External factor evaluation (EFE) matrix is a well known strategic tool has been used for the evaluation of external environment of a firm. External environment mainly consist of political,legal,economical,social and technological factors. A firm should determine the external factors and segregate them into opportunities and threats. The opportunities are the options available for a firm to further strengthen its position in a industry only if a firm exploit each offered opportunity. On the other hand, threats are considered as negative factors for a firm which may harm its position in a industry however, impact of threat could be minimized or eliminated if a firm respond to each threat in a timely manner.

Here is an example of EFE matrix made for Wal-Mart Stores.

Steps in Developing the EFE Matrix

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

2.Assign a weight to each factor, ranging from 0 (not important) to 1.0 (very important).

3.Assign a 1-4 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)

4.Multiply each factor’s weight by its rating to determine a weighted score.

5.Sum the weighted scores.

EFE Matrix of Wal-Mart

Opportunities Weight Rating Weighted Score
Exploit untapped markets of Asia and Europe 0.25 (25%) 4 1.0
Market penetration in USA market 0.05 (5%) 3 0.15
Cost competition 0.10 (10%) 3 0.30
Merger and acquisition 0.10(10%) 1 0.10
Online existence on Internet for shopping 0.10 (10%) 3 0.30
       
Threats      
Strong competition 0.15 (15%) 4 0.60
New entrants in retail industry 0.05 (5%) 3 0.15
Online sales increasing which will results in increasing competition 0.10 (10%) 3 0.30
Economics recession 0.05 (5%) 1 0.05
Political issues 0.05 (5%) 1 0.05
       
Total Weighted Score 1.0(100%) 3.20

We can conclude from the result that Wal-Mart is responding to opportunities and threats in a superior way.