How to create an EFE Matrix

If you’re taking Strategic Management (Strama), you’ll most likely be required to present an EFE Matrix for your chosen business. 

An EFE (External Factor Evaluation) matrix is a strategic tool you can use to analyze and evaluate your business’s strategies in relation to the market and external environment. It is a component of the SWOT analysis and is often paired with an IFE (Internal Factor Evaluation).

An EFE helps you analyze how your business is responding to the changing world around it. 

When evaluating the surrounding world, you look at it through various perspectives: economic, social, technological, governmental, political, legal, and competitive.  Just as you would when deciding whether to buy a house or not. Is it nice? Is the location good? Is the price ok? Is the neighborhood peaceful? Etc etc.

Analysis of external environment

One of the cases our class got to work on was about a hotel called Mandarin Oriental. The hotel was based in Makati but was recently closed because its long-term lease with Ayala Land already expired. The goal was to create an EFE Matrix for Mandarin. As input, we were given a few points about Mandarin. We were also given the profile of its target market, and a few economic high-level data about the Philippines. 

Once we got all the available information assessed, we proceeded with creating an EFE Matrix. Below I’ve posted our team’s matrix. 

EFE Matrix for Mandarin Oriental

A typical EFE Matrix looks like the table shown above.  You may color it up a bit, make it sexier, but overall it should be similar. Your matrix should include the specific opportunities and threats that are relevant to your industry, weight, your rating, and weighted score.

Below are the steps in creating an EFE Matrix.

1. Start by listing down external factors affecting your market and industry. Categorize them as either opportunities or threats. (See Column 1)
   
2. Assign weights to each factor. The weights (column 2) indicate how important a factor is in relation to the industry. In our case we indicated Philippine industry growth and development as the factor with highest rank.
   
3. Write down your company’s rating. The rating (column 3) represents how responsive your firm is toward the opportunities and threats indicated. Ratings range from 1.0 to 4.0. Rate 1.0 if your firm's responsiveness is poor, 4.0 if your firm's responsiveness is high. 
4. Calculate the weighted score per factor. The weighted score (column 3) is equal to the weight multiplied by your ratings. If you add all of them together, you’ll have your total weighted score. If your weighted score is below 2.5, that means your firm’s not responsive enough. If above 2.5, then you’re responsiveness is strong.  Still, you have to check what else you can do to improve further.

We gave Mandarin Hotel a weighted score of 2.15, way below average. This means their current strategies were not working well enough. We think there were opportunities they didn’t fully maximize. For instance, their revenue growth was only 6% compared to the overall industry growth of 15%. 

The numbers you put on your matrix can be subjective. You can write anything  but they should be accompanied by good, intuitive judgment. When you do your Strama presentation, panelists will ask you to explain your EFE Matrix. Make sure to be able to defend your matrix with facts. Most importantly, remember to go through the process consciously and meticulously. Creating your Strama paper begins with this first basic step.


Disclaimer:

I haven't defended yet. Most of what I know about the actual defense process I got from the grapevine. And of course, from my Professors.