Definition
- Internal Factor Evaluation (IFE) Matrix
- is a strategy tool used to evaluate firm’s internal environment and to reveal its strengths as well as weaknesses. [1]
- External Factor Evaluation (EFE) Matrix
- is a strategy tool used to examine company’s external environment and to identify the available opportunities and threats.
Understanding the tool
The internal and external factor evaluation matrices have been introduced by Fred R. Davidin his book ‘Strategic Management’[1] (at least I found them there and couldn’t trace their origins anywhere else). According to the author, both tools are used to summarize the information gained from company’s external and internal environment analyses. The summarized information is evaluated and used for further purposes, such as, to build SWOT analysis or IE matrix. Even though, the tools are quite simplistic, they do the best job possible in identifying and evaluating the key affecting factors. Both tools are nearly identical so we’ll only show an example of an EFE matrix right now.
| Key External Factors | Weight | Rating | Weighted Score |
|---|---|---|---|
| Opportunities | |||
| 1. New trade agreement that lifts the ban of imported food is signed with a neighboring country. | 0.11 | 3 | 0.33 |
| 2. Signing a contract with a new supplier. | 0.09 | 1 | 0.09 |
| 3. Processed food market growing by 15% next year in our largest market. | 0.24 | 2 | 0.48 |
| 4. Incorporating a new company in neighboring country, where the tax rate is decreasing by 3% next year. | 0.10 | 1 | 0.10 |
| Threats | |||
| 5. The contract with the main customer expires in 2 months. | 0.17 | 4 | 0.68 |
| 6. Extreme cases of natural disasters occurring next year. | 0.03 | 2 | 0.06 |
| 7. New law, requiring decreasing the amount of sugar in the food by 20%, could be passed next year. | 0.14 | 3 | 0.42 |
| 8. Competitors opening 3 new stores in the town. | 0.12 | 2 | 0.24 |
| Total | 1.00 | - | 2.40 |
Key External and Internal Factors
EFE Matrix. When using the EFE matrix we identify the key external opportunities and threats that are affecting or might affect a company. Where do we get these factors from? Simply by analysing the external environment with the tools like PEST analysis, Porter’s Five Forces or Competitive Profile Matrix.
IFE Matrix. Strengths and weaknesses are used as the key internal factors in the evaluation. When looking for the strengths, ask what do you do better or have more valuable than your competitors have? In case of the weaknesses, ask which areas of your company you could improve and at least catch up with your competitors?
The general rule is to identify 10-20 key external factors and additional 10-20 key internal factors, but you should identify as many factors as possible.
Weights
Each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance). The number indicates how important the factor is if a company wants to succeed in an industry. If there were no weights assigned, all the factors would be equally important, which is an impossible scenario in the real world. The sum of all the weights must equal 1.0. Separate factors should not be given too much emphasis (assigning a weight of 0.30 or more) because the success in an industry is rarely determined by one or few factors.
Weights have the same meaning in both matrices.
In our first example, the most significant factors are ‘Processed food market growing by 15% next year in our largest market.’ (0.24 points), ‘The contract with the main customer expires in 2 months.’ (0.17 points) and ‘New law, requiring decreasing the amount of sugar in the food by 20%, could be passed next year.’ (0.14 points).
Ratings
The meaning of ratings is different in each matrix, so we’ll explain them separately.
EFE Matrix. The ratings in external matrix refer to how effectively company’s current strategy responds to the opportunities and threats. The numbers range from 4 to 1, where 4 means a superior response, 3 – above average response, 2 – average response and 1 – poor response. Ratings, as well as weights, are assigned subjectively to each factor. In our example, we can see that the company’s response to the opportunities is rather poor, because only one opportunity has received a rating of 3, while the rest have received the rating of 1. The company is better prepared to meet the threats, especially the first threat.
IFE Matrix. The ratings in internal matrix refer to how strong or weak each factor is in a firm. The numbers range from 4 to 1, where 4 means a major strength, 3 – minor strength, 2 – minor weakness and 1 – major weakness. Strengths can only receive ratings 3 & 4, weaknesses – 2 & 1. The process of assigning ratings in IFE matrix can be done easier using benchmarking tool.
Weighted Scores & Total Weighted Score
The score is the result of weight multiplied by rating. Each key factor must receive a score. Total weighted score is simply the sum of all individual weighted scores. The firm can receive the same total score from 1 to 4 in both matrices. The total score of 2.5 is an average score. In external evaluation a low total score indicates that company’s strategies aren’t well designed to meet the opportunities and defend against threats. In internal evaluation a low score indicates that the company is weak against its competitors.
In our example, the company has received total score 2.40, which indicates that company’s strategies are neither effective nor ineffective in exploiting opportunities or defending against threats. The company should improve its strategy and focus more on how take advantage of the opportunities.
Benefits
Both matrices have the following benefits:
- Easy to understand. The input factors have a clear meaning to everyone inside or outside the company. There’s no confusion over the terms used or the implications of the matrices.
- Easy to use. The matrices do not require extensive expertise, many personnel or lots of time to build.
- Focuses on the key internal and external factors. Unlike some other analyses (e.g. value chain analysis, which identifies all the activities in the company’s value chain, despite their importance), the IFE and EFE only highlight the key factors that are affecting a company or its strategy.
