EFE matrix

EFE matrix
See also
Strategic issues Goal intensity matrix Importance of swot analysis Internal analysis Strategic planning models Benefits of strategic management Strategic fit Strategic management principles Feasibility analysis

EFE Matrix (Extrenal Factor Evaluation matrix) is a tool used for strategic management and analysis created by Fred R.David. This tool is very closely related to the SWOT/TOWS analisys, as well as the STEEPLE analysis. It serves the purpose of identifyig the main factors affecting the business in the external environment such as:political, economic, social, legal etc.This matrix depicts and prioritizes the main threats and opportunities that the business is facing. It is usually used as the first step of creating a comprehensive SWOT analysis, as it is aimed at reducing or amplifying the effects of the external factors, depending on the impact they have on the company.The EFE matrix is complimentary to the IFE (Internal Factor Evaluation) matrix which focuses on analyzing the internal factors affecting the business.In other words, it shows the strengths and weaknesses of companies and how they affect their performance.

Benefits of the EFE matrix

Some of the recognized benefits of the External Factor Evaluation method are:

• It is a simple tool that is easy to use and understand, hence can bo used on all levels of the organization,
• helps raising the awareness among the managers regarding the environment they work in and changes that might occur within,
• helps the management with improving the allocation of resources across the business,
• provides the possibility to handle the risk management on a higher level,
• helps raise awareness of the threatening factors before they manage to affect the business,
• enables the management to focus the appropriate resources around the strategic management and change.

Drawbacks of the EFE matrix

Fig.1. EFE matrix example

Some of the drawbacks of this tool are as follows:

• Even though the EFE matrix is regarded as a base for the SWOT analysis, it can easily be fully replaced by it or other similar tools (e.g. PEST or competitive profile method),
• Does not provide a direct support in creating a successful business strategy - only lists and evaluates the external factors affecting the company without providing a solution on how to best deal with them,
• Imposes the need to use further strategic management tools in order to determine the right course of action for the enterprise,
• Requires determining specific factors that might be too broad or mutually exclusive, e.g. what seems to be an opportunity, might prove to be an actual threat to the organization.

The process of identifying the Extrenal Factor Evaluation matrix

The process of identifying the key external factors that affect the companies involve five following steps:

1. Identyfication and selection of the most important environmental factors and dividing them in the groups of threats and opportunities,
2. Assigning weights to each factor depending on its perceived importance.Each weight value schould be set between 0 and 1, or 10 and 100 depending on the scale that is being used-zero being the least and 100 being the most influential. To ensure accuracy of the analysis, the total value of factors schould amount to 1 or 100 respectively.
3. Rating all the key factors in order to establish the effectiveness of the company's strategical management in the face of each analyzed parameter.This rating should be done on a scale between 1 and 4 -one standing for a major threat, two for a minor threat, whereas three would be a minor opportunity and four a major one.
4. Multiplying the rates and weights of each factors to obtain their weighted scores.
5. Determining the total of each weighted score in order to get the total weighted score of the analyzed enterprise.

The overall results of the External Factor Evaluation method are often used for further, deepened analysis of the environment that the company is operating in. Setting specific strategic goals, detailed business plans and clear, explicit priorities are only some of the outcomes of the EFE matrix analysis. Though, in order for a company to succeed long-term and sustain the positive effects of this study, one should not forget of the closely related IFE matrix, which helps understand the internal situation within the business and how it determines its operations in the external environment.

References

• Ahmad R.O. (2011). , “ Strengths, weaknesses, opportunities and threats (SWOT) analysis for farming system businesses management: Case of wheat farmers of Shadervan District, Schoushtar Township, Iran Academy Journals of Business Management, p. 9450-9452.
• Ovidijus J. (2014). ,” IFE AND EFE MATRICES “ Strategic Management
• Wilmington (DE). (2017). EFE matrix Management Mania

Footnotes

Author: Anna Śliwa