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What is a key success factor?
Pergamon
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European Management Journal Vol. 16, No. 3, pp. 335–340, 1998 1998 Published by Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(98)00010-3 0263-2373/98 $19.00 + 0.00
EXECUTIVE BRIEFING
What is a Key Success Factor? ¨ HN, INCAE, Costa Rica WERNER KETELHO Werner Ketelho¨hn argues that the concept of ‘key success factors’ (KSFs) is a key strategic one, and should not be confused with the many fashionable buzzwords in management that come and go. Understanding and developing KSFs enables a company to enter an industry successfully, differentiate between themselves with generic strategies and operate optimally between higher perceived value and lower delivered costs. Ways of identifying operation SKFs are suggested. 1998 Published by Elsevier Science Ltd. All rights reserved “Essential competencies, plain competencies, core competencies, spillover competencies, protective competencies, parasitic competencies, and so on and so forth, what do all these buzzwords mean? Do I need to understand all this ‘stuff’ in order to run a successful business? Is there something new in these words? I now hear from young MBA employees that key success factors are out of favor and that I should think in terms of sticky factors. What is wrong with the old concepts?” These were the frustrated words of Ivar Bergman, general manager of a Norwegian aluminum extrusion division in a major Scandinavian industrial conglomerate, as we drove to Oslo from Fornebu airport, during a beautiful August 1997 summer night. Indeed, a Babel of buzzwords proliferate in contemporary management writings without increasing our understanding of the art and science of management. When a new generation of professors and consultants replaces the previous one, many concepts and insights are rediscovered creating, in the process, waves of new words, terms and definitions. These avalanches of buzzwords may create more harm and confusion than good. We believe there is no need to re-baptize a traditional concept to explain contemporary business phenomena. In our view, business concepts have not increased enough to justify the creation of so many buzzwords. We believe that new words should be reserved to the few truly new concepts that are discovered once in a decade. So, it is important to understand ‘old’ notions, and the context in which they are applied. European Management Journal Vol 16 No 3 June 1998
Consider Ivar’s understanding of key success factors (KSFs). “There are, of course, KSFs for everything. There are a few things that one has to be able to execute well to compete in a particular endeavor. Think of athletes preparing for different races. Clearly they must all train, but they do so differently, depending on the race they are going to run. The muscular build of a 100 m sprinter is completely different from that of a marathon runner. And so are the standard training methods used to develop their physical fitness. What is key to succeed in a 100 m race is different from what it takes to succeed in a marathon. Standard training, however, does not guarantee victory it merely prepares athletes for the race. Standard training is used to build the minimum physical fitness to qualify for the race. It is the key to enter the race.” “In business it is the same. There are KSFs for everything. For instance, for a product launch, for brand management, and anything else that can challenge an organization. Why confuse us with so many other terms? KSFs are relative to the endeavor under scrutiny”. “The KSFs to make money in an industry are most effective in that industry. Just like the training methods for a 100-m race are most effective for that race. An industry’s KSFs are the minimum capabilities that a company must master to enter the competition. In the apparel industry, for instance, there are three KSFs: capturing the market’s mood; quick response to market needs; and shifting inventory risk on suppliers or retailers. Instead, the KSFs of the soya bean industry are purchasing expertise; low cost logistics; and financing high volumes. However, mastering industry KSFs is not enough to win. Industry KSFs do not guarantee the biggest profits, they just prepare the company for competition”. When CEOs are asked: what are the three most important themes in your business? Some respond, in retail one must pay attention to sales per square meter, inventory risks and full price sales; in consulting put attention on leverage of young consult335
WHAT IS A KEY SUCCESS FACTOR?
ants’ time; and in grains pay attention to financing high volumes, purchasing, and logistics. These are, they argue, the keys to success in their business. Their basic idea is that there are a few important things that a company must do well to compete in an industry – the keys to success in that industry. Furthermore, they believe in the existence of an industry business system. An industry business system, they say, is the activity chain used by a typical company in that industry. When Hering textiles, a corporation based in Santa Catarina, Brazil, decided to reorganize its business into five operating units, it was responding to the realization that each business unit had to develop specialized capabilities, corresponding to the KSFs of the industrial sector in which they competed. They sought to create company skills capable of delivering the KSFs required for competing in their industrial sector. These capabilities did not guarantee out-performance, they just assured that the businesses would develop the minimum requirements to compete. Using Ivar’s analogy, industry KSFs are like the physical fitness athletes need to develop to enter a race. Likewise, companies also need to develop special skills to compete in an industry, and these are the KSFs of that industry. So, once we understand the industry’s KSFs we should examine our company skills – capabilities – to check whether or not they are suited to deliver what it takes to compete in the industry. CEOs use Industry KSFs to answer the question: do we have the key to enter? Now, if everyone in the Brazilian apparel industry cultivates the KSFs, will they all make money? Not necessarily so! They would be a bunch of companies stuck in the middle. Typical companies, although representative of the industry, don’t occupy a winning position. The KSFs of typical companies simply define what has to be done on the average to compete in that industry. So, Hering Textiles’ business units also needed differentiation.
