
competencies, business model or network to achieve a profit above the industry average. A
clear example of this is the airline industry. As an industry, profitability is low and yet
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Pusat Bahan Ajar dan eLearning
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individual companies, by applying unique business models, have been able to make a return
in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: the threat of
substitute products or services, the threat of established rivals, and the threat of new
entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and
the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis,
which he found unrigorous and ad hoc. Porter's five forces is based on the StructureConduct-Performance paradigm in industrial organizational economics. It has been applied
to a diverse range of problems, from helping businesses become more profitable to helping
governments stabilize industries. Other Porter strategic frameworks include the value
chain and thegeneric strategies.
Five Forces
Threat of new entrants
Profitable markets that yield high returns will attract new firms. This results in many new
entrants, which eventually will decrease profitability for all firms in the industry. Unless the
entry of new firms can be blocked by incumbents (which in business refers to the largest
company in a certain industry, for instance, in telecommunications, the traditional phone
company, typically called the "incumbent operator"), the abnormal profit rate will trend
towards zero (perfect competition).
The following factors can have an effect on how much of a threat new entrants may pose:
The existence of barriers to entry (patents, rights, etc.). The most attractive segment is one
in which entry barriers are high and exit barriers are low. Few new firms can enter and nonperforming firms can exit easily.
Government policy
Capital requirements
Absolute cost
Cost disadvantages independent of size
Economies of scale
Economies of product differences
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Pusat Bahan Ajar dan eLearning
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Product differentiation
Brand equity
Switching costs or sunk costs
Expected retaliation
Access to distribution
Customer loyalty to established brands
Industry profitability (the more profitable the industry the more attractive it will be to new
competitors)
Threat of substitute products or services
The existence of products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives. For example, tap water
might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product.
Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi,
whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all
soft drinks), albeit while giving Pepsi a larger slice at Coke's expense. Another example is the
substitute of traditional phone with a smart phone.
Potential factors:
Buyer propensity to substitute
Relative price performance of substitute
Buyer switching costs
Perceived level of product differentiation
Number of substitute products available in the market
Ease of substitution
Substandard product
Quality depreciation
Availability of close substitute
Bargaining power of customers (buyers
The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the customer's sensitivity to
price changes. Firms can take measures to reduce buyer power, such as implementing a
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loyalty program. The buyer power is high if the buyer has many alternatives. The buyer
power is low if they act independently e.g. If a large number of customers will act with each
other and ask to make prices low the company will have no other choice because of large
number of customers pressure.
Potential factors:
Buyer concentration to firm concentration ratio
Degree of dependency upon existing channels of distribution
Bargaining leverage, particularly in industries with high fixed costs
Buyer switching costs relative to firm switching costs
Buyer information availability
Force down prices
Availability of existing substitute products
Buyer price sensitivity
Differential advantage (uniqueness) of industry products
RFM (customer value) Analysis
The total amount of trading
Bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm can be a source of
power over the firm when there are few substitutes. If you are making biscuits and there is
only one person who sells flour, you have no alternative but to buy it from them. Suppliers
may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:
Supplier switching costs relative to firm switching costs
Degree of differentiation of inputs
Impact of inputs on cost or differentiation
Presence of substitute inputs
Strength of distribution channel
Supplier concentration to firm concentration ratio
Employee solidarity (e.g. labor unions)
Supplier competition: the ability to forward vertically integrate and cut out the buyer.
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Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
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Intensity of competitive rivalry
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.
Potential factors:
Sustainable competitive advantage through innovation
Competition between online and offline companies
Level of advertising expense
Powerful competitive strategy
Firm concentration ratio
Degree of transparency
Though structure and leadership play a large role in business success, external factors can
also shape your company's potential. One method for systematically discovering and
quantifying those factors is the PEST analysis.
PEST is an acronym for political, economic, social, and technological – external factors that
commonly affect business activities and performance. Created by Harvard professor Francis
Aguilar in 1967, PEST can work alone or be used in combination with other tools, such as
Porter's Five Forces and SWOT analysis, to determine an organization's overall outlook.
Jim Makos, founder of the Pestle Analysis website, says PEST can help companies improve
their decision making and timing. "The best outcome of the PEST analysis would be if your
company is able to make the right decisions at the right time by analyzing different factors.
Another benefit of PEST analysis is it could aid you in predicting the future by looking at the
present. You will be prepared to tackle future challenges. It also helps you highlight the
opportunities you can cash in on and threats which could harm your business," Makos told
Business News Daily.
To get the most out of a PEST analysis, businesses should understand each of the four
factors.
Political
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Pusat Bahan Ajar dan eLearning
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This factor looks at how government regulations and legal issues affect a company's ability
to be profitable and successful. Issues that must be considered include tax guidelines,
copyright and property law enforcement, political stability, trade regulations, social and
environmental policy, employment laws and safety regulations. Companies should also
consider their local and federal power structure, and discuss how anticipated shifts in power
