Benchmarking

Definition
Benchmarking
 
is a strategy tool used to compare the performance of the business processes and products
with the best performances of other companies inside and outside the industry.
Benchmarking
 
is the search for industry best practices that lead to superior performance.
[1]

Understanding the tool

Comparing your own business to a rival is essential when competing. Without it, you would
never know how successful your performance is in a market or whether you perform one or
another task better than your competitor does. For example, 85% customer satisfaction might
look great for you or even compared to your industry’s average, but what if some other
companies (not necessarily rivals) easily achieve 97% rate? In this situation, your 85%
satisfaction rate doesn’t look that brilliant. To better understand your situation and improve
company’s performance, the managers use benchmarking.

Some form of comparison in the companies was used, since 1800s, and mainly included
product’s quality and feature comparison. This type of comparison was scarcely used and didn’t
become a valuable management tool until late 1980s and 1990s, when Xerox introduced the
process benchmarking technique.[2] This type of comparison proved very beneficial and Xerox,
AT&T and other companies began comparing the performance of their processes to the best
standards in the industry. The following table shows how benchmarking evolved into a modern
strategy tool:

Benchmarking history

1950-1975 Reverse engineering

 1976-1986 Competitive benchmarking

1982-1986 Process benchmarking

1988+ Strategic benchmarking

1993+ Global benchmarking

Source: J. Blakeman, University of Wisconsin-Milwaukee[3]

According to Camp,[1] benchmarking is simply “Finding and implementing the best business

practices”. Managers use the tool to identify the best practices in other companies and apply
those practices to their own processes in order to improve the company’s performance.
Improving company’s performance is, without a doubt, the most important goal of
benchmarking.

It’s a very important tool in strategic management, because it often reveals how well your
organization performs compared to rivals.

Other uses of the tool:

 To reveal successful business processes. It is often unclear how successful companies

achieve superior performance. By observing and scrutinizing such companies you can
identify the processes, skills or competences that contribute to organization’s success and
then apply the same practices to your own company.
 To facilitate knowledge sharing. The knowledge acquired about other businesses can be
easily transferred to your own organization.
 To gain competitive advantage. The company can gain a competitive advantage if it
applies the best practices from other industries to its own industry. For example, a small
family owned farm selling its own agricultural products online could apply the same
social media strategies as internet blogs to attract attention and gain new customers. This
would be a new way to gain customers and may result in at least temporary competitive
advantage.

Popularity
The tool is one of the most recognized and widely used tools of all the business strategy tools.
The survey done by The Global Benchmarking Network[4] reveals that adaptation of the tool in
organizations vary from 68% for informal benchmarking to 49% and 39% for performance and
best practice benchmarking, respectively. In addition, annual surveys from Bain &
Company’s[5] indicate similar results.

Source: Bain &

Company[5]

The graph shows that, although, the satisfaction of the tool is high, the usage of it has declined
since the heights in 1999. Still, benchmarking remained the 4th top used tool by businesses in the
world in 2013.[6]

Types
There are different types of benchmarking the managers can use. Tuominen[7] and Bogan &
English[8] identified these 3 major types:

 Strategic benchmarking. Managers use this type of benchmarking to identify the best

way to compete in the market. During the process, the companies identify the winning
strategies (usually outside their own industry) that successful companies use and apply
them to their own strategic process. It is also common to compare the strategic goals in
order to spot new strategic choices.
 Performance benchmarking. It is concerned with comparing your company’s products
and services. According to Bogan & English[8] the tool mainly focuses on product and
service quality, features, price, speed, reliability, design and customer satisfaction, but it
can measure anything that has the measurable metrics, including processes. Performance
benchmarking determines how strong our products and services are compared to our
competition.
 Process benchmarking. It requires to look at other companies that engage in similar
activities and to identify the best practices that can be applied to your own processes in
order to improve them. Process benchmarking is a separate type of benchmarking, but it
usually derives from performance benchmarking. This is because companies first identify
the weak competing points of their products or services and then focus on the key
processes to eliminate those weaknesses. For example, an organization using
performance comparison identifies that their product ‘X’ is superior in features,
manufacturing quality and design, but pricier than competitor’s product ‘Y’. Then the
 company determines, which processes add the most to the cost of the product and seek
how to improve them by looking at similar, but less cost heavy processes in other
companies.

Approaches
In addition to the types, there are four ways you can do benchmarking. It is important to choose
the optimal way because it reduces the costs of the activity and improves the chances to find the
‘best standards’ you can rely on.