Differentiation “I once read,” continued Ivar, “ a piece by Bruce Henderson, founder of the Boston Consulting Group, entitled The Origin of Strategy. Bruce recounted how Professor Gause, a Russian experimental biologist, cultivated three types of bacteria: for simplicity red, blue and yellow bacteria. These three different species would eat exactly the same food. Professor Gause would carefully take equal amounts of bacteria and put them on the same feeding media. The experiment showed that after a few days only one type of bacteria would survive. The catch was that it was impossible to predict which type of bacteria would prevail after two days. For sometimes the whole plate was blue, sometimes red and yet at other times yel336
low. Survival occurred at random. Professor Gause proved that if different bacteria, eating exactly the same food, were placed together, only one would survive in the long run. Instead, if they fed on different nutrients, they would all survive. He proved that bacteria that differentiated themselves from the rest survived. Bruce extended this biological analogy to business competition. He argued that the essence of strategy is differentiation.” It follows that if all companies satisfy an industry’s KSFs, going about their business in identical ways, in the long run only one would survive. Furthermore, the survivor would be selected at random. When all companies operate the same way, economic competition is best described with the laws of chance. So, companies mastering industry KSFs still need to differentiate themselves from average performers to survive in the long run. Eventually, a few competitors will manage to attract the best suppliers, customers and other stakeholders because they offer a unique proposition – a compelling reason to do business with them. The essence of strategy is indeed differentiation – giving our customers a reason to choose our company. Differentiation is a key concept. A company’s strategy is not achieved with mastering the industry’s KSFs alone, it also requires mastering capabilities that differentiate the company in the eyes of its suppliers, customers and other stakeholders.
Generic Strategies Each company has a bundle of activities that is peculiar to its way of doing business – its business system. But not all business systems are worth studying. We prefer to classify competitors into strategically relevant groups, and then proceed to study what the most important competitors in these groups are doing to make money. This way we end up studying only companies pursuing typical strategies. Each one representing an important strategic group. The idea is that by understanding how they make money we’ll create insights about how to compete with them. Consider two generic ways with which a company can differentiate itself: either by achieving higher perceived value or lower delivered costs than its competitors. For a given technology, the graph of all possible effective and efficient (PV, DC) combinations, defines the efficient frontier shown in Figure 1. Points B and C, on the efficient frontier, position companies following High Perceived Value (HPV) and Low Delivered Costs (LDC) strategies respectively. The business system of a typical competitor is created by the activities that position the company as ‘stuck in the middle’, at point A0. These activities are neither particularly effective nor efficient, and some don’t European Management Journal Vol 16 No 3 June 1998
WHAT IS A KEY SUCCESS FACTOR?
Figure 1 Floor Performance
even ‘fit’ in the system. The system just provides the entry ticket to the industry, producing the required goods/services at a relatively high delivered cost (HDC) and a low perceived value (LPV). Typical business systems produce sub-optimal outputs – they position a company away from the efficient frontier. Companies lacking focus, for instance, get stuck in the middle by a subset of unrelated activities that consume time, energy and money. Optimal perceived value is achieved if the company reaches the B or C position. At B, the company achieves twice as much perceived value as at A0 for the same delivered costs. At C, the company achieves the same perceived value as at A0, but at one fourth of the delivered costs. Position A is also on the efficient frontier, requiring an effective and efficient business system as well. The performance of the average competitor should not fall below the floor (A0), if so, they don’t even master the industry’s KSFs. To lift a company’s performance from that floor, strategists approach the efficient frontier by either improving the perceived value (from A0 to B), decreasing their delivered costs (from A0 to C), or both (from A0 to A). The measures taken during this journey are the keys to operational success with the new strategic position. Certainly business systems are company specific. But the business system used by competitors following a generic strategy provides a description of how these companies have chosen to position themselves. The point is that to achieve a specific strategic position a company has to put in place a corresponding bundle European Management Journal Vol 16 No 3 June 1998
of activities. So, there is a business system for each generic strategy. Seasoned executives extend the key success factor argument to each generic strategy. They claim that there are a few important things that make companies succeed with each generic strategy – the operational key success factors (OKSF) of that strategy. In their view, OKSF drive the company’s profits. They believe that certain business system activities, OKSF, are profit drivers (create profitability) and capture these profits for the company (create appropriability). When we identified the relevant business systems in the US$10 billion Brazilian meat industry we looked at outpacing Sadia and focused Frangosul to understand what they were doing. They executed different business systems to make money. Sadia’s keys to success were: first, its top of mind brand name recognition which allowed it to charge prices on average 7 per cent higher than its competitors. The activities that sustained this brand name recognition were one OKSF. Second, Sadia’s geographically concentrated slaughtering activities, in both chicken and pork, offered opportunities to gain economies of scale, provided that their partner farmers were located close enough to appropriate these economies. Third, the activities supporting the excellent Feed Conversion Ratio achieved by Sadia’s partner-farmers, 1.65 for 35 day export birds and 1.96 for 45 day birds. All other activities in Sadia’s business system were necessary ingredients for sustaining their strategic position. However, the OKSF mentioned above had the biggest impact on the company’s delivered cost and perceived value. They were the main drivers of Sadia’s profitability. 337
WHAT IS A KEY SUCCESS FACTOR?
