Using the Internal-External (IE) Matrix for Strategic Analysis

 

By Omodiaogbe Samuel

Last Updated: December 5, 2023

Introduction

The Internal-External (IE) Matrix is a portfolio management tool used for comparing divisions of an organization in terms of revenue and percentage of profit with respect to the Internal Factor Evaluation (IFE) matrix and External Factor Evaluation (EFE) matrix scores. The IE Matrix is based on the analysis of internal and external business factors which are combined into one suggestive model. The IE matrix works in a way that you plot the total weighted score from the EFE matrix on the y -axis and draw a horizontal line across the plane. Then you take the score calculated in the IFE matrix, plot it on the x-axis, and draw a vertical line across the plane. The framework then categorizes IFE as weak, average or strong on the x-axis, and categorizes EFE as low, medium, and high on the y-axis. The point where the horizontal line meets the vertical line is the determinant of the strategy. Also, there are three main regions of the IE matrix and they inform the strategy to be pursued given the analysis conducted. And they are the grow & build region, hold & maintain region, and the harvest and divest region. The IE framework is a diagnostic and prescriptive tool for maximizing corporate competitiveness, and effective resources allocation. The E&I matrix is useful for business leaders who want to formulate their corporate strategy with the goal of implementing informed strategic decisions. Also, for strategist who are interested in helping organization in diagnosing, formulating, and executing the right strategy.

Characteristic of IE Matrix

  • The position of various divisions of an organization is categorized in a nine-cell display.
  • The IE Matrix is much similar to the BCG matrix but there are certain differences. IE matrix needs much information about the divisions. Also, there are separate implications for every kind of matrix.
  • There are two basic dimensions included in IE Matrix. First, on the x-axis the total weighted score of the IFE Matrix is displayed. The second one is on the y-axis, where the total weighted score of EFE Matrix is specified.

Steps-by Step Approach to Developing the IE Matrix

There are certain steps that should be followed in order to prepare Internal External Matrix. These steps are described below.

Step 1: Choose the UnitDetermine the divisions to be analyzed as that will have an impact on the whole analysis. Therefore, it is essential to define the unit for which you’ll do the analysis appropriately

Step 2: Sales and Profit Data: Compute the sales revenue/percentage and profit/percentage of each of the divisions chosen in step 1. These figures are obtained from the internal data of the organization

Step 3: IFE-EFE Matrix: There are two key dimensions which provide the basis of the IE matrix. The IFE and EFE Matrices are the input data necessary to compute the IE matrix. And the IFE and EFE matrices should be computed for all the divisions

Step 4: IFE Weighted/Total Weighted Score: The x-axis portion of the IE matrix includes the total weighted score of IFE matrix. The total weighted score from 1.0 to 1.99 indicates that the internal position of the organization is weaker. The total weighted score of 2.0 to 2.99 represents that the internal position of organization is in average. While the total weighted score of 3.0 to 4.0 indicates that the internal position of the organization is stronger enough.

Step 6: EFE Weighted/Total Weighted Score: The y-axis portion of IE matrix includes the total weighted score of EFE matrix. The total weighted score of 1.0 to 1.99 is represents the low level. The medium range is represented by the score 2.0 to 2.99. While the total weighted score of 3.0 to 4.0 is regarded as high.

Step 7: Determining the Three Regions: There are three main regions of IE matrix and each region indicates different actions to be taken. These three regions are as follow.

  1. Region one: I, II & IV cells of the IE matrix
  2. Region two: III, V or VII cells of the IE matrix
  3. Region three: VI, VIII or IX cells of the IE matrix

Step 8: Strategic Decisions: The purpose of the analysis is to set the right strategy for the corporation. Therefore, given the results of the analysis, we determine the right strategic direction for our organization

The IFE-EFE Matrix

The Internal Evaluation Matrix (IFE) and the External Evaluation Matrix (EFE) and major inputs in developing the IE matrix. As a result, there is need to develop the IFE and EFE matrices for each of the divisions of the organization. The IFE matrix is very similar to the EFE matrix. The major difference between the EFE matrix and the IFE matrix is the type of factors that are included in the model. While the IFE matrix deals with internal factors, the EFE matrix is concerned solely with external factors

Internal Factor Evaluation (IFE)Matrix:

The IFE is focused on identifying and evaluating an organization’s strengths and weaknesses in the functional areas―management, marketing, finance/accounting, production/operations, R&D and IT. By definition, Strengths and Weaknesses are considered to be internal factors over which you have some measures of control.

External Factor Evaluation (EFE) matrix:

EFE matrix on the other hand is used for evaluating the external environment or macro environment of the firm include economic, social, technological, government, political, legal and competitive information. The EFE matrix is a good tool to visualize and prioritize the Opportunities and Threats that a business is facing. This external analysis is critically important in strategic planning because a firm needs to exploit opportunities and avoid or, at least, mitigate threats.

