Benchmarking is the practice of comparing something with the best in that particular area.
From a business perspective, the process of benchmarking helps companies realize the true potential of the company.
In addition, the process of benchmarking also helps identify metrics and in turn areas of improvement.
Although to benchmark is not a compulsion or rather the only way to find areas that can be improved, it is one of the most widely used management tools.
Why do Companies Benchmark?
Benchmarking reveals a lot of information about both internal and external affairs. Obviously, such information is otherwise unknown to the management of companies.
For Instance, if a CEO is curious to know how much sales is his company doing, it is imperative for him to Benchmark against his direct and indirect competitors for this metric.
After the process, he would use the results to brief his teams internally, set new targets, think of new strategies to improve sales, come up with new products to compensate elsewhere, etc.
So you see, just one benchmarked metric can add so much value to the organization’s way of doing things. Similarly, companies that do benchmarking regularly are always up to date
I can think of 2 main reasons why Companies benchmark:
- Helps Companies Gain Perspective
- Helps Adopt Best Practices
1. Helps Companies Gain Perspective
You must have heard a very famous saying, “Information is key to winning a war”. This is very relevant here because companies must know how they are doing in the market. Are they flourishing or struggling?
And to have this understanding, they need some scale or reference. But can they achieve this without doing anything?
No. Companies cannot have any perspective without taking steps in that direction.
Benchmarking brings in that perspective of how the company is doing in comparison to the best in that industry or business. And based on this information, Strategy is shaped towards improvement.
This process is repeated at regular intervals to keep the cycle of improvement going.
Now you might think that this process only helps companies that strive to be the best in the industry. But that is not true.
For organizations that are already “best in class” in whatever they do; the benchmarking process helps scrutinize their competition so that they do not lose their best position to an upcoming competitor.
2. Helps Adopt Best Practices
We must also respect the best in the industry and try to find out why it is so. For Example, Apple is the world’s best company when it comes to the smartphone industry.
The company has done almost everything right about research and development, innovation, product quality, features, packaging, marketing, sales and distribution, and brand.
Obviously, this is not easy but that is what differentiates Apple from others.
Everything for them has also improved over the years which means they have continuously gotten better with time.
But other companies in the industry must acknowledge the market leader and learn how Apple is able to function this way.
This is where the concept of Best Practices come in.
Market leaders always do things in a special way that sets them apart. And other players in that industry can only learn those and try to adopt.
How do Companies Benchmark?
It is good to know the concept. But without being able to implement it would be of no use. So, here is how benchmarking is done by companies.
Although there could be multiple ways of doing this. But here is a simple step-by-step guide that can get you started:
- Identify the product, service, or process that you want to benchmark (For now, let us consider a product that we want to benchmark)
- Look for KPIs or Key Performance Metrics that can measure the product – This could be product specifications, demand, and supply, availability, quality, price, packaging, consumer preferences, etc.
- Identify Companies in your industry that are better off in that product category
- Gather every possible information from primary, secondary, and tertiary sources. It could be in the form of numerical data, graphs, statistics, opinion polls, suggestions/feedback, etc.
- This information is Gold. Utilize it for gauging your product against the best of its category.
- Finally, devise a plan to improve our product
This is a simple and the most widely used way of benchmarking.
However, if you are responsible for benchmarking process in your company, you should definitely experiment with other methods as well.
But even to try other ways, we must understand the types of benchmarking.
What are the Types of Benchmarking?
Benchmarking is primarily of 6 types depending on why it is being done. Therefore, let us take a look at each of them:
1. Internal Benchmarking
This type of benchmarking compares the internal processes, policies, and metrics of an organization. Internal Benchmarking is always done within the company and is usually adopted to improve internally.
2. External Benchmarking
When the comparison is done to other companies in the industry, we would be doing an External benchmarking. It is aimed at bringing external metrics up to certain standards.
3. Practice Benchmarking
This type is aimed at specific practices happening within an organization. It is more focused on one specific practice within the company such that the same can be analyzed thoroughly and improved.
4. Competitive Benchmarking
This one is used to make an evaluation of a firm in comparison to its direct competitors in a marketplace.
Competitive benchmarking is one of the most widely used methods because of the inquisitiveness among companies to know how they are comparing against their direct competitors in the market.
5. Performance Benchmarking
As the name suggests, this type is employed in order to benchmark the Key Performance Indicators. It also helps in setting performance standards that everyone within the company must strive to achieve.
6. Strategic Benchmarking
Last but not the least, this one is used to understand the strategy of other companies and crack down their success codes. Doing this would help fine-tune your strategy for business success.
These types are much deeper than what we have looked at here. If you wish to have a greater understanding of each of them, do check out this article.
By now you’d have gained some perspective on Benchmarking meaning and its types. It is in fact a very easy method to measure what’s wrong and define ways to improve.
But till now we have only talked about the bright side of Benchmarking. It is also necessary to be aware of a few possible consequences that come along with benchmarking.
Possible Consequences of Benchmarking
Distraction is one of the most prominent consequences of Benchmarking. It could create panic and confusion and often shift the focus from internal controllable factors towards external uncontrollable ones.
And in the process of doing so, the management can lose the strategic direction and goal of the company.
2. Stagnated Performance
If two companies compare things to each other and get to a point where both are almost similar in their performance standards, there is stagnation.
Customers won’t want that. Innovation must always pave way for new standards of performance and that pursuit should be never-ending.
Also, the company that is the best in the market does not have anybody to look up to. That could also slow down the growth curve.
3. Incorrect Analysis
Although the process is easy and practical, it needs knowledgeable and experienced professionals to get done. The tool could churn out inaccurate results and mislead companies if used incorrectly.
Thus, it is important for the process of benchmarking to be done correctly at every stage.
In Conclusion, I think that Benchmarking is a very desirable method to help walk the path of improvement. It is logical, effective, and also brings in fresh perspectives from all around.
Also, Benchmarking is only a source of information to make future plans. The process would be effective only when the company acts on the outcomes to improve over time.
What do you think about Benchmarking? Should Companies Do It? If so, how frequently? How can a company make the best use of Benchmarking results? Please share with me in the comments. 🙂