Frangosul, instead, could care less about its brand name recognition and marketing activities to sustain it. Their OKSF were specialized feed plants located near their partner-farmers; 1800 focused rearing farms located in Rio Grande Do Sul, near their two slaughter houses; and their focused customer set chosen among Brazil’s food distributors. Although the company could benefit from bigger slaughter houses to improve economies of scale, the OKSF were all related to the three bundles of activities that had the biggest impact on lowering the delivered cost of fresh and frozen whole chickens.
There Are Few Key Success Factors A strategically relevant activity can have different levels of effectiveness and corresponding efficiency. Airline cabin attention between first, business and tourist class differs in both measures. An effective service in first class costs much more to deliver than an effective service in tourist class. So, we can increase PV by trading it off with higher DC. In this sense business system activities have slack for a given technology. The chosen PV and DC targets define this slack. Certain business system activities don’t make an impact on differentiation because everybody can imitate them. For example, all HPV competitors can buy the same first class tickets, whilst all LDC competitors can buy the same tourist class tickets. These activities are necessary to maintain a desired position but are not keys to differentiation from companies occupying the same position A0. At this position most easy to copy activities are already included. The point is that certain activities, although necessary for an HPV or LDC position, are not keys to success because all competitors can copy them easily. So, inimitability is another property of an operational key success factor – OKSF are difficult to copy.
desired position in the European refractory market for steel and iron mills. Our refractory friends would be better served if they actually invested in activities that will help them develop the European refractory market of iron and steel mills. So, An optimal business system is effective if it delivers the chosen perceived value and efficient if it does so at the chosen delivered cost. It has been argued that OKSF are not important because all activities in the system need to be optimized to be on the efficient frontier. But few companies operate at the efficient frontier. Without exception we have encountered ineffective or inefficient execution of strategically relevant activities. All companies we have seen operate near A0, so that by optimizing just a few activities we drastically approach the efficient frontier at A, B, or C in Figure 1. This is why we strongly recommend the identification of OKSFs. OKSFs are value and cost drivers that push a company towards its desired position on the efficient frontier. So, every business system has operational key success factors for its execution. The point is that there are two or three key activities, OKSF, that need to be executed extremely well to put a company near the efficient frontier – keys to making money with a strategy. The slogan ‘good can be done better’ is indeed true for companies occupying sub-optimal positions.
Identifying Operational Key Success Factors in a Business System Any system, like any argument, is as strong as its weakest link. For example, the capacity of a manufacturing system is determined by the element with the lowest capacity. They are called bottlenecks. So, one approach is to consider the weakest link in a business system as an OKSF. Strengthen the weakest link, and we strengthen the business system’s performance.
However, if we change the target PV and corresponding DC of strategically relevant activities, the company’s strategic position may also change. Changing a strategically relevant activity may trigger a movement away from the floor position A0 in Figure 1. The activities triggering the largest movements towards the efficient frontier are the OKSF of that strategy!
A point in case is the business system of the acoustic systems suppliers to the automobile industry, shown in Figure 2. Each depicted activity generates a PV at a DC, accordingly, competitors can position themselves in the industry in terms of PV and DC. Perceived value is a function of delivered costs, as expressed by PV = f(DC)
Now, a business system achieves its operational effectiveness when the entire bundle of activities delivers the desired perceived value at the targeted delivered costs. A good counter example is provided by a refractory concern in the USA. Their strategy called for an expansion of their traditional refractory for steel and iron mills in continental Europe, but investments in these projects were kept at a minimum. Nevertheless, they were investing heavily in supplying refractory products to cement mills in the USA. These investments were not building the
For a LDC strategy the weakest link is the cost drivers of the activity with the highest costs – purchasing in Figure 2. For an HPV strategy the weakest links are the perceived value drivers of the activity with the less expensive perceived value – joint development in Figure 2. By strengthening the weakest link the business system will become as strong as the second weakest link. Hence we propose that the three weakest links in the system are OKSF of that system.
