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SWOT Analysis and the Three Strategic Questions

Tom Hinthorne

Analysts use the SWOT analysis to identify the firm's strengths (S), weaknesses (W), opportunities (O), and threats (T). Strengths and weaknesses are associated with the firm's internal environment and are to some degree manageable by the firm (e.g., human resources). Opportunities and threats are associated with the firm's external environment and are beyond the control of the firm, although adaptation may be possible. Today, the SWOT analysis is one of several tools available to business analysts; it is widely taught in business schools; it continues to offer value-added opportunities to analysts; and it is equally applicable to for-profit and nonprofit firms. However, its analyses tend to be qualitative and difficult to quantify, which makes rigorous application imprecise.

The purpose of the SWOT analysis is to use the strengths of the firm to capitalize on opportunities, diminish threats, and reduce weaknesses (e.g., fill resource gaps). Jay Barney traces the analysis of the firm's strengths (i.e., resources and capabilities) and weaknesses to the work of Edith Penrose (1959), whose analyses underlie the resource-based view (RBV) of the firm.1,2 Other writers have traced the linking of strengths and weaknesses (i.e., SW) and opportunities and threats (i.e., OT) to the work of Kenneth Andrews (1971).3 The SWOT analysis is typically an analytical platform for creating strategic plans. Ultimately, the firm seeks to answer three strategic questions: Where is the firm now? Where does it want it to be in 5 to 10 years? How does it plan to get it there?4

In the 1950s, 1960s, and 1970s, many large firms developed central planning operations, and the planning process was relatively formal and systematic. Analysts called this approach the rational design school, and the SWOT analysis was associated with this school. In ensuing years, as planning environments became more turbulent and unpredictable, senior management delegated more of the planning to its strategic business units and reduced or eliminated its central planning operations. Increasingly, analysts saw strategy as being crafted through some instinctive experiential-based process emerging out of the weakly coordinated decisions of multiple organizational members.5,6 Analysts called this approach the emergent process school. Today, depending on the circumstances, both approaches have merit.

This chapter develops in four parts. First, to make it instructive and interesting it focuses on the Northrop Grumman Corporation (NGC) and its primary target market, the U.S. Department of Defense (DoD). Second, the chapter focuses on the external environment of the firm and the assessment of opportunities and threats facing NGC and the industry. This is the top down—big picture context for subsequent analyses. Third, the chapter focuses on the internal environment of NGC and the assessment of its strengths and weaknesses. Last, to show how the SWOT analysis structures the planning process, the chapter considers how NGC might answer the three strategic questions. The time of the SWOT analysis is late 2010/early 2011.

NORTHROP GRUMMAN CORPORATION

NGC and its global competitors and suppliers are in the aerospace and defense industry. They are in the early months of a retrenchment process, given pending cuts in DoD expenditures. Product extensions into the commercial and civil markets (i.e., nonmilitary government markets, such as law enforcement) offer new revenue opportunities. Thus, NGC and its competitors are perfecting unmanned aerial systems (e.g., NGC's Global Hawk and Fire Scout drones) and cyber security systems (e.g., protecting computer networks from attacks).

In February 2009, Wes Bush, NGC's president and chief operating officer (CEO), described NGC as a diversified security company serving the long-term needs of the DoD and related markets. The DoD's needs include: (1) "assure U.S. military dominance, (2) confront irregular challenges such as terrorism, and (3) safeguard populations and critical infrastructures."7 Bush said, "The United States faces a complex and rapidly changing national security environment . . . requires the ability to respond to constantly evolving threats, terrorist acts, regional conflicts and cyber attacks."8

In January 2010, NGC's board appointed Wes Bush as the president and CEO of NGC. As of November 2010, NGC had revenues of $35 billion (trailing 12 months) of which about 78 percent were attributable to defense.9,10 NGC had the fourth-largest market share in the aerospace and defense industry behind Lockheed-Martin (United States), BAE Systems (United Kingdom), and Boeing. The largest firms in the industry were conglomerates that tended to follow each other's actions (e.g., in unmanned aerial systems and cybersecurity systems). NGC had 120,000 employees in 50 states and 25 countries. Its supply chain was global. In December 2010, a prominent advisory service gave NGC an A+ financial rating. Its primary U.S. competitors had A+ or A++ ratings.

