What is Critical Success Factors ?
Critical Success Factors in Strategic Management :
The term 'Critical/Key Success Factor' was initially used in the context of data and business analysis. Critical Success Factors (CFS) are the essential attributes required for an organisation to be successful in the marketplace. They can be referred to as the resources, skills and traits that an organisation needs for survival and succeeding in the market.
The critical success factors vary from industry to industry. Critical success factors example, for dairy and processed food industry, variety and efficient distribution are the key success factors, without which the survival of the company would not be possible. On the other hand, for the banking sector, aspects like technology and prompt service are critical success factors.
It is essential for an industry to identify its CSFs for achieving desired growth and success. Critical Success Factors are a part of the environment in which industry operates and also a part of the internal organisational resources available to that particular industry. It is therefore essential to study the resource allocation and utilization methods of the particular industry for analyzing the external environment of of the organisation.
It is important that the internal resources and skills of an industry are analysed before applying the same to the external environment of the firm. The Key Success Factor (KSF) is an essential component or element that the organisation should possess for achieving its mission and succeeding in its external environment.
Sources of Critical Success Factors
The Critical Success Factors of an organisation are dependent on the current business situations. Different situations give rise to different CSFs. Rockart and Bullen have prescribed five critical success factors from the point of view of an individual organisation:
1) Industry Characteristics :
The attributes of a particular industry outline its critical success factors. Hence, it can be said that these success factors can be different for different industries.
For example : if one looks at three different industries - IT, healthcare and education sector, the CSF for each will differ. Even in IT sector, if one looks at HCL and Infosys - the Critical Success Factors for both companies will differ because both companies operate in different environments.
2) Current Strategy and Position :
The CSFs for all the organisations in the industry are not the same. An organisation's current position also defines its success factors. CSFs for an organisation can also be defined by its present market position. The major factors that support the current position are the strategy, resources, and capabilities of an organisation.
For example : in the FMCG market, the CSF for HUL will differ from a fimm like Nirma, though both of them are from the same industry. HUL's CSF will focus more on brand building at a national level and leveraging on its international image, whereas Nirma's CSF will focus on low cost and regional presence. Similarly, the CSF for firms in the IT sector IBM, HCL, Tech Mahindra all will differ because they have different resources and capabilities in their respective segments. Therefore, it is not necessary for every organisation to have the same set of success factors.
3) Environmental Factors :
Some of success factors exist in the external environment as well. Although these environmental variables are beyond the control of the organisation, but the management should consider these factors for developing and improving the critical success factors.
For example : the trends in an industry, government laws and regulations, current economic scenario and cultural changes can affect the organisation's CSFs.
For example : firms operate under legal and environmental restrictions in a country which they have to adhere to. Liquor companies have to operate in an environment where excise duties are high and where the product cannot be directly advertised. This is a constraint under which they have to operate in India and this is applicable to all firms in the liquor industry.
4) Temporal Factors :
Temporary factors are the success factors that result due to some specific event. These factors are not generally a part of day-to-day business operations, but are formed due to some sudden temporary change.
For example : if there is too much or too little stock in an organisation, then inventory can be the critical success factor.
Identification of Critical Success Factors
The identification of critical success factors for a firm and linking it to the strategy of the firm was propounded and developed in 1960s by D. Ronald Daniel of the McKinsey & Company. With the passage of time, this concept has been refined and many industries have applied the concept. Critical success factors are the key determinants of an organisation that help an organisation to achieve its objectives. These are the factors that ensure success of any organisation by assisting in planning, implementing and reviewing of a strategy. If the organisation frames its strategy without keeping the critical success factors in mind, then it will certainly fail. Many companies have failed because of their lack of vision in identifying the critical success factors which are necessary for the firm.
CSFs are also call by the names like strategic thrust areas and strategic challenges, etc. Nowadays, companies face a common 'predicament' (challenge) while identifying the Critical Success Factors. This situation of predicament arises due to the failure in identification of those factors that have a significant impact on the business operations. The companies are generally unsure about the challenging areas that require attention and even when the company is certain that the factors are critical for its success, there is hardly any indication of improvement. As a result, the company is not able to take advantage of the current and future opportunities and hence loses its competitive edge. The answer to this lies in ‘elucidation'. A company should develop systematic approach for identifying critical success factors. After the CSFs are identified, continuous efforts must be applied in organizing and monitoring the progress against each factor.
Process of Identification of Critical Success Factors
Identification of critical success factors requires following steps :
1) Identify the Challenging Factors :
The first step to identify the critical areas is to identify the barriers to the success of firm. These barriers can be related to either internal (company strategy, policies, employees related) external (economic, political, legal, etc.) environment of the company.
2) Create a Strategic Plan :
Once the challenges are identified by the firm, it can then develop a strategic plan for removing these obstacles. This plan will help to overcome these barriers by anticipating them prior to their occurrence. This plan will help to overcome these barriers and also in foretelling the obstacles that might affect the future performance of the organisation.