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One way to identify the weakest links (OKSFs) in a European Management Journal Vol 16 No 3 June 1998
WHAT IS A KEY SUCCESS FACTOR?
Figure 2 PV and DC Relationships for Acoustic Systems Suppliers
system consists of drawing a PERT diagram, linking the activities of a company’s business system on the efficient frontier. At position A, PVA represents the value objective that must be reached by the business system, without exceeding DCA. Some activities will be at their floor cost (can’t lower the costs any further) or ceiling value (can’t improve the perceived value any further), whilst others will be on the critical path. Critical activities will be at their trade-off limit. The activities on the critical path are keys to operational success for the chosen strategic position. When this system is optimized on the efficient frontier, upgrading the value creation or cost savings of non-critical activities won’t improve the system’s performance. Such efforts would be wasteful, and would drive the company off the efficient frontier. Failure to execute OKSF – with target effectiveness and efficiency – will most likely change the critical path, but surely changes a company’s strategic position. So, if two companies occupy the same strategic position, the one executing the OKSF optimally will differentiate itself more. A simpler way to identify OKSF consists of going through the elements of the company’s business system identifying the activities or themes with the biggest impact on the delivered cost and/or perceived value of the final customers as shown in Figure 2. Among all these activities, the three with the highest impact would be key to position the company closest to its target on the efficient frontier. They are the OKSF for the chosen strategy. Finally, Industry standards are components or patents at the center of a product’s functionality. An industry standard is not the same as a standard component. The latter everybody can use because it is a standard readily available; the former everybody must use to achieve standard functionality. An industry standard not only drives the functionality of the end product, but is also used in most products in the industry. So, European Management Journal Vol 16 No 3 June 1998
monopolizing an industry standard becomes an important strategic objective, a key to success. When an industry standard has been imposed, there are continuous attempts to imitate or substitute it with better products or new technologies. When Microsoft launched Windows 3.0 in mid 1990, it both substituted its DOS operating system and imitated the Mac’s interface. Seeking to gain independence from Microsoft’s DOS, IBM worked together with Microsoft on OS/2, a potential successor to DOS in the 1990s. Since the sales of the first release of OS/2 were disappointing, Microsoft released Windows 3.0, a program that enhanced DOS machines by giving them some Macintosh features. Windows was an immediate and surprising hit, it gave millions of old DOS machines a second life. As a result, all other software companies had to pass through a new industry standard: Windows. Apple, at the time with only 7 per cent of the global PC market, was hurt badly by Microsoft’s success with Windows 3.0. Microsoft hurt Apple by making DOS machines look like Macs, and IBM by destroying its plans for OS/2. Worse still, Apple saw its niche market strategy destroyed by the millions of installed DOS machines which could suddenly function almost as a Mac; and IBM had to watch the erosion of the value added by OS/2. Both IBM and Apple lost their differentiation because Microsoft imitated OS/2 and Apple’s operating system, upgrading in the process an immense base of installed DOS machines. In 1997, with hundreds of millions Wintel machines in the market, it is virtually impossible to challenge Windows 95, unless the standard is rendered obsolete through technological innovation.
Conclusions The notion of KSFs is a key strategic concept. It requires understanding the context in which it is 339
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used. There are key success factors for everything, for an industry; each generic strategy; and each company. The keys for operational success position a company near the efficient frontier. Failure to execute an OKSF, shifts the company’s position considerably away from its goal. OKSF can be identified in several ways. First, among the three weakest links in the activity chain; second, among the activities, in the company’s business system, with the highest impact on the delivered cost or perceived value; third, with the activities on the business system’s critical path; and fourth, among industry standards.
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WERNER ¨ HN, KETELHO P.O. Box 025216, Miami, Florida 33102-5216, USA. Werner Ketelho¨hn is Professor of Management at INCAE, (Instituto Centroamericano de Administracion de Empresas), Costa Rica and Visiting Professor at IMD, Lausanne. He has German–Nicaraguan nationality and has spent many years as an entrepreneur and consultant in Central America. He works in the field of strategic problem identification through participative processes and in the design of management development programmes.
