External Factor Evaluation (EFE) Matrix¶
The External Factor Evaluation (EFE) Matrix is a strategic tool used to summarize and evaluate the external factors that influence an organization. By systematically assessing these factors, strategists can determine how well the organization is responding to opportunities and threats in its external environment. The EFE Matrix helps in identifying the key external factors and assigning appropriate weights and ratings to them, ultimately leading to a comprehensive evaluation of the firm's external positioning.
Steps to Develop an EFE Matrix¶
The EFE Matrix can be developed in five systematic steps:
Step 1: List Key External Factors¶
Begin by listing the key external factors identified during the external audit process. These factors should include both opportunities and threats that impact the organization and its industry. Typically, a total of 15 to 20 factors are included. It is important to be as specific as possible, using data such as percentages, ratios, and comparative figures when available.
- Opportunities: Start by listing the opportunities that could positively influence the organization.
- Threats: Follow with the threats that could negatively impact the organization.
Step 2: Assign Weights to Each Factor¶
For each external factor identified, assign a weight ranging from 0.0 (not important) to 1.0 (very important). The weight reflects the relative importance of the factor in ensuring success within the firm's industry.
- Opportunities often receive higher weights than threats because they present potential advantages.
- However, severe or significant threats may also receive high weights.
The sum of all assigned weights must equal 1.0.
Step 3: Assign Ratings to Each Factor¶
Next, assign a rating between 1 and 4 to each factor. The rating reflects how effectively the firm's current strategies respond to the factor:
- 4 = The firm's response is superior.
- 3 = The firm's response is above average.
- 2 = The firm's response is average.
- 1 = The firm's response is poor.
It's important to note that both opportunities and threats can receive any rating from 1 to 4, depending on how well the firm is addressing them. Ratings are based on the effectiveness of the firm’s strategies and are specific to the company, while the weights are industry-based.
Step 4: Calculate Weighted Scores¶
For each external factor, multiply the weight by the rating to obtain the weighted score. This score represents the importance of each factor in relation to the firm's ability to respond to it.
Step 5: Determine the Total Weighted Score¶
Sum the weighted scores for each factor to determine the total weighted score for the organization.
- The total weighted score can range from 1.0 to 4.0.
- A 4.0 indicates that the organization is responding in an outstanding way to the external factors, effectively leveraging opportunities and minimizing threats.
- A 1.0 indicates that the organization's strategies are failing to capitalize on opportunities or adequately mitigate threats.
- The average total weighted score is 2.5.
Interpretation of the EFE Matrix¶
- Total Weighted Score > 2.5: Indicates that the organization is effectively responding to external opportunities and threats, positioning itself well in its industry.
- Total Weighted Score < 2.5: Suggests that the organization is not responding effectively to external factors, potentially putting itself at a competitive disadvantage.
The EFE Matrix provides valuable insights for strategy formulation, guiding organizations to capitalize on external opportunities and mitigate external threats.
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