What is ‘Benchmarking’ in Business?

Benchmarking Definition

The definition of benchmarking in business is the process of gathering information to be compared with other information in an effort to evaluate performance levels and underperformance levels of a business.

Put simply, companies who use benchmarking will assess and measure their own performance, by comparing their products, services or processes with ‘best practice’ elsewhere and industry leaders.

After a business has completed their benchmarking analysis, a benchmark report is developed. This report discusses what comparisons were made and how the results can be used to improve the business.

Benchmarking is a technique that is adopted by businesses as a method for continuous improvement, and provides the business with the insight needed to strengthen their competitive advantage in comparison to the market.

Types of Benchmarking

Typically, there are four types of benchmarking:

Competitor Benchmarking

With competitor benchmarking, the focus is on comparing against business rivals and industry leaders.

This can be challenging, as it would be improbable that other businesses would freely provide information to be used in comparison to help a rival.

Therefore, observation of a competitor’s business is the likely method to be used in competitor benchmarking.

This form of benchmarking can be very worthwhile as a business can identify exactly why a competitor is thriving.

Functional Benchmarking

In functional benchmarking, functions of a business are compared with other functions from another business in a different industry. Examples of business functions would include finance, IT, customer service, payroll, HR etc.

Functional benchmarking can be advantageous in recognising shortfalls in a businesses’ own function, regardless of industry. For example, a gym’s sales department might compare their process of signing up new customers to that of a bank.

Internal Benchmarking

Internal benchmarking is relatively simple, and easy to conduct. The business would compare a process or task to another similar process or task within the business.

This type of benchmarking is useful as it enables business activity to be consistent across all functions and departments. Any areas that are not maintaining these standards can be identified and rectified.

Internal benchmarking is easy to conduct as all of the data and information needed to comparison is readily available in house.

However, this is only possible for large companies with multiple business areas.

Strategic Benchmarking

Strategic benchmarking examines the overall vision and business model of a successful company from any industry.

The basic premise is to identify the strategies that successful companies use, and then compare these strategies with the current business.

Strategic benchmarking is a type of competitor benchmarking, but with a broader perspective. An example of strategic benchmarking is where a hotel company could benchmark against a fast-food chain and analyse why they are successful.

Examples of Benchmarking

To further illustrate the concept of benchmarking, we can look at some real benchmarking types with examples:

Competitor Benchmarking Example

Examining the marketing materials/strategy of a competitor’s business, or ordering a competitor’s product to compare the quality and features.

Functional Benchmarking Example

Evaluating the customer service quality of a cruise ship operator to that of a supermarket.

Internal Benchmarking Example

Comparing the way that products are shipped in different distribution centres in different geographical locations – ie is one site more efficient that the other? If so, then why?

Strategic Benchmarking Example

A chain of high street solicitors analyses the business of a successful pet food retailer, and determines that much of their success comes down to moving away from brick-and-mortar stores in favour of e-commerce. The chain of solicitors then implements a new strategy to offer online consultancies and social media marketing.

Benchmarking Process

Typically, the process behind benchmarking follows four stages:

Planning would involve first choosing which area of the business is to be benchmarked. Then the full buy in of the staff would be needed to identify all of the facets relating to the inputs, outputs and results.

Analysis involves examining the data collected to identify areas for improvement and develop strategies for implementing changes.

Action would be to implement any necessary changes in the business, as a result of the analysis stage.

Review involves continuously monitoring the progress against the plan and reviewing how the changes have affected the business. It is important that benchmarking is constantly evaluated as it is not enough to just complete a benchmarking exercise once, then never revisit it ever again.

Benchmarking Benefits

There are several advantages that benchmarking can bring to a business:

It helps the business to fully understand and question their own products, services and processes. For example, to compare your business to another business, you would first have to intrinsically analyse everything about your own business.

It provides the opportunity to learn from others, either internally or externally, in order to develop and improve their own business proposition. For example, in looking at the methods and approaches of other businesses, you are able to extract the ‘best bits’ and apply them to improve your own business.

It can contribute towards gaining a competitive advantage in the industry. For example, by continuously benchmarking and comparing against other businesses, and then applying these new methods, the business will be evolving into a more effective and viable company.

It harbours a culture of continuous improvements and avoids ‘standing still’ in business. For example, even if the business is successful currently, doesn’t mean that it will be successful forever – as the world evolves and changes, so must a business. Otherwise, it will likely be overtaken by competitors.