EFE matrix

EFE matrix
See also
Strategic issues ASTRA analysis Importance of swot analysis Internal analysis Strategic management tools Goal intensity matrix Strategic planning models ADL matrix Benefits of strategic management

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.

The EFE matrix is a strategic management tool used to evaluate the external environment of an organization. It is based on two dimensions: Opportunities and Threats. The external factors are identified and evaluated on both the Opportunities and Threats scales in order to determine the firm’s current external situation. The factors are then weighted based on the estimated impact they have on the firm’s success. The total weighted score for each factor is used to determine the company’s overall external position.

Opportunities and threats in EFE matrix

Opportunities are external factors that are seen to have a positive impact on the company’s performance or success. Examples of opportunities include:

• Political/Legal: Changes in government regulations that could create new opportunities for the company
• Economic: A positive economic outlook that could lead to increased sales
• Social/Cultural: An increase in consumer demand for the company’s products or services
• Technological: The introduction of new technologies that could improve the company’s operations

Threats are external factors that are seen to have a negative impact on the company’s performance or success. Examples of threats include:

• Political/Legal: Changes in government regulations that could create new restrictions for the company
• Economic: A negative economic outlook that could lead to decreased sales
• Social/Cultural: A decrease in consumer demand for the company’s products or services
• Technological: The introduction of new technologies that could make the company’s current products or services obsolete

The EFE matrix is a useful tool for evaluating an organization’s external environment and can provide valuable insight into potential opportunities and threats. By analyzing the external factors, the EFE matrix can help companies make better decisions and develop plans to capitalize on favorable opportunities and mitigate the impact of potential threats.

Example EFE matrix

Opportunities	Rating	Weighted Score	Total Weighted Score
Political/Legal	0.1	4	0.4
Economic	0.2	3	0.6
Social/Cultural	0.2	2	0.4
Technological	0.5	4	2.0
Threats	Rating	Weighted Score
Political/Legal	0.1	2	0.2
Economic	0.2	1	0.2
Social/Cultural	0.2	3	0.6
Technological	0.5	2	1.0

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 be used on all levels of the organization. By making the tool accessible to all staff, it helps to raise awareness among the managers regarding the environment they work in and the changes that might occur within.
• It helps the management with improving the allocation of resources across the business. By understanding the external environment, the company can make better decisions regarding resource allocation and ensure that resources are being used efficiently.
• It provides the possibility to handle the risk management on a higher level. By identifying potential risks, the management can take steps to mitigate their effects and ensure the business remains successful.
• It helps raise awareness of the threatening factors before they manage to affect the business. By understanding the external environment, the company can anticipate potential threats and take steps to prevent any disruption to operations.
• It enables the management to focus the appropriate resources around the strategic management and change. By understanding the external environment, the company can develop plans to capitalize on favorable opportunities and ensure the company remains competitive.

In summary, the EFE matrix is a very useful tool for helping organizations assess their external environment and identify potential opportunities and threats. It can provide numerous benefits that help companies make better decisions and develop plans to capitalize on favorable opportunities and mitigate the impact of potential threats.

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). This means the EFE matrix is not always the most suitable tool for the job.
• It does not provide a direct support in creating a successful business strategy. All it does is list and evaluate the external factors affecting the company without providing a solution on how to best deal with them.
• It imposes the need to use further strategic management tools in order to determine the right course of action for the enterprise. Since the EFE matrix only evaluates external factors without providing a solution, it is necessary to use other tools to determine the best course of action.
• It requires determining specific factors that might be too broad or mutually exclusive. For example, what seems to be an opportunity might actually prove to be an actual threat to the organization.

In summary, the EFE matrix is a useful tool for evaluating an organization’s external environment, but it does have some drawbacks. These include being easily replaced by other tools, not providing a direct support in creating a successful business strategy, imposing the need to use further strategic management tools, and requiring determining specific factors that might be too broad or mutually exclusive.

Steps for creating External Factor Evaluation matrix

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

1. Identification and selection of the most important environmental factors and dividing them into the groups of threats and opportunities. This step involves identifying the external factors that could have an impact on the success of the business and categorizing them as either threats or opportunities.
2. Assigning weights to each factor depending on its perceived importance. Each weight value should 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 should amount to 1 or 100 respectively. This step involves assigning a weight to each factor based on its perceived importance and impact on the business.
3. Rating all the key factors in order to establish the effectiveness of the company's strategic 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, three for a minor opportunity, and four for a major one. This step involves rating each factor based on its perceived impact on the business.
4. Multiplying the ratings and weights of each factor to obtain their weighted scores. This step involves multiplying the weight and rating of each factor in order to obtain its weighted score.
5. Determining the total of each weighted score in order to get the total weighted score of the analyzed enterprise. This step involves adding all the weighted scores together in order to get the total weighted score for the 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.

IFE and EFE matrices comparison

The IFE and EFE matrices are both strategic management tools used to evaluate the internal and external environments of a company. Both matrices focus on identifying and evaluating the factors that could affect the organization’s performance and success.

The IFE matrix is used to evaluate internal factors such as strengths and weaknesses of the company, while the EFE matrix is used to evaluate external factors such as opportunities and threats. Both matrices identify and evaluate the factors and use a weighted score to determine the overall internal and external position of the company.

The main difference between the two matrices is that the IFE matrix focuses on the internal environment, while the EFE matrix focuses on the external environment. The IFE matrix helps organizations identify their internal strengths and weaknesses, while the EFE matrix helps organizations identify external opportunities and threats.

In summary, the IFE and EFE matrices are both strategic management tools used to evaluate the internal and external environments of a company. The main difference between the two matrices is that the IFE matrix focuses on the internal environment, while the EFE matrix focuses on the external environment. Both matrices identify and evaluate the factors and use a weighted score to determine the overall internal and external position of the company.

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