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 or the overall industry. What does it compare to? The comparison is of various performance metrics 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 than 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 it out? The first step is to measure your internal performance. 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 the company’s credit policies are, is the company is using its assets to their fullest, etc. Companies have also started recognizing the importance of the human workforce in an organization and are making efforts to maximize the productivity of the employees. HR benchmarking measures the performance of the workforce 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 quickly check which areas are you lacking 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 your competitor is 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 compare yourself with the best in the business. The scope is really huge and, if successfully implemented, can bring in many innovative ideas.


Advantages of Benchmarking

  • The main advantage is that it focuses on the areas that 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 ways of working. It gets a feel of the strategy that competitors adopt.
  • Improvement based on the company’s past performance 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 that 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 consider the micro and macro factors that led your competitor or industry leader to succeed or fail.

Also, read about various other methods of analyzing financial statements.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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