IFE is the
acronym for Internal Factor Evaluation Matrix. This is a strategic
formulation tool that helps the management to evaluate the internal
strengths and weaknesses in the functional areas of a business. IFE
is used to identify or evaluate the relationships between the
functional areas of the business. Thus, IFE helps the organization
in strategy formulation. The steps in constructing the IFE are:
- List 10-20 internal key factors that contribute to the success
(strengths) and failure of the business (weakness). Ensure that the
factors are specific in nature such as percentages, ratios
etc.
- Assign weight for each factor in the range from 0 (not
important) to 1 (very important). Ensure that all the weights sum
up to 1. The weights should be based on industry standards.
- Assign score to each factor. Assign 1 for important weakness, 2
for minor weakness, 3 for minor advantage and then the score shifts
to the advantage. 4 stand for important advantages. The score
denotes company standards.
- Multiply the weight of each factor (obtained in step 2) with
that of the scores (from step 3).
- Sum up all the weighted scores computed for all the factors.
The total weight score of the organization is determined in this
final step. The average score 2.5 depicts that the organization is
internally weak. Above 2.5 score denotes that the organization is
strong.
EFE is the
acronym for External Factor Evaluation Matrix. The organization’s
relationship with the external environment is evaluated. This is
also a strategic formulation tool. The strategic intents of the
organization is evaluated with the help of EFE matrix. Thus, EFE
helps the organization in strategy formulation. The steps in
constructing the EFE are:
- List a set of key external factors that are critical for the
success of the business.
- Assign weight for each factor in the range from 0 (not
important) to 1 (very important). Ensure that all the weights sum
up to 1.
- Assign rating from 1-4 to each factor that is critical to the
success of the firm. This is to determine or identify the
effectiveness of the organization’s response to the factors. (1 is
response is poor, 4 is extremely good).
- Multiply the rating with that of each factor’s weight. This
will result in the weighted score.
- Sum the weighted scores. The average score is 2.5. Any score
above 2.5 indicates that the company responds positively to the
external environment by exploiting the opportunities and overcoming
the threats and challenges.
CPM is the
acronym for Competitive Profile Matrix. The CPM tool is used by all
the stakeholders of the company to analyze the strengths and
weaknesses of all the major competitors in the industry. The steps
in constructing the CPM are:
- List the Critical Success Factors (CSF) for the organization.
CSF are the key areas that is performed for an organization’s
success in the competitive environment such as location, efficient
supply chain, customer service, brand reputation, price
competitiveness, etc. The list should be upto the industry
standards.
- Assign weight to each CSF ranging from 0.0 (low importance) to
1.0 (high importance). The weight provides the importance of each
factor in the industry. Ensure the sum of all the weights is
1.
- Assign rating for the CSF. The ratings show well the companies
are doing in each critical area. Rating ranges from 1-4 where 1 is
major weakness, 2 – minor weakness, 3- minor strength and 4- major
strength.
- Multiply the weight with the rating. The total score is the sum
of all the weighted ratings. If the score is high, the company is
relatively stronger in its competitive position.
QSPM is the
acronym for Quantitative Strategic Planning Matrix (QSPM). This
tool is used to evaluate the possible strategies. The feasible
alternative actions are evaluated by QSPM. This is an analytical
tool.
The steps in constructing the QSPM are:
- Key strategic factors are identified with the help of EFE and
IFE matrix.
- Formulate the strategy that the organization would like to
pursue. This is done with the help of SWOT analysis, SPACE and BCG
matrix.
- Each internal and external factors are assigned weights with
the help IFE and EFE matrix.
- Attractive Scores (AS) denotes how each factor is important to
each alternative strategy. Each AS is determined by evaluating each
of the key factors separately (0,1,2,3,4).
- Multiply the weight with the AS. The total Attractive Scores is
obtained finally.
- Sum up the Attractive Scores (AS) for each factor. The sum
total of the AS is obtained.
- The higher the score for the alternative the stronger is the
impact on the success of the company. Hence, the alternative option
with the higher AS should be chosen in the QSPM matrix.