- Multi-purpose. The tools can be used to build SWOT analysis, IE matrix, GE-McKinsey matrix or for benchmarking.
Limitations
- Easily replaced. IFE and EFE matrices can be replaced almost completely by PEST analysis, SWOT analysis, competitive profile matrix and partly some other analysis.
- Doesn’t directly help in strategy formation. Both analyses only identify and evaluate the factors but do not help the company directly in determining the next strategic move or the best strategy. Other strategy tools have to be used for that.
- Too broad factors. SWOT matrix has the same limitation and it means that some factors that are not specific enough can be confused with each other. Some strengths can be weaknesses as well, e.g. brand reputation, which can be a strong and valuable brand reputation or a poor brand reputation. The same situation is with opportunities and threats. Therefore, each factor has to be as specific as possible to avoid confusion over where the factor should be assigned.
Using the tool
Step 1. Identify the key external/internal factors
EFE matrix. Do the PEST analysis first. The information from the PEST analysis reveals which factors currently affect or may affect the company in the future. At this point, the factors can be either opportunities or threats and your next task is to sort them into one or the other category. Try to look at which factors could benefit the company and which ones would harm it.
You should also analyze your competitors’ actions and their strategies. This way you would know what competitors are doing right and what their strategies lack.
IFE matrix. In case you have done a SWOT analysis already, you can gather some of the factors from there. The SWOT analysis will usually have no more than 10 strengths and weaknesses, so you’ll have to do additional analysis to identify more key internal factors for the matrix.
Look again into the company’s resources, capabilities, organizational structure, culture, functional areas and value chain analysis and recognize the strong and weak points of the organization.
Step 2. Assign the weights and ratings
Weights and ratings are assigned subjectively. Therefore, it is a more difficult process than identifying the key factors. We assign weights based on industry analysts’ opinions. Find out what the analysts say about the industry’s success factors and then use their opinion or analysis to assign the appropriate weights. The same process is with ratings. Although, this time you or the members of your group will have to decide what ratings should be assigned. Ratings from 1-4 can be assigned to each opportunity and threat, but only the ratings from 1-2 can be assigned to each weakness and 3-4 to each strength.
Step 3. Use the results
IFE or EFE matrices have little value on their own. You should do both analyses and combine their results to discuss new strategies or for further analysis. They are especially useful when building advanced SWOT analysis, SWOT matrix for strategies or IE matrix.
Examples
We provide only the general examples of both matrices.
| Key External Factors | Weight | Rating | Weighted Score |
|---|---|---|---|
| Opportunities | |||
| 1. New immigration laws abolish the restrictions for immigrants to live and work freely in the country. | 0.02 | 1 | 0.02 |
| 2. A government increases budget spending for our products. | 0.17 | 4 | 0.68 |
| 3. New product market, worth $1 billion a year, could be introduced for the consumers. | 0.05 | 4 | 0.20 |
| 4. Consumers are 20 % more likely to by the products that share the same ecosystem. | 0.12 | 4 | 0.48 |
| 5. We have patented the technology that increases the quality of our products and lowers the amount of the materials needed to produce it. | 0.03 | 3 | 0.09 |
| 6. Our largest competitor is selling their subsidiary in TV market. | 0.14 | 2 | 0.28 |
| Threats | |||
| 7. Tax rates will increase by 10% for the polluting companies. | 0.06 | 2 | 0.12 |
| 8. Due to the fast economic growth credit availability will tighten. | 0.04 | 4 | 0.16 |
| 9. Credit rates are growing by 5%. | 0.02 | 2 | 0.04 |
| 10. Natural disasters disrupt our suppliers’ or our operations. | 0.08 | 3 | 0.24 |
| 11. Rivalry in the market is intensifying. | 0.12 | 4 | 0.48 |
| 12. Competitor is pursuing horizontal integration strategy. | 0.10 | 3 | 0.30 |
| 13. Inflation has increased to 6%. | 0.05 | 2 | 0.10 |
| Total | 1.00 | - | 3.19 |
| Key Internal Factors | Weight | Rating | Weighted Score |
|---|---|---|---|
| Strengths | |||
| 1. Diversified income (5 different brands earning more than $4 billion each) | 0.10 | 4 | 0.40 |
| 2. Brand reputation valued at $35 billion | 0.08 | 3 | 0.24 |
| 3. Strong patents portfolio (13,000 patents) | 0.07 | 4 | 0.28 |
| 4. Excellent employee management | 0.02 | 3 | 0.06 |
| 5. Competency in mergers and acquisitions | 0.06 | 3 | 0.18 |
| 6. Extensive distribution channels | 0.11 | 4 | 0.44 |
| 7. Strong product ecosystem | 0.08 | 4 | 0.32 |
| Weaknesses | |||
| 8. High debt level ($3 billion) | 0.10 | 1 | 0.10 |
| 9. Over-dependence on sales from U.S. | 0.13 | 2 | 0.26 |
| 10. Too low net profit margin | 0.07 | 2 | 0.14 |
| 11. Competition based on prices | 0.09 | 2 | 0.18 |
| 12. Rigid (bureaucratic) organizational culture impeding fast introduction of new products | 0.04 | 1 | 0.04 |
| 13. Negative publicity | 0.05 | 2 | 0.10 |
| Total | 1.00 | - | 2.74 |
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