Define Critical Success Factors (CSF)

A key concept used in strategy formulation is critical success factors.

Early in the strategic planning process the team starts to "negotiate" the critical success factors for their strategy. Our training is to manage what you can measure. When I consult with the team, I emphasize the industry's CSFs, to keep the thinking grounded about the customer.

In any industry, there are fundamental processes where your firm must excel that benefit your customer and sustain your business. For example, Amazon's product delivery system must be fast and very accurate. General Electric's jet engines must be 99.999999% reliable. Otis's elevators must never fall while you are in one! The build-up graphic below explains critical success factors and defines core competencies, distinctive core competency and strategic focus.

This GIF provides an overview of your competitive environment, your strategic space, "inside the box":

(To replay GIF, use backarrow and then return to this page.)

What are key processes in your value chain that all the top competitors in your industry must excel at to be successful? The strategic planning team must understand your industry space, your market, and then assess your core processes: management infrastructure, finance, HR, innovation, technology, procurement, manufacturing quality, service delivery, distribution, marketing, sales, service, something else ... where must you focus. These are key critical success factors to be assessed as you formulate strategy.

Your core competencies are the process or proprietary knowledge you use to convince a customer to buy your product. Your distinctive core competency is that skill or process that sustains your business, that is unique to you and difficult for others to copy. Warren Buffett calls it the moat.

Examples

Consider John Deere and WalMart examples:

For John Deere dealers, after-market service and parts contribute significantly to the bottom line.

Corporate and family farmers cannot afford to have a key piece of equipment fail during harvest - a key factor in their buying decision.

To help the dealers hold down labor costs, to improve scheduling, and to perform to their customers expectations, John Deere has invested millions to develop self-diagnostic electronics so the machinery will inform the dealer a part is about to fail. "Fix it before it breaks" is a distinctive core competency.

Sam Walton viewed WalMart's distribution system as a key to their success - a distinctive core competency. In the mid-1990s, their distribution costs were about 3% of ship goods, their competitors 4.5 to 5%. It took them 20 years to get there. The difference is profit, which can be applied to build further advantage.