An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. EFE Matrix indicates whether the firm is able to effectively take advantage of existing opportunities along with minimizing the external threats. Similarly, it will help the strategists to formulate new strategies and policies on the basis of existing position of the company.
External factors are extracted after deep internal analysis of external environment. Obviously there are some good and some bad for the company in the external environment. That’s the reason external factors are divided into two categories opportunities and threats. Opportunities are the chances exist in the external environment, it depends firm whether the firm is willing to exploit the opportunities or may be they ignore the opportunities due to lack of resources. Threats are always evil for the firm, minimum no of threats in the external environment open many doors for the firm. Maximum number of threats for the firm reduce their power in the industry.
Developing an EFE matrix is an intuitive process which works conceptually very much the same way like creating the IFE matrix. An External Factor Evaluation (EFE) Matrix can be developed in five steps:
- 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.
- 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.
- 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 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = 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.
- Multiply each factor’s weight by its rating to determine a weighted score.
- Sum the weighted scores for each variable to determine the total weighted score for the organization.
Regardless of the number of key opportunities and threats included in an External Factor Evaluation (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.
The External Factor Evaluation (EFE) Matrix is similar to Internal Factor Evaluation (EFE) Matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors.
Reference: Strategic Management Concepts: A Competitive Advantage Approach by Fred R. David.