“Benchmarking provides an inventory of creative changes that other companies have enacted.”
– John Langley, Operations Guru
Over the years, I’ve conducted my fair share of benchmarking. And, anytime I discover a big and important gap between one aspect of a company versus another it always gives me an adrenaline kick since I just discovered a rich vein of gold. To mine the gold, I simply need to address the gap. Your organization’s performance is only as good as the relative performance it has against competitors. If you are truly focused on becoming world-class, you better understand how you perform against your competitors and the industry. Benchmarking tells you where you are ugly or pretty and how ugly or pretty you really are. And, from my benchmarking experience, it is amazing how many people think they are pretty, only to realize how ugly they are. I’m talking figuratively here!
What is benchmarking?
Benchmarking is a form of variance analysis and is the practice of comparing the performance of products, processes, and financials to that of other internal, competitive or industry performance, to understand the improvement potential or relative performance of the benchmarked products, processes or financials. There are many types of benchmarking, including:
Customer & Competitive Benchmarking
By far, the most important benchmarking exercise is customer and competitive benchmarking. Companies that win drive customer value better than the competition, in a financially superior way. Understanding the gaps in your customer value proposition versus competitors is essential to developing winning growth strategies.
Using different internal entities or historical performance data to provide a guidepost in calculating relative performance. I’ve used internal benchmarking extensively with retailers, benchmarking dozens of metrics for each store against their district and national average, and placing them in performance deciles. They were also longitudinally benchmarked against their best historic performance on each metric.
Comparing an organization’s products, services, and customer processes against key competitors. One of the most important strategic exercises that should be completed at least once a year, to understand core differences and opportunities in the eyes of your target customers.
Comparing an organization’s financial and process performance to that of other organizations, in the same or different industries.
Focusing on a particular function and comparing the performance of the function to that of generally accepted standards or benchmarks.
How do you benchmark?
Customer & competitive benchmarking
At least once a year, you should do a deep dive on how your company compares to competitors on those dimensions of your value proposition that are important to your target customer. And, you should do it before any strategic or annual planning. You should read the sections on customer strategy, customer value proposition, and the voice of the customer to get some ideas on how to approach customer and competitive benchmarking.
Historical or Longitudinal Benchmarking
The easiest form of benchmarking is to compare current performance to that of historical averages and high watermarks. This historical benchmarking should be a consistently used tool in most analyses.
Internal Competitive Benchmarking
One of the most powerful strategic tools is using internal benchmarking to drive awareness and competition in similar, but separate entities, teams, business units, etc. In retail, we benchmarked individuals based on their sales per hour, personal customer service scores, transactions per hour, and it drove incredible competition and productivity and service improvements. It necessitates significant investment in systems, change management, and training, but once in place, ongoing internal competitive benchmarking is an incredibly effective performance driver.
Technical competitive benchmarking
If you have a technical product, it is critical you periodically compare your product to top competitor products, or when a competitor launches a new product. Create a simple chart, with all of the different comparison elements including features, quality, performance, price, and reviews, and start comparing, using actual data where you can. You can download the chart below in the Product Strategy section. You will get a lot of ideas and typically a reality check when benchmarking your product against your competitors’. The benchmarking is even better if you know how the target customers’ rank the relative importance of different dimensions.
Many product companies also conduct product teardowns, where they disassemble products and compare components and designs. It is one of the best exercises to find ideas to cut costs or improve a design. I once did a project for a big rig trucking company. The first step in the design process for the new truck was to buy the three best-selling trucks (each about $100k), and completely tear them apart, categorize every screw and component, and document every idea and good design learned from the other trucks.
Customer Service and Process Benchmarking
Have you ever experienced the customer shopping, purchasing and service experience of your organization and your competitors? If not, you really should. Objectively understanding your customer journey and systematically comparing it to your competitors’ customer journey, will give you the highlight issues, advantages to leverage, and ideas on how to shape your customer journey for the future.
A great first step in benchmarking is to understand the financial gaps you may have compared to competitors or the industry. Our sister company, Kentley Insights, covers over 100+ industry benchmarks across 1100 industries, which makes industry benchmarking a fairly simple exercise. Or, you can find 3 or 4 public companies, and compare your key financial metrics and ratios (e.g., gross margin, growth, sales per employee, SG&A as a % of sales, inventory turns, AP and AR as a % of sales, etc.) to the public companies.
Best Practice Benchmarking
A key to driving improvements is to ensure your organization is using industry best practices. This could include practices related to manufacturing, sourcing, packaging, logistics, customer experience, vendor relations, marketing, sales, and any part of the organization. While it can be difficult to understand your competitors’ practices, there are so many resources you can find online to help you with industry best practices.
There are associations for pretty much every function including HR, IT, Finance & Accounting, Legal, etc. They are a great resource to understand the typical functional KPIs and metrics, and what the average and best practice benchmarks are for the KPIs and metrics. Give them a call to understand the resources they have, which often necessitates a fee to join the association, but it often pays off if you leverage the resources.