The EFE matrix is the strategic tool used to evaluate firm existing strategies, EFE matrix can be defined as the strategic tool to evaluate external environment or macro environment of the firm include economic, social, technological, government, political, legal and competitive information.
The EFE matrix is similar to IFE matrix the only difference is that IFE matrix evaluate the internal factors of the company and EFE matrix evaluate the external factors.
The EFE matrix consists of following attributes mentioned below.
External factors are extracted after deep analysis of external environment. Obviously there are some good and some bad for the company in the external environment. That’s the reason external factors are divided into two categories opportunities and threats.
Opportunities are the chances exist in the external environment, it depends firm whether the firm is willing to exploit the opportunities or maybe they ignore the opportunities due to lack of resources.
Threats are always evil for the firm, minimum no of threats in the external environment open many doors for the firm. Maximum number of threats for the firm reduce their power in the industry.
Rating in EFE matrix represent the response of firm toward the opportunities and threats. Highest the rating better the response of the firm to exploit opportunities and defend the threats. Rating range from 1.0 to 4.0 and can be applied to any factor whether it comes under opportunities or threats.
There are some important point related to rating in EFE matrix.
- Rating is applied to each factor.
- The response is poor represented by 1.0
- The response is average is represented by 2.0
- The response is above average represented by 3.0
- The response is superior represented by 4.0
Weight attribute in EFE matrix indicates the relative importance of factor to being successful in the firm’s industry. The weight range from 0.0 means not important and 1.0 means important, sum of all assigned weight to factors must be equal to 1.0 otherwise the calculation would not be consider correct.
Weighted score value is the result achieved after multiplying each factor rating with the weight.
TOTAL WEIGHTED SCORE
The sum of all weighted score is equal to the total weighted score, final value of total weighted score should be between range 1.0 (low) to 4.0(high). The average weighted score for EFE matrix is 2.5 any company total weighted score fall below 2.5 consider as weak. The company total weighted score higher then 2.5 is consider as strong in position.
STEPS IN DEVELOPING THE EFE MATRIX:
- Identify a list of KEY external factors (critical success factors).
- Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).
- Assign a 1-4 rating to each critical success factor to indicate how effectively the firm’s current strategies respond to the factor. (1 = response is poor, 4 = response is extremely good)
- Multiply each factor’s weight by its rating to determine a weighted score.
- Sum the weighted scores.