EFE Matrix analysis or External Factor Evaluation Matrix analysis is used in the strategic analysis of the external environment of a business organization. Specifically, it is used to identify and analyze an organization’s threats and opportunities.
In other words, EFE matrix analysis is used in the evaluation of an organization’s external environment to determine the strengths and weaknesses of an organization.
What is External Factors Evaluation (EFE) Matrix Analysis in Strategic Management?
In strategic management, external factors evaluation (EFE) matrix analysis is done in respect of the market threats and opportunities facing a business that affect its ability to successfully implement a proposed growth strategy.
The External Factor Evaluation matrix is used in combination with IFE matrix analysis to generate a summarized report of an organization’s external and internal environment that is achieved through QSPM Matrix Analysis.
EFE Matrix Example and Template
Below is an example External Factor Evaluation (EFE) matrix analysis template. From the scores of the EFE matrix example, it is clear that the company’s response to market opportunities is quite poor.
This is because only one of the selected opportunity factors has a rating of 3 (above average response). The rest have a rating of 2 (average response) or 1 (poor response). However, the company has a good preparedness for market threats. It is best prepared for the threat of expiring contracts.
The sections below expound on EFE Matrix template formulation and analysis of EFE matrix factors. It contains a detailed description of the key external factors of an EFE matrix using the example above. Additionally, it explains the selection of factors and assignment of ratings, weights, and scores in the EFE matrix analysis template.
Key External Factors in EFE Matrix Analysis
In order to get accurate information from an EFE matrix analysis, it is crucial to first identify the external threats and opportunities that exist in the business environment. The identified opportunities and threats should be relevant to the organization of interest. In External Factor Evaluation matrix analysis, these external threats and opportunities are known as factors.
The key external factors that exist within the organization’s external environment can be identified using tools like Porter’s Five Forces analysis, PESTLE analysis, Profile Matrix, etc. Worth noting is the fact that, for an effective EFE matrix analysis, one should identify and select as many factors as possible.
Weight of External Factors in EFE Matrix Analysis
In EFE matrix analysis, each of the selected factors is assigned a weight, with the least important factor being assigned a weight of 0.0 and the most important, 1.0. In other words, the weights for each factor can only range between 0.0 to 1.0.
The weight of each factor represents the importance of the factor and its ability to bring success to a business organization or improve its competitiveness in the market.
The idea behind weights is that, if no weight is assigned, all factors would be taken to have equal significance and ability to bring success to a business, a scenario that is impractical in the real business environment.
Worth noting is the fact that the sum of all the weights for all selected EFE Matrix Analysis factors must add up to 1.0. Moreover, it is important to avoid putting too much emphasis on some factors at the expense of others because an organization’s success in the market is hardly determined by a single or some few factors.
In that regard, it is important that the weight of each factor be assigned subjectively and also be above 0.0.
Rating of Factors or Strategies in EFE Matrix Analysis
In EFE matrix analysis, the rating of external factors refers to the effectiveness of an organization’s strategy and its responsiveness to threats and opportunities in the market.
The responsiveness of a business strategy is rated from 1 to 4, where 1 means poor response, 2 means average response, 3 means an above average response, while 4 denotes a superior response. Assigning ratings to each of the selected factors should be done in a subjective manner.
How to Calculate the Weighted Score of EFE Matrix External Factors
To calculate the weighted score of an External Factor Evaluation (EFE) matrix one needs to multiply the weight of each external factor by the rating of each EFE matrix factor.
In IFE matrix analysis, the weighted score for each of the selected key external factors must be calculated. The weighted scores of each of the factors is then summed up to acquire the total weighted score of the entire business strategy.
The total weighted score ranges from 1 to 4, where a score of 2.5 is the average. A high total weighted score from an EFE matrix analysis means that strategy adopted by a business entity at a given time is ideal for capitalizing on existing (external) market opportunities and cushioning against threats.
Just like IFE Matrix Analysis, EFE Matrix Analysis is one of the prerequisite steps of a Quantitative Strategic Planning Matrix (QSPM) Analysis. For a practical example of how the score, rating, and weight of factors in EFE matrix analysis is used to determine the suitability of a given business strategy, please check the QSPM Matrix Analysis example of Strategic Management at Amazon
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