Module 7:

EFE Matrix (External Factor Evaluation)

External Factor Evaluation (EFE) matrix method is a strategic-management tool often used
for assessment of current business conditions. The EFE matrix is a good tool to visualize and
prioritize the opportunities and threats that a business is facing.
The EFE matrix is very similar to the IFE matrix. The major difference between the EFE matrix
and the IFE matrix is the type of factors that are included in the model. While the IFE matrix
deals with internal factors, the EFE matrix is concerned solely with external factors.

External factors assessed in the EFE matrix are the ones that are subjected to the will of social,
economic, political, legal, and other external forces.

How do I create the EFE matrix?

Developing an EFE matrix is an intuitive process which works conceptually very much the same
way like creating the IFE matrix. The EFE matrix process uses the same five steps as the IFE
matrix.

List factors: The first step is to gather a list of externalfactors. Divide factors into two groups:
opportunities and threats.

Assign weights: Assign a weight to each factor. The value of each weight should be between 0
and 1 (or alternatively between 10 and 100 if you use the 10 to 100 scale). Zero means the
factor is not important. One or hundred means that the factor is the most influential and
critical one.  The total value of all weights together should equal 1 or 100.

Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating
indicates how effective the firm’s current strategies respond to the factor. 1 = the response is
poor. 2 = the response is below average. 3 = above average. 4 = superior. Weights are industry-
specific. Ratings are company-specific.

Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate
the weighted score for each factor.

Total all weighted scores: Add all weighted scores for each factor. This will calculate
the total weighted score for the company.

You can find more details about this approach as well as about possible values that the EFE
matrix can take on the IFE matrix page.

EFE matrix example

Total weighted score of 2.46 indicates that the business has slightly less than average ability to
respond to external factors. (See the page on IFE matrix for an explanation of what category
the 2.46 figure falls to.)
What should I include in the EFE matrix?
Now that we know how to construct or create the EFE matrix, let's focus on factors. External
factors can be grouped into the following groups:

● Social, cultural, demographic, and environmental variables:

● Economic variables
● Political, government, business trends, and legal variables

Below you can find examples of some factors that capture aspects external to your business.
These factors may not all apply to your business, but you can use this listing as a starting point.

Social, cultural, demographic, and environmental factors...

- Aging population
- Percentage or one race to other races
- Per-capita income
- Number and type of special interest groups
- Widening gap between rich & poor
- Number of marriages and/or divorces
- Ethnic or racial minorities
- Education
- Trends in housing, shopping, careers, business
- Number of births and/or deaths
- Immigration & emigration rates
Economic factors...

- Growth of the economy

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

Political, government, business trends & legal factors...

- Globalization trends
- Government regulations and policies
- Worldwide trend toward similar consumption patterns
- Internet and communication technologies (e-commerce)
- Protection of rights (patents, trade marks, antitrust legislation)
- Level of government subsidies
- International trade regulations
- Taxation
- Terrorism
- Elections and political situation home and abroad

IFE Matrix (Internal Factor Evaluation)

Internal Factor Evaluation (IFE) matrix is a strategic management tool for auditing or
evaluating major strengths and weaknesses in functional areas of a business.
IFE matrix also provides a basis for identifying and evaluating relationships among those
areas. The Internal Factor Evaluation matrix or short IFE matrix is used in strategy formulation.

The IFE Matrix together with the EFE matrix is a strategy-formulation tool that can be utilized
to evaluate how a company is performing in regards to identified internal strengths and
weaknesses of a company. The IFE matrix method conceptually relates to the Balanced
Scorecard method in some aspects.

How can I create the IFE matrix?

The IFE matrix can be created using the following five steps:

Key internal factors...

Conduct internal audit and identify both strengths and weaknesses in all your business areas. It
is suggested you identify 10 to 20 internal factors, but the more you can provide for the IFE
matrix, the better. The number of factors has no effect on the range of total weighted scores
(discussed below) because the weights always sum to 1.0, but it helps to diminish estimate
errors resulting from subjective ratings. First, list strengths and then weaknesses. It is wise to
be as specific and objective as possible. You can for example use percentages, ratios, and
comparative numbers.

Weights...

 Having identified strengths and weaknesses, the core of the IFE matrix, assign a weight that
ranges from 0.00 to 1.00 to each factor. The weight assigned to a given factor indicates the
relative importance of the factor. Zero means not important. One indicates very important. If
you work with more than 10 factors in your IFE matrix, it can be easier to assign weights using
the 0 to 100 scale instead of 0.00 to 1.00. Regardless of whether a key factor is an internal
strength or weakness, factors with the greatest importance in your organizational
performance should be assigned the highest weights. After you assign weight to
individual factors, make sure the sum of all weights equals
1.00 (or 100 if using the 0 to 100 scale weights).
The weight assigned to a given factor indicates the relative importance of the factor to being
successful in the firm's industry. Weights are industry based.

