"If you know your enemy, and if you know yourself, you need not worry about the outcome of a hundred battles." This oft-quoted principle was made famous more than 2,500 years ago by the famous Chinese warlord Sun Tzu, author of the legendary treatise The Art of War. It seems like a long time ago, but the meaning of benchmarking is very similar: determining your own company's position in the market and then improving it by comparing it to your competitors. The emphasis is on leveraging strengths while simultaneously countering weaknesses.
What is benchmarking?
The term "benchmarking" comes from the English "benchmark". What is a benchmark? You will come across translations such as "standard" or "comparative point", but the essence of benchmarking is best described by "comparative indicator".
Benchmarking itself is one of the tools of strategic management. Ideally, it is a continuous and systematic process of comparing and measuring your own company's products, processes and methods with those of other relevant companies (i.e. those that have been assessed as suitable for your measurement) in order to define targets for improving your own activities. Another well-known definition of benchmarking was mentioned in the very beginning of this article (see the very first sentence).
The first company to make full use of benchmarking in practice was the American Xerox, and this happened in the late 1970s. Benchmarking proved to be a very valuable and effective technique for improving performance and its use spread rapidly thereafter. In the 1980s, the basic practices of benchmarking were defined as follows:
- Identifying the firm or organization that is best at a given activity.
- Analyzing the causes that led to these results.
- Developing plans and processes to improve their own activities and performance.
- Implementing these processes and plans.
- Monitoring and evaluating results.
Today, general benchmarking practices are simplified as follows:
- Establishing the company's own market position - defining the company's activities and identifying its own weaknesses and strengths.
- Determining the position of competitors in the market and then identifying the ways in which it secures its share of a particular market. This is followed by identifying the weaknesses and strengths of competitors.
- Definition of success factors based on the information obtained from the company itself and from companies competing in the market. This is followed by the adoption of the defined factors and the identified strengths of competitors - essentially imitating or modifying the strengths of competitors.
- An attempt to increase the competitiveness of the company and to exploit the knowledge and strengths of the company.
- Repeating the above steps as often as possible and necessary.
Forms and types for benchmarking
Benchmarking in practice is divided into several types and kinds. The most important division is by approach.
The concept of benchmarking by approach
According to the methodological approach, benchmarking is divided into several types:
- Performance (data) benchmarking is based on data that compares relative performance against a number of performance measures, often between competitors. Essentially, it addresses what the company itself is achieving in terms of performance. Its advantage is that it can help identify specific places where the company needs to work most to improve. On the other hand, however, it can be more difficult to interpret the results. In addition, it does not directly identify the processes and company processes by which the desired results are achieved - it does not provide any 'guidance'. It is therefore ideally carried out in conjunction with process benchmarking.
- Process (generic) benchmarking focuses on specific processes of companies that operate similar activities (but not necessarily direct competitors) - it measures individual process performance and functionality and looks for best practices. According to experts, this is the "right" approach to benchmarking - unlike performance benchmarking, it does not look at "what" or "how much" but "how" - it looks at the causes. Its results are also easier to interpret, but on the other hand, the company must define exactly what it will include in the benchmark and what it wants to compare.
- Strategic benchmarking - a special approach consisting of a process of identifying world-class performance and standards that seeks to identify differences in the competitiveness of companies. It is useful in special cases where a company is attempting to revise its strategy or mission. A certain 'sub-class' is then tactical benchmarking, which is used to monitor processes in different sectors.
- Informal benchmarking - is a more "polished" term for "checking out" and comparing competitors' performance, processes and practices during conferences, open days and other similar events. However, it is not benchmarking in the true sense of the word, at least not at the level of performance or process benchmarking.
Types of benchmarking by type of comparison
Benchmarking can be further divided according to the types of benchmarking.
- Internal benchmarking - used mostly in large and multinational companies, where techniques and approaches to work within the company are compared and identified with different divisions that handle similar or the same tasks better. An example would be comparing the approaches to production planning of different plants (within the same organisation) that use different information systems. It is a good preparation for benchmarking activities against external partners and identifies well the differences between sister companies. On the other hand, however, it is only meaningful for large or global companies and identifies opportunities for improvement only within one's own company.
- Competitive benchmarking - usually focuses on the products or processes used by a company's best competitors. It is usually carried out by a third party to ensure that competitive information is not misused, the appearance of which in the final report is then approved by all contributing parties. In practice, such benchmarking may be, for example, a comparison of methods of distributing a product through common distribution channels. This type of benchmarking is good for uncovering the initial area of interest, but it limits the opportunities for improvement to 'business as usual' or competitive practices. A major problem is finding an adequate partner to share in detail and, above all, in a credible way.
- Industry (sometimes functional) benchmarking - compares similar functions within the same industry. It is a good opportunity to achieve great results and enables significant performance improvement.
Why use benchmarking?
Benchmarking will provide one of the clues in the search for an answer to the question "What can we do to be successful (in business)?". Benchmarking will - ideally - describe:
- What to improve - where you have "gaps" compared to competitors based on metrics that compare performance between multiple companies.
- How much improvement is needed - i.e. how big is the performance gap identified by comparing against the identified performance levels.
- How to improve - i.e., how to evaluate the process analysis, what actions to take to improve, and how not to follow best practices.
Benchmarking in practice - how to implement?
The specific procedures for implementing benchmarking in practice cannot be easily determined - first of all, it depends on the type or approach chosen (see above), and there are different process models that differ in the number and priority of steps.
APQC (American Productivity & Quality Center) is a world-renowned leader in benchmarking, measuring business process performance and establishing best practices. The company itself uses a 4-step model; however, it also conducted a survey of 87 other companies that are benchmarking. Based on this, it has created a sort of universal model summarising the usual steps in a generic benchmarking process (i.e. focused on company processes):
Preparing for benchmarking
This includes defining the area to be benchmarked, setting up the relevant work team and thoroughly mapping the company's own processes.
In this step, ask yourself the following questions:
- Have you identified the key success factors of your business?
- Have you assigned a key person to create and lead the benchmarking team?
- Have you correctly identified the area you want to measure?
- Have you determined the results you want to achieve?
- Will the changes in company processes be perceived as beneficial by customers?
- Have you mapped out your process and are you sure you understand how it works specifically?
- Will you be able to compare your parameters with others and can you analyse the results?
Research involves collecting information.
Deal with the following topics:
- Which companies perform the process better and more efficiently?
- Which multinational corporations are the best globally at the process?
Establish a relationship and collaboration with a benchmark partner, establishing a plan and methodology for both gathering and sharing information.
Information gathering and sharing
Usually done through questionnaires, visits and engaging a third party to handle the sharing of sensitive information.
Ask questions about the partner's approach to the process:
- What does their company process look like?
- What is their performance goal?
- How do they measure the performance of their process?
- Can you verify the results in any way?
Analysis and adaptation
This step involves data collation, action planning, implementation and follow-up monitoring. Only continuous improvement should follow. One that will result in the use of best practices that lead to outstanding results - and thus strengthen your company's competitiveness.
But always tailor the specific approach to your company and situation. If you don't dare to do the benchmarking yourself or don't know how to answer certain questions above, contact a specialist consulting company.