European Management Journal Vol 16 No 3 June 1998
PII:
European Management Journal Vol. 16, No. 3, pp. 335–340, 1998 1998 Published by Elsevier Science Ltd. All rights reserved Printed in Great Britain S0263-2373(98)00010-3 0263-2373/98 $19.00 + 0.00
EXECUTIVE BRIEFING
What is a Key Success Factor? ¨ HN, INCAE, Costa Rica WERNER KETELHO Werner Ketelho¨hn argues that the concept of ‘key success factors’ (KSFs) is a key strategic one, and should not be confused with the many fashionable buzzwords in management that come and go. Understanding and developing KSFs enables a company to enter an industry successfully, differentiate between themselves with generic strategies and operate optimally between higher perceived value and lower delivered costs. Ways of identifying operation SKFs are suggested. 1998 Published by Elsevier Science Ltd. All rights reserved “Essential competencies, plain competencies, core competencies, spillover competencies, protective competencies, parasitic competencies, and so on and so forth, what do all these buzzwords mean? Do I need to understand all this ‘stuff’ in order to run a successful business? Is there something new in these words? I now hear from young MBA employees that key success factors are out of favor and that I should think in terms of sticky factors. What is wrong with the old concepts?” These were the frustrated words of Ivar Bergman, general manager of a Norwegian aluminum extrusion division in a major Scandinavian industrial conglomerate, as we drove to Oslo from Fornebu airport, during a beautiful August 1997 summer night. Indeed, a Babel of buzzwords proliferate in contemporary management writings without increasing our understanding of the art and science of management. When a new generation of professors and consultants replaces the previous one, many concepts and insights are rediscovered creating, in the process, waves of new words, terms and definitions. These avalanches of buzzwords may create more harm and confusion than good. We believe there is no need to re-baptize a traditional concept to explain contemporary business phenomena. In our view, business concepts have not increased enough to justify the creation of so many buzzwords. We believe that new words should be reserved to the few truly new concepts that are discovered once in a decade. So, it is important to understand ‘old’ notions, and the context in which they are applied. European Management Journal Vol 16 No 3 June 1998
Consider Ivar’s understanding of key success factors (KSFs). “There are, of course, KSFs for everything. There are a few things that one has to be able to execute well to compete in a particular endeavor. Think of athletes preparing for different races. Clearly they must all train, but they do so differently, depending on the race they are going to run. The muscular build of a 100 m sprinter is completely different from that of a marathon runner. And so are the standard training methods used to develop their physical fitness. What is key to succeed in a 100 m race is different from what it takes to succeed in a marathon. Standard training, however, does not guarantee victory it merely prepares athletes for the race. Standard training is used to build the minimum physical fitness to qualify for the race. It is the key to enter the race.” “In business it is the same. There are KSFs for everything. For instance, for a product launch, for brand management, and anything else that can challenge an organization. Why confuse us with so many other terms? KSFs are relative to the endeavor under scrutiny”. “The KSFs to make money in an industry are most effective in that industry. Just like the training methods for a 100-m race are most effective for that race. An industry’s KSFs are the minimum capabilities that a company must master to enter the competition. In the apparel industry, for instance, there are three KSFs: capturing the market’s mood; quick response to market needs; and shifting inventory risk on suppliers or retailers. Instead, the KSFs of the soya bean industry are purchasing expertise; low cost logistics; and financing high volumes. However, mastering industry KSFs is not enough to win. Industry KSFs do not guarantee the biggest profits, they just prepare the company for competition”. When CEOs are asked: what are the three most important themes in your business? Some respond, in retail one must pay attention to sales per square meter, inventory risks and full price sales; in consulting put attention on leverage of young consult335
WHAT IS A KEY SUCCESS FACTOR?
ants’ time; and in grains pay attention to financing high volumes, purchasing, and logistics. These are, they argue, the keys to success in their business. Their basic idea is that there are a few important things that a company must do well to compete in an industry – the keys to success in that industry. Furthermore, they believe in the existence of an industry business system. An industry business system, they say, is the activity chain used by a typical company in that industry. When Hering textiles, a corporation based in Santa Catarina, Brazil, decided to reorganize its business into five operating units, it was responding to the realization that each business unit had to develop specialized capabilities, corresponding to the KSFs of the industrial sector in which they competed. They sought to create company skills capable of delivering the KSFs required for competing in their industrial sector. These capabilities did not guarantee out-performance, they just assured that the businesses would develop the minimum requirements to compete. Using Ivar’s analogy, industry KSFs are like the physical fitness athletes need to develop to enter a race. Likewise, companies also need to develop special skills to compete in an industry, and these are the KSFs of that industry. So, once we understand the industry’s KSFs we should examine our company skills – capabilities – to check whether or not they are suited to deliver what it takes to compete in the industry. CEOs use Industry KSFs to answer the question: do we have the key to enter? Now, if everyone in the Brazilian apparel industry cultivates the KSFs, will they all make money? Not necessarily so! They would be a bunch of companies stuck in the middle. Typical companies, although representative of the industry, don’t occupy a winning position. The KSFs of typical companies simply define what has to be done on the average to compete in that industry. So, Hering Textiles’ business units also needed differentiation.
