External Factor Evaluation (EFE) Matrix is a strategic management tool which allows the strategists to examine the cultural, social, economic, demographic, political, legal, and competitive information. EFE Matrix indicates whether the firm is able to effectively take advantage of existing opportunities along with minimizing the external threats. Similarly, it will help the strategists to formulate new strategies and policies on the basis of existing position of the company. An example of external factor evaluation (EFE) matrix is given for the Wal-Mart (An American public corporation that runs a chain of large discount department stores and a chain of warehouse stores).
Steps in the Construction of EFE Matrix
In the first column, list down all the opportunities and threats. EFE matrix should include 10 to 20 key external factors.
In the second column assign weights to each factor that ranges from 0.0 (not important) to 1 (most important). The total weights must sum to 1.00 (It should be noted that the importance of weights depend upon the probable impact of factors on the strategic position of the company).
In the column three, rate each factor (ranging from 1 to 4) on the basis of company’s response to that factor. (Here, 1 shows poor response, 2 shows average response, 3 shows above average response and 4 shows superior response)
In the column four, calculate the weighted score by multiplying the each factor’s weight by its rating.
Find the total weighted score by adding the weighted score for each variable.
Wal-Mart External Factor Evaluation Matrix
By adding the weighted score of various opportunities and threats of Wal-Mart, we get the total weighted score of 3.40. Here it should be noted that the highest possible total weighted score of a firm is 4 whereas the lowest possible total weighted score is 1. The total weighted score remains in the limit of 1 to 4 regardless of the total number of opportunities and threats. Similarly, the average total weighted score is 2.5. If the total weighted score of a company is 4, it means that the company is effectively taking advantage of existing opportunities and is also able to minimize the risk. On the other hand, the total weighted score of 1 shows that firm is not able to take advantage of current opportunities or avoid external threats.
In the case of Wal-Mart, the total weighted score is above average, which means that the Wal-Mart strategies are effective and the company is taking advantage of existing opportunities along with minimizing the potential adverse effects of external threats.