SWOT-Model Validity in the Strategic Planning Process Lawrence E. Ross, Ph.D Florida Southern College [email protected] Elvin L. Lobbins, MBA Florida Southern College [email protected]

ABSTRACT Strategic management refers to a process that explores the future direction of the organization and attempts to maximize the long-term allocation of resources through the development of appropriate strategies intended to guide the organization's operations. Most of the accepted approaches to strategic management emphasize the process of strategic decision-making based on analysis of situational variables. Subsequently, strategies are developed that rely on the information assembled regarding these situational variables. This paper reviews the literature within the management field and examines the relationships between the widely-used SWOT model and specific financial outcomes.

INTRODUCTION Just as there are no perfect organizational-fits in strategy selection, so too there is no one set of perfect strategic planning models for any organization. Every organization will inevitably develop its own processes and procedures for strategic planning. In so doing, the planning team/person may select models and modify them as they go. This paper explores one of the most common planning models used by large organizations for strategic planning purposes. This model provides guidance for the development of alternatives from which organizations might select the most appropriate and effective strategies. Many organizations choose to integrate multiple models as they attempt to address strategic issues and set strategic goals. The analysis presented herein looks into the relationship between the use of one of these models and the financial performance of the firm. There are many extraneous variables that may also drive financial performance, therefore this analysis does not purport to be conclusive but rather it is an exploratory study designed to address the possibility that relationships between model usage and performance may exist.

BACKGROUND Strategic Planning is a management process that involves analysis, forecasting, and goal setting aimed at ensuring effective strategic decision making. Strategic decisions are characterized as having a broad scope with enduring effects. Many organizations follow a basic process that has subsequently evolved over time with more planning phases and activities to ensure well-rounded

direction. Planning is usually carried out by top-level management. The basic strategic planning process includes: 1. Identify an organizational purpose (mission statement) – captured in the statements that describe why an organization exists, i.e., its basic purpose. The statement describes which client needs are intended to be met and with what services. Top-level management should develop and agree on the mission statement. The statement is typically supported by a set of commonlyaccepted values. Essentially, what we do, who we do it for, and how we do it constitutes an effective mission statement. Mission statements are dynamic and may evolve over time. (Campbell, Devine & Young, 1990) 2. Set organizational goals aligned with the organizational mission – Strategic goals are broadly stated outcomes that the organization needs to accomplish in order to fulfill its purpose, or mission, and address major issues facing the organization. If these outcomes are stated as specific, measureable, achievable, relevant, and timely (i.e., SMART) they may be referred to as objectives. Goals may be confused with objectives. Strategic goals are open-ended statements of what is to be accomplished without quantification and/or a timeframe for completion. (Hunger & Wheelen, 2011, p.6) 3. Specify the approaches, or strategies, which will guide implementation and facilitate the achievement of each strategic goal - strategies will be what distinguish the organization from its competitors as it addresses the external and internal dimensions of its current situation. A strategy typically refers to how an organization positions itself for competitive advantage. Strategies involve choices about which industries to compete in, what products and services to offer, and how to allocate organizational resources. (deKluyver & Pearce, 2012, p.2) 4. Identify discrete action steps associated with the execution of each strategy – action steps are the specific activities that the functional divisions of the organization (marketing, accounting, human resources, etc.) must undertake to ensure the organization is effectively and efficiently executing each strategy. Objectives linked to each action step should be clearly worded so that it is possible to assess if the outcome has been achieved or not. (Stonich, 1984, pp. 45-57) 5. Assess, compare and revise the plan – controlling the strategic management process involves evaluating progress towards achieving the outcomes of the plan and verifying whether action steps are being implemented appropriately and effectively. Evaluation of the plan, referred to as outcome control, is the critical link in the strategic planning process, focusing on monitoring the results. (Eisenhardt, 1985, pp. 134-49)

