What is Benchmarking in Business | Various Types of Benchmarking
What is Benchmarking?
Benchmarking is the process of adopting best practices, and it allows your organization to examine what other companies are doing, what is working for them, and what is not.
Benchmarking is best defined as a process of identifying, reviewing, understanding, and adapting best practices and strategies from the leading organizations regionally or globally to aid your organization improve its performance.
Typically, performance should be compared with an organization that is known to be the best in the class of product or service in question. Benchmarking exercise should concentrate on areas of business that are of critical strategic importance to your organization.
Competitive benchmarking is the benchmarking process of making comparisons with direct competitors.
Internal benchmarking is a benchmarking process that compares one part of a business with a different part of the same industry.
Process and activity benchmarking involve analyzing and comparing an internal function within your company with that of the best leaders or practitioners and may not necessarily a direct competitor. In many cases, it does not matter which industry the best practitioner is in. This type of benchmarking helps identify the best practices in any organization that has established a reputation for excellence in specific business activities, e.g., marketing, engineering, human resources, etc.
Steps in Benchmarking
- Identify a particular area to benchmark.
- Establish a competent team comprised of functional, strategic, and tactical representatives from all affected areas.
- Determine the company to study.
- Once best practices have been selected and identified, collect and analyze the data and plot its performance against best practices. Identify improvement opportunities.
- Determine the level of effort required to re-engineer the best practices to suit the given firm’s unique circumstances.
- Do a cost-benefit analysis and implement the priorities established.
Various Types of Benchmarking
Benchmarking is a versatile tool that can be applied in various ways to meet a wide range of requirements for performance improvement.
There are different terms used to distinguish and differentiate the various ways of applying to benchmark. At the start of benchmarking projects, it is vital to clarify precisely what is to be achieved by using an appropriate methodology.
Standard benchmarking terms include:
- Strategic Benchmarking
- Performance Benchmarking or Competitive Benchmarking
- Process Benchmarking
- Functional Benchmarking or Generic Benchmarking
- Internal Benchmarking
- External Benchmarking
- International Benchmarking
Strategic Benchmarking is used where organizations seek to improve the organization’s overall performance by examining strategies that are long term and general approaches that the best organizations are using to succeed.
Strategic Benchmarking involves considering high-level strategic goals like developing new products and services, core competencies, changing the company structure, and improving core capabilities for managing changes in the work environment. The changes resulting from strategic benchmarking can be challenging to implement, and the benefits are likely to take a long time to materialize.
Performance Benchmarking/Competitive Benchmarking
Competitive Benchmarking or Performance Benchmarking is used where organizations consider their positions concerning performance characteristics of essential services and products. Benchmarking organizations or partners are drawn from the same industry/ sector. However, it is common for companies to undertake this type of benchmarking through trade associations or third parties to protect confidentiality in the commercial world.
Process Benchmarking is a type of benchmarking that is used when the focus is on improving specific vital operations and processes. Benchmarking organizations or partners are selected from best practice organizations that deliver similar services or perform similar work. Process benchmarking basically involves setting process maps to help facilitate process comparison and analysis. Process type of benchmarking can result in benefits in the short term.
Functional Benchmarking or Generic Benchmarking
Functional Benchmarking or Generic Benchmarking is used by organizations who intend to benchmark with organizations selected from different business industries or sectors to identify ways of improving the same functions or work processes. Functional types of benchmarking can lead to innovation and dramatic improvements.
Internal Benchmarking basically involves identifying activities that can be benchmarked from one department or function to another but within the same organization, for example, from business units located in different locations. Internal bench marking’s main advantages are that access to sensitive data and information is more comfortable, standardized information is often readily available, and usually takes less time and resources to implement.
Again, there may be fewer barriers to implementation as practices may be relatively easy to transfer across the same organization. However, lack of real innovation and best in class performance is more likely to be found through external benchmarking.
