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A tool to be best-in-class.

Benchmarking is becoming an essential process for sustaining competitive advantage and surpassing the value creation of one's leading competitors.

Benchmarking has been growing rapidly since the mid-1980s as a result of intensifying global competition. Effective benchmarking programs are difficult to implement, but there are successful examples of such programs among large and small companies in most industries, including Xerox, Motorola, Ford, and AT&T.

In research conducted with the American Productivity and Quality Center, we discovered that 60% of the companies surveyed are already practicing benchmarking, and 10% more report that they will begin formal benchmarking in the next three years. Benchmarking is clearly becoming an essential management tool for sustaining competitive advantage and establishing standards by which "premier" companies are judged.

Like other popular business trends of the 1980s benchmarking will undoubtedly fail to solve all of the problems facing American industry. Nevertheless, it is a useful tool when it is well-conceived and well-executed. Due to its growing popularity, benchmarking has matured as a business process; it will be particularly relevant in this era of global competition and short-lived competitive advantage.


What Is It?

There are as many definitions of benchmarking as there are practitioners. Most of these definitions share several features: * Benchmarking is a process of discovery and examination of the "best practices" within the world's "best companies." * Applying benchmarking successfully means treating it as a continual process and focusing it wherever best practices and best companies are to be found, even beyond a company's own industry and geographic scope of operations. * Benchmarking is relevant only if it leads to superior competitive performance that is reflected in a company's operating margins and capital returns.

Benchmarking is not a new concept. In fact, related analytical techniques have been a staple of effective competitive analysis. In many industries, peer companies have participated in third-party benchmarking surveys of compensation and benefits practices, organizational arrangements, pivotal job designs, staffing levels, and the like, for decades. What, then, is fueling its growing popularity?

Interest in benchmarking is derived from intensifying global competition. With declining government protection and limited domestic growth prospects, economic survival requires that companies understand their relative performance and raise that performance standard to the level of existing international competition or better.

Through benchmarking, entire industries can boost their competitiveness. This is accomplished when all competitors focus their improvement efforts on closing the gap between their own performance and that of the "world-class" company with respect to things that are truly important to their competitive success. The Malcolm Baldrige National Quality Award includes benchmarking among its criteria for demonstrating that a company is indeed world-class.

Even in companies with less ambitious goals than winning the Baldrige Award, benchmarking has become a standard feature of continual quality improvement processes. These processes seek better and lower-cost ways of doing essential work, thereby improving competitive performance.


Enormous Potential

Benchmarking has the potential to be revolutionary in the 1990s; at the very least, it could become a standard business practice and maybe a key to revitalizing our domestic industries.

Benchmarking reveals gaps between a company's perceived and actual competitive performance, both with respect to its best industry peer and to the absolute standard set by the world's best companies. These gaps can be stunning in magnitude, amounting to as much as a threefold difference in important performance parameters, such as cycle time. As a result, management's initial reaction to them is often denial - senior executives often cannot believe that any competitor could be so clearly advantaged.

The large performance gap may also be discouraging, causing managers to feel that they can't possibly catch up to, let alone overtake, the performance of their best competitors. Nonetheless, benchmarking can be extremely useful in overcoming management complacency about the status quo and in exposing incorrect perceptions about the company's and its competitors' strengths and weaknesses.

In addition, particularly when competitive analysis and benchmarking are done in tandem, a company can analyze the sources of a leading competitor's advantage and develop strategies to achieve a competitive performance breakthrough. Even if the company is already the best-in-class in its own industry, the combination of competitive analysis and benchmarking can give it an early warning of when its relative advantages begin to erode in cost structure, customer satisfaction, technology, or business processes.

Furthermore, once a company understands the "true" costs of its own and its competitors' operations, benchmarking outside of its industry can be a source of innovative ideas as well as intelligence about emerging technologies or revolutionary business practices. Benchmarking can also be a basis for setting measurable performance improvement targets aimed at surpassing the current industry leader.

With such powerful benefits (see Exhibit 1) and the testimonials of premier companies, why don't companies ignore the plethora of improvement initiatives being sponsored today and concentrate attention on effective and ongoing benchmarking processes?

