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
|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|
|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.