SITUATION ANALYSIS One commonly held belief, and commonly practiced planning technique, suggests that setting or selecting the appropriate strategies for the organization to pursue should follow a thorough and detailed current situation analysis. The situation analysis (also referred to as a SWOT or TOWS analysis) investigates the external environments in which the organization operates, as well as the internal dimension of the firm. The SWOT model is believed to have been developed and introduced into the planning lexicon by a consultant, Albert Humphrey, in the late 1960s while

working at the Stanford Research Institute. (Morrison, 2006) The SWOT acronym is derived from Strengths and Weaknesses of the organization (internal) as well as the Opportunities and Threats facing the organization (external). The TOWS model is a nearly identical conceptual model with one difference being that the TOWS approach focuses on the external over the internal. (Weihrich, 1982, p. 60) Proactively conducting a situation analysis can be facilitated by the use of conceptual models for systematically investigating both the internal and external dimensions of the organization. Some of the models for external analysis, or environmental scanning, may include Michael Porter’s, Five Forces, in which the author proposes that strategists too-often define competition too narrowly. Given the premise that, “The essence of strategy formulation is coping with competition,” Porter believes that intense competition in a given industry is not a coincidence. (Porter, 1979) The five forces model explores the elements of competition that drive competitive rivalry. These forces include the threat of new entrants; the threat of substitutes; the power of the suppliers; and the power of the buyers. Where these forces are not very strong, it can be said that the industry (and in turn, the external dimension of SWOT) is attractive or favorable. This situation will allow a wider range of strategies for the organization to pursue. When the forces are unfavorable, the strategic options are correspondingly limited. Use of the Five Forces model requires a significant effort to objectively capture data on each of the five forces. While there may be a temptation to intuitively rank the forces, a thorough and timely evaluation of the underlying elements for each force should be rigorously undertaken. In a similar fashion, Porter (1985) proposes the conceptual model of the organization’s value chain, representing the internal dimension of the current situation. He suggests that activities within the organization add explicit value to the services and products that the organization produces. All of these activities should be run at optimum levels if the organization is to gain any real competitive advantage. Porter suggested that the organization is split into ‘primary activities’ and ‘support activities’. Primary activities include: • • • • •

Inbound Logistics Operations Outbound logistics Marketing and Sales Customer Service

Secondary, or support, activities assist the primary activities in helping the organization achieve its competitive advantage. They include: • • • •

Procurement: Technology development Human resource management Firm infrastructure:

There are many other models (financial as well as strategic) that may be useful in a similar fashion for use in analyzing the organization’s strengths and weaknesses.

Model

Table 1: Alternative Strategic Planning Models Author Intended Use

Competitiveness Model

W. K. Hall

External competitive environment

Product/Market Grid

H. I. Ansoff

Possible marketing growth strategies

Dynamic Diamond

M. E. Porter

Analysis of foreign market opportunities

Competitive Profile Matrix

F. R. David

External competitive environment

McKinsey’s Seven Ss

R.H. Waterman

Analysis of strategic fit

One application of the situation analysis process is to convert the assembled data into a plot point within a four quadrant matrix (see Figure 1.) The plotting process can lead to rapid consensus on the appropriate strategy to choose. In some cases however, the use of SWOT can lead to a limited range of strategies and possibly harm strategic performance. (Armstrong, 1982)

Figure 1: SWOT ANALYSIS Opportunities II. Limited Options

I. Growth

Strengths

Weaknesses

III. Survival

IV. Pivotal Strategies Threats

Not all parties agree on the best approach to formulating strategy. In some cultures the formal concept of strategy may not exist. Pascale (1984) recounts the story of Honda’s strategic entry into the US motorcycle market as a series of pivotal events that took place as the result of the interplay between the namesake founder of the company and a low-ranking marketing executive, Takeo Fujisawa. It is a story of how the determined actions of one company were largely responsible for the decline of the once mighty motorcycle industry in the United Kingdom. It is the premise of the authors of this paper that all strategies can be combined, at the highest level of strategy formulation, into what can be called “grand strategies.” These grand strategies may reflect the opportunity to grow the revenues and size of the organization, or at the opposite extreme, to save the organization from demise by pursuing a survivalist strategy. In addition, the grand strategies may include maintaining position, and/or transforming the organization to

compete in new ways or in new markets. The choice of grand strategy is dependent upon the results of the analysis of the situational variables – or SWOT analysis. A popular tool for selecting grand strategies is known as the “Grand Strategy Matrix” and was first introduced by Christensen, Berg and Salter (1976) as a convenient way to express the twelve different strategic options available to the firm. Generally, these twelve options can be reduced and clustered under the four grand strategies mentioned in the previous paragraph. Although some authors further delineate the options as: Aggressive, Conservative, Competitive, and Defensive based on the use of the SPACE Matrix model, this paper recognizes, but does not pursue an investigation of this tool. (Rowe, Mason, & Dickel, 1982)

