Using the Internal Factor Evaluation-External Factor Evaluation (IFE-EFE) matrix for Strategic Analysis

 

By Omodiaogbe Samuel

Last Updated: November 24, 2023 

Introduction

Internal Factor Evaluation-External Factor Evaluation (IFE-EFE) matrix is strategic management tools used for input stage of strategy formulation. 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. The IFE and the EFE can be conducted separately. The IFE gives you insights on the strengths and weaknesses of the organization. On the other hand, the EFE is focused on the opportunities and threats of the organization. But by combining the IFE and EFE, you will have a holistic understanding of how both the internal and external factors impact your organization. The IFE-EFE matrix is created by assigning weight to each of the factors based on their perceived impact. Then the factors are ranked based on the company performance on each. The weighted score is determined by multiplying the weight by the ranks. Finally, the information on the overall scores of the IFE- EFE would reveal if the company meets the threshold to survive the competitiveness of the industry. The matrix is useful for business leaders and entrepreneurs who want have a deep insight on how their internal and external factors determines their competitiveness. Also, for strategist who are interested in helping organization in making informed strategic decisions

Let’s now take a deeper dive of the components

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. Intuitive judgments are required in populating the IFE matrix with the factors. But, having to assign weights and ratings to individual factors brings a bit of empirical nature into the model. The focus is on understanding the strengths and weaknesses of the organization

 Strength is a special competency that provides a comparative advantage for companies in the market. Strength can be contained in financial resources, image, market leadership. buyer relationship with suppliers and other factors. On the other hand, weakness is a limitation or lack in resources, skills and capabilities that seriously inhibits the effective performance of a company or organization. Facilities, financial resources, management capabilities, marketing skills, brand image can be a source of weakness. By definition, Strengths and Weaknesses are considered to be internal factors over which you have some measures of control. Evaluating your company’s strengths is likely easier than taking a hard look at its flaws. Therefore, one helpful way to overcome that is to seek the information from your customers and other stakeholder. The information you then receive will help you identify your weaknesses

Follow these five steps to develop the IFE matrix.

  • List factors: The first step is to gather a list of internal factors. Divide factors into two groups: strengths and weaknesses.
  • Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1. 0 means the factor is not important, while 1 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.

External Factor Evaluation (EFE) matrix

 EFE matrix 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. Opportunities are the chances existing in the external environment, and therefore depends on the firm willingness to exploit or ignore them, depending on the availability of capabilities or resources. On the other hand, threat is a condition beyond the control of an organization but influences it chance of success. By evaluating these conditions, you will be able to construct a contingency plan to minimize the negative impact they might have. The external analysis is critically important in strategic planning because a firm needs to exploit opportunities and avoid or, at least, mitigate threats.

Developing an EFE matrix is an intuitive process which works conceptually very much the same way like creating the IFE matrix. The EFE matrix process uses the same five steps as the IFE matrix. The EFE matrix process uses the same five steps as the IFE matrix, but focuses on external factors.

  • List factors: The first step is to gather a list of external factors. Divide factors into two groups: opportunities and threats.
  • Assign weights: Assign a weight to each factor. The value of each weight should be between 0 and 1. O means the factor is not important, while 1 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. 1 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.
                     Detailed Step-by-Step Approach to Creating the IFE-EFE Matrix

Listing the Factors

For the IFE, conduct internal audit and identify both strengths and weaknesses (while the EFE, the focus is on opportunities and threats). It is suggested you identify 10 to 20 internal factors, and 10-20 external factors. But the more you can provide for the IFE-EFE matrix, the better. The number of factors has no effect on the range of total weighted scores because the weights always sum to 1.0, but it helps to diminish estimate errors resulting from subjective ratings. For the IFE, first list strengths and then weaknesses. While for the EFE, first list the opportunities, and then the threats. It is wise to be as specific and objective as possible, and so, you can use percentages, ratios, and comparative numbers.

Weights

 Having identified IFE strengths and weaknesses, and the EFE opportunities and threats, then you assign weight that ranges from 0.00 to 1.00 to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry. Weights are industry based. The weight ranges between zero and one. Zero means not important. One indicates very important. After you assign weight to individual factors, make sure the sum of all weights equals 1.00, or if you use percentage, the sum of the weight should be 100%

Rating

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. For example, on the IFE, strengths should receive a 4 or 3 rating while weaknesses should receive a 1 or 2 rating. Rating on EFE matrix represent the response of firm toward the opportunities and threats. The higher the rating, the better the response of the firm to exploit opportunities and defend the threats. The rating should take this format:

  1. = the response is poor.
  2. = the response is below average.
  3. = above average.
  4. = superior.