Rating...

Assign a 1 to X rating to each factor. Your rating scale can be per your preference. Practitioners
usually use rating on the scale from 1 to 4. Rating captures whether the factor represents a
major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a
major strength (rating = 4). If you use the rating scale 1 to 4, then strengths must receive a 4 or
3 rating and weaknesses must receive a 1 or 2 rating.

Note, the weights determined in the previous step are industry based. Ratings are company
based.

Multiply...

Now we can get to the IFE matrix math. Multiply each factor's weight by its rating. This will
give you a weighted score for each factor.

Sum...

The last step in constructing the IFE matrix is to sum the weighted scores for each factor.
This provides the total weighted score for your business.
Example of IFE matrix
The following table provides an example of an IFE matrix.

Weights times ratings equal weighted score.

What values does the IFE matrix take?

Regardless of how many factors are included in an IFE Matrix, the total weighted score can
range from a low of 1.0 to a high of 4.0 (assuming you used the 1 to 4 rating scale). The average
score you can possibly get is 2.5.

Side note...

Why is the average 2.5 and not 2.0? Let's explain using an example. You have 4 factors, each
has weight 0.25. Factors have the following rating: 1, 4, 1, 4. This will result in individual
weighted scores 0.25, 1, 0.25, and 1 for factors 1 through 4. If you add them up, you will get
total IFE matrix weighted score 2.5 which is also the average in this case.
Total weighted scores well below 2.5 point to internally weak business. Scores
significantly above 2.5 indicate a strong internal position.

What if a key internal factor is both a strength and a weakness in IFE

matrix?
When a key internal factor is both a strength and a weakness, then include the factor twice in
the IFE Matrix. The same factor is treated as two independent factors in this case. Assign
weight and also rating to both factors.

What are the benefits of the IFE matrix?

To explain the benefits, we have to start with talking about one disadvantage. IFE matrix or
method is very much subjective; after all other methods such as the TOWS or SWOT
matrix are subjective as well. IFE is trying to ease some of the subjectivity by introducing
numbers into the concept.

Intuitive judgments are required in populating the IFE matrix with factors. But, having to assign
weights and ratings to individual factors brings a bit of empirical nature into the model.

How does the IFE matrix differ from the SWOT matrix method?
More is better...

One difference is already obvious. It is the weights and ratings. This difference leads to another
one. While it is suggested that the SWOT matrix is populated with only a handful of factors,
the opposite is the case with the IFE matrix.

Populating each quadrant of the SWOT matrix with a large number of factors can lead to the
point where we are over-analyzing the object of our analysis. This does not happen with IFE
matrix. Including many factors into the IFE matrix leads to each factor having only a small
weight. Therefore, if we are subjective and assign unrealistic rating to some factor, it will not
matter very much because that particular factor has only a small weight (=small importance) in
the whole matrix.

It is important to note that a thorough understanding of individual factors included in the IFE
matrix is still more important than the actual numbers.

Quantitative Strategic Planning Matrix (QSPM)

Quantitative Strategic Planning Matrix (QSPM) is a high-level strategic management
approach for evaluating possible strategies. Quantitative Strategic Planning Matrix or a QSPM
provides an analytical method for comparing feasible alternative actions. The QSPM
method falls within so-called stage 3 of the strategy formulation analytical framework.
When company executives think about what to do, and which way to go, they usually have
a prioritized list of strategies. If they like one strategy over another one, they move it up on the
list. This process is very much intuitive and subjective. The QSPM method introduces some
numbers into this approach making it a little more "expert" technique.

What is a Quantitative Strategic Planning Matrix or a QSPM?

The Quantitative Strategic Planning Matrix or a QSPMapproach attempts to objectively select
the best strategy using input from other management techniques and some easy
computations. In other words, the QSPM method uses inputs from stage 1 analyses, matches
them with results from stage 2 analyses, and then decides objectively among alternative
strategies.

Stage 1 strategic management tools...

The first step in the overall strategic management analysis is used to identify key strategic
factors. This can be done using, for example, the EFE matrix and IFE matrix.

Stage 2 strategic management tools...

After we identify and analyze key strategic factors as inputs for QSPM, we can
formulate the type of the strategy we would like to pursue. This can be done using the stage 2
strategic management tools, for example the SWOT analysis (or
TOWS), SPACE matrixanalysis, BCG matrix model, or the IE matrix model.