How to develop the IFE and EFE Matrices

  • List factors: The first step is to gather a list of internal factors (IFE), and external factors (EFE). Divide factors into two groups: strengths and weaknesses for IFE, and opportunities and threats for EFE
  • Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1. Zero means the factor is not important, while one means that the factor is the most influential and critical one. The total value of all weights together should equal 1. Weights are industry-specific
  • Rate factors: Assign a rating to each factor. Rating should be between 1 and 4. Rating indicates how effective the firm’s current strategies respond to the factor. Ratings are company-specific.
  • Multiply weights by ratings: Multiply each factor weight with its rating. This will calculate the weighted score for each factor.
  • Total all weighted scores: Add all weighted scores for each factor. This will calculate the total weighted score for the company.

 

                 Application of the Internal-External (I-E) Matrix

Case Study

Okoroh Energy Service

Okoroh Energy Services is an energy services company that provide solutions to oil & gas, power plants, petrochemical, and other construction companies in Nigeria. The company has five Divisions comprising of maintenance, fabrication, electrical & Instrumentation (E&I), drilling, and installation services. Each division of the company require evaluation and therefore the company wants to conduct analysis on each to determine their performance, as that would inform the strategic approach of the company.  Without understanding the performance and contribution of each of the divisions, it would be very difficult for the company to formulate the corporate strategic planning for the entire company. Therefore, the analysis would help the company to determine the strategy to pursue on each of the division, and such strategies could range from grow & build, hold & maintain, and harvest or divest

For Okoroh Energy Service to understand the type of strategy to eventually pursue, it has decided to use the Internal-External (IE) Matrix to analyze and formulate the right corporate strategy. The Internal-External (I-E) Matrix is a portfolio management tool used to compare divisions of an organization in terms of revenue and percentage profit with respect to the Internal Factor Evaluation (IFE) matrix and External Factor Evaluation (EFE) matrix scores. The IE Matrix categorizes the IFE Matrix as weak, average or strong on the x-axis, and categorizes the EFE Matrix as low, medium, and high on the y-axis. Revenue and percentage profit are displayed by division based on the size of the divisional contribution on the matrix. The IE Matrix positions an organization in nine cell-matrix, and that enables the organization to determine the type of strategy to pursue given the information on the analysis conducted   

The IE matrix can be divided into three major regions that have different strategy implications. On the first region, the prescription for divisions that fall into cells I, II or IV can be “grow & build, “strategies. The second division that falls into cells III, V or VII can be best be managed with “hold and maintain strategies. While the third category that falls on cells VI, VIII or IX has the prescription strategies of “harvest and divest”. Portfolio analysis is critically significant in strategic planning because allocation of resources across divisions is arguably the most important strategic decision facing multidivisional firms each year. As a result, Okoroh Energy Services wants to use the IE Matrix to have a deeper insight on the performance of each of the divisions in the portfolio. Such analysis would determine the strategic approach of the company.  Essentially, the results from the IE Matrix analysis would help the company to improve on its corporate strategic planning, enhances decision-making, and determine the resource allocation mechanism

                   Application of the Metrix to Okoroh Energy Services

Division

Sales (Millions) ₦

Profit (Millions) ₦

Drilling

930000

120000

Installation

550000

75000

Fabrication

420000

110000

E&1

120000

30000

Maintenance

40000

7000

Total

2060000

342000

The internal factors (IFE), and external factors (EFE) of Okoroh Energy Services

Computation of Sales, Profits, and the IFE & EFE matrix of each of the divisions of Okoroh Energy Services

 

       

Division

Sales (Millions) ₦

% Of Sales

Profit (Millions) ₦

% Of Profit

IFE Score

EFE Score

Drilling

930000

45.15%

120000

35.1%

3.345

3.79

Installation

550000

26.70%

75000

21.9%

2.525

3,113

Fabrication

420000

20.39%

110000

32.2%

2.985

2.849

E&1

120000

5.83%

30000

8.8%

2,345

1.955

Maintenance

40000

1.94%

7000

2.0%

1.789

1.435

Total

2060000

100.00%

342000

100.0%

  

The Internal-External Matrix of Okoroh Energy Services

First Region: 1, 11 &1V = Grow & Build

The business units that fall on this category are Drilling and Installation

Second Region: 111, V, &IV =Hold & Maintain

The business unit that falls on this is Fabrication

Third Region: V1, V111, & IX =Harvest and Divest

The business units that fall on this region are E&I and Maintenance

                                                         Strategic Options

1: Grow & Build Region:

The prescription for divisions that fall into cells I, II, or IV can be described as grow and build. Intensive strategies―market penetration, market development, and product development. Or integrative strategies―backward integration, forward integration, and horizontal integration strategies can be most appropriate for these divisions. This is the best region for divisions, given their high IFE and EFE scores. Successful organizations are able to achieve a portfolio of businesses positioned in region 1. Strategic options: Expand aggressively; Seek control over distributors or suppliers (vertical integration); capitalize on strengths; and acquire competitors

