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External Evaluation Matrix

 

External Factor Evaluation (EFE) matrix is a strategic-management tool popularly used for accessing the current business condition. The EFE matrix is an appropriate tool for visualizing and prioritizing threats and opportunities facing a business.

The only main difference between the EFE matrix and the IFE matrix are the factors in the model. Whereas the latter deals with internal factors, EFE is mainly about external factors. The external factors that EFE matrix assesses are those subject to the will of legal, political, economic, and social factors among others.

How is the EFE matrix created?

Creation of the EFE matrix employs the same five steps used when creating an IFE matrix.

Factors listing: First, list all the factors involved and divide them into two main groups; threats and opportunities.

Weight assignment: Each factor should be assigned a weight value which should be between o and 1 (or 10 and 100 in the 10-100 scale) Zero or 10 indicates low importance, while 1 or 100 is an indication that the factor is the most critical and influential. Total value of weights should either equal 1 or 100.

Rate factors: Each factor should have a rating of between 1 and 4. Rates are indicators of the effectiveness of the strategies to the varying factors. 1 shows poor response, 2, a below average response, 3 an above average response, and 4 superior response. Ratings are specific to companies whereas weights are specific to industries.

Multiply weights by ratings: To calculate the weighted score for each factor, each factor weight should be multiplied with its corresponding rating.

Sum all weighted scores: All weighted scores should then be summed up to calculate a company’s total weighted score.

KEY EXTERNAL FACTORS

WEIGHT

RATING

WEIGHTED SCORE

Opportunities

 

1. Industry Consideration

11%

4

0.44

2. Increase in air travel in Mexico

12%

3

0.36

3. Privatization in CE countries

10%

2

0.20

4. Growth of low-cost sector

8%

4

0.32

5. Increased demand in China

16%

3

0.48

Threats

 

1. Declining Margins

10%

1

0.10

2. Government oversight

5%

3

0.15

3. Climbing prices of  key inputs

8%

2

0.16

4. New Security tax

5%

2

0.10

5. Economic downturn

15%

1

0.15

Poor(1),Below average (2),Above average (3), Superior (4)

TOTAL

100%

 

2.46

Contents of the EFE matrix

External factors that should be included in the EFE matrix are grouped into:
Economic variables
Social, cultural, demographic, and environmental variables
Political, government, business trends, and legal variables
 

The below factors are examples of factors that capture aspects that are external o your business. The factors may or may not apply to your business but can be used as a guide.

• Emigration and immigration rates
• Number of deaths and/or births
• Trends in business, careers, shopping, housing
• Education
• Racial or ethnic minorities
• Number of divorces and/or marriages
• Widening gap between the poor and the rich
• Number and type of special interest groups
• Pre-capita income
• Percentage of one race to other races
• Aging population
 

Economic Factors

• Level of competitiveness (see Michael Porter’s Five Forces model)
• Product life cycle (see product life cycle page)
• Product differentiation
• Barriers to market entry
• Economies of scale
• Industry properties
• Government spending
• Import and export factors and barriers
• Level of disposable income
• Stock market trends
• Foreign exchange rates
• Inflation
• Level of savings, investments, and capital spending
• Economic growth

Business trends, legal, political and government factors

• Level of government subsidies
• Protection of rights (antitrust legislation, trademarks, patents)
• Internet and communication technologies (e-commerce)
• Worldwide trend towards similar consumption patterns
• Government policies and regulations
• Trends in globalization
• Political situation and elections abroad and home
• Terrorism
• Taxation
• International trade regulations

An External Factor Evaluation (EFE) Matrix ensures that strategies are summarized. It further evaluates competitive information, technological, legal, governmental, political, environmental, demographic, cultural, social and economic factors. There are five main steps for developing an EFE Matrix:

1. All the threats and opportunities you identifies during the external audit. These are mostly between 10-20 factors. Opportunities should be listed first followed by the threats. Explicitly define the factors using comparisons tools like numbers, ratios or other.
2. Assign each factor a weight as from the least important (0.0) to the most important (1.0). Weights show how important a factor is and how it could influence the firm’s market position.  Threats, unless very sever, receive lower weights. You can determine appropriate weight by comparing the successful competitors with the unsuccessful ones, or discussing each of the factors until the entire group comes to an agreement. 

Illustration Example 

KEY EXTERNAL FACTORS

WEIGHT

RATING

WEIGHTED SCORE

Opportunities

 

1. Global markets are practically untapped         by smokeless tobacco market

0.15

1

0.15

2. Increased demand caused by public banning of smoking

0.05

3

0.15

3. Astronomical Internet advertising growth

0.05

1

0.05

4. Pinkerton is leader in discount tobacco market

0.15

4

0.60

5. More social pressure to quit smoking, thus leading users to switch to alternatives

0.10

3

0.30

Threats

 

1. Legislation against the tobacco industry

0.10

2

0.20

2. Production limits on tobacco increases competition for production

0.05

3

0.15

3. Smokeless tobacco market is concentrated  in southeast region of United States

0.05

2

0.10

4. Bad media exposure from the FDA

0.10

2

0.20

5. Clinton Administration

0.20

1

0.20

TOTAL

1

 

2.10
3. Assign each key factor a 1-4 rating to indicate the effectiveness of the current strategies of the firm to each factor. The rating number list is represented as; 1=poor, 2=average, 3=above average, 4=superior. Each key factor rating should be given based on how it affects the strategies of the firm. While weights are industry-specific, while ratings are based on the company. It’s important to note that you can give the rating of between 1 and 4 to both opportunities and threats.
4. The weighted score is determined though multiplication of each of the factors by their individual rating.