Differentiation “I once read,” continued Ivar, “ a piece by Bruce Henderson, founder of the Boston Consulting Group, entitled The Origin of Strategy. Bruce recounted how Professor Gause, a Russian experimental biologist, cultivated three types of bacteria: for simplicity red, blue and yellow bacteria. These three different species would eat exactly the same food. Professor Gause would carefully take equal amounts of bacteria and put them on the same feeding media. The experiment showed that after a few days only one type of bacteria would survive. The catch was that it was impossible to predict which type of bacteria would prevail after two days. For sometimes the whole plate was blue, sometimes red and yet at other times yel336
low. Survival occurred at random. Professor Gause proved that if different bacteria, eating exactly the same food, were placed together, only one would survive in the long run. Instead, if they fed on different nutrients, they would all survive. He proved that bacteria that differentiated themselves from the rest survived. Bruce extended this biological analogy to business competition. He argued that the essence of strategy is differentiation.” It follows that if all companies satisfy an industry’s KSFs, going about their business in identical ways, in the long run only one would survive. Furthermore, the survivor would be selected at random. When all companies operate the same way, economic competition is best described with the laws of chance. So, companies mastering industry KSFs still need to differentiate themselves from average performers to survive in the long run. Eventually, a few competitors will manage to attract the best suppliers, customers and other stakeholders because they offer a unique proposition – a compelling reason to do business with them. The essence of strategy is indeed differentiation – giving our customers a reason to choose our company. Differentiation is a key concept. A company’s strategy is not achieved with mastering the industry’s KSFs alone, it also requires mastering capabilities that differentiate the company in the eyes of its suppliers, customers and other stakeholders.
Generic Strategies Each company has a bundle of activities that is peculiar to its way of doing business – its business system. But not all business systems are worth studying. We prefer to classify competitors into strategically relevant groups, and then proceed to study what the most important competitors in these groups are doing to make money. This way we end up studying only companies pursuing typical strategies. Each one representing an important strategic group. The idea is that by understanding how they make money we’ll create insights about how to compete with them. Consider two generic ways with which a company can differentiate itself: either by achieving higher perceived value or lower delivered costs than its competitors. For a given technology, the graph of all possible effective and efficient (PV, DC) combinations, defines the efficient frontier shown in Figure 1. Points B and C, on the efficient frontier, position companies following High Perceived Value (HPV) and Low Delivered Costs (LDC) strategies respectively. The business system of a typical competitor is created by the activities that position the company as ‘stuck in the middle’, at point A0. These activities are neither particularly effective nor efficient, and some don’t European Management Journal Vol 16 No 3 June 1998
WHAT IS A KEY SUCCESS FACTOR?
Figure 1 Floor Performance
even ‘fit’ in the system. The system just provides the entry ticket to the industry, producing the required goods/services at a relatively high delivered cost (HDC) and a low perceived value (LPV). Typical business systems produce sub-optimal outputs – they position a company away from the efficient frontier. Companies lacking focus, for instance, get stuck in the middle by a subset of unrelated activities that consume time, energy and money. Optimal perceived value is achieved if the company reaches the B or C position. At B, the company achieves twice as much perceived value as at A0 for the same delivered costs. At C, the company achieves the same perceived value as at A0, but at one fourth of the delivered costs. Position A is also on the efficient frontier, requiring an effective and efficient business system as well. The performance of the average competitor should not fall below the floor (A0), if so, they don’t even master the industry’s KSFs. To lift a company’s performance from that floor, strategists approach the efficient frontier by either improving the perceived value (from A0 to B), decreasing their delivered costs (from A0 to C), or both (from A0 to A). The measures taken during this journey are the keys to operational success with the new strategic position. Certainly business systems are company specific. But the business system used by competitors following a generic strategy provides a description of how these companies have chosen to position themselves. The point is that to achieve a specific strategic position a company has to put in place a corresponding bundle European Management Journal Vol 16 No 3 June 1998
of activities. So, there is a business system for each generic strategy. Seasoned executives extend the key success factor argument to each generic strategy. They claim that there are a few important things that make companies succeed with each generic strategy – the operational key success factors (OKSF) of that strategy. In their view, OKSF drive the company’s profits. They believe that certain business system activities, OKSF, are profit drivers (create profitability) and capture these profits for the company (create appropriability). When we identified the relevant business systems in the US$10 billion Brazilian meat industry we looked at outpacing Sadia and focused Frangosul to understand what they were doing. They executed different business systems to make money. Sadia’s keys to success were: first, its top of mind brand name recognition which allowed it to charge prices on average 7 per cent higher than its competitors. The activities that sustained this brand name recognition were one OKSF. Second, Sadia’s geographically concentrated slaughtering activities, in both chicken and pork, offered opportunities to gain economies of scale, provided that their partner farmers were located close enough to appropriate these economies. Third, the activities supporting the excellent Feed Conversion Ratio achieved by Sadia’s partner-farmers, 1.65 for 35 day export birds and 1.96 for 45 day birds. All other activities in Sadia’s business system were necessary ingredients for sustaining their strategic position. However, the OKSF mentioned above had the biggest impact on the company’s delivered cost and perceived value. They were the main drivers of Sadia’s profitability. 337
WHAT IS A KEY SUCCESS FACTOR?
