Critical success factors and core competences

When formulating their strategy businesses will consider the match between their own competencies and the critical success factors required to compete profitably in their chosen markets.

Critical success factors

An important strength for any organisation will be the achievement of critical success factors. This should allow the organisation to cope better than rivals with any changes in its competitive environment.

What are critical success factors?

Critical success factors (CSFs) are performance requirements that are fundamental to an organisation's success. In this context CSFs should thus be viewed as those product features that are particularly valued by customers. This is where the organisation must outperform competition.

Examples of CSFs for major industries include:

• in the automobile industry - styling, an efficient dealer network, organisation, performance
• in the food processing industry - new product development, good distribution channels, health aspects (e.g. low fat)
• in the life insurance industry - reputation, innovative new policies
• in the supermarket industry - the right product mix available in each store, having it actually available on the shelves, pricing it correctly.

Measured targets for CSFs are called key performance indicators (KPIs).

Sources of CSFs

Rockart claims that there are four sources for CSFs:

(1) The industry that the business is in – each has CSFs that are relevant to any company within it.

For example, the car industry must have as one of its CSFs ‘compliance with pollution requirements regarding exhaust gases’.

(2) The company itself and its situation within the industry – e.g. its competitive strategy and its geographic location

For example, a firm that has decided to compete on the basis of quality could have CSFs relating to identifying and delivering key
product features that are valued by customers.

(3) The wider environment – e.g. the economy, the political factors and consumer trends in the country or countries that the organisation operates in.

For example, in a time of oil shortages ‘energy supply availability’ could be a critical success factor.

(4) Temporal organisational factors – these are areas of company activity that are unusually causing concern because they are
unacceptable and need attention.

For example, a company with liquidity problems may place "short term cash management" as a CSF to ensure survival.

Developing CSFs from customer needs

In developing CSFs from customer needs, the following issues should be borne in mind:

• Customers' buying decisions are often complex and may involve a wide range of motivating factors. CSFs need to focus on the most important factors that ultimately determine the buying decision. Using IT systems to understand customer needs is particularly important in consumer markets.
• Many factors are taken for granted by customers (e.g. fitness for purpose). These give rise to 'threshold' features - i.e. all products must have these simply to enter the market.
• CSFs will vary from segment to segment. The organisation will need to assess its strategic capabilities to identify which segments it should target.
• Customers' understanding of value can vary over time, so the organisation needs to be open to changing the monitored CSFs.

Example: buying a new car

• Motivating factors include brand, image, price, service interval, running costs, safety, warranty, performance, reliability, dealer network, availability and cost of extras (e.g. air-conditioning, leather seats), fuel economy, economic footprint, depreciation, etc.
• Reliability is likely to be a threshold product feature.
• Corporate purchasers may focus more on price (including discounts), running costs and depreciation.
• Families may be more concerned about safety whereas single young males, image and performance.

Strategic capabilities, resources and competencies

Another way to look at CSFs is to examine an organisation's strategic capabilities. Strategic capability is defined as the ability to perform and prosper at the level required to survive and prosper. It is underpinned by the resources and competencies of the organisation.

In particular, if a business can obtain unique resources and core competencies that meet the CSFs in a market, then this should lead to its success.:

Resources

Resources are usually grouped under four headings:

• physical or operational resources
• human resources
• financial resources
• intangibles.

The key is to know what you have available to you and how this will help you in any strategic initiative. At the same time the organisation needs to know what it is lacking and how things may change in the future. Shortage of
resources will often constrain strategic initiative.

Resources are needed to undertake a strategy:

• "Basic" resources are the same as competitors whereas "unique" resources are different to competitors and more difficult to copy.
• Unique resources may thus be able to create competitive advantage in some situations.

Examples of unique resources are:

• brand
• situation, for example, near a source of raw material or a source of cheap labour
• sunk costs. Competitors have to cover depreciation costs
• right to use a patented process.

Competencies

The term "competence" refers to the activities and processes an organisation uses to deploy its resources effectively. In understanding strategic capability it is thus important to consider resources and how they are used.

As with resources, we can distinguish between two levels of competencies:

• Threshold competencies are those actions and processes that you must be good at just to be considered as a potential supplier to a customer. If these are not satisfied, you will not even get a chance to be considered by the buyer. These are 'the order qualifiers'.
• Core competencies are things that you are able to do that are very difficult for your competitors to emulate. They form the basis for competitive advantage and they are referred to by Johnson & Scholes as 'the order winners'.

Examples of core competencies are:

• sophisticated IT that, for example, enables complex and accurate demand forecasting
• a corporate culture that fosters innovation
• the ability to share and lever knowledge throughout the organisation

Developing strategy

Many theorists of strategic planning argue that strategy should be about developing and extending competencies across markets, rather than focusing on one industry and trying to guess what resources and capabilities will be needed some years hence.

Such thoughts have come from the study of companies such as Marriott, that one normally associates with hotels. However, most of the company's profits come from activities that they learned in the hotel business, but have managed to transfer across the organisation - facilities management, hospitality, conference organisation and very many others. The point is that their experience of competing in hotels has helped them develop a range of competencies in which they are world-class - known as core competencies.

These core competencies are complex harmonisations of knowledge, organisational routines and the integration of production, design and marketing skills. This is a wider use of the term than simply the competencies one needs to be effective in a particular market. The term 'threshold competence' is reserved for these skills that the firm must have to put a saleable product in front of a customer.

Hamel and Prahalad have argued that thinking of businesses as a portfolio of products and markets, rather than a bundle of competencies, is a critical mistake. In their view, strategic management is about identifying, developing and harmonising the core competencies across the organisation. They use the term 'strategic architecture' to discuss the way that information and skills are moved around the organisation.

Sony and Honda, in particular, have a routine of moving experts away from their expertise into different projects and technologies. Consequently, they have a large number of expert generalists working on projects, and can bring technologies together in unexpected ways and find innovative applications for even relatively straightforward ideas.

Although firms can use all the market research techniques available to any firm, they can also rely rather more on the strategic architecture to bring them into contact with customers and partners. Resource-based firms can then diversify on the basis of superior competencies and may shatter the existing patterns of competitive behaviour.

For example, Canon entered the photocopier business against Xerox, a company many times its size. However, it had had superior skills in optics from its experience in cameras and had developed technologies that did not infringe Xerox's patents.

 Marriott moved into many of its new areas by simply noting what went on in its hotels, and thinking about the value added of the various activities.

The key concept here is to match core competencies to the critical success factors in markets.

• One approach could be to to start with a chosen market, then identify the CSFs and then see if we can meet them.
• The alternative is to start with developing core competencies and then asking which markets would these competencies constitute CSFs and hence give competitive advantage.

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