3) Segmentation of Customers :
The next step after formulating the strategic plan is to segment the customers. The prime motive for market segmentation is to understand the behavior of customers. Segmenting the customers refers to the process of dividing the heterogeneous group of customers into several homogeneous groups based on certain factors such as geography, demography, benefits, etc. By segmenting the customers, the marketers are able to analyse the needs and wants of consumers and identify the points where they lack in their performances.
4) Compare the Performance of Company :
After segmenting the market, the marketers are able to identify the expectation of consumers from different companies and compare the products offered by those companies. This comparison also enables the companies to understand the performance of other brands. In this step, the company can analyse its own performance vis-a-vis its competitors across the entire value chain on factors like cost, quality, cycle time, customer satisfaction, etc. This process of bench marking helps the company to identify few critical areas which can help the company to overtake its competitors.
5) Examine the Competitor's Practices :
The company also needs to understand how its competitors operate, how do they produce the products, what kind of quality standards do they have, what is their production cycle, etc. The company then needs to compare these practices with own methods and identify how they are superior or inferior to the standards of other companies. This will help the company to identify shortcomings in own strategy and to devise means to overcome them so that it can serve the target customers in a better way.
6) Analyse the Impact on Result :
After identifying the critical areas, the management of the organisation should discuss the importance of those factors and analyse their impact. This also helps in identifying the relevant critical success factors. The analysis of impact can help the management to know the barriers that may prevent it from achieving the organisational objectives. This analysis of the results may help in providing in-depth understanding of the success factors.
7) Modifying the Production Strategy if Required :
When analysis of the competitor's strategy is completed for the production of same products, and the related shortcomings are analysed, then the company can modify its own production strategies for competing with the competitors.
Critical success factors example : when HUL lost its market-share of Surf to cheaper priced Nirma, it was forced to look at its production methods and innovate. This led to the birth of Wheel which was launched by HUL to counter Nirma in the Indian consumer marketplace.
Implementation of Critical Success Factors
Critical success factors can be implemented with the help of the following steps :
1) Determine the Needs of Customers :
The first and foremost step in implementing Critical Success Factors is to determine the needs and wants of customers. They should regard customers as the very basis of existence of the industry and also the source of profitability. To analyse
analyse the customers accurately, the marketers need to identify their customers, analyse their needs, and determine how they choose between various offerings in the marketplace. Once the marketers have a good understanding of the customer, they can proceed to the next implementation step.
Critical success factors example : if one analyses the needs of people travelling by flight in India, two needs are highlighted the need for low costs and the need for timely service. Any company offering airlines services,in India has to take this as a starting point if it wants to delight its customers. It will thus have to analyse its entire service model so that it can provide a low cost service to its customers. Indigo is a perfect example of this.
2) Determine the Basis of Competition :
The firm also needs to understand the dynamics of competition in its industry, i.e., how are firms competing in the industry? Is it on the basis of cost, differentiation or value? Marketers need to understand the level of competition and the bases upon which the competition exists and upon which the organisations can survive.
For example : in the electronics market, customers select on the basis of price, durability, quality,,brand reputation, performance, etc. For a company to survive and succeed in the market, it needs to produce offerings at low cost so that the capital cost is covered.
3) Identifying Critical Success Factors (CSFs) :
Some of the major types of critical success factors are as follows:
i) Technology-Oriented Success Factors :
- Capability to innovate in the production
- process,
- Expertise in latest technologies,
- Expertise in scientific research, and
- Capability to innovate new product.
ii) Manufacturing-Oriented Success Factors :
- Manufacturing quality products,
- Highly productive labour force,
- Setting plant locations incurring low cost,
- Ability to manage a wide range of products and customized products,
- Ability to produce at low cost,
- Designing and engineering of products of low cost,
- Efficient utilization of fixed assets, and
- Sufficient supply of skilled manpower,
iii) Distribution-Oriented Success Factors :
- Reduced distribution costs,
- Efficient channel network of marketing intermediaries,
- Gaining plenty of space on store shelves,
- Prompt delivery and
- Having retail outlets that are owned by the company.
iv) Marketing-Oriented Success Factors :
- Skilled, available, and trained service employee,
- Skills for selling,
- Adequate after-sales services,
- Eye-catching package of product,
- Extensive product line and adequate selection of products,
- Trained and skilled salespeople, and
- Correct fill-ups of purchase orders.
v) Skills-Oriented Success Factors :
- Proficiency in designing products,
- Speedy process of research and production,
- Talented employee and salespeople,
- Knowledge of technology,
- Knowledge about quality, and
- Attractive and attention-grabbing advertisements.
vi) Organisational Capability :
- Good and efficient information system, and
- Flexibility and agility to respond according to the changing market conditions.
4) Build Organisation on the Basis of Critical Success Factors :
Elucidating the critical success factors and building the strategy around it lead to the organisation having a very good understanding of its industry, markets and customers. Adhering to the steps in implementing the critical success factors ensures success for the marketer and thus makes the organisation a leader in the industry. The analysis of success factors provides an in-depth understanding of the industry in which the organisation operates its markets, and the customers it should focus on.