 Internal benchmarking. In large organizations, which operate in different geographic

locations or manage many products and services, same functions and processes are
usually performed by different teams, business units or divisions. This often results in
processes performed very well in one division but poorly in another. Internal
benchmarking is used to compare the work of separate teams, units or divisions to
identify the ones that are working better and share the knowledge throughout the
company to other teams to achieve higher performance. It is usually employed by the
companies that have recently expanded geographically, but haven’t yet created proper
knowledge sharing systems between divisions. If such systems are in place, there’s no
need to use internal benchmarking to look for best practices.
 External or competitive benchmarking. Some authors use these terms interchangeably
but there are a few differences between them. First, competitive benchmarking refers to a
process when a company compares itself with the competitors inside its industry.
Whereas external benchmarking looks both inside and outside the industry to find the
best practices, thus, including competitive benchmarking.[9] Second, competitive
benchmarking, in my opinion, will only be used with performance benchmarking to
compare your products and services. Strategic or process benchmarking won’t be viable
options, because it’ll be very hard to find a competitor, who wants to share sensitive
information with you and you’ll never outcompete your rival if you’ll be using his
strategy or processes. Besides, external benchmarking is a more beneficial approach to
use due to higher possibilities of finding the best practices.
 Functional benchmarking. Managers of functional departments find it useful to analyze
how well their functional area performs compared to functional areas of other companies.
It is quite easy to identify the best marketing, finance, human resource or operations
departments, in other companies, that excel in what they do and to apply their practices to
your own functional area. This way the companies can look at a wide range of
organizations, even unrelated ones, and instead of improving separate processes, they can
improve the whole functional areas.
 Generic benchmarking. According to Kulmala,[9] it refers to comparisons, which “focus
on excellent work processes rather than on the business practices of a particular
organization”. For example, your company tries to improve its marketing capabilities and
benchmarks itself against company ‘A’. While observing company’s ‘A’ marketing
processes you also notice how well their human resources are managed using ‘big data’
analytics. This gives you an idea to implement the data collecting and analysis team in
your own company to significantly improve its overall performance. 
The other example of generic benchmarking would be to compare your processes against
 generally accepted best standards. For example, every organization strives to become a
learning organization, because such an organization is better equipped to overcome
challenges and adapt to the market changes. By comparing your company to some
general standards, which would indicate that your company is a learning organization,
you would be using generic benchmarking.

The following diagram summarizes the types and approaches to benchmarking:

Advantages
 Easy to understand and use.
 If done properly, it’s a low cost activity that offers huge gains.
 Brings innovative ideas to the company.
 Provides you with insight of how other companies organize their operations and
processes.
 Increases the awareness of your costs and level of performance compared to your rivals.
 Facilitates cooperation between teams, units and divisions.

Disadvantages
 You need to find a benchmarking partner.
 It is sometimes impossible to assign a metric to measure a process.
 You might need to hire a consultant.
  If your organization is not experienced at it, the initial costs could be huge.
 Managers often resist the changes that are required to improve the performance.
 Some of best practices won’t be applicable to your whole organization.

Using the tool

Benchmarking is used extensively by organizations, but no universal process of how to conduct
it is established. Each organization designs its own way of using the tool. Before revealing some
of the examples, we provide you with the guidelines[3] to make the process easier.

Guidelines:

1. Only choose the products, services or processes, which perform poorly. Comparing the
processes you are good at will be a waste of time and money, and won’t bring the desired
results.
2. Define the specific metrics or processes to measure. Be careful not to choose too broad
processes that can’t be measured as you won’t be able to compare it properly.
3. Prepare your company for change. Your organization must overcome the resistance to
change to implement new best practices.
4. Choose the team that is qualified. Although benchmarking is easy to use, you shouldn’t
pick up just anybody to do it. Include the people that will be responsible for
implementing the changes and the people that are skilled at it.
5. Participate in benchmarking networks and use the appropriate software to facilitate the
process. There are various benchmarking networks, where participating companies can
find benchmarking partners or gather the data for the metrics they need. Such
participation facilitates the process significantly by reducing the costs and time spent
looking for the right data.
6. Look for the best standards and ideas even in unrelated areas. Many significant
discoveries will be made by observing the companies that are completely unrelated to
your organization.

