Key Success Factors (KSFs) can be important in managing the company – helping to monitor key dimensions of importance within the organization and drive improvements throughout the firm on such dimensions. However, key success factors can vary in the extent to which they directly connect to firm profitability – some measures very closely connected to profitability (although are often quite distant from individual behaviors), while others are more distant (but potentially more under the control of individuals in the firm). This article explores the range of different Key Success Factors – and how they can complement one another in managing the firm.
Measures closely aligned with firm profitability
Examples of key success factors very closely aligned with profitability
It is often possible to decompose the profitability of the firm into a small number of factors that directly drive the sales or cost of a firm. For example, in the hotel industry, it is possible to break the revenue of the hotel down into two key success factors: occupancy rate and nightly rate. The nightly revenue of the hotel is these two factors multiplied by the number of rooms in the hotel (i.e., nightly revenue = nightly rate * occupancy percentage * the number of rooms).
Benefits of measures closely aligned with firm profitability
The key benefit of measures that are aligned closely with firm profitability is that they are can drive behaviors that most directly influence the profitability of the company. Such measures can help align high-level decisions on behaviors that influence the profitability of the company. They can also provide early warning signs to management of deteriorating performance – as well as possible reasons for a decline.
Limitation of measures closely aligned with firm profitability
The limitation of measures that are very closely aligned with profitability is that they are often quite distant from factors that can be controlled by individuals in the company. While upper management may benefit from understanding the performance of high-level measures, it is difficult for individuals in the company to understand how it should influence their behaviors.
Measures closely aligned with individual behavior
Examples of key success factors very closely aligned with individual behaviors
While certain key success factors are very directly aligned with industry profitability, others are more distant but can be more directly influenced by individuals within the firm. For example, if we take the example of the hotel industry, measures such as the cleanliness of the rooms, or the time taken to clean the rooms are more directly under the control of the cleaning or room service department. While the influence of these factors is less direct on firm profitability, at some level, they will indirectly lead to improved firm performance (by either increasing bookings due to good reviews, or reducing costs by reducing the time required to service the rooms).
Benefits of measures closely aligned with individual behavior
The key benefit of measures that are closely aligned with individual behavior is that they can help motivate direct actions by individuals in the company. Such measures can drive improvements, that may indirectly improve the financial performance of the company over time.
Limitations of measures closely aligned with individual behavior
The key limitation of key success factors that are relatively distant from the profitability of the company (albeit close to individual actions) is that the impact on profitability may be very distant. Sometimes measures that are very proximal, may only have a negligible impact on ultimate profitability. It is important not to become caught up in measures that can be controlled, but ultimately don’t impact the bigger picture.
Balancing different forms of key success factors
It is important to consider a balance between measures that directly influence firm profitability and measures that are more directly aligned with individual behavior. Combining the two forms of measures can both ensure that the company remains focused on the primary drivers of firm performance, while also ensuring that individual behavior is aligned with company performance (and indirectly firm profitability).