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In this blog we will look at the different types, purposes and benefits of benchmarking in business, including:
So, what are benchmarks in business? In general there are two types, being either internal benchmarking or external benchmarking. Then these can be further categorized into several different types, each serving a specific purpose and providing valuable insights for a business.
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To start with, let's first understand the differences between internal and external benchmarking, as follows:
Internal benchmarking involves comparing things within different departments or units of the same organization. This type of benchmarking helps identify best practices within the company and fosters cross-functional learning and improvement.
It is typically used in larger organizations that operate across multiple geographies, where management can conduct research and benchmark the performance and internal processes between countries. While internal benchmarking is a useful tool, it can't be used effectively by smaller organizations due to the lack of quantitative data available, so they have to turn to another benchmarking type.
External benchmarking is a broader approach that involves comparing an organization's processes, performance, and practices with similar organizations to identify industry trends. This comparison is a quick way to see how any business stacks up to other businesses in its own industry.
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This benchmarking process can lead to competitive analysis, which can help to redesign the business strategy, identify performance gaps, and improve business operations. The goal of this benchmarking process is usually quite simple, such as to make some process improvements, or it can more ambitious like reaching world class performance demonstrated by the most successful companies in a particular industry.
The hard thing with this kind of benchmarking process is the data collection, especially if similar companies in your industry are private and do not disclose the required information. This is where a third party benchmarking platform like CompanySights can really help save you time and money.
Now with these two main types of benchmarking outlined, there are other types of benchmarking that can be either internal, external or both in nature, as follows:
Competitive benchmarking is a subset of external benchmarking, and as the name suggests, it involves comparing an organization's performance, products, or services directly with its competitors.
The goal with competitive benchmarking is to specifically assess the company's strengths and weaknesses relative to others in the same market. For example, we could benchmark the prices of products (from competitor websites), product ratings (from sites like TrustPilot), and employee satisfaction ratings (from sites like Glassdoor) to gain a multi-dimensional view of the competitive position in a market.
This type of benchmarking is more short-term when compared to strategic benchmarking, which we discuss next.
Strategic benchmarking focuses on long-term strategic goals and involves comparing a company's strategic approaches and processes with those of industry leaders or organizations known for their excellence.
This type of benchmarking helps organizations set strategic objectives and identify opportunities for innovation. It is less focused on historical data, but more qualitative by analyzing other organizations and their business goals through market research.
Strategic benchmarking is an integral component of a company's success because it can be the competitive edge that can help drive better performance and increase sales. It is an ongoing process that should be performed by management to drive innovative ideas and reach the ultimate goal of superior performance against similar businesses.
Functional benchmarking compares specific functions or processes within an organization to those of another part of that organization, or other companies. The aim is to identify opportunities for improvement in particular areas, such as supply chain management, customer service, or human resources.
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Business benchmarking functions against other businesses is a quick way to identify areas in business operations that may no be efficient and could look at ways to improve performance. It is common in mergers and acquisitions, such as during the due diligence process or when designing an optimized organization.
Process benchmarking involves analyzing and comparing specific processes or workflows within an organization with those of other companies. It aims to identify and adopt best practices to improve efficiency, reduce costs, and enhance quality.
This type of benchmarking process typically involves process mapping to make sure that each step of the workflow is understood before any comparison is made to other departments or companies. Only after this has occurred then management can see how their own business compares to others.
Process benchmarking (often using key performance indicators) is typically viewed amongst professionals as an effective way to identify gaps within internal operations or even just to see how an organization stands up against others in a particular process.
Financial benchmarking assesses a company's financial performance, including key financial metrics (and key performance indicators) like profitability, liquidity, and leverage, in comparison to industry averages or competitors.
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As the financial situation of a company is inherently linked to its commercial landscape (e.g. revenue) and operational situation (e.g. costs), then financial benchmarking can be a very helpful indicator of areas where Management should focus their attention.
If the area of concern is revenue then strategic benchmarking can provide another view point for Management. Conversely, if the area of concern is costs, then either functional or process benchmarking can provide another helpful data point before making any decisions.
Ultimately, the choice of benchmarking type depends on the specific goals and objectives of the organization, as well as the areas of improvement it wants to target. Many businesses use a combination of these benchmarking types to gain a comprehensive understanding of their performance and opportunities for enhancement.
Benchmarking in business serves several valuable purposes, helping organizations improve their performance, competitiveness, and decision-making processes. Here are some of the primary purposes and benefits of benchmarking:
Benchmarking allows a business to assess its current performance and compare it to that of similar peers or competitors. This provides an objective measure of where the company stands relative to others in the same market.
By analyzing the practices and strategies of world class organizations, benchmarking can help identify best practices that can be adopted or adapted to improve a company's own processes and outcomes.
Benchmarking can highlight inefficiencies and areas where a company is underperforming compared to industry standards. This information is invaluable for process improvement initiatives, as it provides a roadmap for making changes and increasing efficiency.
Benchmarking can help businesses set realistic performance targets by providing benchmarks against which to measure progress. This can often be the case when a restructuring is underway and a business has an immediate focus on headcount reduction and cost control.
Benchmarking encourages innovation by exposing a business to new ideas and approaches used by competitors. This can inspire creative solutions and new strategies to close any performance gaps.
By comparing customer satisfaction and quality metrics with those of competitors, benchmarking can help identify areas where improvements are needed to meet or exceed customer satisfaction rates.
Benchmarking data can inform strategic decisions, such as market positioning, product development, pricing strategies, and resource allocation. It provides a factual basis for making informed choices.
Benchmarking can help identify potential risks and vulnerabilities by comparing a company's practices and performance with those of others in the industry.
Businesses can use benchmarking to identify opportunities to reduce costs by adopting more efficient practices and processes that have been proven to work in similar organizations.
By continuously benchmarking and improving processes, a business can gain a competitive edge over rivals, as it becomes more efficient, agile, and responsive to market changes. This usually occurs when management promote a culture of continuous improvement in the business operations team.
Sharing benchmarking results with employees can motivate them to work toward common goals, improve morale, and foster a culture of continuous improvement. It can also help if management align employee incentives or targets to benchmarks once they have buy in from the employee group.
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In summary, benchmarking is a valuable tool for businesses seeking to enhance their performance, remain competitive, and adapt to changing market conditions. It enables organizations to learn from others, identify areas for improvement, and make informed strategic decisions.
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