Benchmarking Wheel
The benchmarking wheel model introduced in article “Benchmarking for Quality”[10] is a 5 stage
process that was created by observing more than 20 other models.
It’s fairly simple and comprises of following stages:

1. Plan. Assemble a team. Clearly define what you want to compare and assign metrics to
it.
2. Find. Identify benchmarking partners or sources of information, where you’ll be able to
collect the information from.
3. Collect. Choose the methods to collect the information and gather the data for the metrics
you defined.
4. Analyze. Compare the metrics and identify the gap in performance between your
company and the organization observed. Provide the results and recommendations on
how to improve the performance.
5. Improve. Implement the changes to your products, services, processes or strategy.

Xerox Process
Xerox has popularized benchmarking and was one of the first companies to introduce the process
of doing it. This 5-phase and 12-step process was created by Camp, R. the manager of Xerox
responsible for benchmarking.[3]
Most of the processes are similar to the examples above and can be applied to any company or
non-profit organization that strives to achieve superior performance using benchmarking.

Example
Company ‘A’ has used performance benchmarking to compare its product ‘X’ with the
competitor’s product ‘Y’ and found out that the product ‘X’ is priced slightly lower, but it also
has fewer features than product ‘Y’. The company recognized that in order to win a larger
market share and establish itself in the market, it has to increase the number of features in its
product while keeping the price at the same level or even decreasing it.

To achieve this, the company ’A’ has set up a team that investigated product ‘X’ value chain
analysis. The team identified that the activities adding the most to the cost are marketing and
purchasing parts in an open market. The team also identified that by buying standards parts in the
market, the company has little room to introduce new features as this would require customized
parts for its product ‘X’. The next step was to assign the proper metrics to marketing and
purchasing activities and gather the required data. The company joined the benchmarking
network and in a few weeks gathered enough data to compare the performance of its processes.

The results indicated that the marketing activities could be improved significantly. The team
recognized that many businesses in the industry were able to attract new customers profitably
through heavy advertising online. Yet, further observations of the companies outside the industry
showed that the average returns on advertising weren’t so huge compared to the returns when
attracting customers through social media. Therefore, the team decided to rely on social media
rather than advertising to attract more customers, while reducing its costs by 20%.

The next activity analyzed was the purchase of parts in the open market. While this was a
convenient way to conduct the business it was costing more and didn’t allow customizing the
product. The team identified that this activity could be improved by manufacturing the parts
inside the company or by establishing long term relationships with suppliers. The collected data
and the experience of other similar businesses showed that the best option would be to establish
long term relationships with suppliers. It would cost less than manufacturing the parts inside the
company or buying them in an open market. It would also allow ordering customized parts that
were needed for the new features.

By engaging in benchmarking activities, the team has identified the gaps in company’s
performance and introduced new ways to improve the current processes to achieve the higher
performance.

Sources
1. Camp, R.C. (1989). Benchmarking. The Search for Industry Best Practices That Lead to
Superior Performance. ASQC Quality Press
2. Spendolini, M. (1992). The Benchmarking Book. American Management Association
3. Blakeman, J. (2002). Benchmarking: Definitions and Overview. University of Wisconsin
- Milwaukee . Available at: https://www4.uwm.edu/cuts/bench/bm-desc.htm
4. Global Benchmarking Network (2010). Global Survey on Business Improvement and
Benchmarking. Available at:
http://www.globalbenchmarking.ipk.fraunhofer.de/fileadmin/user_upload/GBN/PDF/201
0_gbn_survey_business_improvement_and_benchmarking_web.pdf
5. Bain & Company (2013). Benchmarking. Available
at: http://www.bain.com/publications/articles/management-tools-benchmarking.aspx
 6. Rigby, D. & Bilodeau, B. (2013). Management Tools & Trends 2013. Available
at: http://www.bain.com/publications/articles/management-tools-and-trends-2013.aspx
7. Tuominen, K. (1997). Muutoshallinnan mestari. Kuinka toteuttaa strategiset suunnitelmat
kilpailijoita nopeammin? Suomen Laatuyhdistys ry.
8. Bogan, C. E., & English, M. J. (1994). Benchmarking for best practices: Winning
through innovative adaptation. McGraw-Hill
9. Kulmala, J. (ND). Approaches to Benchmarking
10. Shah, D. and Kleiner, B. H. (2011). Benchmarking for Quality. Industrial Management,
pp. 22-25

Types of Benchmarking
A copier company has benchmarked against a camping goods store. An ammunition supplier has
benchmarked against a cosmetics company, comparing shell casings and lipstick holders. An airline
company looked at a racing crew to see how to perform quick equipment maintenance and repairs.
Within the federal government, agencies have benchmarked their customer service lines for
promptness, accuracy, and courtesy against other federal agencies as well as the private sector.
The type of study undertaken is not as important as recognizing that benchmarking, both inside and
outside an organization, can be enormously beneficial for different reasons and in different ways.
Due to the vast differences in resource investments and possible outcomes associated with different
types, management must make the decision and identify which type the benchmarking team is to
use.
No one type is the best way. One type might be more appropriate for an organization than another
depending on its environment, products, services, resources, culture, and current stage of TQ
implementation. There are four primary types of benchmarking: internal, competitive, functional, and
generic.