could affect their business.
Economic
This factor examines the outside economic issues that can play a role in a company's
success. Items to consider include economic growth, exchange, inflation and interest rates,
economic stability, anticipated shifts in commodity and resource costs, unemployment
policies, credit availability and unemployment policies.
Social
This issue analyzes the demographic and cultural aspects of the company's market. These
factors help businesses examine consumer needs and determine what pushes them to make
purchases. Among the items that should be examined are demographics, population growth
rates, age distribution, attitudes toward work, job market trends, religious and ethical
beliefs, lifestyle changes, educational and environmental issues and health consciousness.
Technological
This factor takes into consideration technology issues that affect how an organization
delivers its product or service to the marketplace. Among the specific items that need to be
considered are technological advancements, government spending on technological
research, the life cycle of current technology, the role of the Internet and how any changes
to it may play out, and the impact of potential information technology changes. In addition,
companies should consider how generational shifts, and their related technological
expectations, are likely to affect those who will use their product and how it is delivered.
Internal Factor Evaluation (IFE) Matrix is a strategy tool used to evaluate firm’s internal
environment and to reveal its strengths as well as weaknesses.
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Pusat Bahan Ajar dan eLearning
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External Factor Evaluation (EFE) Matrix is a strategy tool used to examine company’s
external environment and to identify the available opportunities and threats.
The internal and external factor evaluation matrices have been introduced by Fred R. David
in his book ‘Strategic Management’ (at least I found them there and couldn’t trace their
origins anywhere else). According to the author, both tools are used to summarize the
information gained from company’s external and internal environment analyses. The
summarized information is evaluated and used for further purposes, such as, to build SWOT
analysis or IE matrix. Even though, the tools are quite simplistic, they do the best job
possible in identifying and evaluating the key affecting factors. Both tools are nearly
identical so we’ll only show an example of an EFE matrix right now.
Key External Factors
Weight
Rating
Weighted
Score
1. New trade agreement that lifts the ban of imported food is signed with a
neighboring country.
0.11
3
0.33
2. Signing a contract with a new supplier.
0.09
1
0.09
3. Processed food market growing by 15% next year in our largest market.
0.24
2
0.48
4. Incorporating a new company in neighboring country, where the tax rate is
decreasing by 3% next year.
0.10
1
0.10
5. The contract with the main customer expires in 2 months.
0.17
4
0.68
6. Extreme cases of natural disasters occurring next year.
0.03
2
0.06
7. New law, requiring decreasing the amount of sugar in the food by 20%, could be
passed next year.
0.14
3
0.42
8. Competitors opening 3 new stores in the town.
0.12
2
0.24
Total
1.00
-
2.4
Opportunities
Threats
Figure 3. Example of an external factor evaluation matrix
Key External Factors
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EFE Matrix. When using the EFE matrix we identify the key external opportunities and
threats that are affecting or might affect a company. Where do we get these factors from?
Simply by analysing the external environment with the tools like PEST analysis, Porter’s Five
Forces or Competitive Profile Matrix.
IFE Matrix. Strengths and weaknesses are used as the key internal factors in the evaluation.
When looking for the strengths, ask what do you do better or have more valuable than your
competitors have? In case of the weaknesses, ask which areas of your company you could
improve and at least catch up with your competitors?
The general rule is to identify 10-20 key external factors and additional 10-20 key internal
factors, but you should identify as many factors as possible.
Weights
Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high
importance). The number indicates how important the factor is if a company wants to
succeed in an industry. If there were no weights assigned, all the factors would be equally
important, which is an impossible scenario in the real world. The sum of all the weights must
equal 1.0. Separate factors should not be given too much emphasis (assigning a weight of
0.30 or more) because the success in an industry is rarely determined by one or few factors.
Weights have the same meaning in both matrices.
In our first example, the most significant factors are ‘Processed food market growing by 15%
next year in our largest market.’ (0.24 points), ‘The contract with the main customer expires
in 2 months.’ (0.17 points) and ‘New law, requiring decreasing the amount of sugar in the
food by 20%, could be passed next year.’ (0.14 points).
Ratings
The meaning of ratings is different in each matrix, so we’ll explain them separately.
EFE Matrix. The ratings in external matrix refer to how effectively company’s current
strategy responds to the opportunities and threats. The numbers range from 4 to 1, where 4
means a superior response, 3 – above average response, 2 – average response and 1 – poor
response. Ratings, as well as weights, are assigned subjectively to each factor. In our
example, we can see that the company’s response to the opportunities is rather poor,
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because only one opportunity has received a rating of 3, while the rest have received the
rating of 1. The company is better prepared to meet the threats, especially the first threat.
IFE Matrix. The ratings in internal matrix refer to how strong or weak each factor is in a firm.
The numbers range from 4 to 1, where 4 means a major strength, 3 – minor strength, 2 –
minor weakness and 1 – major weakness. Strengths can only receive ratings 3 & 4,
weaknesses – 2 & 1. The process of assigning ratings in IFE matrix can be done easier using
benchmarking tool.
Weighted Scores & Total Weighted Score
The score is the result of weight multiplied by rating. Each key factor must receive a score.
Total weighted score is simply the sum of all individual weighted scores. The firm can
receive the same total score from 1 to 4 in both matrices. The total score of 2.5 is an
average score. In external evaluation a low total score indicates that company’s strategies
aren’t well designed to meet the opportunities and defend against threats. In internal
evaluation a low score indicates that the company is weak against its competitors.
In our example, the company has received total score 2.40, which indicates that company’s
strategies are neither effective nor ineffective in exploiting opportunities or defending
against threats. The company should improve its strategy and focus more on how take
advantage of the opportunities.
Benefits
Both matrices have the following benefits:

