The external factor evaluation matrix (EFE Matrix) is prepared by considering certain key external factors. These key external factors need to be properly summarized in order to develop an effective external factor evaluation matrix.
The information related to economic, social, demographic, cultural, technological, legal, political, governmental & environmental variables is summarized & evaluated by the strategists in the preparation of the External Factor Evaluation matrix (EFE Matrix).
How to Prepare External Factor Evaluation Matrix (EFE Matrix)
The process of development of the External factor Evaluation Matrix is completed in the five steps which are as follows.
- Listing of Key External Factors (10-20):
All those factors which can affect the External Factor Evaluation matrix are listed in this step. Two points should be kept in mind while listing these key external factors which are the treats & opportunities.
- Assigning of Weight to Each (0 to 1.0):
In the second step of preparation of the External Factor Evaluation matrix, all the identified factors are arranged on the basis of their weightage which is according to their importance intensity. This weightage should be represented in percentage term. But the main point of consideration in this step is that all the sum of all the factors must be equal to one.
- Assigning of 1-4 rating to each factor:
Each factor in this step should be assigned some rating which ranges from 1 to 4. These ratings are based on the responses of the organization to the factors under consideration.
- Multiplication of Weight of Each Factor by its Rating:
In this step, the weight assigned to each factor is multiplied to it’s the rating assigned to it. This generates a weighted score.
- Summing up of the Weighted Score of Each Factor:
In the last step of the External Factor Evaluation matrix, the weighted score of each factor is summed up in order to ascertain the total weighted score for the entire organization. The organization that has the highest possible score is 4.0 & the lowest possible score is 1.0 while the average possible score is 2.5.
Below is the table which shows the development of the External Factor Evaluation matrix by using these above five steps.
External Factor Evaluation
01- All the key external factors that are identified in the process of the external audits are identified. These factors may be number from ten to twenty but these must be related to all the opportunities & threats that influence the organization & industry. The opportunities are listed first and then the threats are listed.
The listing of these factors should be specific in nature by using the ratios, percentages & comparative numbers where possible.
02- Certain weight is assigned to each factor on the basis of its importance that ranges from 0.0 (not important) to 1.0 (very important). The relative importance of that factor is indicated by given weight in terms of being successful in the industry of the organization.
Mostly higher weights are given to opportunities as compared to the threats but in certain cases threats can also be assigned higher weight when it is severe in nature. By comparing successful competitors with the unsuccessful ones, appropriate weights can be determined.
There is also another way of ascertaining the appropriateness of the weights by discussing a factor among the nominated group members and performing consensus. But the sum of all weights that are assigned to the factors should be equal to one.
03- Each factor is assigned ratings range from 1 to 4 which are based on the responses of the strategies of the organization towards that relative factor. When a factor has given the rating 4 then this means that the response of the strategies of the organization towards that factor is superior.
Similarly, rating 3 reflects that the response is above average, rating 2 shows that the response is average and in the case of 1 the response is poor. As ratings are related to the strategies of the organization, therefore they are organization based.
On the other hand, the weighs assigned in the second step are industry based in nature. It is quite significant to understand that 1, 2, 3, or 4 ratings can be assigned to both opportunities & threats.
04- The weight of each factor is multiplied by its rating so that a weighted score can be determined.
05- The weighted average score of all the factors are summed up so that a total weighted score for the entire organization is ascertained. Although there are a number of important opportunities & threats in the EFE matrix, the highest total weighted score that an organization can obtain is 4.0.
On the other hand, the organization that can give the lowest possible score is always 1.0. The total average score that an organization represents is equal to 2.5. When an organization reflects a 4.0 score, it shows that it is considering the opportunities & threats comprehensively & generating such kinds of responses through which the opportunities are fully availed while the threats are effectively avoided.
The organization develops potential strategies in the light of those opportunities & threats that can provide maximum benefit to the organization while reducing from the adverse harms. The organization that shows 1.0 total weight score reflects its weak & ineffective strategies that do not cover the beneficial aspects of the provided opportunities & harmful aspects of the available threats.
The above-mentioned table shows the example of the EFE Matrix which is related to UST, Inc., which manufactures Skoal & Copenhagen smokeless tobacco. The administration of Clinton was the factor that severely influences the industry & has given the weight of 0.20.
The UST does not formulate effective strategies for availing that opportunity & so it is rated as 1.01. The total weighted score of 2.01of the UST shows that it is not applying effective strategies that can cover the threats & opportunities of the organization.
This score indicates that the organization is below average in formulating & implementing effective strategies for taking advantage of the opportunities & avoiding the threats. There is one more important thing that the factors used in the EFE matrix are more important than the weightage or rating assigned.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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