SWOT, objectives, critical success factors and benchmarking

1 Introduction

The environmental appraisal (Chapters 4 and 5) and the internal appraisal (Chapters 6 and 7) produce a mass of findings. This chapter covers the tools that turn those findings into something managers can act on:

• SWOT and TOWS analysis – summarising the position and generating responses

• Goals and objectives – making ambitions specific

• From objectives to action plans, targets and incentives

• Critical success factors (CSFs) and key performance indicators (KPIs)

• Integrated reporting and integrated thinking

• Benchmarking – making sure targets are set by evidence, not guesswork

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2 SWOT/TOWS analysis

At the end of the internal and external appraisals, an organisation should be able to carry out a SWOT analysis, which summarises:

For example, a company might have a very good IT system (a strength in its resources) but be poor at marketing (a weakness). The economy might be set to boom (an opportunity), but a powerful competitor could be about to enter the market (a threat).

The emphasis must not stop at categorising. The essential question is ‘so what?’ – what action should follow from each finding? Arranging the findings in a TOWS matrix forces that question, by pairing each external factor with the internal factors it meets:

3 Goals and objectives

3.1 From mission to objectives

Once the strategic position has been assessed, objectives can be set. Missions and visions are deliberately grand and hazy – ‘we will be the best in the world’. That is fine as inspiration, but useless for managing: if a company claims ‘quality’ as part of its mission, what does quality mean? Which defects must be eliminated, and by when? Something more specific is needed, and these more specific ambitions are objectives.

3.2 SMART objectives

Good objectives are SMART:

• Specific – sales, reject rates and cost per unit are specific; ‘better’ and ‘improve’ are not.

• Measurable – the specific aspect of performance must be quantified: ‘increase profit by 10%’, not ‘increase profit’.

• Agreed / accepted / achievable – the people charged with meeting an objective must believe it is possible and accept it as valid; imposing an unrealistic target is ineffective and demotivating.

• Relevant – relevant to the person responsible (they must be able to affect it) and to the organisation’s mission, so people can see why it matters. Objectives that look arbitrary fall into disrepute.

• Time-bound – to be attained within a stated period: often a year, sometimes monthly.

Objectives can be set top-down (management imposes them – ideally still explained and agreed rather than simply landed on desks) or bottom-up (staff propose them, with management challenge). Whichever direction is used, communication and explanation of why the objective is what it is makes it far more likely to be accepted.

Real published objectives look like this (a bank’s three-year financial objectives):

• Increase operating profit before tax by 15%

• Achieve a return on equity of at least 20%

• Keep the cost-income ratio below 45%

• Keep net credit losses below 0.5% of lending

4 Difficulties with objectives

Objectives are set at corporate level and then flow down through divisions and departments, perhaps to individuals. Several problems recur:

• Consistency. Objectives must be consistent vertically (if one subsidiary can make $5m and the other $4m, a $10m group target does not stack up), horizontally (sales of 1,000 units cannot sit beside manufacturing capacity of 800 unless outsourcing is planned) and over time (a gross margin target that whips from 40% to 20% to 55% is arbitrary; 40–42–45 is a pattern people can believe in).

• More than one objective is needed. Whatever you measure, you change: people concentrate on what they are judged on, and other desirable behaviour recedes. Set objectives for every area that matters – a sales team measured only on volume will hit the target by slashing prices, destroying the unmeasured margin.

• Interdependencies. One person’s performance depends on others, so deciding who was responsible for missing an objective is hard. A favourable materials price variance (the buyer bought cheap rubbish) can cause an adverse usage variance in production – blaming production would be unfair.

• Short-term versus long-term conflicts. Listed companies face intense annual pressure on profits and dividends. Cutting research, training or maintenance boosts this year’s profit and quietly damages the years after – accounting’s 12-month lens is poor at showing the damage. Balancing the two horizons is a permanent tension.

• Not everything desirable is easy to measure – but if an attribute is desirable, it makes no sense not to measure it, however imperfectly. If staff morale matters in a hospitality business, assess it: staff and customer surveys, staff turnover, sickness absence. What is not measured is, in practice, ignored.

