Critical Success Factors (also known as Critical Factors for Success) and their link with Key Performance Indicators (KPIs) can perhaps be considered as one of the key bridges that connect strategy academia and practice. KPIs help businesses, as well as organisations, to stay focused on the key areas that matter in achieving their goals. Many management gurus and practitioners have highlighted the importance of aligning KPIs with the Critical Success Factors (CSF) to ensure organisational success. In a more practical perspective, ‘high occupancy’ in each flight is a CSF for an airline in order to remain profitable and competitive in the turbulent airline industry. The common KPI used by industry players to measure this is the load factor. Similarly, a software solution provider aiming for a certain percentage of profit increase would need to understand the exact CSFs that would deliver this goal such as, delivery time, cost, client satisfaction, quality etc. and set their KPIs/ targets accordingly.
It is clear that CSFs consists of characteristics or variables that have a direct and serious impact on the various functional areas of the organization in deciding their effectiveness, efficiency and viability. All actions associated with these CSFs must be performed at the highest possible level of excellence and monitored rigorously through a tight set of KPIs to achieve success and outperform competitors. In a more simplified way, KPIs are a way to analytically measure the progress on CSFs while CSFs are the fundamental drivers of business success. Hence, CSFs are factors internal to the organisation that are imperative to operation al success. This initial understanding of CSFs is a prerequisite to grasping the main point of this text, i.e. distinguishing between CSF and Key Success Factors (also known as Key Factors for Success). The ultimate objective of strategy development is strategic fit, which is the ability to match organisational capabilities with the prevailing conditions of its environment. In other words, managers need to be alert, knowledgeable and able to identify external environmental dynamics in order to create and match organisational capabilities to remain competitive and strong. This is the exact point where the concepts of Key Success Factors (KSFs) and Critical Success Factors (CSFs) come in to play with their exact meanings and applications. Nevertheless, these concepts have been used interchangeably over the years despite limited relevant theoretical and empirical evidence and their inherent confusions. In fact, the early literature on this area highlights the significance of CSFs from both organisational and industry perspectives with limited insights on the exact differences. Furthermore, it didn’t provide any insight as to how these concepts can be used in strategy development. However, recent studies in this area, particularly, conceptual studies of Dr George Panagiotou, have proposed a more cohesive, structured and focused theory by integrating CSFs and KSFs in the context of strategy development and decision making.
As stated before, the essence of strategy is to achieve a perfect match between internal capabilities and external realities, i.e. specific challenges and opportunities in the competitive landscape. Being in line with this structural dimension in strategy, Dr George Panagiotou suggests splitting these combined terms of CSFs and KSFs into two distinct terms and thereby, refocus them onto the two environmental realities. That is, to understand KSFs as the key external competitive factors or conditions that an organisation must satisfy in order to be successful and competitive in a given industry while CSFs as factors internal to the organisation that are imperative to operational success. KSFs are equally applicable to all companies in the industry since all companies in that market must satisfy the same competitive factors. Companies need to possess a relevant set of CSFs to match against the identified KSFs of the respective industry in order to achieve a good level of strategic fit.
External environmental analysis or a careful investigation into the prevailing market conditions, industry dynamics, technological advancements, customer expectations and competitor capabilities would reveal the KSFs that each company in that industry should satisfy. Similar investigation of the internal environment, i.e, capabilities, competencies and value creation activities would reveal the internal aspects of the company that need to be matched against the industry KSFs. In the retail industry, the relative importance of KSFs such as convenience, choice, accessibility, quality in products and service have increased in the recent past compared to the traditional value-for-money judgement. One needs to understand this dynamic nature of KSFs in order to remain competitive in the retail industry. Failure to do so would result in drifting the organization away from the environmental realities, the lessons from Kodak, Nokia and Myspace. A market-driven company will begin this process with the identification of the industry KSFs in order to develop required internal CSFs. In contrast, a product-driven company may start with the identification of CSFs and then seek to match these against KSFs in the selected industry. Hence, this integrative conceptual approach can also be linked with Market-based (Prescriptive) and Resource-based (Descriptive) views/perspectives as well. What matters, at last, is not the theoretical arguments or suggestions, but the exact practical implications of these conceptual changes and paradigm shifts. Considering this, the two basic questions one needs to ask are: What are the KSFs (or key external conditions) of my industry and how am I going to meet these conditions better than others? Questions are simple, but the answers are challenging and changing. [ Source: Dr G. Panagiotou (2005), Cognition of Competitive Environments: A Strategic Group Analysis,PhD Thesis, Nottingham University. ]
Exposition Magazine Issue 15
Mr. Gayan Jayasinghe
Department of Industrial Management
University of Kelaniya