External Factor Evaluation

By – Narendra kumar
Dept- commerce
Central university of
rajasthan
2014-2016
About external factor
evaluation
■ EFE matrix can be defined as the strategic tool to evaluate external
environment or macro environment of the firm include economic, social,
technological, government, political, legal and competitive information.
■ 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.
■ EFE Matrix is an analytical technique related to the SWOT analysis.
EFE Matrix evaluates the external position of the organization or its
strategic intent.
External Factors

■ External factors are extracted after deep analysis of external

environment.
Obviously there are some good and some bad for the company in
the external environment. That’s the reason external factors are divided
into two categories opportunities and threats.
■ Opportunities :- Opportunities are the chances exist in the external
environment, it depends firm whether the firm is willing to exploit
the opportunities or may be they ignore the opportunities due to lack
of resources.
■ Threats :- Threats are always evil for the firm, minimum no. of threats in
the external environment open many doors for the firm. Maximum
number of threats for the firm reduce their power in the industry.
Rating
Rating in EFE matrix represent the response of firm toward the
opportunities and threats. Highest the rating better the response of the
firm to exploit opportunities and defend the threats. Rating range from
1.0 to
4.0 and can be applied to any factor whether it comes under opportunities
or
threats.
There are some important point related to rating in EFE matrix.
■ Rating is applied to each factor.
■ The response is poor represented by 1.0
■ The response is average is represented by 2.0
■ The response is above average represented by 3.0
■ The response is superior represented by 4.0
Weigh
t
■ Weight attribute in EFE matrix indicates the relative importance of factor
to being successful in the firm’s industry. The weight range from 0.0
means not important and 1.0 means important, sum of all assigned
weight to factors must be equal to 1.0 otherwise the calculation would
not be consider correct.

Weighted Score
■ Weighted score value is the result achieved after multiplying each factor
rating with the weight.
Total Weighted Score

■ The sum of all weighted score is equal to the total weighted score, final
value of total weighted score should be between range 1.0 (low) to
4.0(high).
■ The average weighted score for EFE matrix is 2.5 any company total
weighted score fall below 2.5 consider as weak.
■ The company total weighted score higher then 2.5 is consider as strong
in position.
Steps in developing the EFE matrix

■ Identify a list of KEY external factors (critical success factors).

■ Assign a weight to each factor, ranging from 0 (not important) to 1.0
(very important).
■ Assign a 1to 4 rating to each critical success factor to indicate
how effectively the firm’s current strategies respond to the factor.
(1 = response is poor, 4 = response is extremely good)
■ Multiply each factor’s weight by its rating to determine a weighted
score.
■ Sum the weighted scores.
Examples of EFE Matrix

Below is the example of EFE matrix for Nextal Communication.Nextel

Communications Inc. is a provider of communications services with
three operating segments:
■ Digital Cellular
Customers receive crystal clear calls and guaranteed message delivery
in a secure environment, within the Nextel National Network.
■ Walkie-Talkie Services
Direct Connect, Nationwide Direct Connect, and International Direct
Connect services allow communication without having to dial a number.
 Nextel EFE Matrix

As the results shows that Nextal Communication is respoding above average to the enviroment for
exploiting opportunties and to overcome threats.
What is External
factors
■ Outside influences that can impact a business. Various
external factors can impact the ability of a business or
investment to achieve its strategic goals and objectives.
These external factors might include :
■ competition, social, legal and technological
changes, and the economic and political environment.
What is
EFE
■ 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.
■ EFE is an acronym of the External Factor Evaluation. EFE
Matrix is an analytical technique related to the SWOT
analysis. EFE Matrix evaluates the external position of the
organization or its strategic intent.
How to create EFE
Matrix
■ Developing an EFE matrix is an intuitive process . The EFE
matrix process uses follow five steps :-
■ List factors: The first step is to gather a list of external factors.
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.
Contd..
.
■ 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. The Ratings are company based.
■ 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.
 Example of EFE
Matrix
■ 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 be included in 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
Contd..
.
■ 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
Contd..
.
■ 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)
Contd..
.
■ 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