EFE Matrix

External Factor Evaluation (EFE) matrix method is a strategic-management tool often

used for assessment of current business conditions. The EFE matrix is very similar to the IFE
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. The 4 Components of EFE matrix are:

Key External Factors

When using the EFE matrix we identify the key external opportunities and
threats that are affecting or might affect a company. By analysing the
external environment with the tools like PESTLE analysis, Porter’s Five
Forces or Profile Matrix, the key external factors can be identified.

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.

Ratings
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.

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.
Here is the example of EFE matrix for Computer Industry. 6 threats and 6 opportunities are
given and the total weighted score is calculated which Is 3.24. It means the score of the
industry is above average
The 3 most important things which should be included in EFE Matrix are:
Social, cultural, demographic, and environmental factors...

- Aging population
- Percentage or one race to other races
- Per-capita income
- Number and type of special interest groups
- Widening gap between rich & poor
- Number of marriages and/or divorces
- Ethnic or racial minorities
- Education
- Trends in housing, shopping, careers, business
- Number of births and/or deaths
- Immigration & emigration rates

Economic factors...

- Growth of the economy

- Level of savings, investments, and capital spending
- Inflation
- Foreign exchange rates
- Stock market trends
- Level of disposable income
- Import and export factors and barriers
- Product life cycle (see the Product life cycle page)
- Government spending
- Industry properties
- Economies of scale
- Barriers to market entry
- Product differentiation
- Level of competitiveness (see the Michael Porter's Five Forces model)

Political, government, business trends & legal factors...

- Globalization trends
- Government regulations and policies
- Worldwide trend toward similar consumption patterns
- Internet and communication technologies (e-commerce)
- Protection of rights (patents, trade marks, antitrust legislation)
- Level of government subsidies
- International trade regulations
- Taxation
- Terrorism
- Elections and political situation home and abroad