What is Benchmarking? Types and Limitations of using it

Benchmarking is a process of measuring the performance of a company’s internal processes and then sizing up against organizations considered best in class. In other words, it is a comparison exercise to know where we stand when compared to our competitors.

What is Benchmarking?

Benchmarking can be defined as a technique of evaluating a company’s performance by comparing it with that of the competitor’s or the overall industry. What does it compare? The comparison is of various metrics of performance such as the quality of products or services, costs involved etc.

As a business owner, have you ever come across questions like these?

  • Why do some companies always end up making higher profits as compared to their counterparts?
  • What are the strengths and weaknesses of my business?
  • Which is the area that I need to target so as to increase a higher bottom-line?
  • Which is the best company in business with respect to different aspects of running a business?
  • What are your competitor’s strengths and weaknesses?

If these questions have been nagging you, it is time for you to take a benchmarking exercise for your company and the sector you are working in.

How to carry out Benchmarking?

Measure Performance

Now the question arises, how to carry out? The first step is to measure your internal performances. One can measure your performance from various perspectives. We can measure how effectively the finance is being deployed by the company with respect to the returns that it is getting. One can also measure the operational efficiency of the company. This entails how efficiently the inventory in the company is being used, how efficient is the credit policies of the company, is the company using its assets to its fullest etc. Companies have also started recognizing the importance of human workforce in an organization and are taking efforts to maximize the productivity of the employees. HR benchmarking measures the performance of the workforces in an organization.

Compare with Best in Class

Once you measure your internal performances, the next step is to compare these with the best-in-class organizations. What this does is, you can now easily check which areas are you lacking at and which areas are you right at par with best-in-class. Once you spot areas that you are weak at, you can then take steps to improve in those areas.

Types of Benchmarking

Internal Benchmarking

You compare the internal performances of various departments across different locations within your organization. This is easy to implement as data is not an issue. But the scope is very limited.

Competitive Benchmarking

You compare your performance with that of your direct competitors. Data collection is difficult here but at the same time, you get great insights as to why is your competitor performing the way it is performing.

Industry Benchmarking

Here, the comparison is with the leaders in the industry. Although data collection for performing industry benchmarking is very difficult and tedious, you are comparing yourselves with the best in the business. The scope is really huge and if successfully implemented, can bring in a lot of innovative ideas.


Advantages of Benchmarking

  • The main advantage is that it brings the focus to the areas which require special attention. This is how it sets the base for improvement. It forces the organization to adopt change, the other name of which is progress.
  • While conducting this exercise, a company discovers various new ideas and way of working. It gets a feel of the strategy adopted by its competitors.
  • Improvement based on the past performance of the company is not the right measure. Comparison with competitors is required because survival has to be fought with these rivals. This is what exactly benchmarking provides.

Limitations of Benchmarking

  • Benchmarking simply helps you to spot areas which need improvement. It does not contribute to solving the issues at hand. Benchmarking can just be the first of many steps to improve a company’s performance.
  • It simply compares the numbers. It does not take into account the micro and macro factors that led to your competitor or industry leader to succeed or fail.
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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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