External Benchmarking involves seeking outside organizations that are known to be the best in class. External benchmarking provides opportunities for learning from organizations that are on the leading edge, best of the best. However, it is good to note that not every best practice solution can be transferred to others.
Besides, this type of benchmarking may take up more time and resources to ensure data and information comparability and the credibility of the findings, and the development of practical recommendations. Again, external learning is also often slower because of the not invented here ‘syndrome.
International Benchmarking is used to seek benchmarking partners from different countries because the best practitioners are located elsewhere globally. There are too few benchmarking partners within the same country to produce valid results. Because of increased advances in information technology as well as globalization, such benchmark activities are becoming common.
Despite this, however, international benchmarking can take more resources and time to do and implement, and the results may need careful analysis because of regional differences.
This type of benchmarking can also be called “best practices benchmarking.” Competitive benchmarking is often used in competitor analysis. When researching your direct competitors, you also explore the best organizations in the industry even though they may be serving a different market segment or location and may not be the direct competitors. This benchmark organization is then used as a standard of comparison when assessing your immediate competition and yourself.
Benchmarking, invented initially as a formal process by Rank Xerox is usually done by an individual organization or can be carried out collaboratively by organization groups like branches or subsidiaries of a multinational in separate countries/regions.
Reasons for Benchmarking
Here are top 5 reasons why benchmarking is important. Reasons for Benchmarking;
Improves Organizational Efficiency and Effectiveness.
Because business efficiency and effectiveness are critical, it is vital to enhance, and benchmarking can do that. Most service-driven businesses need to be highly efficient and effective to remain competitive in the marketplace. Benchmarking can be a game-changer in this area.
Improves Performance Potential.
One key reason that organizations do benchmark is that it helps them improve performance. It helps them gain on the right performance metrics and therefore take action to improve.
Understanding the Competition
Getting a better understanding of competing businesses is just as critically important as ensuring that you remain competitive. The benchmarking process gives the organization insight into what the competitor is doing, making it more proactive.
Expanding Your Business’ Strategy
Businesses looking forward to planning and expand strategically must have a SMART goal. By looking at other market leaders’ market leaders, the organization can get a better outlook and perspective about what they can achieve.
While benchmark analysis may show that the organization can do more, that may not always be a good idea. Sometimes catering to a niche and specializing in that niche can turn a higher profit over the long term but with a lower investment regarding time, labor, and effort.
Helps to Motivate Staff
One key reason for conducting benchmark activities helps get the organization and its employees of the comfort zone. The comfort zone is where you never want the staff to be because it leads to stagnation. When benchmarking internally with different departments against the competition, the result, good or bad, can be used as a source of motivation. It helps to set goals, and then it’s everyone’s job to work towards achieving those goals.
Helps Identify Strength and Weakness
The benchmarking process can enable an organization to identify its strengths and weaknesses. This is important because, without this insight, the company could be making blind business decisions without the right information.
Advantages of Benchmarking
The benchmarking process is an important management tool that can help organizations overcomes paradigm blindness. This Paradigm Blindness can be explained as the mode of thinking. This is because the way we do it is the best. After all, this is the way we’ve always done it.
Benchmarking can open organizations to see ideas, new methods, and tools to improve their effectiveness. Benchmarking helps crack through resistance to change by demonstrating other ways of solving problems than the one currently employed and showing that they work because others are using them.
The advantages of benchmarking include:
- Benchmarking provides a systematic approach to the assessment of best practice
- Benchmarking can promote reflective practice
- Benchmarking processes do provide evidence for additional resources
- Provides a forum for shared and open learning
- It ensures pockets of innovative way are not wasted
- The process reduces repetition of effort and resources
- Reduces fragmentation/geographical variations in care
- The benchmarking process provides an avenue for change in management practice
- Benchmarking can facilitate multidisciplinary team building and networking
- It is practitioner-led, so it gives a sense of ownership
- Accelerates quality improvement