What is Benchmarking? Types, Process

  • Post last modified:19 August 2023
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What is Benchmarking?

Benchmarking is a strategic management process that involves comparing the performance, practices, and processes of one organization with those of other organizations, typically ones that are considered leaders or best-in-class in a particular industry or field. The goal of benchmarking is to identify areas for improvement, learn from successful practices, and implement changes that lead to enhanced performance, increased efficiency, and better outcomes.

To attain success in today’s cut-throat competition, an organisation is compelled to consistently measure and evaluate its performance from time to time. Benchmarking is one of the most widely used terms in quality management, where it refers to the process of finding out the ‘best practices’ in organisations.

For this, the organisation should compare its performance with the ‘best practices’ of the relevant industry. According to The American Productivity and Quality Center (1999), benchmarking is the process of continuously comparing and measuring an organisation against business leaders anywhere in the world to gain information that will help the organisation take action to improve its performance.

The concept of benchmarking was introduced in the 1950s, when the idea of quality control was made famous by Edward Deming. Toyota was among the pioneers to implement benchmarking in the organisation. Earlier, Toyota was using the just-in-case (JIC) management system, which was originally practised in Ford Motors.

The term benchmarking was used in the USA for the first time in the 1980s. Robert Camp, who was a logistics engineer in Xerox, introduced benchmarking in the organisation. According to him, benchmarking is the search for industry best practices that lead to superior performance.

Through benchmarking, an organisation aims to comprehend its level of progress in respect to ‘best practices’ and identify the areas of improvement. For example, in 1983, General Telephone & Electronics Corporation (GTE), a US-based telephone company, found that Japanese competitors had lower defect rates than it. Consequently, GTE started adopting various practices of Japanese competitors to reduce its defect rates.

Benchmarking need not necessarily remain limited to the same industry. An organisation can adopt the best practices followed in other industries as well. In the process of benchmarking, organisations select an industry leader. The selected leader organisation is referred to as the ‘target’ and is used by others for comparing business processes and practices. The organisation that initiates the process of benchmarking is termed the ‘initiating organisation’.

Types of Benchmarking

Benchmarking can be defined as a process of comparing one’s performance with the ‘best practices’ in the industry. Benchmarking is performed to compare products, services, processes and competitive strategies. On the basis of the factors being benchmarked, benchmarking can be divided into different categories. These categories can be explained as follows:

Process Benchmarking

This type of benchmarking focusses on the comparison of business processes in order to ascertain and evaluate their best practices. The main aim of performing process benchmarking is to improve the vital processes of an organisation. In process benchmarking, the functioning of a process, its output and critical success factors are understood to determine the desired output and performance level of the process. Finally, the best practices need to be adopted to achieve the desired output and performance level. Companies such as Boeing, Digital, Motorola and Xerox have already incorporated process benchmarking into their processes long ago.

Financial Benchmarking

It involves doing a financial analysis of the initiating organisation and the benchmarked organisation(s) and comparing the two to determine the effectiveness and efficiency of the initiating organisation. Financial benchmarking can be done on the basis of the published financial reports of the organisations, wherein profitability positions, liquidity, working capital, cash cycle and capital structures are compared.

Performance Benchmarking

It involves comparing the products and services of two or more organisations to ascertain the level of efficiency and effectiveness. Such a type of benchmarking is generally carried out with the help of third parties in order to ensure secrecy. An example of performance benchmarking is Hewlett-Packard’s benchmarking programme to improve its time-tomarket performance of its research and development activities.

Product Benchmarking

It is the type of benchmarking that is performed with the objective of designing and upgrading various products of an organisation. For example, Remington, a manufacturer of guns and ammunition, conducted a market research to find out the requirements of customers. The organisation found that customers wanted smooth and shiny shells. So it benchmarked its products against other organisations to meet the demands of its customers.

Functional Benchmarking

In this type of benchmarking, the initiating organisation focusses only on a specific function and compares it with the target organisation(s), to improve the operation of that particular function. Functional benchmarking mainly leads to the introduction of innovative methods and techniques to perform different functional activities. For example, many retailers benchmark their logistics functions against that of Wal-Mart.