5 From objectives to action plans, targets and incentives

Setting objectives is only the start of strategic control. The 2027 syllabus expects a finance professional to help develop, communicate and monitor action plans and to align incentives to performance – the machinery that converts a chosen strategy into things people actually do.

5.1 Action plans

An action plan cascades the strategy into concrete commitments. A good one specifies, for each strand of the strategy:

Communicating the plan matters as much as writing it: people implement what they understand and believe in. That means translating the strategy into what it means for each unit and role, explaining the reasoning, and keeping the message consistent across channels – a direct link to change management (Chapter 14).

5.2 Target setting

Targets operationalise objectives at every level. They should be SMART (above), stretching but achievable, and grounded in evidence – which is exactly what benchmarking (later in this chapter) provides. Beware of targets set purely by negotiation: managers learn to bargain targets down and beat them comfortably, which rewards negotiating skill, not performance.

5.3 Monitoring implementation

Progress against the plan is monitored through the KPIs attached to each target, with regular comparison of actual against plan, explanation of variances, and corrective action – the strategic-control feedback loop. Chapter 12 develops the performance-measurement machinery (including the balanced scorecard); the danger to flag here is monitoring that measures activity (‘12 workshops held’) rather than results (‘defect rate halved’).

5.4 Aligning incentives to performance

People do what they are rewarded for. If bonuses, promotion and recognition still reward the old strategy’s behaviour, the new strategy will lose. Alignment means:

• Linking rewards to the targets that flow from the strategy – not to legacy measures

• Balancing short-term financial measures with longer-term and non-financial ones, so managers cannot prosper by mortgaging the future

• Rewarding team and organisational outcomes where interdependencies make individual attribution unfair

• Watching for gaming: any measure tied to money will be managed – design measures in mutually checking pairs (volume AND margin, speed AND quality)

6 Critical success factors and KPIs

An organisation can easily end up with 50 or 60 objectives across its departments – too many to keep an eye on, and a temptation to concentrate on the easy ones. Some objectives matter far more than others: these are the critical success factors (CSFs). Two definitions:

• Johnson, Scholes & Whittington: ‘Those product features that are particularly valued by a group of customers, and, therefore, where the organisation must excel to outperform the competition.’

• More simply: the things an organisation must do well if it is to succeed at all.

The second is easier to remember, but the first is more useful, because it locates success where it really comes from: customers. It is vital (critical) to excel at exactly the things customers value – which is also the lesson of the value chain (Chapter 7). Examples of possible CSFs include profitability, market position and share, productivity, reputation, product leadership and innovation, personnel development, employee attitudes and public responsibility.

Key performance indicators (KPIs) are what is measured in relation to each CSF. Sometimes the KPI is obvious (CSF = profitability → KPI = profit); for softer CSFs, proxies must be constructed (CSF = reputation → KPIs = customer-survey scores, repeat business, customer loyalty).

6.1 What determines an organisation’s CSFs?

• Structure of the industry – in an industry of a few large players, defending market share is critical to avoid being overwhelmed; in fiercely competitive industries, cost per unit may dominate.

• Competitive strategy and industry position – a cost leader’s CSFs revolve around efficiency; a small player’s may be superb service to the few customers to whom it is a big fish.

• Geographical location – in a developing market, penetration now may matter more than profit now.

• Environmental factors – if technology is shifting, exploiting it at least as well as competitors is critical; for an airline, the oil price (outside its control) may make fuel efficiency and route profitability critical.

6.2 Classifying CSFs

Note that a factor can be a CSF even though the organisation cannot fully control it – the point is that success depends on it, so it must at least be watched and managed as far as possible.

6.3 Qualities of good KPIs

• Ownership – a person or team must own each KPI and be able to influence it; there should be a visible link between effort and achievement.

• Fairness – performance must be judged fairly: if the factory was on strike for six months, shouting at the sales department about missed sales targets achieves nothing.

• Achievable – KPIs should stretch but be attainable; targets seen as impossible demotivate rather than motivate.