Frangosul, instead, could care less about its brand name recognition and marketing activities to sustain it. Their OKSF were specialized feed plants located near their partner-farmers; 1800 focused rearing farms located in Rio Grande Do Sul, near their two slaughter houses; and their focused customer set chosen among Brazil’s food distributors. Although the company could benefit from bigger slaughter houses to improve economies of scale, the OKSF were all related to the three bundles of activities that had the biggest impact on lowering the delivered cost of fresh and frozen whole chickens.
There Are Few Key Success Factors A strategically relevant activity can have different levels of effectiveness and corresponding efficiency. Airline cabin attention between first, business and tourist class differs in both measures. An effective service in first class costs much more to deliver than an effective service in tourist class. So, we can increase PV by trading it off with higher DC. In this sense business system activities have slack for a given technology. The chosen PV and DC targets define this slack. Certain business system activities don’t make an impact on differentiation because everybody can imitate them. For example, all HPV competitors can buy the same first class tickets, whilst all LDC competitors can buy the same tourist class tickets. These activities are necessary to maintain a desired position but are not keys to differentiation from companies occupying the same position A0. At this position most easy to copy activities are already included. The point is that certain activities, although necessary for an HPV or LDC position, are not keys to success because all competitors can copy them easily. So, inimitability is another property of an operational key success factor – OKSF are difficult to copy.
desired position in the European refractory market for steel and iron mills. Our refractory friends would be better served if they actually invested in activities that will help them develop the European refractory market of iron and steel mills. So, An optimal business system is effective if it delivers the chosen perceived value and efficient if it does so at the chosen delivered cost. It has been argued that OKSF are not important because all activities in the system need to be optimized to be on the efficient frontier. But few companies operate at the efficient frontier. Without exception we have encountered ineffective or inefficient execution of strategically relevant activities. All companies we have seen operate near A0, so that by optimizing just a few activities we drastically approach the efficient frontier at A, B, or C in Figure 1. This is why we strongly recommend the identification of OKSFs. OKSFs are value and cost drivers that push a company towards its desired position on the efficient frontier. So, every business system has operational key success factors for its execution. The point is that there are two or three key activities, OKSF, that need to be executed extremely well to put a company near the efficient frontier – keys to making money with a strategy. The slogan ‘good can be done better’ is indeed true for companies occupying sub-optimal positions.
Identifying Operational Key Success Factors in a Business System Any system, like any argument, is as strong as its weakest link. For example, the capacity of a manufacturing system is determined by the element with the lowest capacity. They are called bottlenecks. So, one approach is to consider the weakest link in a business system as an OKSF. Strengthen the weakest link, and we strengthen the business system’s performance.
However, if we change the target PV and corresponding DC of strategically relevant activities, the company’s strategic position may also change. Changing a strategically relevant activity may trigger a movement away from the floor position A0 in Figure 1. The activities triggering the largest movements towards the efficient frontier are the OKSF of that strategy!
A point in case is the business system of the acoustic systems suppliers to the automobile industry, shown in Figure 2. Each depicted activity generates a PV at a DC, accordingly, competitors can position themselves in the industry in terms of PV and DC. Perceived value is a function of delivered costs, as expressed by PV = f(DC)
Now, a business system achieves its operational effectiveness when the entire bundle of activities delivers the desired perceived value at the targeted delivered costs. A good counter example is provided by a refractory concern in the USA. Their strategy called for an expansion of their traditional refractory for steel and iron mills in continental Europe, but investments in these projects were kept at a minimum. Nevertheless, they were investing heavily in supplying refractory products to cement mills in the USA. These investments were not building the
For a LDC strategy the weakest link is the cost drivers of the activity with the highest costs – purchasing in Figure 2. For an HPV strategy the weakest links are the perceived value drivers of the activity with the less expensive perceived value – joint development in Figure 2. By strengthening the weakest link the business system will become as strong as the second weakest link. Hence we propose that the three weakest links in the system are OKSF of that system.
