Question

Explain how to develop and use an External Factor Evaluation (EFE) Matrix.

Discuss the five steps needed to develop an EFE Matrix.

Answer 1

External Factor Evaluation Matrix is developed by identifying the external factors affecting the firm's business environment. It is a tool used to evaluate the threats and opportunities pertaining to the external environment for the firm and use it for strategy development. The external factors impacting the firm depending on the type of business can be categorized into political, economic, social, legal, environmental and cultural .

The five steps needed to develop an EFE Matrix can be given as below :-

1. List the external environment factors influencing the firm's strategy and performance. The factors can be listed in two categories i.e, opportunities and threats.

2. Weight assignment - Weights can be assigned to each factor between 0 to 1 . The zero rating means the factor is not important and can be increased as per the significance to the firm.The total sum of weights assigned should be equal to 1.

3. Rating factors - Ratings are assigned to each factor depending on the degree of intensity of firm's efforts and initiatives taken by the firm to counter the threats and avail the opportunities. Ratings are given from 1 to 4. Major threats are given ratings of 1, minor threat rating of 2, major opportunities are given ratings of 3 and high potential opportunities are rated 4.

4. Weighted Score - Multiplying the rates with weights is equal to weighted score for each factor.

5. Total weighted Score - Total weighted score can be arrived at by totalling the sum of weighted scores of the all the factors.

The total weighted score gives an indication of the firm's strategic capabilities to deal with its external environment factors. The highest score is 4 and lowest is 1 with 2.5 score indicating an average strategic effort by firm. The tool can be used to evaluate the impact of various strategic initiatives and scope for improvement. The strategy with best possible score should be chosen for firm's success.