Stage 3 strategic management tools...

The stage 1 strategic management methods provided us with key strategic factors. Based on
their analysis, we formulated possible strategies in stage 2. Now, the task is to compare in
QSPM alternative strategies and decide which one is the most suitable for our goals.

The stage 2 strategic tools provide the needed information for setting up the Quantitative
Strategic Planning Matrix - QSPM. The QSPM method allows us to evaluate alternative
strategies objectively.

Conceptually, the QSPM in stage 3 determines the relative attractiveness of various strategies
based on the extent to which key external and internal critical success factors are capitalized
upon or improved. The relative attractiveness of each strategy is computed by determining the
cumulative impact of each external and internal critical success factor.
What does a QSPM look like and what does it tell me?
First, let us take a look at a sample Quantitative Strategic Planning Matrix QSPM, see the
picture below. This QSPM compares two alternatives. Based on strategies in the stage 1 (IFE,
EFE) and stage 2 (BCG, SPACE, IE), company executives determined that this company XYZ
needs to pursue an aggressive strategyaimed at development of new products and further
penetration of the market.
They also identified that this strategy can be executed in two ways. One strategy is acquiring a
competing company. The other strategy is to expand internally. They are now asking which
option is the better one.

(Attractiveness Score: 1 = not acceptable; 2 = possibly acceptable; 3 = probably acceptable; 4 =

most acceptable; 0 = not relevant)

Doing some easy calculations in the Quantitative Strategic Planning Matrix QSPM, we came to
a conclusion that acquiring a competing company is a better option. This is given by the Sum
Total Attractiveness Score figure. The acquisition strategy yields higher score than the
internal \expansion strategy. The acquisition strategy has a score of 4.04 in the QSPM shown
above whereas the internal expansion strategy has a smaller score of 2.70.

How do I construct a QSPM?

You can see a sample Quantitative Strategic Planning Matrix QSPM above. The left column of
a QSPM consists of key external and internal factors (identified in stage 1). The left column of a
QSPM lists factors obtained directly from the EFE matrix and IFE matrix. The top row consists
of feasible alternative strategies (provided in stage 2) derived from the SWOT analysis, SPACE
matrix, BCG matrix, and IE matrix. The first column with numbers includes weights assigned to
factors. Now let us take a look at detailed steps needed to construct a QSPM.

STEP 1...

Provide a list of internal factors -- strengths and weaknesses. Then generate a list of the firm's
key external factors -- opportunities and threats. These will be included in the left column of the
QSPM. You can take these factors from the EFE matrix and the IFE matrix.

Step 2...

Having the factors ready, identify strategy alternatives that will be further evaluated. These
strategies are displayed at the top of the table. Strategies evaluated in the QSPM should be
mutually exclusive if possible.

Step 3...

Each key external and internal factor should have some weight in the overall scheme. You can
take these weights from the IFE and EFE matrices again. You can find these numbers in our
example in the column following the column with factors.

Step 4...

Attractiveness Scores (AS) in the QSPM indicate how each factor is important or attractive to
each alternative strategy. Attractiveness Scores are determined by examining each key
external and internal factor separately, one at a time, and asking the following question:

Does this factor make a difference in our decision about which strategy to pursue?

If the answer to this question is yes, then the strategies should be compared relative to that
key factor. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3
= reasonably attractive, and 4 = highly attractive. If the answer to the above question is no, then
the respective key factor has no effect on our decision. If the key factor does not affect the
choice being made at all, then the Attractiveness Score would be 0.

Step 5...

Calculate the Total Attractiveness Scores (TAS) in the QSPM. Total Attractiveness Scores are

defined as the product of multiplying the weights (step 3) by the Attractiveness Scores (step 4)
in each row.

The Total Attractiveness Scores indicate the relative attractiveness of each key factor and
related individual strategy. The higher the Total Attractiveness Score, the more attractive the
strategic alternative or critical factor.

Step 6...
Calculate the Sum Total Attractiveness Score by adding all Total Attractiveness Scores in
each strategy column of the QSPM.

The QSPM Sum Total Attractiveness Scores reveal which strategy is most attractive. Higher
scores point at a more attractive strategy, considering all the relevant external and internal
critical factors that could affect the strategic decision.

Can I compare more than two strategies using a QSPM?

Yes, in general, any number of alternative strategies can be included in the QSPM analysis. We
included only two alternatives in our example just to keep it simple. It is important to note that
strategies subject to comparison should be mutually exclusive if possible.