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One way to identify the weakest links (OKSFs) in a European Management Journal Vol 16 No 3 June 1998
WHAT IS A KEY SUCCESS FACTOR?
Figure 2 PV and DC Relationships for Acoustic Systems Suppliers
system consists of drawing a PERT diagram, linking the activities of a company’s business system on the efficient frontier. At position A, PVA represents the value objective that must be reached by the business system, without exceeding DCA. Some activities will be at their floor cost (can’t lower the costs any further) or ceiling value (can’t improve the perceived value any further), whilst others will be on the critical path. Critical activities will be at their trade-off limit. The activities on the critical path are keys to operational success for the chosen strategic position. When this system is optimized on the efficient frontier, upgrading the value creation or cost savings of non-critical activities won’t improve the system’s performance. Such efforts would be wasteful, and would drive the company off the efficient frontier. Failure to execute OKSF – with target effectiveness and efficiency – will most likely change the critical path, but surely changes a company’s strategic position. So, if two companies occupy the same strategic position, the one executing the OKSF optimally will differentiate itself more. A simpler way to identify OKSF consists of going through the elements of the company’s business system identifying the activities or themes with the biggest impact on the delivered cost and/or perceived value of the final customers as shown in Figure 2. Among all these activities, the three with the highest impact would be key to position the company closest to its target on the efficient frontier. They are the OKSF for the chosen strategy. Finally, Industry standards are components or patents at the center of a product’s functionality. An industry standard is not the same as a standard component. The latter everybody can use because it is a standard readily available; the former everybody must use to achieve standard functionality. An industry standard not only drives the functionality of the end product, but is also used in most products in the industry. So, European Management Journal Vol 16 No 3 June 1998
monopolizing an industry standard becomes an important strategic objective, a key to success. When an industry standard has been imposed, there are continuous attempts to imitate or substitute it with better products or new technologies. When Microsoft launched Windows 3.0 in mid 1990, it both substituted its DOS operating system and imitated the Mac’s interface. Seeking to gain independence from Microsoft’s DOS, IBM worked together with Microsoft on OS/2, a potential successor to DOS in the 1990s. Since the sales of the first release of OS/2 were disappointing, Microsoft released Windows 3.0, a program that enhanced DOS machines by giving them some Macintosh features. Windows was an immediate and surprising hit, it gave millions of old DOS machines a second life. As a result, all other software companies had to pass through a new industry standard: Windows. Apple, at the time with only 7 per cent of the global PC market, was hurt badly by Microsoft’s success with Windows 3.0. Microsoft hurt Apple by making DOS machines look like Macs, and IBM by destroying its plans for OS/2. Worse still, Apple saw its niche market strategy destroyed by the millions of installed DOS machines which could suddenly function almost as a Mac; and IBM had to watch the erosion of the value added by OS/2. Both IBM and Apple lost their differentiation because Microsoft imitated OS/2 and Apple’s operating system, upgrading in the process an immense base of installed DOS machines. In 1997, with hundreds of millions Wintel machines in the market, it is virtually impossible to challenge Windows 95, unless the standard is rendered obsolete through technological innovation.
Conclusions The notion of KSFs is a key strategic concept. It requires understanding the context in which it is 339
WHAT IS A KEY SUCCESS FACTOR?
used. There are key success factors for everything, for an industry; each generic strategy; and each company. The keys for operational success position a company near the efficient frontier. Failure to execute an OKSF, shifts the company’s position considerably away from its goal. OKSF can be identified in several ways. First, among the three weakest links in the activity chain; second, among the activities, in the company’s business system, with the highest impact on the delivered cost or perceived value; third, with the activities on the business system’s critical path; and fourth, among industry standards.
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WERNER ¨ HN, KETELHO P.O. Box 025216, Miami, Florida 33102-5216, USA. Werner Ketelho¨hn is Professor of Management at INCAE, (Instituto Centroamericano de Administracion de Empresas), Costa Rica and Visiting Professor at IMD, Lausanne. He has German–Nicaraguan nationality and has spent many years as an entrepreneur and consultant in Central America. He works in the field of strategic problem identification through participative processes and in the design of management development programmes.
European Management Journal Vol 16 No 3 June 1998