Inter-firm Comparison: Definition, Advantages, Disadvantages

What is Inter-firm Comparison?

Inter-firm comparison means a comparison of two or more similar business units with the objective of finding the competitive position to improve the profitability and productivity of those business units. Thus, inter-firm comparison is a tool used by the management of a company to compare its operating performance and financial results with those of similar companies engaged in the same industry.

The results of this give him an instant and vivid picture of how his firm’s profitability, its costs, its stock turnover, and other key factors affecting the success of a business compare with other firms in his industry.

Definition of Inter-firm Comparison

According to Centre for Inter-firm Comparison, established by the British Institute of Management, Inter firm Comparison is concerned with the industrial firm, its success and the part played by the management in achieving it. The end product of a properly conducted inter firm comparison is not a statistical survey but the flash of insight in the mind of meaning director of the firm which has taken part in such an exercise.

Prerequisites for Introduction of Inter-firm Comparison

These are some prerequisites for introduction of inter-firm comparison for better understnad:

1. The firms which agree to follow inter-firm comparison should create a central organisation for collecting, comparing and providing information to the member firms. In U.K. and other foreign countries there are professional organisations independent of the member firms which act as the central organisations. As they do not have any personal interest in the information collected by them, they work in a completely impartail way and member-firms also provide information to them without any hesitation.
   
   In India trade associations, Chambers of Commerce, trade journals and periodicals and National Productivity Councils act as the central organisations for collection, codification, calculation of ratios and providing the ratios to firms for making inter-firm comparison. Without such central organisation inter-firm comparison is not possible.
   
   
2. The member-firms should have mutual trust in each other and they should have confidence that the inter-firm comparison will be beneficial to all memberfirms.
   
   
3. The member-firms should have clear idea about the areas in which the cost data and other information is to be provided by them. They should know the requirements of the management and the extent to which information should be provided so that it will prove useful for member-firms to achieve improvement in their working.
   
   
4. Firms desirous to use inter-firm comparison must already be using uniform costing system so that there is already uniformity about cost unit, costing method and techniques, procedures followed for cost calculation, items to be included and excluded from costs, etc. In other words, the base in the form of uniform costing must already be in existence before introduction of the inter-firm comparison among the member-firms.
   
   
5. For collecting the information from member-firms the necessary forms should be prepared and copies supplied to each member-firm. Information obtained is analysed, studied and converted in the form of agreed ratios and by allotting codes to each member-firm the information in ratios is provided to each member-firm. Identity of the firms is not disclosed and each member-firm knows only its code.
   
   By comparing its ratio with that of other member-firms and also with the average ratios for the member-firms considered together, a member-firm can understand where it stands and how much further progress in efficiency can still be made by it.

Advantages of Inter-firm Comparison

These are advantages of inter-firm comparison which given below:

1. By using the information provided by the central organisation, management of a member-firm becomes aware of its points of strength and weakness and it can take appropriate steps to reduce the weaknesses and to increase its strength. Competitive capacity of each member-firm can thus be increased.
   
   
2. In inter-firm comparison as the information is provided in ratios and not in absolute form the member-firms know that the information provided by them to the central organisation will remain secret and confidential. The managements of the member-firms, therefore, do not hesitate to provide the information to the central organisation.
   
   
3. The central organisation created for inter-firm comparison is a professional body consisting of members who are experts in the various fields of the industry. The benefit of the expert knowledge and experience of the central organisation becomes available to each member-firm.
   
   
4. When all or majority of the firms of an industry become the members and follow inter-firm comparison the situation existing in the industry and new developments that are taking place in the industry become known to all firms through the information provided by the central organisation. Using this information, collective efforts can be made by the firms for improving the condition of the industry. Spirit of co-operation among the managements of member-firms is thus increased.
   
   
5. Reliable information about costs, production capacity, existing demand, prices charged by member-firms, margin of profit available, etc. becomes available due to the inter-firm comparison and it can be used by the industry while negotiating with the Government, trade unions about allotment of quotas to the firms, fixation of price of the product or service provided by the industry, determenation of wage rates of the workers of the industry, etc. Bargaining power of the representatives of the industry is increased because of the reliable data available from the central organisation.
   
   
6. Through inter-firm comparison, managements of the member-firms get vital information which helps them in making proper and timely changes in the policies followed by them and for taking corrective action where their efficiency is less. Proper use of resources, use of better methods of production and minimisation of wastage enables them to increase their productivity and this helps in creating stability in the industry in the long run.

Limitations of Inter-firm Comparison

Limitations of inter-firm comparison are similar to the limitations of the uniform costing. Some of the limitations are mentioned below:

1. Inter-firm comparison becomes possible only when the prerequisites necessary for introduction of inter-firm comparison are completed. It may be difficult for some firms to fulfill all these prerequisites.
   
   
2. It may not be possible to create a professional and independent central organisation to take responsibility of introducing and implementing the scheme of inter-firm comparison in each industry. Absence of such central organisation may hinder inter-firm comparison.
   
   
3. Managements of the member-firms should be capable of interpreting and using the data provided by the central organisation, otherwise their interest in the use of inter-firm comparison will be lost.
   
   
4. A spirit of co-operation and trust is very essential for implementation of inter – firm comparison scheme. Managements of all member-firms may not have this spirit and they may not provide full and correct data to the central organisation which reduces the utility of the scheme of inter-firm comparison.
   
   
5. Even though the member-firm belong to the some industry they may be different in sizes, process of production, ownership and management, etc. and it may be very difficult to bring them an common footing for the comparison of data related to cost and efficiency.

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