External Factor Evaluation for Costco Company

Introduction

The EFE Matrix is an important evaluation tool for achieving the organization goals. This helps identify the balance between the available opportunities and the prevailing threats in the industry from an external perspective. The purpose of detecting opportunities and threats is to take advantage of the advantages and reduce the risk that threats entail. In other words, knowing the environment where we are, increases the degree of probability of achieving the objectives and achieving a successful business (Wijayati et al., 2019). This study presents the EFE evaluation for Costco Wholesale Corp.

Costco Wholesale Corp. is an American wholesale company based in Seattle in the state of Washington. Costco is the world’s largest cash and carries company and the third-largest grocery retailer in North America (Rahman, 2020). The statistics show the number of branches of the grocery retailer Costco in the financial years 2006/07 up to and including 2020/21. In the fiscal year 2020/21, Costco had 815 locations worldwide, as of August 30, 2021 (Johnson, 2021).

External environment evaluation

The success of a strategy is not only about recognizing the internal factors of a brand, but also knowing the external environment, evaluating the latent threats that exist and that can affect the scalability of a company or brand and the opportunities that can arise and take advantage to increase growth. The objective of this external analysis is to form a list of opportunities that the company can take advantage of and threats that must be overcome. This list should be limited to those key factors that are feasible to manage and for which strategies can be generated. Differing from the EFI Matrix, this instrument allows us to understand, anticipate and know the environment in which our business or activity is carried out. In addition, it allows the detection of courses of action aimed at increasing the chances of success (Zulkarnain, et al., 2018).

To develop an EFE matrix, we will first identify 10 factors relating to Costco company are selected, where opportunities and threats must be included, which influence the brand and the sector it is dedicated to, this is one of the main differences between the EFI and EFE matrix, since the matrix EFE must evaluate the entire environment, including competitors or neighbours who are located in the same sector. It is recommended to write the opportunities and then the threats, since you can focus on looking for the factors that you can exploit, however my recommendation is that on a separate sheet or document you write the details that arise, regardless of whether they are opportunities or threats.

A mandatory aspect is that each factor must be as specific as possible, and if it has reports with supporting figures, it would be excellent if you included it in the analysis. The opportunities and threats that can affect Costco Company will be defined, it should be noted that this case study was used for the development of the EFE matrix: The analysis of Costco com will be carried out, where it will focus on wholesale services (Wijayati et al., 2019). At first, the brand had a great presence and the works were sold without investing much effort or time. However, in recent years, due to socioeconomic problems, sales have dropped suddenly, affecting the profitability of the brand. Therefore, it was decided to hire professionals in the areas of entrepreneurship, finance, and marketing to refresh the brand image and, of course, boost sales.

Identifying opportunities and threats

Opportunities:

1. Exploration of current digital technology, to boost wholesales volumes.
2. Make alliances with other wholesalers.
3. Use the presence of each location to boost the presence of the business.
4. Accept different payment methods (transfer, deposit, check, payment platforms, TDC) and currencies (dollars, euros, crypto currencies, among others).
5. Creating experiential service categories, this means that not only the products will be sold but also an experience will be sold to the buyer.

Threats:

1. Stiff competition in the industry by large wholesale firms which have a presence in digital media.
2. The wholesale industry has become a bloody competition as giant firms from different branches emerge every day.
3. Shipping has become much more tedious, since the pieces are delicate and sometimes arrive with details or completely damaged.
4. Wholesale business is subjective, this means that the value of the goods is very variable and depends a lot on the specialist who evaluates and determines the value, and more so if it is a serial work; the value can also be influenced by the reputation and reputation of manufacturers.
5. Not having enough space to store goods before sale.

Assigning relative weights and rating to each factor

The weight of each factor ranges from 0.0, less important, to 1.0, very important. It should be emphasized that the weight indicates the importance of the factor and its influence on achieving success in the sector. Opportunities mostly have a high weight over threats, however if the threat can threaten the stability and growth of the brand, its weight is just as high as an opportunity. In order to determine with more certainty the weight for each factor, it is recommended to make a comparison with the competitors that are more successful in the area to define the impact they have made. The sum of all the factors must give 1.0, it cannot be less or more.

We then attribute a rating to each one, which is divided into four values between 1 and 4 for each of the factors, in order to indicate whether the factor represents a major weakness (score = 1), a minor weakness (score = 2), a minor force (rating = 3) or a major force (rating = 4) . Thus, the ratings refer to the effectiveness of the strategies while the weights of step 2 are based on the sector or area.

It is important that you know that opportunities usually have higher weights than threats, but these, in turn, can have high weights if they are especially serious or threatening. Appropriate weights can be determined by comparing successful competitors with unsuccessful ones or by analyzing the factor as a group and reaching a consensus (Wijayati et al., 2019). The sum of all the weights assigned to the factors must add up to 1.0. An important fact is that the weight assigned in this step is based on the whole industry.

Discussion

To complete the analysis, it is necessary to evaluate and obtain the total value of the opportunities, which gives a value of 2.36 and the total value of the threats is 0.60. If the value of the opportunities is higher than the threats, it means that the external environment is favourable for Costco, but if it is the opposite, the weaknesses of the brands must be analysed and reinforced and the strengths of the brand strengthened to create a shield against the external environment (Wijayati et al., 2019).

Regardless of the number of factors considered in the evaluation, the highest score will be 4, which means that the organization is addressing all factors in an extraordinary way, taking advantage of all opportunities and keeping all threats under control. The lowest possible score is 1, where the organization is not addressing any factor analysed and therefore has a long way to go to develop plans and actions to improve. Although there are several aspects in which the organization can improve, at this moment it is above average in terms of addressing the external factors that create opportunities and threats (Leliga et al., 2019).

Conclusion

The EFE Matrix is an important evaluation tool for achieving the organization goals. When organizations establish strategies, it is not enough to know and describe the internal factors of the brand, without considering the external environment. The EFE matrix serves this role. Every industry environment is made up of threats that can affect a company or brand, and opportunities that can arise and take advantage of for exponential growth. The external factors evaluation matrix (EFE) allows information to be summarized and evaluated. This information can be of an economic, social, cultural, demographic, environmental, political, governmental, legal, technological and competitive nature.

References

Johnson, E. A. (2021). Costco Wholesale’s Dominance in the Market.

Rahman, M. H. (2020). Financial Analysis Of Costco Wholesale Corporation: Exploring The Strengths And Weaknesses. The Bangladesh Journal of Agricultural Economics, 41(1), 17-34.

Zulkarnain, A., Wahyuningtias, D., & Putranto, T. S. (2018, March). Analysis of IFE, EFE, and QSPM matrix on business development strategy. In IOP Conference Series: Earth and Environmental Science (Vol. 126, No. 1, p. 012062). IOP Publishing.

Leliga, F. J., Koapaha, J. D., & Sulu, A. C. (2019). Analysis of Internal Factor Evaluation Matrix, External Factor Evaluation Matrix, Threats-Opportunities-Weaknesses-Strengths Matrix, and Quantitative Strategic Planning Matrix on Milk Products and Nutrition Segment of Nestlé India. East African Scholars Journal of Economics, Business and Management, 2(4), 186-191.

Wijayati, I. F., Setio, I., & Tanupatra, S. M. (2019). Strategic Analysis of Internal, External Factor Evaluation Matrix and Strategic Planning in BTPN bank, Indonesia. Strategic Analysis.