Easy to understand. The input factors have a clear meaning to everyone inside or
outside the company. There’s no confusion over the terms used or the implications
of the matrices.

Easy to use. The matrices do not require extensive expertise, many personnel or lots
of time to build.

Focuses on the key internal and external factors. Unlike some other analyses (e.g.
value chain analysis, which identifies all the activities in the company’s value chain,
despite their importance), the IFE and EFE only highlight the key factors that are
affecting a company or its strategy.

Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-McKinsey
matrix or for benchmarking.
Limitations
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
Easily replaced. IFE and EFE matrices can be replaced almost completely by PEST
analysis, SWOT analysis, competitive profile matrix and partly some other analysis.

Doesn’t directly help in strategy formation. Both analyses only identify and evaluate
the factors but do not help the company directly in determining the next strategic
move or the best strategy. Other strategy tools have to be used for that.

Too broad factors. SWOT matrix has the same limitation and it means that some
factors that are not specific enough can be confused with each other. Some
strengths can be weaknesses as well, e.g. brand reputation, which can be a strong
and valuable brand reputation or a poor brand reputation. The same situation is with
opportunities and threats. Therefore, each factor has to be as specific as possible to
avoid confusion over where the factor should be assigned.
Using the tool
Step 1. Identify the key external/internal factors
EFE matrix. Do the PEST analysis first. The information from the PEST analysis reveals which
factors currently affect or may affect the company in the future. At this point, the factors
can be either opportunities or threats and your next task is to sort them into one or the
other category. Try to look at which factors could benefit the company and which ones
would harm it.
You should also analyze your competitors’ actions and their strategies. This way you would
know what competitors are doing right and what their strategies lack.
IFE matrix. In case you have done a SWOT analysis already, you can gather some of the
factors from there. The SWOT analysis will usually have no more than 10 strengths and
weaknesses, so you’ll have to do additional analysis to identify more key internal factors for
the matrix.
Look again into the company’s resources, capabilities, organizational structure, culture,
functional areas and value chain analysis and recognize the strong and weak points of the
organization.
Step 2. Assign the weights and ratings
Weights and ratings are assigned subjectively. Therefore, it is a more difficult process than
identifying the key factors. We assign weights based on industry analysts’ opinions. Find out
what the analysts say about the industry’s success factors and then use their opinion or
analysis to assign the appropriate weights. The same process is with ratings. Although, this
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time you or the members of your group will have to decide what ratings should be assigned.
Ratings from 1-4 can be assigned to each opportunity and threat, but only the ratings from
1-2 can be assigned to each weakness and 3-4 to each strength.
Step 3. Use the results
IFE or EFE matrices have little value on their own. You should do both analyses and combine
their results to discuss new strategies or for further analysis. They are especially useful
when building advanced SWOT analysis, SWOT matrix for strategies or IE matrix.
Examples
We provide only the general examples of both matrices.
Key External Factors
Weight
Rating
Weighted
Score
1. New immigration laws abolish the restrictions for immigrants to live and
work freely in the country.
0.02
1
0.02
2. A government increases budget spending for our products.
0.17
4
0.68
3. New product market, worth $1 billion a year, could be introduced for the
consumers.
0.05
4
0.20
4. Consumers are 20 % more likely to by the products that share the same
ecosystem.
0.12
4
0.48
