External factors Evaluation matrix (EFE) is used to audit the external factors of any company. In EFE matrix the external factors are divided into opportunities and threats. A company can capitalize on opportunities and avoid or reduced threats.

Following are the steps to develop EFE matrix.

1. List down the external factors.

2. Categorize factors in opportunities and threats.

3. Assign weight to each factor based on its importance, ranging from 0 (not important) to 1.0 (most important). The sum of weight of factors must be equal to 1.

4. Assign a rating ranging from 1 to 4 to each external factor. The rating of each factor shows how promptly firm strategies responding to each opportunity or threat(1 = response is poor, 4 = response is extremely good).

5. Multiply each factor weight by its rating to get weighted score.

6. Sum the weighted score.