RESEARCH PROPOSITIONS This paper investigates the strength of the commonly held belief that an accurately compiled situation analysis (SWOT) will yield the appropriate “grand” strategy and in turn success or failure of that strategy will be measured by commonly reported financial measures. The use of these financial measures will establish that each grand strategy will correlate with the appropriate and intended outcome. In other words, a grand strategy of growth will be associated with actual revenue growth. A grand strategy of retrenchment will be associated with stagnant or declining revenues accompanied by a positive trend in profit, and so forth. P1: Companies reporting a position in the “growth” quadrant, defined as a strong organization operating in an environment with more opportunities than threats, will demonstrate growth as measured by revenue increases, profit increases, or both. P2: Companies reporting a position in the “limited options” quadrant, defined as a weakened organization operating in an environment with more opportunities than threats, will demonstrate diminished growth as measured by uneven growth in revenues, profits, or both. P3: Companies reporting a position in the “survival” quadrant, defined as a weakened organization operating in an environment with more threats than opportunities, will not demonstrate growth, but rather declining revenues, negative profits, or both. P4: Companies reporting a position in the “pivotal” quadrant, defined as a strong organization operating in an environment with more threats than opportunities, will demonstrate diminished success as measured by uneven growth in revenues, profits, or both.

DATA COLLECTION AND ANALYSIS To facilitate exploration of the four research propositions, a secondary source was identified which published both the summary of analysis of situational variables and actual financial performance. An exploratory sample of 100 companies was specified using a quota sampling method. The situation analyses (SWOT) and financial measures were selected through a systematic random sample from a database of approximately 3060 company profiles. The company profiles were provided by Datamonitor, “an independent, premium business information and market Analysis Company that assists clients with operational and strategic

decision-making.” Datamonitor was chosen for its apparent lack of bias and for the timeliness and high-quality of its data as the leading international marketing research company, based in the United Kingdom. It is a division of Informa plc, and was founded in 1989 but the organization has grown rapidly through acquisition. (Grande & Johnson, 2007) The SWOT analysis from each company profile was evaluated and used to determine the most accurate quadrant placement. Quadrant placement was determined by comparing the listed number of strengths with weaknesses and opportunities with threats. Further analysis was used in the event of equivalency. The financial measures: revenue, operating profit (or loss), and net profit (or loss) for corresponding current and previous years were taken from the company profiles and used to measure relationships among the measures and with the SWOT quadrants. There are different statistical measures that can indicate the strength of the relationship and/or the direction of the relationship between the response data for any pair of questions in a particular research project. The focus of this paper is determining the presence of an associative relationship. A relationship is defined as the systematic linkage between values given for any two variables. The linkage represents a statistically meaningful relationship and does not indicate that one variable causes a change in the other variable. Relationships between variables can take several forms. The relationship can be nonmonotonic, monotonic, linear, or curvilinear. A nonmonotonic relationship describes the situation where there is a relationship between two variables, but there is no evidence of a direction in the relationship. Direction describes the situation that exists when one variable changes in value and the other variable also changes in a systematic fashion. When both variables move in a positive direction (both go up or down together) there is a positive relationship. When the opposite occurs and one goes up in value while the other goes down, then there is a negative relationship. An example of a nonmonotonic relationship is the expected relationship between revenues and profits. We know that we are more likely to have profits at higher levels of revenue rather than at low levels of revenue, but we cannot say with certainty that a given level of revenue will always generate a profit without knowing why or in what direction the relationship moves. Nonmonotonic relationships are of general interest to management and do not provide specific or conclusive insights. The most common form of statistical measure used to determine association is known as a crosstabulation. It is the most common because it is used to detect the presence of a nonmonotonic relationship, the first step in associative analysis. It is also the most used associative measure because it can compare two nominally-scaled variables. A cross-tabulation table compares two variables in a, “rows and columns” format. At a minimum, a cross-tabulation will contain the raw data from the two variables being simultaneously compared and tabulated. In addition, it may be useful to include row percentages, column percentages, or total percentages in each cell. Row percentages indicate what percent of a specific response category for variable A is accounted for by each response for Variable B that gave an answer to that specific variable. Column percentages do the same thing for a specific response category for Variable B. Total percentages indicate what percent of the total responses to all of the response categories for both variables are accounted for by the data in each cell. The test statistic for a cross-tabulation is the X2 statistic and it is also called the “goodness of fit” measure. It represents a statistical comparison of the observed frequencies (actual cell counts)