1. Internal benchmarking is a comparison of a business process to a similar process inside

the organization.
2. Competitive benchmarking is a direct competitor-to-competitor comparison of a product,
service, process, or method.
3. Functional benchmarking is a comparison to similar or identical practices within the same
or similar functions outside the immediate industry.
4. Generic benchmarking broadly conceptualizes unrelated business processes or functions
that can be practiced in the same or similar ways regardless of the industry.

A more detailed explanation of these four types of benchmarking follows, along with: a brief
description of each type; possible outcomes; examples from DON, DOD, federal government, and
private industry; and some of the pros and cons for each type.

Internal benchmarking
Internal benchmarking is a comparison of a business process to a similar process inside the
organization to acquire the best internal. business practices. At the federal level, two Department of
Transportation sites might prepare their budget submissions for Congressional approval. In the
private sector, a retail food store chain selects its most profitable store as a benchmark for the
others.
Benefits
  most cost efficient
 relatively easy
 low cost
 fast
 good practice/training with benchmarking process
 information sharing
 easy to transfer lessons learned
 common language
 gain a deeper understanding of your own process
 makes a great starting point for future benchmarking studies

Challenges

 fosters mediocrity
 limits options for growth
 low performance improvement
 can create atmosphere of competitiveness
 not much of a stretch
 internal bias
 may not yield best-in-class comparisons

Competitive benchmarking
Competitive benchmarking is a direct competitor-to-competitor comparison of a product, service,
process, or method. This form of benchmarking provides an opportunity to know yourself and your
competition better; combine forces against another common competitor. An example of competitive
benchmarking within the Department of Defense, might include contrasting Army and Air Force
supply systems for Joint initiatives. Within the private sector, two or more American car companies
might benchmark for mutual benefit against common international competitor; or, rival chemical
companies benchmark for environmental compliance.
Benefits

 comparing like processes

 know your competition better
 possible partnership
 useful for planning and setting goals
 similar regulatory issues

Challenges

 difficult legal issues

 relatively low performance improvement
 threatening
 limited by trade secrets
 may provide misleading information
 may not get best-in-class comparisons
 competitors could capitalize on your weaknesses
Functional benchmarking
Functional benchmarking is a comparison to similar or identical practices (e.g., the picking process
for assembling customer orders, maintaining inventory controls of spare computer parts, logistics to
move operational forces, etc.) within the same or similar functions outside the immediate industry.
Functional benchmarking might identify practices that are superior in your functional areas in
whatever industry they may exist. Functional benchmarking would be accomplished at the federal
level by comparing the IRS collections process against those of American Express. Comparing
copper mining techniques to coal mining techniques is an example in the private sector.
Benefits

 provides industry trend information

 quantitative comparisons
 better improvement rate; about 35

Challenges

 diverse corporate cultures

 great need for specificity
 not invented here. syndrome
 common functions can be difficult to find
 takes more time than internal or percent
 must be able to visualize how to adapt the best practices

Generic benchmarking
Generic benchmarking broadly conceptualizes unrelated business processes or functions that can
be practiced in the same or similar ways regardless of the industry (e.g., transferring funds, bar
coding, order fulfillment, admissions, replenishing inventory, warehousing, etc.). Generic means
without a brand. It is a pure form of benchmarking,. (Camp, 1989). The focus is on being innovative
and gaining insight into excellent work processes rather than on the business practices of a
particular organization or industry. The outcome is usually a broad conceptualization, yet careful
understanding, of a generic work process that works extremely well. Generic benchmarking is
occurring when a Veterans Administration hospital's check-in process is contrasted against a car
rental agency's check-in process. Adapting grocery store bar coding to control and sort airport
luggage might be another example.
Benefits

 high payoff; about 35 percent

 noncompetitive/nonthreatening
 broad,new perspective
 innovative
 high potential for discovery
 examines multiple industries
 can compare to world

Challenges

 difficult concept
 can be difficult to identify best-in- class
 takes a long time to plan
 known world-class companies are inundated with requests
 quantum changes can bring high risk, escalate fear
 class organizations in your process