SWOT-Model Validity in the Strategic Planning Process
Lawrence E. Ross, Ph.D
Florida Southern College
lross@flsouthern.edu
Elvin L. Lobbins, MBA
Florida Southern College
doclobbins@gmail.com
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
S<W / O>T
3
100.0%
0
0
3
100.0%
III.
Survival
S<W / O<T
2
100.0%
0
0
2
100.0%
IV.
Pivotal
S>W / O<T
9
39.1%
6
26.1%
8
34.8%
23
100.0%
23
38.3%
10
16.7%
27
45.0%
60
100.0%
Totals
Chi-Square Tests
Asymp.
Value
Df
Sig. (2-sided)
Pearson Chi-Square
12.478a
6
.052
N of Valid Cases
60
a. 7 cells (58.3%) have expected count less than 5. The minimum
expected count is .33.
LIMITATIONS AND FUTURE DIRECTIONS
Future studies concerning the use of situation analysis in strategic planning should examine other
outcomes in addition to the three variables examined in the present project. These outcomes
could include other financial results such as ROI, EVA, ROE and other strategic outcomes such
as market share, market growth, or customer satisfaction. Improved, more meaningful results
could be achieved by better identification of the full range of situational variables. Once
identified, a weighting scheme could be developed for these internal and external variables that
make-up a firm’s current situation and should also be examined. There are examples of this
approach such as the IE Matrix (Allen, 1979) purportedly used by General Electric as part of that
organization’s strategic planning efforts. This approach results in placing the organization’s
divisions or strategic business units (SBUs) into one of nine cells (as opposed to four in the
SWOT Matrix) based on a quantitative approach for assessing each of the multiple variables that
make-up the firm’s internal and external environment. In addition, reflecting the long-term
nature of strategic outcomes relative to current situation, future research could use a longitudinal
approach and look at outcome measures over a multi-year period following the published
situation analysis. Most importantly, similar research should incorporate primary data compiled
through survey methods directly from the firms under consideration. Primary data is information
that is collected specifically for the current use. It is almost always more expensive and timeconsuming to collect primary data and primary data collection should be considered only after
secondary sources are exhausted.
Several limitations in the current project are evident. First, only three outcome variables were
examined as measures of strategic results. Other outcomes might have produced different results
and led to different conclusions. Second, a relatively small sample size was used for the present
study. While sufficient for an exploratory study of this nature, the results were affected by the
resulting low number of valid cases (n=60) included in the cross-tabulation. Of the 100 randomly
selected firms, 17 were removed from the data set due to lack of information and an additional
23 cases were removed during the cross-tabulation due to missing values. Finally, only the
simply-stated list of strengths, weaknesses, opportunities and threats as published by
Datamonitor were used to establish the SWOT quadrant placement. It is an almost certainty that
the nature of the organizations included in this study are far more complex than the brief list of
factors would indicate. Gaining access to more comprehensive situation analyses would provide
a greater amount of data, and potentially a higher quality of data, needed to apply a weighting
scheme and to develop a more realistic SWOT analysis necessary to accurately position the firm
in the four-quadrant SWOT model. This would in turn facilitate a more robust analysis. The
combination of different outcome measures, larger sample size, and more accurate SWOT
analysis should lead to a higher level of significance, greater reliability, and higher degree of
external validity.
IMPLICATIONS
While there may not be a set formula for the application of strategic planning that leads to
guaranteed strategic success, there most likely is a simplified “set” of strategies that have the
highest probability of success in a given situation. By following standard procedures for
conducting an organizational situation analysis (SWOT) and subsequently relying on the
resultant position within the four quadrants SWOT model, an organization should be able to plan
accordingly. The organizations can focus appropriately on attacking the weaknesses, avoiding
the threats, and/or exploring the opportunities that exist. All planning efforts should lead to some
form of quantitative improvement in a particular area that will in turn have an overall impact on
financial measures. Knowing where in time and space the organization exists can yield a
competitive advantage and the lack of such knowledge can lead to a dangerous loss of strategic
direction.
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