and the expected frequencies (theoretical values that would be expected if there is no relationship between the variables) When a comparison is made of the results of the responses from two groups, it is expected that there will be no difference. The null hypothesis (status quo) is that there is no difference. If there is a pattern or relationship that reveals that there is a difference and if the X2 is “statistically significant”, then the analyst would reject the null hypothesis and conclude that there is a difference. (Ross, 2009)

RESULTS A series of cross-tabulations were performed with four variables of interest: 1) SWOT Quadrant Location, 2) Revenue Growth, 3) Operating Income Growth, and 4) Net Income Growth. The variables are all nominally-scaled variables. SWOT Quadrant was defined as either: I. II. III. IV.

Growth Limited Options Survival Pivotal Options

Revenue growth, Operating Income Growth and Net Income Growth were scaled as: A. Negative (< 0%) B. Average (0 – 3.9%) C. Above Average (> 3.9%) Of the three cross-tabulations, only one relationship with the SWOT Quadrant Location variable showed statistical significance – Revenue Growth (see Table 2.) This result partially supports two of the four research propositions regarding performance consistent with grand strategies as indicated by the published SWOT analysis. The data supports P1 regarding companies in the “growth” quadrant demonstrating growth as measured by revenue increases, profit increases, or both. A much higher proportion (59.4%) of those firms in quadrant I (growth strategies) report “above average” revenue growth. This suggests that firms, having identified the current situation as strengths outweighing weaknesses and opportunities outweighing threats are in fact pursuing growth strategies and achieving growth results in their revenues. This supports the premise that quadrant I growth firms have a mandate to pursue growth. To not leverage the firm’s strengths and pursue the identified opportunities would constitute strategic mismanagement. The “window” of opportunity is only open for a limited timeframe. Other firms, operating in the same environments, are faced with the same opportunities and may choose to pursue same. In which case, the opportunities are soon taken by the competing firms. Strengths that are not properly leveraged may become, over time, diminished and may even decline to the point that they become weaknesses. Likewise, a slightly higher proportion (39.1%) of firms in quadrant IV (pivotal strategies) report negative revenue growth, but the performance results are more evenly distributed across all three levels of performance. This suggests that firms in quadrant IV are more likely to show uneven financial performance, consistent with the need to implement strategies of change. If the

strengths of these firms are not properly leveraged to move from the threatening environment into more opportunity advantaged environments, then eventually the firm will enter the survival quadrant. This scenario plays out daily among large and diverse firms operating in dynamic markets where innovation can create or eliminate demand for a product or service over night. Consider the case of the Palm OS originator of the smart-phone product, and market dominator in the PDA (personal digital assistant) segment for several years, but pronounced dead in 2009 (http://www.crunchgear.com/2009/02/11/palm-os-she-is-dead/). Failing to capitalize on the changes in the environment, Palm OS squandered its considerable resources and eventually was sold in bankruptcy to Hewlett-Packard who has so far failed to generate the growth that was anticipated (http://www.hp.com/hpinfo/newsroom/press/2010/100428xa.html). The data analysis does not clearly support P2 and P3. Firms in quadrants II (limited options) and III (survival strategies) all report negative revenue growth. However, the small number of firms and the number of cells with a count less than 5 (58.3%) may be distorting the results and do not allow for an accurate assessment. It is possible that a larger sample size might yield sufficient data to overcome some of the statistical issues, but it cannot be determined if the proposed relationships would be evident. Table 2: Crosstab – Revenue Growth with SWOT Quadrant Quadrant Placement

Negative

Revenue Growth Average Above Avg

Total

I.

Growth

S>W / O>T

9 28.1%

4 12.5%

19 59.4%

32 100.0%

II.

Limited

ST

3 100.0%

0

0

3 100.0%

III.

Survival

S