5. We have patented the technology that increases the quality of our products
and lowers the amount of the materials needed to produce it.
0.03
3
0.09
6. Our largest competitor is selling their subsidiary in TV market.
0.14
2
0.28
7. Tax rates will increase by 10% for the polluting companies.
<0.06
2
0.12
8. Due to the fast economic growth credit availability will tighten.
0.04
4
0.16
9. Credit rates are growing by 5%.
0.02
2
0.04
10. Natural disasters disrupt our suppliers’ or our operations.
0.08
3
0.24
11. Rivalry in the market is intensifying.
0.12
4
0.48
12. Competitor is pursuing horizontal integration strategy.
0.10
3
0.30
Opportunities
Threats
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13. Inflation has increased to 6%.
0.05
2
0.10
Total
1.00
-
3.19
Weight
Rating
Weighted
Score
1. Diversified income (5 different brands earning more than $4 billion each)
0.10
4
0.40
2. Brand reputation valued at $35 billion
0.08
3
0.24
3. Strong patents portfolio (13,000 patents)
0.07
4
0.28
4. Excellent employee management
0.02
3
0.06
5. Competency in mergers and acquisitions
0.06
3
0.18
6. Extensive distribution channels
0.11
4
0.44
7. Strong product ecosystem
0.08
4
0.32
8. High debt level ($3 billion)
0.10
1
0.10
9. Over-dependence on sales from U.S.
0.13
2
0.26
10. Too low net profit margin
0.07
2
0.14
11. Competition based on prices
0.09
2
0.18
12. Rigid (bureaucratic) organizational culture impeding fast introduction of
0.04
1
0.04
13. Negative publicity
0.05
2
0.10
Total
1.00
-
Figure 4. EFE Matrix
Key Internal Factors
Strengths
Weaknesses
new products
Figure 5. IFE Matrix
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Financial Ratio
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical
values taken from an enterprise's financial statements. Often used in accounting, there are
many standard ratios used to try to evaluate the overall financial condition of a corporation
or other organization. Financial ratios may be used by managers within a firm, by current
and potential shareholders (owners) of a firm, and by a firm's creditors. Financial
analystsuse financial ratios to compare the strengths and weaknesses in various
companies.[1] If shares in a company are traded in a financial market, the market price of the
shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as an
equivalent percent value, such as 10%. Some ratios are usually quoted as percentages,
especially ratios that are usually or always less than 1, such asearnings yield, while others
are usually quoted as decimal numbers, especially ratios that are usually more than 1, such
as P/E ratio; these latter are also called multiples. Given any ratio, one can take
its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The
reciprocal expresses the same information, but may be more understandable: for instance,
the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for
example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Sources of data for financial ratios
Values used in calculating financial ratios are taken from the balance sheet, income
statement, statement of cash flows or (sometimes) the statement of retained earnings.
These comprise the firm's "accounting statements" orfinancial statements. The statements'
data is based on the accounting method and accounting standards used by the organisation.
Purpose and types of ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial
statement analysis. Financial ratios are categorized according to the financial aspect of the
business which the ratio measures. Liquidity ratios measure the availability of cash to pay
2016
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debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
Debt ratios measure the firm's ability to repay long-term debt.Profitability ratios measure
the firm's use of its assets and control of its expenses to generate an acceptable rate of
return. Market ratios measure investor response to owning a company's stock and also the
cost of issuing stock. These are concerned with the return on investment for shareholders,
and with the relationship between return and the value of an investment in company’s
shares.
Financial ratios allow for comparisons

