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EFE Matrix Strategic Management

The document discusses the external factor evaluation (EFE) matrix, a tool that allows companies to evaluate opportunities and threats in their external environment. It provides a 5-step process for developing an EFE matrix: 1) list external factors, 2) assign each a weight, 3) rate how effectively strategies respond to each, 4) multiply weights by ratings, and 5) sum the weighted scores. An example analysis of a local cinema is provided, with observations about important factors, strong responses, and the overall above-average weighted score. The document also discusses how individuals can apply EFE matrix principles to personal development by evaluating external opportunities and threats and formulating contingency plans.

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Chelsea Dela Torre
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455 views3 pages

EFE Matrix Strategic Management

The document discusses the external factor evaluation (EFE) matrix, a tool that allows companies to evaluate opportunities and threats in their external environment. It provides a 5-step process for developing an EFE matrix: 1) list external factors, 2) assign each a weight, 3) rate how effectively strategies respond to each, 4) multiply weights by ratings, and 5) sum the weighted scores. An example analysis of a local cinema is provided, with observations about important factors, strong responses, and the overall above-average weighted score. The document also discusses how individuals can apply EFE matrix principles to personal development by evaluating external opportunities and threats and formulating contingency plans.

Uploaded by

Chelsea Dela Torre
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chelsea Dela Torre February 6, 2020

4BSBA2 Business Policy and Strategic Management


The External Factor Evaluation
The External Factor Evaluation Matrix
It allows strategists to summarize and evaluate economic, social, cultural, demographic,
environmental, political, legal, technological, and competitive information in a form of
visualization tool. A firm can implement this business framework in order to address both
opportunities and threats in their external environment. It is an analytical technique related to
SWOT analysis.

5 Steps in Developing the EFE Matrix


1. LIST
➢ List 20 key external factors as identified in the external-audit process
➢ Include both opportunities and threats that affect the firm and its industry
➢ Opportunities are listed 1st then the threats
Helpful Tips:
Be specific as possible
Use percentages, ratios, and comparative numbers whenever possible.
Utilize “actionable” factors – strategies that are feasible to accomplish shortly
2. ASSIGN WEIGHT
➢ Assign to each factor a weight [Range: 0.0 (not important) to 1.0 (very
important)]
➢ Weight indicates the relative importance of that factor to being successful in the
firm’s industry.
➢ Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and reaching a group
consensus
➢ Sum of all weights assigned to the factors must equal 1.0
Helpful Tips:
Opportunities often receive higher weights than threats
Threats can receive high weights if they are especially severe or threatening
3. ASSIGN RATING
➢ Rate between 1 and 4 to each key external factor to indicate how effectively the
firm’s current strategies respond to the factor
➢ It is based on the effectiveness of the firm’s strategies
➢ Ratings are company-based while weights in step 2 are industry-based
LEGEND:
▪ 4 = the response is superior
▪ 3 = the response is above average
▪ 2 = the response is average
▪ 1 = the response is poor.
Helpful Tip: Threats and opportunities can receive a rating of 1, 2, 3, or 4.
4. MULTIPLY
➢ Multiply each factor’s weight by its rating to determine a weighted score.
Multiply
5. ADD
➢ Sum the weighted scores for each variable to determine the total weighted score
for the organization
Interpreting Results
A total weighted score of 4.0 connotes that the organization has a superior response to
existing opportunities and threats in its industry. Their strategies effectively take advantage of
existing opportunities and minimize the potential adverse effects of external threats. While a total
score of 1.0 indicates that the firm’s strategies poor response on available opportunities or in
avoiding external threats. The total average weighted score is at 2.5, which indicates that if a firm
goes above this midpoint then they are doing good in taking advantage of opportunities and
avoiding threats in their external environment.

Observations:
1. Most important factor to being successful in this business is “Trend toward healthy eating
eroding concession sales,” as indicated by the 0.12 weight.
2. The local cinema is doing excellent in handling the two external factors, “TDB University
is expanding 6 percent annually” and “Trend toward healthy eating eroding concession
sales” as indicated by a rating of four.
3. Factors are stated in quantitative terms to the extent possible, rather than being stated in
vague terms.
4. Total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cinema business
is doing pretty well, taking advantage of the external opportunities and avoiding the
threats facing the firm.

Specificity is essential in providing quantitative evidence to support each key external factor.
More importantly, author commentary on each factor is vital in providing insight on the thinking
that supports both inclusion of respective factors and various weights and ratings assigned.
Bibliography
David, Fred R, David, Forest R. (2017). Strategic Management Concepts and Cases: A
Competitive Advantage Approach, Global Edition (16th Edition). Pearson Education Inc.
PERSONAL LEARNING
Applying EFE Matrix to Personal Development

External analysis focuses on situations outside your business that is out of your control. It
usually goes with the SWOT analysis framework, with strengths and weaknesses components as
the business’ internal environment. While the opportunities and threats components comprise the
business’ external environment. An EFE Matrix would offer the most help in prioritizing the
opportunities and threats faced by a business through a visualization tool. Firm’s strategies must
be aligned in order to take full advantage of existing opportunities and minimize negative impact
of external threats to the operations of a business.
By seeing all the components of the EFE Matrix at play, I noticed that its strength lies on being
a quantitative method. It does away with subjective judgment that is prone to biases and inaccuracy
of results which is frowned upon in today’s competitive market. It starts with providing
opportunities and threats that must be backed by quantitative evidence such as percentages, ratios,
and comparative numbers whenever possible. These number would later guide the rater in
accurately assigning weight to each factor. But seeing quantitative evidences would not suffice if
the rater is not knowledgeable with the firm and the industry it belongs to. Knowledge of the
industry helps the firm stay ahead of competition by formulating strategies to either take advantage
of an opportunity or creating contingency plans for possible threats. All these decisions must
revolve on driving profitability, growth, and volatility of the firm.
My personal takeaway from learning to conduct an EFE matrix would be that not only firms
can benefit from being aware of the opportunities and threats around them. As individuals, we can
also use this to guide us in achieving our goals. It can help contribute to our overall personal
development as how businesses strive to improve their operations. First, learning about potential
opportunities open many doors for an individual to acquire new skills or further develop the current
skill set they possess. Taking on opportunities that are presented to us helps us grow holistically.
Regardless of its outcome, we must treat every opportunity as a learning ground to draw us closer
to our personal goals. And lastly, threats around us should not be there for us to just avoid but to
work on it by formulating contingency plans that would prevent greater risks. Planning is important
not only for businesses but also to every individual. But only having plans and not knowing when
to implement it could be detrimental. Contingency plans must be able to consider the current
capabilities, resources, strengths, and weaknesses of a business as well as the individual.
From this, we learn that individuals can also shape their life with how businesses guide their
operations through the help of several business frameworks and models. Every opportunities and
threats we face should not serve as hindrances to our personal growth but push ourselves to strive
harder the next time we are put into a similar situation. Treating every situation as a learning
experience will help us choose the best decisions along the way and draw us closer to our
aspirations and goals in life.

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