Weighted Score

Weighted score value is the result achieved after multiplying each factor rating with the weight. This will give you a weighted score for each factor.

Total Weighted Score

In this step of constructing the IFE-EFE matrix, you sum the weighted scores for each factor. Sum the weighted scores for each variable to determine the total weighted score for the organization. The total weighted score should be between range 1.0 (low) to 4.0(high), while the average weighted score for the IFE- EFE matrix is 2.5. If the total weighted score falls below 2.5 is considered as weak, while if the weighted score is higher than 2.5 is considered as strong.

Strategic Decision Making

In developing the internal and external assessments for your firm, be mindful that gaining and sustaining competitive advantage is the overarching purpose of developing the IFE-EFE Matrix. Therefore, you need to use the information obtained from the analysis to determine how to capitalize on your strengths, while at the same time take measures to improve on weaknesses. Also, the information would give you the insights of exploiting opportunities, while at the same time, mitigating threats

Using the SWOT Analysis to Determine the Internal and External Factors

Strengths (O)

Strengths are things that an organization does particularly well, or in a way that distinguishes it from competitors. Strengths are capabilities that could include human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. So, strengths are the qualities that enables an organization to accomplish its mission. They are the basis on which continued success can be made and sustained. Remember, any aspect of your organization is only a strength if it brings you a clear advantage

Key questions to enable you identify your strengths:

  • What is your organization famous for?
  • What qualities do you or your products have that set you apart from competitors?
  • What physical assets do you have which might put you ahead of the competition?
  • What intellectual property do you own?
  • What internal resources do you have that you’re particularly proud of?

Weaknesses (W)

Weaknesses are the qualities that prevent an organization from accomplishing its mission or achieving its full potential. Weaknesses are the factors which do not meet the standards we feel they should. They are areas where the business needs to improve to remain competitive. Weaknesses stop an organization from performing at its optimum level. But they are controllable, and so they could either be minimized or eliminated.

To help you understand your weaknesses, consider the following questions:

  • What major failures have you had in the past 12 months, and why?
  • What physical resources do you lack?
  • What internal / skill-based resources do you lack?
  • What do your competitors do better than you?
  • How does customers rate your products? What issues would they raise?
  • How is your cash-flow position?’
  • Where can we improve?
  • What products are underperforming?

Opportunities (P)

Opportunities refer to favorable external factors that could give an organization a competitive advantage. Opportunities usually comes from situations outside the organization, and they might arise as developments in the market you serve, or in the technology you use. Being able to spot and exploit opportunities can make a huge difference for an organization’s ability to create a competitive edge.

To identify your opportunities, ask yourself the following questions:

  • What trends am I aware of in my industry?
  • Are there any changes to policies or regulations that could help my business?
  • Are there new technologies emerging that we could use to stand out from our competitors?
  • Is the economy changing in a way to encourage consumers to spend more?
  • Is our target market growing?

Threats (T)

Threats arise when conditions in external environment jeopardize the reliability and profitability of the organization. Examples of threats includes social-political problems; ever changing technological landscape; increasing competition leading to excess capacity, change in regulatory environment, emergence of new competitors, macroeconomic issues; etc. Threats are uncontrollable. However, it’s important to anticipate threats and to take action against them before becoming a victim of them.

To identify the threats to your organization, ask yourself the following questions:

  • Do we have any new competitors?
  • Are any of our competitors gaining a strong foothold in our target market?
  • Is our target market shrinking?
  • Are there any changes to policies or other regulations that could harm my business?
  • Is there new technology emerging that could threaten my business?
  • What consumer trends threatens your business?

Case Study

Okoroh Energy Services

Okoroh Energy Services is an energy services company that provide solutions to oil & gas companies, power plants and petrochemical companies in Nigeria. The company is into maintenance, fabrication, and installation services. At the moment, the company want to have a deeper insight on the performance of each of the three divisions of the company, but with particular focus on the fabrication division. The idea is that each division has different strengths and weaknesses, and therefore, all divisions should not be treated the same. Essentially, the analysis is informed by faience competitive environment that resulted to slow growth, and therefore it need to re-strategizes in order to maintain its competitive position, or stay ahead of competition

To analyze the performance of the fabrication division, the company needs to understand it strengths & weaknesses, as well as the opportunities & threats. The information on the internal and external environments would inform its strategy formulation. To effectively conduct the analysis, Okoroh Energy Services need to use the Internal Factor Evaluation-External Factor Evaluation (IFE-EFE) Matrix. The IFE-EFE matrix would give the company a critical perspective on the key factors that determines its competitiveness; give weight to each of the factors based on the perceived impact on the industry; rank the factors based on the company performance on each; and then determine the overall scores of both the internal and external factors. As a result, the IFE-EFE matrix analysis would put Okoroh Energy Services in a better position to formulate its strategy based on the data from its internal and external environments