In October 2010, Bush gave further definition to the scope of the DoD's mandate. The U.S. military had to be able to fight "conventionally trained and equipped military adversaries," contend with "violent insurgencies" and conduct "humanitarian operations" (e.g., in Haiti). In addition, the U.S. military had to be prepared to fight adversaries that had nuclear and biological weapons, ballistic missiles, and space capabilities. Moreover, there was the threat of cyber-attack and multiple regional instabilities. Bush concluded saying, "the global commons now includes cyber-space, and energy, food and water-rich areas among a world population that grows every year in numbers, desperation, and technological savvy."11

In October 2010, Bush reviewed the third-quarter calendar results, which were good. He said, "Third quarter results demonstrate that our focus on sustainable performance improvement (i.e., NGC's top policy directive) continues to gain traction across the corporation" (emphasis added). Sales were up four percent to $8.7 billion and free cash flow was $817 million (i.e., the cash left after the business has paid all of its cash expenses). NGC had also repurchased $180 million of its shares, continuing its share purchase program of nearly $6.8 billion in the last six years. NGC was investing in NGC. Its business units included:

1. Aerospace systems: (e.g., manned and unmanned aircraft, spacecraft, high-energy laser systems, microelectronics, etc.). Its 2009 revenues were $10.4 billion.

2. Electronic systems: (e.g., airborne surveillance, aircraft fire control, precision targeting, electronic warfare, air and missile defense, etc.). Its 2009 revenues were $7.7 billion.

3. Information systems: (e.g., intelligence processing, decision support systems, cybersecurity, systems engineering and integration, etc.). Its 2009 revenues were $8.6 billion.

4. Shipbuilding: (e.g., designs, builds, and refuels nuclear-powered aircraft carriers and submarines for the U.S. navy, etc.). Its 2009 revenues were $6.2 billion.

5. Technical services: (e.g., logistics, infrastructure, sustainment support, training and simulation services, etc.). Its 2009 revenues were $2.8 billion.12

With the exception of shipbuilding, NGC's four other business units are involved with other firms and countries in developing the $382 billion F-35 Joint Strike Fighter program. Lockheed Martin is the contractor; NGC is a principal subcontractor. The DoD launched the program in the mid-1990s. The objective is to develop an affordably stealthy multirole fighter plane for three target markets: (1) the F-35A for the U.S. air force and its allies; (2) the F-35B short takeoff, vertical landing, for the U.S. marines and British Royal Navy; and (3) the F-35C carrier-launched version for the U.S. navy.13 By January 2010, the consortium had produced 19 F-35s; it was still testing the planes; and the estimated cost per plane ranged from $95 million to $135 million.14 The program is controversial, but NGC is well positioned to capitalize on its 20 percent to 25 percent share of the project revenues in the near future.

NGC is a 40 percent partner in the production of the F/A-18E/F Super Hornet, the U.S. navy's frontline carrier-based strike fighter and the world's most advanced multirole strike fighter. Boeing is the contractor, while NGC is the principal subcontractor. NGC manufactures fuselage sections and associated subsystems. Delays in the production of the F-35s would likely be offset by increased production of the Super Hornet. The F/A-18s have been sold to the air forces of Australia, Canada, Finland, Kuwait, Malaysia, Spain, and Switzerland.

In June 2010, Loren Thompson, defense analyst and CEO for the Lexington Institute, said NGC seemed "well-positioned in terms of its business lines and competencies." For example, in 1999, NGC purchased Ryan Aeronautical, inventor of the Global Hawk, it continued to develop the unmanned stealth plane, and in 2009, it had almost 45 percent of the $3 billion market.15 The Hawk can fly at 60,000 feet for more than 30 hours, at speeds of almost 340 nautical miles per hour. Equipped with proven new technology, it can see through most types of weather, day or night, and identify simulated improvised explosive devices (IEDs).16 In sum, the international market for unmanned aerial systems is small and growing; there are potential civil and commercial applications (e.g., agriculture and energy); and existing firms are already positioned to aggressively exploit these market opportunities.17

Thompson approved of the recent "replacement of CEO Ron Sugar with the younger, more numbers-driven Wes Bush" and NGC's renewed emphasis on "capital efficiency over revenue growth." He favored "divesting under-performing businesses like shipbuilding."1 8 NGC was weighing the divestment of its shipbuilding unit (i.e., a sale or spinoff). The unit's operating income (i.e., income before interest and taxes) as a percentage of the unit's revenues was a 4.8 percent profit in 2009, a 37.5 percent loss in 2008, and a 9.3 percent profit in 2007.19 In November 2010, NGC e-mailed its 30,000 shipbuilding employees to say that if it were to spinoff the newly named Huntington Ingalls Industries shipbuilding division, NGC's stockholders would own 100 percent of the outstanding shares of the independent, public traded, wholly owned NGC subsidiary. Moreover, NGC's board had approved the spinoff and appointed retired Admiral Thomas Fargo, a member of NGC's board, as chairman of the board of the spinoff—should the spinoff happen.20

This background description of NGC provides the context for a SWOT analysis of NGC and the aerospace and defense industry. Next, the chapter focuses on the external environment of the firm and the techniques used to analyze the opportunities and threats facing NGC and its industry and, by extrapolation, other firms and industries. This process begins with an analysis of societal forces, followed by an analysis of competitive (industry) forces, an analysis of scenarios, and an analysis of stakeholder forces.

 
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