IFE/EFE

Understanding the tool

The internal and external factor evaluation matrices have been introduced by Fred R. David in
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 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.

SPACE MATRIX

Now, how do we get to the possible outcomes shown in the SPACE matrix? The SPACE Matrix
analysis functions upon two internal and two external strategic dimensions in order to determine
the organization's strategic posture in the industry. The SPACE matrix is based on four areas of
analysis.

Internal strategic dimensions:

          Financial strength (FS)

          Competitive advantage (CA)

External strategic dimensions:

          Environmental stability (ES)

          Industry strength (IS)

There are many SPACE matrix factors under the internal strategic dimension. These factors
analyze a business internal strategic position. The financial strength factors often come from
company accounting. These SPACE matrix factors can include for example return on
investment, leverage, turnover, liquidity, working capital, cash flow, and others. Competitive
advantage factors include for example the speed of innovation by the company, market niche
position, customer loyalty, product quality, market share, product life cycle, and others.

Every business is also affected by the environment in which it operates. SPACE matrix factors
related to business external strategic dimension are for example overall economic condition,
GDP growth, inflation, price elasticity, technology, barriers to entry, competitive pressures,
industry growth potential, and others. These factors can be well analyzed using the Michael
Porter's Five Forces model.

The SPACE matrix calculates the importance of each of these dimensions and places them on
a Cartesian graph with X and Y coordinates.

The following are a few model technical assumptions:

- By definition, the CA and IS values in the SPACE matrix are plotted on the X axis.
- CA values can range from -1 to -6.
- IS values can take +1 to +6.

- The FS and ES dimensions of the model are plotted on the Y axis.

- ES values can be between -1 and -6.
- FS values range from +1 to +6.
IE MATRIX

Your horizontal and vertical lines meet in one of the nine cells in the IE matrix. You should follow
a strategy depending on in which cell those lines intersect.

The IE matrix can be divided into three major regions that have different strategy implications.

Cells  I, II, and III suggest the grow and build strategy. This means intensive and aggressive
tactical strategies. Your strategies should focus on market penetration, market development,
and product development. From the operational perspective, a backward integration, forward
integration, and horizontal integration should also be considered.
Cells IV, V, and VI suggest the hold and maintain strategy. In this case, your tactical
strategies should focus on market penetration and product development.

Cells VII, VIII, and IX are characterized with the harvest or exit strategy. 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.

BCG Matrix Model

The BCG matrix or also called BCG model relates to marketing. The BCG model is a well-
known portfolio management tool used in product life cycle theory. BCG matrix is often used to
prioritize which products within company product mix get more funding and attention.

The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the

Boston Consulting Group in the early 1970's.

The BCG model is based on classification of products (and implicitly also company business
units) into four categories based on combinations of market growth and market share relative to
the largest competitor.

When should I use the BCG matrix model?

Each product has its product life cycle, and each stage in product's life-cycle represents a
different profile of risk and return. In general, a company should maintain a balanced portfolio of
products. Having a balanced product portfolio includes both high-growth products as well
as low-growth products.

A high-growth product is for example a new one that we are trying to get to some market. It
takes some effort and resources to market it, to build distribution channels, and to build sales
infrastructure, but it is a product that is expected to bring the gold in the future. An example of
this product would be an iPod.
A low-growth product is for example an established product known by the market.
Characteristics of this product do not change much, customers know what they are getting, and
the price does not change much either. This product has only limited budget for marketing. The
is the milking cow that brings in the constant flow of cash. An example of this product would be
a regular Colgate toothpaste.

But the question is, how do we exactly find out what phase our product is in, and how do we
classify what we sell? Furthermore, we also ask, where does each of our products fit into our
product mix? Should we promote one product more than the other one? The BCG matrix can
help with this.

The BCG matrix reaches further behind product mix. Knowing what we are selling helps
managers to make decisions about what priorities to assign to not only products but also
company departments and business units.

What is the BCG matrix and how does the BCG model work?

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

BCG STARS (high growth, high market share)

- Stars are defined by having high market share in a growing market.

- Stars are the leaders in the business but still need a lot of support for promotion a placement.
- If market share is kept, Stars are likely to grow into cash cows.

 BCG QUESTION MARKS (high growth, low market share)

- These products are in growing markets but have low market share.
- Question marks are essentially new products where buyers have yet to discover them.
- The marketing strategy is to get markets to adopt these products.
- Question marks have high demands and low returns due to low market share.
- These products need to increase their market share quickly or they become dogs.
- The best way to handle Question marks is to either invest heavily in them to gain market share
or to sell them.

BCG CASH COWS (low growth, high market share)

- Cash cows are in a position of high market share in a mature market.

