EFE and IFE Matrices for Strategic Analysis

The EFE Matrix (External Factor Evaluation Matrix)

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.

1. List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.
2. 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 10 to 100 scale). Zero means factors are 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.
3. Rate factors: Assign a rating to each factor. Rating should be between 1 to 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.
4. Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor.
5. Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.

OPPORTUNITIES	WEIGHT	RATING	WEIGHTED SCORE
Industry Consolidation	11%	4	0.44
Increase in air travel in Mexico	12%	3	0.36
Privatization in OE Countries	10%	2	0.20
Growth of low-cost sector	8%	4	0.32
Increased demand in China	16%	3	0.48
THREATS
Declining margins	10%	1	0.10
Government Oversight	5%	3	0.15
Climbing prices of key inputs	8%	2	0.16
New Security tax	5%	2	0.10
Economic Downturn	15%	1	0.15
TOTAL WEIGHTED	100%		2.46
Poor (1), Below Average (2), Above Average (3), Superior (4)

Total weighted score of 2.46 indicates that the business has slightly less than average ability to respond to external factor (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:

1. Social, cultural, demographic, and environmental variables
• Aging population
• Percentage or one race to other races
• 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
2. Economic variables :
• 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
• Government spending
• Industry properties
• Economies of scale
• Barriers to market entry
• Product differentiation
• Level of competitiveness
3. Political, government, business trends, and legal variables :
• Globalization trends
• Government regulations and policies
• Worldwide trend toward similar consumption patterns
• Internet and communication technologies (e-commerce)
• Protection of rights (patents, trademarks, antitrust legislation)
• Level of government subsidies
• International trade regulations
• Taxation
• Terrorism
• Elections and political situation home and abroad

IFE Matrix (Internal Factor Evaluation)

The internal factor evaluation matrix (Internal Factor Evaluation Matrix, IFE matrix), is a kind of internal factors analysis tool, its practice is to find out the impact from the advantages and disadvantages of two aspects Enterprise The key factors for the future development, according to the degree of each influencing factor of determining weights, then press the Enterprise Effective reaction extent of each factor score and the key factors, finally calculates the total weighted score. Through IFE, enterprises can have their own advantages and disadvantages facing the summary, to depict all internal stress. 

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

INTERNAL STRENGTHS	WEIGHT	RATING	WEIGHTED SCORE
Largest manufacturer in the market	10%	4	0.40
Supplies major airlines	12%	4	0.48
Good reputation and image	4%	3	0.12
Close proximity to the airport	8%	4	0.32
Strong management team	4%	3	0.12
Increasing cash flow	5%	3	0.15
Loyal employees	4%	3	0.12
Access to cheap and reliable financing	3%	4	0.12
History at minimal service complaints	4%	3	0.12
Financial Ratio	5%	4	0.20
INTERNAL WEAKNESSES
Saturated market	10%	1	0.10
Sensitive to Oil prices	15%	2	0.30
Little diversification	8%	2	0.16
Absence of strategic partner	4%	1	0.04
Limited access to international markets	4%	1	0.04
TOTAL WEIGHTED SCORE	100%		2.79
Major weakness (1), Minor Weakness (2), Minor strength (3), Major strength (4)

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.

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 scores 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 strength and a weakness in IFE matrix?

When a key internal factor is both 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?

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.

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