Benchmarking is a systematic process of comparing the activities and work processes of an a organisation, functions and its departments with those of outstanding organisations, functions or departments, normally in the same industry, with the objectives of improving performance.
Benchmarking was first developed by the Xerox Corporation in the 1970s when Xerox realised it was losing profit and market share to its Japanese competitors, who were able to sell photocopiers for the same price that it cost Xerox to make them. The development of benchmarking is described by the Xerox executive Robert C Camp, universally regarded as the founding father of the benchmark process, in his 1989 book: The search for industry best practices that lead to superior performance.
There are various types of benchmarking:
- Internal benchmarking - a comparison of one function with another within the same industry.
- Functional benchmarking - a comparison of one function with another, regardless of the industry.
- Competitive benchmarking - gathering information about direct competitors
- Strategic benchmarking - the objective is organisational changes through strategic action.
Benchmarking (sometimes called best practice benchmarking - BPB) is used to measure the gap between the firm's performance and the performance of other organisations in the same, or similar, industry. The firm selects a product of high quality or efficient process, possibly that of a competitor, and uses it as a standard for improvement in their own products and processes.
Benchmarking effectively means finding out what, in the eyes of the customer, makes the difference between an ordinary product and an excellent product and then establishing procedures to implement these standards. The process requires several stages:
- Establishing what should be benchmarked, by talking to customers about significant factors in their purchase decisions, and identifying specific areas where the firm would gain from improvement.
- Deciding who the firm should benchmark against, by identifying those firms that have the best reputations and quality in the industry.
- Obtaining the information using a variety of primary and secondary research methods and sources.
- Analysing the information, particularly using quantitative methods that can be used for comparison with industry standards.
- Establishing how the information should be used to improve the product or business practices. This will involve the firm in the setting of standards for improvement and communicating these to relevant employee groups. Senior managers must be responsible to drive these improvements forward, by providing the necessary resources and training opportunities.
It is possible to benchmark different aspects of the production process against competitors who excel in each of these areas. A car manufacturer, for instance, may benchmark the performance of its engines against one competitor, which is regarded as the market leader, and the quality of its paint finish against another, and so on.
Advantages of benchmarking
- Identifying the major concerns of customers, allows the firm to use its resources most effectively by focusing on specific elements of the business.
- Reduces complaints and improve customer satisfaction and the firm's reputation.
- As part of a continuous improvement process, benchmarking is likely to result in reduced waste and less reworking of substandard products.
- Investigation of best practice will increase awareness of important industry innovation and alternative solutions.
- The involvement of employees in the benchmarking process can improve motivation and productivity.
- Increased sales revenue and profits.
The process of benchmarking will only be effective if the firm is able to obtain the information it requires about its competitors. It is very unlikely that this information will be given voluntarily and the cost of obtaining it in other ways may be significant. Even if the information is forthcoming, the information alone may not be enough for the processes to be replicated; copying what other firms are doing may not provide competitive advantage.
In the automotive industry benchmarking is a key process. Car manufacturers need to compete for sales since the supply capacity exceeds demand. Design, features, technology, producing methods, efficiency in design and manufacture are some of the benchmarked points between brands.