Critical success factors (CSFs)
Critical success factors are factors that are essential to the strategic success of a business entity. They have been defined as: ‘those components of strategy in which the organisation must excel to out-perform competition’ (Johnson and Scholes).
Identifying and managing these factors is essential for achieving strategic goals and objectives. CSFs can vary depending on the industry, organization, or project, but they generally represent the key areas that must be effectively addressed to ensure success.
Here are some common examples of critical success factors; Customer satisfaction, market positioning, financial performance, quality of product or services, Innovation and adaptability, operational efficiency, social responsibility and ethic, technology integration etc.
Key Performance Indicators (KPIs) are measurable values that indicate how effectively an organization or a specific process is achieving its key business objectives. KPIs are essential for monitoring performance CSFs. Measured targets for CSFs are called key performance indicators (KPIs).
CSFs and key performance indicators (KPIs)
Critical success factors should be identified at several stages in the strategic planning process.
- CSFs should be identified during the process of assessing strategic position. Management need to understand the main reasons why particular products or services are successful.
- CSFs are important in the process of making strategic choices. A business entity should select strategies that will enable it to achieve a competitive advantage over its competitors. These are strategies where the entity has the ability to excel in the critical success factors for its products or services.
- CSFs are also important for strategy implementation. Performance targets should be set for each CSF. This involves deciding on a measurement of performance, that can be used to assess each CSF, and then setting a quantified target for achievement within a given period of time.
Johnson and Scholes: a six-step approach to using CSFs
Johnson and Scholes proposed a six-step approach to using Critical Success Factors (CSFs) in strategic management. The six-step approach helps organizations identify, prioritize, and utilize CSFs effectively in the strategic planning process.
Step 1:
Identify the success factors that are critical for profitability (long-term as well as short-term). These might include ‘low selling price’, and also aspects of service and quality such as ‘prompt delivery after receipt of orders’ or ‘low level of sales returns’. It is useful to think about customer needs and the 4Ps of the marketing mix when trying to identify the CSFs for products or services.
Step 2
Identify what is necessary (the ‘critical competencies’) in order to achieve a superior performance in the critical success factors. This means identifying what the entity must do to achieve success. For example:
- If a critical success factor is ‘low sales price’, a critical competence might be ‘strict control over costs’.
- If a critical success factor is ‘prompt delivery after receipt of orders’, a critical competence might be either ‘fast production cycle’ or ‘maintaining adequate inventories’.
- If a critical success factor is ‘low level of sales returns’, a critical competence might be either ‘zero defects in production’.
Step 3
The entity should develop the level of critical competence so that it acquires the ability to gain a competitive advantage in the CSF.
Step 4
Identify appropriate key performance indicators for each critical competence. The target KPIs, if achieved, should ensure that the level of critical competence that creates a competitive advantage is obtained in the CSF.
Step 5
Give emphasis to developing critical competencies for each aspect of performance, so that competitors will find it difficult to achieve a matching level of competence.
Step 6
Monitor the firm’s achievement of its target KPIs, and also monitor the comparative performance of competitors.