An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic,
social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive
information. Illustrated in Table 3, the EFE Matrix can be developed in five steps:

1. List key external factors as identified in the external-audit process. Include a total of from
eight to ten factors, including both opportunities and threats affecting the firm and its industry. List the
opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and
comparative numbers whenever possible.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The
weight indicates the relative importance of that factor to being successful in the firm’s industry.
Opportunities often receive higher weights than threats, but threats too can receive high weights if they
are especially severe or threatening. Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and
reaching a group consensus. The sum of all weights assigned to the factors must equal 1.0.

3. Assign a 1-to-4 rating to each key external factor to indicate how effectively the firm’s current
strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 =
the response is average, and 1 = the response is poor. Ratings are based on effectiveness of the firm’s
strategies. Ratings are, thus, company based, whereas the weights in Step 2 are industry based. It is
important to note that both threats and opportunities can receive a 3, 2, 3, or 4.

4. Multiply each factor’s weight by its rating to determine a weighted score.

5. Sum the weighted scores for each variable to determine the total weighted score for the
organization.

Regardless of the number of key opportunities and threats included in an EFE
Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest possible
total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0
indicates that an organization is responding in an outstanding way to existing opportunities and threats in
its industry. In other words, the firm’s strategies effectively take advantage of existing opportunities and
minimize the potential adverse effect of external threats. A total score of 1.0 indicates that the firm’s
strategies are not capitalizing on opportunities or avoiding external threats.

An example of an EFE Matrix is provided in Table 1 for UST, Inc., the manufacturer of Skoal and
Copenhagen smokeless tobacco. Note that the Clinton administration was considered to be the most important
factor affecting this industry, as indicated by the weight of 0.20. UST was not pursuing strategies that
effectively capitalize on this opportunity, as indicated by the rating of 1.01. The total weighted score of
2.10 indicates that UST is below average in its effort to pursue strategies that capitalize on external
opportunities and avoid threats. It is important to note here that a thorough understanding of the factors
being used in the EFE Matrix is more important than the actual weights and ratings assigned.

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