between companies

between industries

between different time periods for one company

between a single company and its industry average
Ratios generally are not useful unless they are benchmarked against something else, like
past performance or another company. Thus, the ratios of firms in different industries,
which face different risks, capital requirements, and competition are usually hard to
compare.
Accounting methods and principles
Financial ratios may not be directly comparable between companies that use
different accounting methods or follow various standard accounting practices. Most public
companies are required by law to use generally accepted accounting principles for their
home countries, but private companies, partnerships and sole proprietorships may not use
accrual basis accounting. Large multi-national corporations may use International Financial
Reporting Standards to produce their financial statements, or they may use the generally
accepted accounting principles of their home country.
There is no international standard for calculating the summary data presented in all financial
statements, and the terminology is not always consistent between companies, industries,
countries and time periods.
Abbreviations and terminology
Various abbreviations may be used in financial statements, especially financial statements
summarized on the Internet. Sales reported by a firm are usually net sales, which deduct
2016
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returns, allowances, and early payment discounts from the charge on an invoice. Net
income is always the amount after taxes, depreciation, amortization, and interest, unless
otherwise stated. Otherwise, the amount would be EBIT, or EBITDA (see below).
Companies that are primarily involved in providing services with labour do not generally
report "Sales" based on hours. These companies tend to report "revenue" based on the
monetary value of income that the services provide.
Note that Shareholders' Equity and Owner's Equity are not the same thing, Shareholder's
Equity represents the total number of shares in the company multiplied by each share's
book value; Owner's Equity represents the total number of shares that an individual
shareholder owns (usually the owner with controlling interest), multiplied by each share's
book value. It is important to make this distinction when calculating ratios.
Other abbreviations
(Note: These are not ratios, but values in currency.)

COGS = Cost of goods sold, or cost of sales.

EBIT = Earnings before interest and taxes

EBITDA = Earnings before interest, taxes, depreciation, and amortization

EPS = Earnings per share
Ratios
Profitability ratios
Profitability ratios measure the company's use of its assets and control of its expenses to
generate an acceptable rate of return
Gross margin, Gross profit margin or Gross Profit Rate
:::OR :::
Operating margin, Operating Income Margin, Operating profit margin or Return on
sales (ROS)
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Note: Operating income is the difference between operating revenues and operating
expenses, but it is also sometimes used as a synonym for EBIT and operating profit. This is
true if the firm has no non-operating income. (Earnings before interest and taxes/ Sales)
Profit margin, net margin or net profit margin
Return on equity (ROE)
Return on assets (ROA ratio or Du Pont Ratio)
Return on assets (ROA)
Return on assets Du Pont (ROA Du Pont)
Return on Equity Du Pont (ROE Du Pont)
Return on net assets (RONA)
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Return on capital (ROC)
Risk adjusted return on capital (RAROC)
:::OR :::
Return on capital employed (ROCE)
Note: this is somewhat similar to (ROI), which calculates Net Income per Owner's Equity
Cash flow return on investment (CFROI)
Efficiency ratio
Net gearing
Basic Earnings Power Ratio
Liquidity ratios
Liquidity ratios measure the availability of cash to pay debt.
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Current ratio (Working Capital Ratio)
Acid-test ratio (Quick ratio)
Cash ratio
Operating cash flow ratio
Activity ratios (Efficiency Ratios)
Activity ratios measure the effectiveness of the firm's use of resources.
Average collection period
Degree of Operating Leverage (DOL)
DSO Ratio.
Average payment period
Asset turnover
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Stock turnover ratio
Receivables Turnover Ratio
Inventory conversion ratio
Inventory conversion period (essentially same thing as above)
Receivables conversion period
Payables conversion period
Cash Conversion Cycle
Debt ratios (leveraging ratios)
Debt ratios quantify the firm's ability to repay long-term debt. Debt ratios measure financial
leverage.
Debt ratio
Debt to equity ratio
Long-term Debt to equity (LT Debt to Equity)
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Times interest earned ratio (Interest Coverage Ratio)
OR
Debt service coverage ratio
Market ratios
Market ratios measure investor response to owning a company's stock and also the cost of
issuing stock. These are concerned with the return on investment for shareholders, and with
the relationship between return and the value of an investment in company’s shares.
Earnings per share (EPS)
Payout ratio
OR
Dividend cover (the inverse of Payout Ratio)
P/E ratio
Dividend yield
Cash flow ratio or Price/cash flow ratio
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Price to book value ratio (P/B or PBV)
Price/sales ratio
PEG ratio
Other Market Ratios
EV/EBITDA
EV/Sales
Cost/Income ratio
Sector-specific ratios
EV/capacity
EV/output
Capital budgeting ratios
Capital budgeting
In addition to assisting management and owners in diagnosing the financial health of their
company, ratios can also help managers make decisions about investments or projects that
the company is considering to take, such as acquisitions, or expansion.
Many formal methods are used in capital budgeting, including the techniques such as
2016

Net present value

Profitability index

Internal rate of return

Modified internal rate of return

Equivalent annuity
27
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http://www.mercubuana.ac.id
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http://www.mercubuana.ac.id
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