- If competitive advantage has been achieved, cash cows have high profit margins and generate
a lot of cash flow.
- Because of the low growth, promotion and placement investments are low.
- Investments into supporting infrastructure can improve efficiency and increase cash flow more.
- Cash cows are the products that businesses strive for.
BCG DOGS (low growth, low market share)

- Dogs are in low growth markets and have low market share.
- Dogs should be avoided and minimized.
- Expensive turn-around plans usually do not help.

And now, let's put all this into a picture:

What is the Grand Strategy Matrix?

The model is based on two dimensions plotted along a vertical and a horizontal axis; the vertical
axis represents market growth, varying from slow to fast growth. The horizontal axis represents
the organisation’s competitive position, which may range from weak to very strong. These data
combine to create four quadrants, in which organisations can be positioned so that selecting
suitable strategies can be easily researched. Both a company’s current growth and its
competitive status count as important factors. The model also allows businesses that are split
into multiple divisions to formulate a best strategy for each of those divisions (product groups).

Grand Strategy Matrix: 4 Quadrants

According to the Grand Strategy Matrix, companies and/or divisions may be subdivided into the
four quadrants. Using the matrix, a company will gain insight into feasible strategies, which can
be mapped out in the quadrants in order of attractiveness. The eventual goal is to choose a
fitting strategy that fits the company’s market and its competitive position. The Grand Strategy
Matrix helps analyse this clearly. Each of the quadrants is explained in more detail below.

Quadrant 1 – Strong competitive position & Fast market growth

Companies that are located in this first quadrant of the Grand Strategy Matrix usually have an
excellent strategic position. Apart from active and fast growth in the market, they also have a
strong position relative to the competition.
Compared to Ansoff’s growth matrix, such companies would do very well to proceed to market
penetration, market development, and product development. Market penetration is about using
expansion to position oneself even better on the market. For example, by opening new
subsidiaries with the same assortment. Using market development, these companies will be
able to aim at other markets and/or target audiences, increasing their reach. Product
development should not be left out either; a new assortment provides more customers and more
returns.

In addition, strategies such as forward, backward, or related integration fit into this quadrant.
Forward integration involves a company taking over the activities of a customer; backward
integration involves taking over the activities of a supplier from the production chain, and related
integration is about taking over the activities from a fellow company from the same industry.
Even diversification is an option, which involves taking over the activities from a fellow company
from a different industry. Think, for example, of a cotton importer taking over the tasks of a
coffee importer.

The idea behind all the strategies listed above is that companies will focus more on their own
business operations, as well as strengthen their competitive basis. The integration strategies,
however, should never come at the expense of the company’s own core business. It’s wise to
keep thinking about the current competitive advantage, which is why companies should prevent
losing focus of the competitive advantage they have built painstakingly over time.

Quadrant 2 – Weak competitive position & Fast market growth

For companies in this second Grand Strategy Matrix quadrant, it’s a good idea to seriously
evaluate the current approach. Although their growth may be strong and large, their competitive
position is weakening and they are under threat of being pushed out of the market by other
companies. They are not able to compete effectively.

Apart from the market development, market penetration, and product development mentioned in
the previous quadrant, horizontal integration is also highly suitable as a useful strategy in the
second quadrant. Because the market is growing fast, an intensive horizontal integration
strategy helps, in which companies concentrate on attracting activities that form a nice addition
to their current core business. In such a case, a service station may consider opening a small
supermarket in addition to their petrol business, with which they can offer extra service to their
customers.

If horizontal integration is not a possibility, it would be wise to sell off part of the organisation (or
divisions). Decentralisation may be another possibility. In that case, the focus no longer lies on
the whole organisation, but is divided over smaller segments. If the chance of the competition
winning is high, a company may decide to be bought in an acquisition. Otherwise, the only
remaining options will be folding or insolvency.

Quadrant 3 – Weak competitive position & Slow market growth

This is the least favourite quadrant of the Grand Strategy Matrix. For companies, after all, it
means that are faced with vicious competition on the one hand and with a market growth that’s
faltering on the other hand. Only drastic measures, adjustments, and changes will be able to
save such companies and prevent further demise or impending liquidation.
First of all, a wise strategy would be to move to wholesale cost reduction, which in most cases
will result in enormous austerity measures, reorganisation, discontinuation of product groups,
and employees being laid off. Should austerity measures fail to achieve an effect, forms of
diversification may offer a last hope. Despite requiring some investment, spreading the product
range can lead to increased returns. For example, a chemist may consider generating some
additional income by moving into dry cleaning as well. Such cases are referred to as unrelated
diversification. If the chemist decides to sell specific medications, in cooperation with the
pharmacy next door, we are talking about related diversification.

Should all of the above strategies fail to have an effect, selling or bankruptcy are the only
remaining options.