Exhibit 1: The Benefits of Effective Benchmarking

* Improve the general level of industry

performance by performance standards and

by educating industry peers about the long-term

effects of predatory behavior and stupid

competition. * Disclose gaps between a company's perceived

and actual competitive performance. * Overcome management complacency by

exposing incorrect perceptions about

competitor strengths and weaknesses and by

showing where competitors are investing and

what value they are creating in doing so. * Create momentum for cultural change by

sensitizing employees to the need for

continual improvement in productivity growth

and real costs. * Provide clues to achieving a competitive

performance breakthrough. * Give early warning that a company is falling

behind the peer group in terms of cost

structure, customer satisfaction technology,

and business processes. * Be a source of innovative ideas for correcting

problems with the actual performance of a

business process. * Help to uncover emerging technologies or

practices that can focus future improvement

efforts. * Test whether a company's strategic direction

is sound and whether total quality

management programs are successful in

terms of measurable economic benefit. * Establish a basis for setting measurable

performance improvement targets.


To Benchmarking

Unfortunately, there are some impediments to benchmarking. For one thing, developing relevant and accurate information about competitors can present legal and ethical problems. This is one reason why successful benchmarking efforts often involve partnerships with world-class companies outside of a company's own industry.

Benchmarking requires a depth of understanding that generally can be developed only through an information exchange agreement between participating companies. In highly competitive industries. such as consumer products, peer companies are justifiably concerned that their most important sources of competitive advantage could be compromised if they were to enter into a benchmarking partnership with a direct competitor.

Even when competitive issues are less significant, industry peers do not often share information about management practices and business processes. Sometimes, this is because of their belief in the superiority of their own ideas. More often, however, resistance to benchmarking with peer companies reflects managers' perceptions about the uniqueness of their operations, business environments, or other pertinent factors that they believe defy normalization.

A Concept

For Integrated Benchmarking

There are a variety of benchmarking frameworks, including strategic, customer, and cost benchmarking. The latter has organizational, operational, and process components. These frameworks provide the most value when they are integrated.

Strategic and customer benchmarking should set the stage and provide a context for the cost benchmarking that follows. Moreover, the process benchmarking that tends to be the focal point for Total Quality Management and continual improvement efforts is but one of several cost benchmarking techniques that can be used in measuring a company's relative performance and in searching for ways to achieve superiority.

Strategic Benchmarking. Strategic benchmarking measures shareholder value creation relative to capital costs and the performance of individual competitors. The basis of measurement can include one or more financial metrics - such as total shareholder return - measured over a period of years. The purpose of strategic benchmarking is to establish the premier level of shareholder value creation within a company's industry and measure the gap between a company's own performance and that of the leading company.

Strategic benchmarking helps management determine whether its company is viable as an independent entity over the long run. A company that cannot provide much better than a risk-free rate of return will not be viable. Through strategic benchmarking, a company can determine how deep a hole it is in and whether it is sinking deeper.

Strategic benchmarking helps to assess the impact of possible actions for closing the "value gap" between a company and its peers. Typically, these might include steps to improve revenue, reduce the real costs of doing business, improve asset management, or beneficially change the business portfolio. By testing possible gap-closing actions, management can avoid focusing on improvements or targeting improvements that would, if achieved, yield only competitive parity rather than superiority.

Strategic benchmarking generally is limited to a company's own industry.Because investment portfolios tend to contain one equity within an industry group, strategic benchmarking must focus management on surpassing the value creation of the leading company in its own industry - in order to attract investors. A company that is already premier within its industry group might use strategic benchmarking to improve its market value through better financial communications, asset management, or any means that can be gleaned from studying the leading shareholder value companies in other industries.

Customer Benchmarking. Customer benchmarking establishes a company's relative position on customer performance standards (i.e., expectations), and its own and its peer companies' performance relative to these standards. Customer benchmarking relies on surveys and analytical techniques, such as conjoint analysis, that establish the relative importance of the attributes that drive customer satisfaction - such as quality, product reliability, customer service, price, or delivery time.

Customer benchmarking helps a company understand the importance of these attributes in shaping customer standards and provides insights into how these attributes and the associated standards are changing. Once defined, customer benchmarks can be used to differentiate activities that help shape customer judgments from those that do not add value.

