Benchmarking as a Strategic Business Tool

Benchmarking is the process of continuously measuring and comparing the business processes against comparable process of the leading organization to obtain the information that will help the organization  to identify and implement improvement programs.

Benchmarking as a tool stems from the early 1980s when organisational specialists from Xerox were discussing the big performance gaps between Xerox and its competitors. These specialists found two major applications for the process. First, benchmarking can be used to understand competitors and any other organisation by isolating and analyzing common functions and comparing the company’s own practices with them. Second, benchmarking can be used to compare the details of processes used in design, manufacture, marketing and services, as opposed to just the finished result

In simple words, benchmarking is an approach of setting goals and measuring productivity based on best industry practices. It developed out of need to have information against which performances can be measured. For example, a customer support engineer of a television manufacturer attends a call within forty-eight hours. If the industry norm is that all calls are attended within twenty-four hours, then the twenty-four hours can be a benchmark.

Benchmarking as a Strategic Business Tool

The essence of benchmarking is to contrast the firm’s performance against some challenging yardsticks. Benchmarking helps in improving performance by learning from best practices and the processes by which they are achieved. It involves regularly comparing different aspects of performance with the best practices, identifying gaps and finding out novel methods to not only reduce the gaps but to improve the situations so that the gaps are positive for the organization. Benchmarking is a multistage process in which the firm doing the benchmarking seeks to learn and incorporate process refinements, even if the model firm is different from its own.

Definitions of Benchmarking by Different Authors

There are many definitions of benchmarking. The formal form of benchmarking was first used in production companies, so it has been closely connected with production, development and quality. More narrowly defined, benchmarking is a systematic and continuous process involving the comparison of characteristics of the best products, services and processes in order to improve business performance

  • “The continuous process of measuring products, services and practices against the toughest competitors or those companies recognised as industry leaders.” – Camp, 1989
  • “A process of finding the world-class examples of a product, service or operational system and then adjusting own products, services or systems to meet or beat those standards.” – Geber, 1990
  • “An ongoing process of measuring and improving products, services and practices against the best.” – Codling, 1992
  • “A continuous process comparing an organisation’s performance against that of the best in the industry considering critical consumer needs and determining what should be improved.” – Vaziri, 1992
  • “The continuous input of new information to an organisation.” – Watson, 1993
  • “Measuring own performance against best-in-class organisations to determine how they achieve their performance levels and use the knowledge to improve own performance.” – Evans, 1993
  • “An excellent tool to use in order to identify a performance goal for improvement, identify partners who have accomplished these goals, identify applicable practices to incorporate into a redesign effort.” – Kleine, 1994
  • “A method for finding how to improve processes quickly by learning from others dealing with similar issues.” – Cortada, 1995
  • “A kind of performance improvement process by identifying, understanding and adopting outstanding practices from within the same organisation or from other businesses.” – Cook, 1995
  • “The process of continuously comparing and measuring an organisation against business leaders anywhere in the world to gain information which will help the organisation take action to improve its performance.” – APQC, 1999

The Benchmarking Process

Benchmarking processes lack standardization. However, common elements are as follows:

  1. Identify the need for benchmarking and planning: This step will define the objectives the benchmarking exercise. It will also involve selecting the type of benchmarking. Organizations identify realistic opportunities for improvements.
  2. Clearly understanding existing business processes: This step will involve compiling information and data on performance. This will include mapping processes. Information and data is collected by different methods for example, interviews, visits and filling of questionnaires.
  3. Identify best processes: Within the selected framework, best processes are identified. These may be within the same organization or external to them.
  4. Compare own processes and performance with that of others: While comparing gaps in performance between the organization and better performer is identified. Further, gaps in performance is analysed to seek explanations. Such comparisons have to be meaningful and credible. Feasibility of making the improvements in the light of the conditions that apply within the organization is also examined.
  5. Prepare a report and implement the steps necessary to close the performance gap: A report on the Benchmarking initiatives containing recommendations is prepared. Such a report includes the action plan(s) for implementation.
  6. Evaluation: Business organizations evaluate the results of the benchmarking process in terms of improvements vis-à-vis objectives and other criteria set for the purpose. It also periodically evaluates and reset the benchmarks in the light of changes in the conditions that impact the performance.

Benchmarking is not a panacea for all problems. Rather, it studies the circumstances and processes that help in superior performance. Better processes are not merely copied. Efforts are made to learn, improve and evolve them to suit the organizational circumstances. Further, benchmarking exercises are also repeated periodically so that the organization does not lag behind in the dynamic environment.

Benefits of Benchmarking

Benchmarking is a process of continuous improvement in search for competitive advantage. It measures a company’s products, services and practices against those of its competitors or other acknowledged leaders in their field. Xerox pioneered this process in late 70’s by benchmarking its manufacturing costs against those of domestic and Japanese competitors and got dramatic improvement in the manufacturing cost. Subsequently ALCOA, Eastman Kodak, IBM adapted benchmarking.

The benefits of benchmarking are as follows:

  • It sparks the creativity of internal people.
  • The firm can be the front runner of implementing practices which was never conceived of in the industry. For example: The “BARCODE” invented by the American Agricultural Food Products Association.
  • Targeting the best, so the firm keeps itself ahead of the other competitors.

Types of Benchmarking

The major types of benchmarking are;

  1. Strategic Benchmarking: Aimed at improving a company’s overall performance by studying the long-term strategies and approaches that helped the ‘best practice’ companies to succeed. It involves examining the core competencies, product/service development and innovation strategies of such companies. This type is usually not industry specific, meaning it is best to look at other industries.
  2. Competitive Benchmarking or Performance Benchmarking: This type of benchmarking examines the products,services and work processes of an organisation’s direct competitors and compares them with the company’sown.This helps the firm to position products,services and processes relative to other companies in the market. Sometimes practices observed elsewhere can easily be applied by an organisation, while occasionally companies that have already undertaken their own benchmarking are willing to exchange information with others. Companies sometimes join forces to benchmark in non-proprietary areas.
  3. Process Benchmarking: The initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms (firms involved in performing similar work or offering similar services).
  4. Functional Benchmarking or Generic Benchmarking: Used by companies to improve their processes or activities by benchmarking with other companies from different business sectors or areas of activity but involved in similar functions or work processes. Regarding this particular type, a company will focus its benchmarking on a single function in order to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
  5. Internal Benchmarking: This type of benchmarking looks at internal business practices and compares them, thereby helping to identify the best practices within an organisation. Internal benchmarking assumes that work processes will differ due to geography, local organisational history,the nature of managers and employees in different locations, etc. The aim is to identify the most effective or efficient work processes in different parts of the organisation and to share them, so that these best practices become widely used throughout the organisation. This internal understanding becomes a baseline when examining other companies. Internal benchmarking allows easy access to information, even sensitive data, and also takes less time and resources than other types of benchmarking.
  6. External Benchmarking: This is used by companies to seek the help of organizations that succeeded on account of their practices. This kind of benchmarking provides an opportunity to learn from high-end performers.

To summarize, benchmarking is a continuous process that provides information a company can use or adapt to improve virtually any corporate activity.The process takes considerable time, effort, discipline and labor. It is not a one-time, quick and easy activity that supplies simple answers. The idea of benchmarking is to learn, understand, assimilate and apply(not copy) what is learned in a pragmatic way that suits the company at hand.

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