6.4 Johnson and Scholes: a six-step process for CSFs

Johnson and Scholes suggest a six-step process for developing CSFs, shown here alongside a running airline example:

7 Integrated reporting and integrated thinking

Strategic control needs more than financial measures, because organisations create (and destroy) value through many kinds of resource. The 2027 syllabus asks what role integrated reporting can play in strategic performance management, and expects you to understand integrated thinking as a discipline for making coherent choices.

The framework itself – the six capitals, the distinction between integrated thinking and integrated reporting, and the custodianship story (the IIRC's framework now sits within the IFRS Foundation, home of the ISSB) – is taught in Chapter 12 as part of strategic performance measurement. What matters at this chapter's stage of strategic control is what the idea does to objectives, CSFs and KPIs:

• Define objectives, CSFs and KPIs across all the capitals the organisation depends on – people, relationships, knowledge and natural resources as well as money – so that the measure-set reflects everything success actually depends on.

• Make trade-offs between capitals visible when objectives are set: cutting training spend improves the financial numbers this year and depletes human capital for years afterwards – the short-term/long-term conflict discussed earlier in this chapter.

• Use capital-wide measurement to counterbalance short-termism: it captures what annual financial statements miss.

Integrated thinking is applied when strategic choices are combined into a coherent strategy (Chapter 10), and developed – with integrated reporting itself – in Chapter 12.

8 Benchmarking

8.1 Introduction

How do we know whether an objective, target or CSF level is reasonable? Is a cost of $50 per unit, or a 30-minute aircraft turnaround, generous or demanding? Benchmarking answers that question by comparison. It can be defined as:

‘The establishment, by the collection of data, of comparators that allow relative levels of performance to be identified.’

Benchmarking is a scientific way of setting objectives and targets. Without it, targets risk being plucked from the air – much too easy or much too difficult – and either error damages performance. Data sources include internal data (results of different branches), data about other companies, and public and government data.

8.2 Types of benchmark

• Internal benchmarking. Comparison is still required – a figure invented in a dark room is not a benchmark. Compare against history (last year’s 30-minute average turnaround suggests trying 25) or across branches (if the best branch achieves a 15% net margin, that is a defensible target for the rest; if one shop has the lowest stock shrinkage, others can aim for it). The dangers: it is inward-looking – competitors may be far ahead and you would never know – and the opportunities for learning are small.

• Industry benchmarking – comparing with other organisations in the same industry. It divides into non-competitor benchmarking (hospitals’ treatment results, local authorities’ refuse collection, schools’ examination results) and competitor benchmarking (airlines’ turnaround times and load factors are visible and closely watched). The obstacle with competitors is confidentiality: the most interesting data – a rival’s unit costs, say – is exactly what they will not share. Some organisations go to extraordinary lengths: when a new smartphone launches, rivals buy one, strip it down, cost the parts and estimate assembly time – benchmarking by reverse engineering.

• Best-in-class benchmarking. Rather than comparing whole organisations, compare an individual activity with whoever performs that activity best, in any industry. A telephone bank can benchmark call answering against a renowned call-handling operation; a hotel can study how airlines price perishable capacity (empty seats and empty rooms are the same economic problem). Because the comparator is not a competitor, real co-operation is possible – a hospital pharmacy could learn inventory management from a supermarket (both hold perishable, dated, temperature-controlled stock where running out is serious). The great strength is the degree of learning: observing genuinely excellent processes wherever they are found often sparks radical improvement – and excellence in one industry (a slick travel website) raises customer expectations in every other.

8.3 Potential problems with benchmarking

1. The benchmark may be inappropriate – too easy or too tough – and even a good one goes stale if it is not updated; organisations become complacent and aim at the wrong things.

2. Benchmarking does not explain WHY performance falls short. The exercise is pointless unless effort goes into understanding causes – and it must be used supportively, to improve performance together, not as a stick. Managers who are simply shouted at become defensive and attack the credibility of the benchmark instead of learning from it.

3. Whatever you measure, you change. Benchmarks become objectives, appraisal follows, and attention flows to whatever is benchmarked – often to the detriment of desirable behaviour that is not.

9 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.