Cost Benchmarking. In all competitive businesses, cost benchmarking is an essential component of an integrated benchmarking process. Cost benchmarking seeks to identify differences in variable and fixed overheads, and in indirect and direct operating expenses, which collectively make up a company's cost structure. This cost structure can be examined in terms of organizational, operational, and process components and the factors that determine the level of costs in each area.

The organizational and operational components of cost benchmarking are similar to those of competitive analysis. Organizational benchmarking focuses on indirect cost structures (i.e.,overheads) and the sources of superior organizational capability (e.g., organizational design, relative staffing efficiency, and skills). Operational benchmarking defines a company's true cost structure and looks at its relative cost position in each major segment of the value chain. Because operational benchmarking also measures direct work force productivity, it can provide insights into the sources of leading competitors' operating leverage. Given the enterprise-level sensitivity of the information involved, operational benchmarking is often facilitated by third parties or industry associations.

The third major component of cost benchmarking - process benchmarking - is fast becoming the most widely applied. This technique identifies the most important operating and business processes for establishing competitive advantage and then determines the best practices within and across industries. By benchmarking its process performance - for example, in terms of transaction processing costs or cycle times - a company can establish an agenda for reengineering or otherwise advancing key business and operating processes.

Process benchmarking is particularly well suited to inter-industry comparisons and is perhaps the easiest area in which to gather detailed information. This is because, in most instances, best-in-class process performance and frame-breaking ideas are found outside of a company's own industry. Companies are also more likely to exchange information on business or administrative processes that to provide cost or productivity data.


A Benchmarking Program

Whether to initiate ongoing benchmarking depends on management resolve and practicality considerations. Specifically, a company must address three questions before proceeding with the design of a benchmarking program: * Are we willing to learn from others, and do we have the resolve to act on what we learn via benchmarking * Can we obtain sufficiently accurate information through legal and ethical means? * Are we willing to commit the time and resources to complete an orderly benchmarking program?

These questions assess whether a company is prepared to change on the basis of what it learns through benchmarking - and, if so, whether useful information and data can be practically obtained with a reasonable commitment of time and effort.

The time required to set up and implement a comprehensive benchmarking effort can easily reach six months to a year. A company may need to establish several benchmarking teams, each of which may have a half dozen or more members. As for management's readiness to change, benchmarking means looking for ways of surpassing a company's toughest competitors. Doing so will inevitably require that management initiate fundamental changes to realize quantum improvements.

Once a company is prepare to initiate benchmarking, management must decide what functions/areas to benchmark. There are only two relevant issues in this regard. Management must determine (1) what customers put value on and what standards they expect and (2) their company's relative cost position in each major segment of the value chain. By following these indicators, management can avoid the trap of benchmarking what is easily measurable rather than what drives a company's long-term economic success - customer satisfaction and the profitability, liquidity, and capital returns that flow from satisfying customers.

Benchmarking's Four Phases

Benchmarking is approached in four broad phases: planning, research, analysis, and implementation. Exhibit 2 depicts the four benchmarking phases and itemizes some of the pitfalls that might be encountered in designing and implementing a comprehensive benchmarking program.


Planning Phase. In the initial phase, the scope of the benchmarking effort is set. The first decision is whether benchmarking should be done internally or externally, or both. To understand and imitate the world's best performance, a company will ultimately need some form of external benchmarking. However, many companies find that internal benchmarking can provide immediate opportunities for performance improvement. This is accomplished by assessing whether one internal organization is performing significantly better than others; by exploring the source of its relatively superior performance; and by deciding how to transfer the internal best practices from the superior performing unit to other units within the company.

If a company decides to pursue internal benchmarking, management must then address which organizations and functions should be covered. In terms of organizational coverage, a company might choose to pilot test its benchmarking process with selected business units before launching a comprehensive internal benchmarking program. In choosing functions for benchmarking management might select areas that are recognized weakness as well as areas of perceived strength. In both cases, the specific functions selected need to be limited to those that are critical to customer satisfaction and competitive cost.