Quadrant 4 – Strong competitive position & Slow market growth

A strong competitive position is very enjoyable to companies. The slow market growth offers
options for finding creative solutions and creating a new market for products and services.
Diversification, such as mentioned in Ansoff’s growth matrix, is a good option. Offering new
products and/or services on a new market leads to an increase in market growth. For example,
a supermarket will suffer when many consumers choose to have fresh meal boxes delivered
and no longer get their groceries from the shop as a result. To the supermarket, such a product
is new. Offering products online also allows them to reach a new target audience. When the
supermarket chooses to sell fresh meal boxes online, that would be an example of
diversification. Nonetheless, this comes at the cost of a considerable investment. Companies in
this Grand Strategy Matrix quadrant usually have the capacity and the means for this.

Engaging in partnerships in the form of a joint venture is another possible strategy that fits this
Grand Strategy Matrix quadrant. A characteristic feature of such partnerships is that both
companies continue to exist and each of them profits from the other’s strength. The partnership
between KLM and North West Airlines is a good example of this. Their joint venture gives them
an advantage in the form of sharing landing rights, purchasing catering, and sharing overhead
costs.

Market Share
In the first quadrant of the Grand Strategy Matrix, it’s mostly about stimulating companies to
grow fast and maintain their competitive position. In the other three quadrants of the Grand
Strategy Matrix, it’s about achieving the best position and increasing their market share. On the
one hand, this can be done by researching new markets; on the other hand, by offering new
products. It’s up to the board and management to decide on such drastic strategic choices. The
Grand Strategy Matrix gives a good and clear image of both the health and the future prospects
of a company. Nonetheless, one should always take unforeseen factors and complications in
the business world into consideration.

Strategies of First Quadrant: Strategies of Second Quadrant:

First quadrant contains the following strategies Second Quadrant of the Grand Strategy Matrix includes the
 Market Development following set of strategies
 Product Development  Market Development
 Market Penetration  Product Development
 Backward Integration  Market Penetration
 Forward Integration  Horizontal Integration
 Horizontal Integration  Liquidation
 Concentric Diversification  Divestiture
Strategies of the Third Quadrant: Strategies of the Fourth Quadrant:
There are certain set of Marketing Strategies that are  Horizontal Diversification
categorized in the third quadrant. These strategies are listed  Joint Ventures
below  Concentric Diversification
 Horizontal Diversification  Conglomerate Diversification
 Concentric Diversification
 Conglomerate diversification
 Retrenchment
 Liquidation

How do I construct a QSPM?

You can see a sample Quantitative Strategic Planning Matrix QSPM above. The left column of
a QSPM consists of key external and internal factors (identified in stage 1). The left column of a
QSPM lists factors obtained directly from the EFE matrix and IFE matrix. The top row consists
of feasible alternative strategies (provided in stage 2) derived from the SWOT analysis, SPACE
matrix, BCG matrix, and IE matrix. The first column with numbers includes weights assigned to
factors. Now let us take a look at detailed steps needed to construct a QSPM.

STEP 1...

Provide a list of internal factors -- strengths and weaknesses. Then generate a list of the firm's
key external factors -- opportunities and threats. These will be included in the left column of the
QSPM. You can take these factors from the EFE matrix and the IFE matrix.

Step 2...

Having the factors ready, identify strategy alternatives that will be further evaluated. These
strategies are displayed at the top of the table. Strategies evaluated in the QSPM should be
mutually exclusive if possible.

Step 3...

Each key external and internal factor should have some weight in the overall scheme. You can
take these weights from the IFE and EFE matrices again. You can find these numbers in our
example in the column following the column with factors.

Step 4...

Attractiveness Scores (AS) in the QSPM indicate how each factor is important or attractive to
each alternative strategy. Attractiveness Scores are determined by examining each key
external and internal factor separately, one at a time, and asking the following question:

Does this factor make a difference in our decision about which strategy to pursue?
If the answer to this question is yes, then the strategies should be compared relative to that
key factor. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3
= reasonably attractive, and 4 = highly attractive. If the answer to the above question is no, then
the respective key factor has no effect on our decision. If the key factor does not affect the
choice being made at all, then the Attractiveness Score would be 0.

Step 5...

Calculate the Total Attractiveness Scores (TAS) in the QSPM. Total Attractiveness Scores are

defined as the product of multiplying the weights (step 3) by the Attractiveness Scores (step 4)
in each row.

The Total Attractiveness Scores indicate the relative attractiveness of each key factor and
related individual strategy. The higher the Total Attractiveness Score, the more attractive the
strategic alternative or critical factor.

Step 6...

Calculate the Sum Total Attractiveness Score by adding all Total Attractiveness Scores in

each strategy column of the QSPM.

The QSPM Sum Total Attractiveness Scores reveal which strategy is most attractive. Higher
scores point at a more attractive strategy, considering all the relevant external and internal
critical factors that could affect the strategic decision.

Can I compare more than two strategies using a QSPM?

Yes, in general, any number of alternative strategies can be included in the QSPM analysis. We
included only two alternatives in our example just to keep it simple. It is important to note that
strategies subject to comparison should be mutually exclusive if possible.