Strategic Benchmarking

This is a type of competitive benchmarking, used to recognise the best strategies for competing in the market. The initiating companies can identify the best strategiesused by successful companies and implement them to their own strategic processes. For example, Bath Ironworks benchmarked against Royal Schelde and some other shipyards in Holland to devise business strategies.

Competitive Benchmarking

It is a special type of benchmarking in which the focus of benchmarking remains on the products and services offered by the competitors. In other words, this type of benchmarking attempts to identify what the competitors are doing with respect to their products and services.

One classic example of competitive benchmarking is Ford’s development of Tauras and Sable. The development team wanted to design a car that would be “best in class” in a number of important categories. They bought 50 cars including the ones that were not sold in the United States. Next, the team identified which car performed the best on each of those 400 items. These specifications were used to design the new models, Tauras and Sable.

Collaborative Benchmarking

This is a type of benchmarking where multiple companies engage in the benchmarking process together. In other words, collaborative benchmarking is performed as a part of a group where many companies join as associations.

These collaborative associations provide best practice reports to all association members, which can be further used by them to improve their own operations. For example, NASSCOM (National Association of Software and Services Companies), which is a trade association of Indian IT and Business Process Outsourcing (BPO) industry, provides the association members the best prevailing practices in the industry.

Cost Benchmarking

It is one of the most widely-used financial benchmarking processes. In cost benchmarking, companies compare their cost positions with those of low-cost companies. Since the cost determines the profitability and financial viability of a company, cost benchmarking contributes significantly to the financial performance of a company. For example, Walmart is one of the most low-cost retailers in the world. The retailer promises to provide merchandises at “Always low price”.

Process of Benchmarking

The process of benchmarking is a series of steps performed to benchmark products, processes, services, performance, etc., against the best practices of another organisation. However, no standard process is developed for benchmarking as it depends on the type and scope of benchmarking.

Defining Problematic Areas

In this step, the different functions and processes of the initiating organisation must be understood in depth. The initiating organisation must have complete knowledge of all the activities and functions performed in the organisation. Moreover, the organisation should be in a position to identify various issues that are hampering its growth and solve them in order to grow and prosper in the future.

Selecting Targets

In this step, as organisation that can be used as a point of reference for benchmarking must be selected. Various organisations across industries are considered leaders of specific processes. The initiating organisation should select a target organisation that is stronger in the areas in which the initiating organisation is weak. For example, an organisation having problems with inventory management must try to identify organisations having a very strong inventory management system, such as Wal-Mart.

Analysing the Best Practices of the Target Organisation

In the third step, the initiating organisation tries to understand the various measures and practices adopted by the target organisation that have made it successful. However, it is not always easy to find out details of the products and processes of competitors.

Implementing Upgraded Business Processes

After understanding the various measures and practices adopted by the target organisation, the initiating organisation should implement them as upgraded business processes.

Let us understand the process of benchmarking with the help of an example. Xerox was one of the pioneers of the benchmarking practice. The company invented photocopier in 1959 and kept monopoly control over the market for almost two decades. However, after a period, the brand “Xerox” turned into a generic name for all type of photocopiers. As a result, by 1981, the market shares of the company came down to around 35%.

Around the same time, a number of competitors, such as IBM and Kodak, manufactured high-quality and high-end photocopiers. In addition, companies such as Canon, Ricoh and Savin started dominating the low-end segment of the market.

Therefore, Xerox initiated a benchmarking programme to focus on the key processes rather than only the finished products. The objective was to adopt the best practices in the key processes of the company. The company identified the fact that most processes followed in the organisation were not practised in the photocopier industry alone but in a number of other industries as well. Therefore, Xerox understood that benchmarking should not be limited to the practices of competitors but should extend to the “best practices” followed by different industries.

As a result, the company benchmarked its processes not only with the companies from the same industry but also with those of different industries. For example, it benchmarked against the warehousing system of L.L. Bean, a catalogue sales company having a highly efficient warehousing system.

The benchmarking helped Xerox in identifying the following three necessary characteristics of logistics operations:

  • Products require warehousing and shipping.

  • Different products are of different sizes, shapes and weights.A manual system supported by computer systems would be the most suitable for the company.

Following are some of the changes initiated by Xerox after benchmarking:

  • Using computer systems for processing orders

  • Using bar codes

  • Minimising the travel distance of products by managing the picking activities

  • Ensuring accurate shipping by checking the weights of shipping products

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