benchmarking

What Is Benchmarking And Why It Matters In Business

Benchmarking is a tool that businesses use to compare the performance of their processes and products against businesses considered to be the best in their industries. Benchmarking allows a business to refine their practices and thus increase its overall performance. Generally, benchmarking can be broken down in the process, performance, and strategic benchmarking.

Understanding benchmarking

The process of benchmarking is the search for a measure – or a benchmark. In simple terms, the benchmark is the “what” and benchmarking describes the “how”.

However, it’s important to understand that benchmarking is not a simple process. For example, it is not as straightforward as visiting the manufacturing facilities of another company and taking notes on their processes. Many organizations – particularly those with patented technologies or other competitive advantages – enforce strict limitations on the information that can be gathered by outsiders.

In any case, a company that utilizes benchmarking should not limit their research to their own industry. Benchmarking should also be a continuous process that yields similarly continuous performance metric improvements.

The three types of benchmarking

Benchmarking can be broadly divided into three categories – process, performance, and strategic.

Process benchmarking

Process benchmarking allows a business to better understand how their processes compare to competitors in their industry. With this knowledge, businesses can refine their processes according to the industry benchmark. A subset of process benchmarking is internal benchmarking. In this case, the business in question is in effect setting its own benchmark because viable competitors have not yet been established.

Performance benchmarking

In performance benchmarking, a company assesses its performance against industry standards. Internally, a HR department may set outcomes relating to employee net promoter score or staff engagement. Externally, a customer care team may hire a consultant to benchmark customer service metrics against those of a main competitor.

Strategic benchmarking

Strategic benchmarking takes what a business has learnt in process and performance benchmarks and applies these insights to a strategy. Here, the goal is to create the sort of strategies that underpin benchmark metrics in a given industry.

The benefits of benchmarking

The benefits of benchmarking are numerous, but the primary benefit is enhanced business and operational performance.

In terms of business performance, this means:

  • Improved customer service and satisfaction. City planners can benchmark quality of life metrics against those found in other cities to increase the health and well-being of citizens.
  • Increased market share and positive cash flow. For example, a shoe retailer may compare its sales per square meter with industry standards and adjust their strategies to suit.

As far as operational performance is concerned, benchmarking means:

  • Increased manufacturing efficiency, with lower rates of defects and product failures. Higher productivity in manufacturing also leads to fewer resources being diverted to warranty claims and protracted customer service enquiries.
  • Rapid and versatile equipment changeover with streamlined order-processing procedures. For example, an eCommerce company benchmarks its average order fulfilment and delivery time against industry standards.

Key takeaways:

  • By studying companies with superior performance, a business can use benchmarking to identify opportunities for internal improvement.
  • Benchmarking can be divided into three main categories – process, performance, and strategic.
  • Effective benchmarking has a vast array of benefits for both business and operational performance.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"