The overall goal is that the company wants to formulate a strategy to create a competitive advantage. Therefore, with such information on its internal and external factors, the company would be able to understand its strengths and weaknesses as a company, and also the opportunities and threats of the fabrication industry. The objective is to identify the factors that determines its strengths to capitalize on; the factors that determines its weaknesses to improve on; the opportunities the industry presents that it should try to take advantage of; and the threats to the industry it needs to beware of. The knowledge obtained from the IFE-EFE matrix would also help Okoroh Energy Services to benchmark it performance against other industry players, to see how it fare relative to competition. Eventually, the results from the analysis would help the company to improve the enterprise-level planning, enhances decision-making, improves communication and helps to coordinate operations

Let’s now compute the IFE-EFE of the Fabrication Division of Okoroh Energy Services

                                Analysis of the Application to Okoroh Energy Services

Regardless of how many factors are included in an IFE-EFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. A total weighted score of the IFE that is below 2.5 indicates that the company is weak internally to use its strengths to minimize the weaknesses. Also, on the EFE part, if the total weighted score is below 2,5, it implies the company does not have the capacity to take advantage of the opportunities, and cannot mitigate threats as well. While reverse is the case on both the IFE and EFE.

Okoroh Energy Services scored 2.985 on the IFE. What is the implication of that? It means the company has strong internal position (since its above average). In other words, the company has above average capabilities on capitalizing on its strengths while minimizing the weaknesses. But that is not an outstanding position. There is room for improvement. Outstanding position is 4, and that means the company is 34% falls short of that. On the EFE, the company scored 2.849. That means it has above average capabilities to respond to the external opportunities and threats. In other words, the firm’s strategies effectively take advantage of existing opportunities and minimize the potential adverse effect of external threats. However, there is room for improvement, as the gap of being outstanding is 40%

To determine whether it has competitive advantage in the industry, Okoroh Energy Services need to conduct research on the competitors to find out how the fare on the IFE-EFE matrix. Without knowledge of the performance of competition, Okoroh Energy Services would not be able to determine whether it has competitive advantage or not. For example, if there is a competitor that scores 3.00 on the IFE and EFE, it means that company has a competitive edge. Essentially, a total weighted score of 4.0 indicates that the company is using it strengths to respond adequately to existing opportunities and threats in its industry, while at the same time, minimizing the internal weaknesses. On the other hand, a total score of 1.0 indicates that the firm’s strategies are weak and the weaknesses overwhelms it strengths, while the threats make the company not to be able to take advantage of the opportunities

                                   Advantages and Disadvantages of the Matrix

Advantages

Some of the recognized benefits of the IFE-EFE matrix are:

  • It is a simple tool that is easy to use and understood, hence it’s an effective framework for developing insights on the organization
  • It helps raise the awareness among the managers regarding the internal-external environment they work in and changes that might occur
  • It helps the management with effective allocation of resources to where they are most needed
  • The model provides a framework for managing risks as they’re identified
  • The EFE and IFE matrix enables the company to better manage its business operations and processes
  • Access to a range of data from multiple sources help to improve planning and policy-making

Disadvantage

Some of the drawbacks of the tool are as follows:

  • Does not provide a direct support in creating a successful business strategy – only lists and evaluates the internal-external factors affecting the company without providing a solution on how to best deal with them,
  • Imposes the need to use further strategic management tools in order to determine the right course of action for the enterprise,
  • Requires determining specific factors that might be too broad or mutually exclusive, e.g., what seems to be an opportunity, might prove to be an actual threat to the organization

                                      Summary

The purpose of the IFE-EFE matrix is to assess the internal and external environments with the overarching goal of creating a competitive advantage for the organization. The IFE is tool for gathering, assimilating, and evaluating information about the firm. The objective is to capitalize on the internal strengths and overcome weaknesses Therefore, the question to ask is, does the company has internal capabilities to be able to utilize its strengths to overcome weaknesses? On the other hand, the overall result of the EFE framework is to further deepen analysis of the environment that the company is operating in. It helps in prioritizing business objectives by setting specific strategic goals. EFE matrix indicates whether the firm is able to effectively take advantage of the existing opportunities while at the same time mitigates the external threats. Essentially, the IFE-EFE matrix is a comprehensive framework for strategy formulation with the goal of creating a sustainable competitive advantage. Despite the advantages of the model, it still has some drawbacks. Therefore, the framework has more potent when applied along with other strategic management tools

 

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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