What Are Critical Success Factors?
Critical Success Factors (CSF) are specific elements or action areas a business, team, or department must focus on and successfully implement to reach its strategic objectives. Successful execution of these success factors should generate a positive outcome and create meaningful value for the business.
CSFs are important because each one works as a guiding compass for a company. When they are explicitly clarified to everyone at the company, they function as a reliable point of reference for focus and for determining success.
Many companies also use their critical success factors to determine whether they should proceed with a new business initiative or activity. For example, an organization may determine that a proposed initiative does not directly support a particular success factor and may distract from their overall strategic goals, waste precious time, and drain resources.
While it’s not a hard and fast rule, it’s common practice to limit the number of critical success factors to five or fewer. Keeping the number of factors manageable helps guarantee that each factor has a clear impact on strategic priorities and other elements of your business.
How do CSFs support Strategic Management?
Critical success factors should be developed to link and align with the strategic goals of a company. They are used to determine how a business unit, department, or function can reach its specific goals and facilitate forward progress toward the organization’s strategic goals. These factors also influence how individual employees and teams support and do their part in contributing to strategic plans and objectives.
Each CSF is identified to support the achievement of a specific strategic goal and guide the creation and tracking of Key Performance Indicators (KPIs). For example, the diagram below illustrates where CSF fit in the achievement of a strategic goal.
How Are Critical Success Factors Categorized?
All critical success factors can be grouped into five main categories*:
1. Environmental Factors
Environmental factors refer to things that are happening outside the organization over which the company has no direct control. For example, the economy, public policy, competitor’s actions, and new technologies are all elements that fall under this category. A company must stay informed, anticipate changes, and stay ahead of the curve by recognizing environmental factors that might affect its ability to accomplish its mission. By labeling and being aware of them, organizations can be mindful of these factors and monitor their performance relative to them.
2. Industry-Related Factors
These are tasks your organization must complete to remain competitive within a specific industry. For example, a food manufacturing company might focus on “innovation in packaging” as a critical success factor to achieve its strategic goal to reduce shipping costs and its carbon footprint, while an airline might focus on “on-time service.”
3. Peer-Related Factors
Peer-based success factors have to do with a business’s relative position to its competitors or peers in the industry. If your business is a leader in the industry, you may focus on critical success factors that will ensure your ability to maintain your market share and position, like, “increasing brand loyalty.” If, however, you do not lead in the market, your factors may be aimed at improving your overall competitive position. For example, providing unmatched customer service.
4. Temporal Factors
Most critical success factors are tied to an organization’s long-term or permanent strategic goals. However, sometimes companies face temporary situations that, while important, only need to be managed for a limited time period. The CSF related to these situations are categorized as temporal factors.
An example of the adoption of this type of critical success factor is the effect COVID-19 had on small brick-and-mortar businesses. These businesses had to quickly increase the number of online orders and ramp up shipping and delivery processes. This focus and the related changes may be temporary or may evolve into long-term solutions.
5. Management-Position Factors
Management-position factors differ greatly from the other four listed because they are identified internally by managers who have a unique perspective on their role, responsibility, and function area. This type of CSF has an internal focus and may include areas related to continuous improvement, culture changes, or employee engagement.
Each manager needs to be aware of the factors associated with their own roles. For example, operational managers may have critical success factors that address production and cost control. Meanwhile, higher-level executives would be more focused on risk management and exposure.
How Do You Select Critical Success Factors?
Critical Success Factors are usually identified through data gathering, analysis, and discussion. While some companies may choose to bring in consultants who have more experience establishing critical success factors, there are four steps you can take to help determine the critical success factors that support the strategic goals of your business.
- Examine the key elements of your long-term strategic goals. How have these goals been influenced by SWOT analyses (Strengths, Weaknesses, Opportunities, and Threats) or changes to your overall agenda? This deep analysis will help you better understand the end goal and make it easier to identify CSF on which to focus.
- Review and discuss the organization’s overarching strategic goals with key stakeholders. Don’t formalize critical success factors until you’ve gathered data. You can get this by talking to employees and customers, hosting focus groups, and reviewing recent trends. Do your best to quantify how your organization is doing today, rather than how you were doing at some point in the past, so you can plan for the future. You can begin by talking with senior executives and discuss the potential CSF that might best contribute to success of the long-term strategic goals.
- Ask leaders and team members for their ideas and feedback. Clearly communicate with employees about the organization’s long-term strategic goals. Then, use what you learned during the discussion with senior leaders as a framework for an employee feedback session. For example, you might ask, “What factors do you think we should focus on to achieve these goals?”
- Combine the information received from employee feedback and group discussions to pinpoint which factors are key to achieving your goals. With ideas coming from all over the company, you’re sure to find one that nails down exactly what you should focus on. You can then implement those factors into your company-wide strategic plan. Ensure that people know exactly what they need to contribute to the CSF.
How Do You Measure Critical Success Factors?
Critical Success Factors (CSF) are often measured using Key Performance Indicators (KPI). Think of a CSF as an overarching element that is critical to achieving a strategic goal. Then identify KPI’s that are more granular and specific, things you can tangibly measure against. An example might look like the following.
- Critical Success Factor – Build the selling skills and product knowledge of the Sales Team
- Key Performance Indicator 1 – Complete selling skills training for 1,200 sales leaders by Q3
- Key Performance Indicator 2 – Increase sales revenue of new customers by 8% over the next 12 months.
Managers monitor KPI’s to see how they are correlating with and supporting CSF as well as the strategic initiatives or outcomes in the company. If initiatives and success factors don’t appear to correlate—or worse, if the strategies and success factors have a negative relationship—then the manager can reassess their factors or initiatives.
Make a Commitment
Successful achievement of strategic goals is directly tied to delivering on appropriate and targeted CSF. That takes focus and commitment. Especially when dealing with environmental and temporal factors, everyone in the organization needs to be ready and willing to change. This is especially important for leadership teams who have become accustomed to doing things a certain way. Make sure to identify and communicate how the organization is doing today as well as opportunities and challenges so that you can create effective CSF that will support your plan for the future.
* Adapted from ideas presented by D. Ronald Daniel, in his article “Management Information Crisis” (Harvard Business Review, September-October 1961).