  For Okoroh Energy Services, more attention needs to be given to Drilling and Installation units. The company needs to capitalize on its strengths in these units to create a competitive advantage. By building on the existing capabilities, the company would be able to leverage on them to become the dominant player in those divisions

 

2: Hold & Maintain Region:

The prescription for divisions that fall into cells III, V, or VII can be described as hold and maintain strategies. Market penetration and product development are two commonly employed strategies recommended here. Strategic options: Expand, but not aggressively; Penetrate market further; Develop new products or modify existing products

We have the Fabrication unit on this region. Although this is not the best region to be occupied, but it’s still far better than the harvest & divest region. Therefore, Okoroh Energy Services need to be cautious on further investment on this region. However, by expanding the scope of operations outside the markets it currently occupied, the company stand a chance to increase market share in the Fabrication division

3:  Harvest & Divest Region:

The prescription for divisions that fall into cells VI, VIII, or IX can be described as harvest or divest.  On this region, you can do the following: Don’t expand; divest; retrench; diversify; Improve weaknesses; or form joint ventures Strategic options: For this region, if costs for rejuvenating the business are low, then it should be attempted to revitalize the business. In other cases, aggressive cost management is a way to play the end game.

E&I and Maintenance are the laggers of Okoroh Energy Services. It would be quick to recommend such units for liquidation. However, the company need to be cautious in making hasty decisions. There is need to consider the synergetic contribution of the units. If their existence makes the Drilling, Installation, and Fabrication units to perform better, then the company need to keep them, but without further investments on them

Essentially, the Internal-External Matrix being a diagnostic and prescriptive tool for maximizing corporate competitiveness has helped Okoroh Energy Services to allocate resources more efficiently. It has also helped in  formulating strategies to create a competitive advantage in the energy industry in Nigeria

                                       Advantages and Disadvantage of the Framework

Advantages

  • The matrix provides a high-level way to visualize the performance of each of the divisions of the company
  • It enables you to think about how to allocate your limited resources to the portfolio so that profit is maximized over the long-term
  • helps raising the awareness among the managers regarding the internal-external environment they work in and changes that might occur
  • helps the management with effective allocation of resources to where they are most needed
  • Access to a range of data from multiple sources improves enterprise-level planning and policy-making, enhances decision-making, improves communication and helps to coordinate operations
  • Helps to understand the strategic positions of business portfolio
  • The IE Matrix can be used by small and large, for-profit and nonprofit organizations.

the strategy series could be observed in orderly

Disadvantage

  • It is only a snapshot of the current situation. It doesn’t look to see what is likely to happen to a market in the future.
  • Imposes the need to use further strategic management tools in order to determine the right course of actionfor the enterprise
  • It requires intuitive judgments and educated assumptions. The weights and ratings require judgmental decisions, even though they should be based on objective company and industry trends, facts, data, and information
  • The framework assumes that each business unit is independent of the others.

                                             Summary

IE Matrix is a strategic management tool which is used to analyze the current position of the divisions and suggest the strategies for the future for better results. The IE Matrix is based on an analysis of internal and external business factors which are combined into one suggestive model. The matrix works in a way that you plot the total weighted score from the EFE matrix on the y-axis and draw a horizontal line across the plane. Then you take the score calculated in the IFE matrix, plot it on the x-axis, and draw a vertical line across the plane. The point where your horizontal line meets your vertical line is the determinant of your strategy. The IE Matrix can be divided into three major regions that have different strategy implications. Base your ratings on your earlier internal and external assessments. The intersection of your ratings reveals the type of strategies best for your firm. Such strategies should range from Grow and Build, Hold and Maintain, or Harvest and Divest. Despite the benefits of the IE Matrix, it still has some limitations, and therefore should be used along with other corporate strategic planning tools such as BCG matrix or GE/McKinsey matrix for deeper analysis and effective corporate strategy formulation

Omodiaogbe Samuel, MSc. CMC, ChMC, FIMC

Omodiaogbe is a Strategic Management Consultant, and he the Principal Consultant/CEO at Vast Thinking Consults Ltd where he help organizations and business leaders to create superior value. Omodiaogbe holds BSc. and MSc. in Economics. Also, he is a Certified Management Consultant (CMC), a Chartered Management Consultant (ChMC), and a Fellow, Institute of Management Consultants, Nigeria. He is an Instructor on Coursera, where he teaches 25 courses in Strategic Management. Omodiaogbe is one of the world’s leading learners on Coursera and Edx with over 500 Certificates from top-ranked Universities, Business Schools, and Organizations.

Contact him:
Email; somodiaogbe@vastthinking.com.ng
Visit: www.vastthinking.com.ng

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