External Factor Evaluation (EFE) Matrix

n 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.

An  External Factor Evaluation (EFE) Matrix can be developed in five steps:

1. 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.
2. 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.
3. 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.
4. Multiply each factor’s weight by its rating to determine a weighted score.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

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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.

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Internal Factor Evaluation (IFE) Matrix

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An Internal Factor Evaluation (IFE) Matrix is a strategy formulation tool that summarizes
and evaluates the major strengths and weaknesses in the functional areas of a business, and it
also provides a basis for identifying and evaluating relationships among those areas. Intuitive
judgments are required in developing an IFE Matrix, so the appearance of a scientific approach
should not be interpreted to mean this is an all €‘powerful technique. A thorough understanding
of the factors included is more important than the actual numbers.

An  Internal Factor Evaluation (IFE) Matrix can be developed in five steps:

1. List key internal factors as identified in the internal €‘audit process. Use a total of from
ten to twenty internal factors, including both strengths and weaknesses. List strengths
first and then weaknesses. Be as specific as possible, using percentages, ratios, and
comparative numbers.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all €‘important) to each
factor. The weight assigned to a given factor indicates the relative importance of the
factor to being successful in the firm’s industry. Regardless of whether a key factor is an
internal strength or weakness, factors considered to have the greatest effect on
organizational performance should be assigned the highest weights. The sum of all
weights must equal 1.0.
3. Assign a 1 to 4 rating to each factor to indicate whether that factor represents a major
weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a
major strength (rating = 4). Note that strengths must receive a 4 or 3 rating and
weaknesses must receive a 1 or 2 rating. Ratings are thus company €‘based, whereas the
weights in Step 2 are industry €‘based.
4. Multiply each factor’s weight by its rating to determine a weighted score for each
variable.
5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

Regardless of how many factors are included in an  Internal Factor Evaluation (IFE) Matrix,
the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score

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being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak
internally, whereas scores significantly above 2.5 indicate a strong internal position. An IFE
Matrix should include from 10 to 20 key factors. The number of factors has no effect upon the
range of total weighted scores because the weights always sum to 1.0. When a key internal factor
is both a strength and a weakness, the factor should be included twice in the IFE Matrix, and a
weight and rating should be assigned to each statement.

The Internal Factor Evaluation (IFE) Matrix  together with the External Factor Evaluation (EFE)
Matrix  is a strategy-formulation tool that can be utilized to evaluate how a company is
performing in regards to identified internal strengths and weaknesses of a company.