Benchmarking in Business

Posted on Mar 29, 2019 - By Leesa Love

For most successful companies, continuous improvement and quality initiatives are integral parts of day-to-day operations. As a result, processes like benchmarking are considered powerful tools in the business world. Benchmarking comes in several forms, from internal and competitive to functional and generic. While each of these forms has a slightly different focus, the overall purpose is the same: to see where a company’s practices fall short and what improvements need to be made.

The key to successful benchmarking is knowing how to utilize and balance the different types. In order to achieve the best results, it is vital to explore more than one form of benchmarking, rather than focus on only one. Otherwise, you run the risk of developing tunnel vision and ultimately causing more harm than good to your business. When utilized properly, the benchmarking process can reinvigorate your business practices and bring your company to the forefront of the industry.

What is benchmarking?

Whether you realize it or not, it is likely that you participate in a form of benchmarking nearly every day. Any time you compare your own behaviors or practices to those of experts, colleagues or friends, you are performing a sort of informal benchmarking. This allows you to see how you measure up to those around you and identify where you have room for improvement. Schools even utilize benchmark testing to see how well each student is learning when compared with his or her peers. Overall, we rely on benchmarking in order to make small improvements in the way we learn, perform and interact with the world.

This same idea is also often harnessed by business owners in order to measure a company’s success. In the commercial world, benchmarking is a method of evaluating business practices and finding ways to make improvements through the process of comparison. During this process you use a benchmark, or reference point, to compare your company’s operations to those used by competitors in your industry. This includes top marketplace performers or even competitors within your own company. The most common factors used as benchmarks include:

  • Time.
  • Quality.
  • Customer satisfaction.
  • Cost and effectiveness.

How does your company measure up?

Benchmarking is an effective tool because it allows you to compare your practices with those that already exist and are proven successful. You can utilize this approach to improve many aspects of your business, from your internal operations and employment policies to your customer service and products themselves. Through this process, you can adopt ideas for improving your practices to make your business more efficient and profitable. Ultimately, this allows you to increase customer satisfaction.

The overall point of benchmarking is to improve your business and keep an eye on your competitors. However, the results you receive depend largely on the type of benchmarking research you perform. Some forms of benchmarking center on creating an external view of your industry and the competitors in it, while others focus inward to compare practices within your company. There are several types of benchmarking used in business, each playing an important role in the growth and overall success of your company. This includes:

  • Internal benchmarking – This involves turning a critical eye inward and collecting data on the operations within your business. Through this approach, you can compare one area to another to see if there are any practices that could be successful across departments.
  • Competitive benchmarking – Sometimes referred to as performance benchmarking, this involves taking a look at direct competitors within your industry. This allows you to gain insight into your competitor’s ideas in order to address gaps in your own services.
  • Functional benchmarking – Also known as strategic benchmarking, this approach looks beyond your own industry to find world-class companies known for their innovative approaches and products that are similar to yours in some way.
  • Generic benchmarking – Similar to functional benchmarking, this also asks you to look outside of your immediate industry. However, it involves comparing successful practices that are completely unrelated from your own but may be able to translate into your business.

Depending on the needs of your business, one type of benchmarking may be more effective than another. For example, Southwest Airlines is one company that is well-known for its functional benchmarking initiative. After studying the speed and efficiency of race car pit crews, Southwest was able to improve turn-around time at their airport gates. They continue to save millions of dollars each year from these efforts.

Where Benchmarking Falls Short

As with any process in business, there are certain disadvantages to benchmarking if it is not utilized appropriately. In particular, internal benchmarking can produce negative effects on your business if you do not balance it out with another approach. Internal benchmarking is helpful because it allows you to take practices that are already working in one area of your business and translate it to another area.

This can help you understand your business on a more intimate level, but it is important not to get caught up in this approach. If you focus only on the inner-workings of your company, then you risk falling behind in your industry. You are more likely to lose sight of your competitors and fail to meet the evolving needs of your customers.

Competitive, functional and generic benchmarking have their own pitfalls as well when used in isolation. While these external forms of benchmarking are great for identifying areas of success in other companies, it is not able to take overall context into account. Your company may not operate under the same circumstances and restrictions that others did when they found success. As a result, the techniques utilized by those companies may not work as well for you in the end.

Planning Your Benchmarking Initiative

Cultivating a balance between the different types of benchmarking can help you make improvements that keep your business relevant, innovative and profitable. In order to harness this process, it is important to understand how benchmarking data is collected in the first place.

In some cases, benchmarking data is published and sold within different industries for easy access. Alternately, you can decide to perform your own research to uncover this information and use it for your company. The step-by-step approach to benchmarking tends to vary according to the business, product or particular process you wish to compare. However, the general process involves:

  1. Selecting a subject to study and a comparison subject.
  2. Data collection for both subjects.
  3. Examining the data collected to identify key differences.
  4. Analyzing the reasons behind these differences.
  5. Crafting and executing an improvement initiative based on your findings.

It is important to perform this research as clinically and consciously as possible. This helps you avoid collecting skewed or misleading data, so you can make the most of your benchmarking efforts. Once you have a plan in place for your benchmarking initiative, you are only steps away from optimizing your business to its fullest potential.