If external benchmarking is adopted, management must decide whether to limit the scope of study to its own industry (at least initially) or to include best-practices companies from the start. Choices about companies to benchmark with are varied. These include focusing on a single or direct competitor, which could be the industry leader or perhaps the most similar peer company. Or, management might engage the full range of industry peer companies in a benchmarking partnership.

Including best-practices companies outside of a company's industry in the scope of external benchmarking requires management to identify the pacesetters in areas that are critical to their own company's long-term success. Best-practices companies will generally vary for specific critical functions.

Generally speaking, a tightly focused internal or external benchmarking program is likely to produce the deepest insights.

Research Phase. With the scope of the benchmarking program defined, management can begin the research phase by screening and prioritizing the best sources of benchmarking information. Exhibit 3 lists the three major sources of benchmarking information: proprietary information, public information, and physical observation. Unlike competitive analysis, which uses a wide range of sources to gather proprietary information, benchmarking relies on two-way exchange or sharing of information with top-performing companies.


Physical observations are particularly difficult to make. Aside from selecting the right facilities and operations to visit, management must decide how to conduct the field visits and how to document and interpret findings. Getting the right mix of management, planning analysts, and benchmarking experts involved in the site visits is critical to conducting effective field research.

Analysis Phase. The analytical phase concentrates on measuring performance gaps, assessing their implications, and establishing future performance standards. To ensure that these standards hold up over time, a company should establish them by forecasting the performance of its peer companies.

The thrust of the analysis phase, however, is the evaluation of what makes world-class companies world-class. The analytical Techniques used for this evaluation depend on the type of benchmarking and what a company hopes to learn from it. For instance, process benchmarking relies heavily on flow charting, reengineering, cycle-time analysis, and related techniques. On the other hand, operational benchmarking frequently requires building competitive cost models and checking their accuracy through simulations and hypothesis testing.

Implementation Phase. In the implementation phase, the benchmarking company establishes action plans, budgets, and schedules together with a method for monitoring the results of improvement initiatives. In developing action plans, a company must assess its options in terms of its prerequisites, risks, and benefits.

Benchmarking Priorities

For the 1990s

In our opinion, there are several areas with maximum potential for improvement via benchmarking in the 1990s. Among these priority areas is supply chain management, where exemplars of supplier and customer integration are found outside of existing industry paradigms. Cycle-time analysis, covering the full scope of critical operating and business processes, will also continue to be an area of high potential for improved quality, customer service, and cost management.

Perhaps the most pressing priority is the emerging area of people effectiveness, where trends in work force diversity, flexible employment, and total employment cost management, require companies to find innovative and effective ways to manage change. Further, controversial subjects such as pay equity and CEO compensation will require objective comparison within and across industries, which benchmarking can offer. In the latter case, investors will be looking for evidence, developed through benchmarking analyses, that executive pay is prudently correlated with shareholder value creation, improved competitive positioning, or other logical bases of reward.

Although benchmarking identifies best practices, successful benchmarking occurs only when a company is able to incorporate such practices and improve them. In a sense, the term "best practices" is really a misnomer because, as a means for continual improvement, benchmark standards are changing all the time.

Indeed, the half-life of any competitive advantage is the time required for a competitor, quite possibly through benchmarking, to understand and figure out how to surpass the standard. Today's best practice will not be "best" for very long, when the general level of industry performance is continually rising. For this reason, if a company sets its target too low, it may find the gap between its own and its competitors' performance is widening even though the company is improving.

Whether benchmarking becomes a standard element of prudent management practice in the 1990s remains to be seen. Clearly, there is growing evidence that this management tool can help to bring about major and beneficial transformation of mediocre companies. But, as with all management practices, techniques alone do not ensure long-term success. In the final analysis, successful transformations depend on intangibles, such as the initiative, skills, and competitiveness of a company's managers and employees.

In this decade, we must recognize that each company, and all of its employees, are engaged in hand-to-hand combat for competitive advantage and, ultimately,, economic survival. If benchmarking does nothing more than break the dam of management complacency and organizational inertia that plagues uncompetitive companies, then it will become a new and worthy standard.
COPYRIGHT 1992 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Chairman's Agenda: Governing for Shareholder Prosperity; benchmarking
Author:Schmidt, Jeffrey A.
Publication:Directors & Boards
Date:Mar 22, 1992
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