How good of a driver are you? If you make your own espresso at home, how would you rate yourself? If you play basketball, how good are you at free throws? What these assessments have in common is that they rely on your generally having formed an opinion about your abilities based on comparing them with somebody else’s. They’re examples of informal benchmarking.
The only real way to know the quality of your free throwing, for example, is by sizing up the competition (hopefully it’s not Shaquille O’Neal) and then drawing an analogy.
Companies have a more formalized process to size up their competition and make improvements accordingly. Aptly, it’s called “formal benchmarking.” If used correctly, an effective benchmarking process can help a company implement changes and stay ahead of the competition.
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Benchmarking performance is important because it enables a company to determine whether its business processes and practices, products, and services are the best they can be. When you know these benchmarks, you will be better able to compete successfully in the marketplace. Moreover, the best companies want to do more than simply compete. They want to dominate the market. They want to be the go-to choice for the markets they’re serving.
Consider Amazon.com. It’s not content just to capture some of the business away from its competitors. It’s continuing to invest in big-move acquisitions, such as Whole Foods, to dominate.
When companies can see what other companies are doing and compare and contrast—which is essentially what benchmarking is all about—they can modify their supply chains and make other improvements. Profit margins can always be fatter, so cutting costs and streamlining where appropriate are measures that always look good to shareholders and C-suite executives.
It might seem easy to benchmark performance, but it’s not always. Just doing a comparison may not get the immediate results that a company would like. What works for one company may not always work for another. This is why many companies freely share on CNBC and in the business press about how they operate.
Yes, a competitor is free to try to copy them, but many times, the copycat will fail. Even if a company hires bigwigs at a highly respected organization like McKinsey & Co. to do its competitive benchmarking, it may find that another’s procedures, methodologies and initiatives don’t sync up with the company’s own operational playbook. As a result, the company will be greatly disappointed in the end.
On the other hand, sometimes there is indeed success. A company will discover “secrets” it didn’t know before and put them to use to improve its own operations. The key lies in a true apples-to-apples match-up versus an apples-to-oranges comparison.
When done right, benchmarking can lead to strategic insights that can be put into practice right away. The right metrics can help a company with both internal and external operational factors. Armed with this comparative data, a company can better determine how much to charge for a product or a service, for example. The company can see what it’s lacking that a rival is providing. Whatever it is, it might be just the lure to draw in new customers and keep existing customers loyal.
An example is how Gillette has decided to start a shaving club, or subscription-based offering, after the huge success that low-cost providers like the Dollar Shave Club have had with similar subscription services.
Further, a company armed with the right metrics can figure out the best compensation packages for all levels of employees. It can understand how to improve manufacturing times as well. And benchmarking can help you decide what purchases you should make to speed up operations, among other cost-saving factors.
All companies want to do better, and they should. Otherwise more nimble organizations with a better read on consumer behaviors and other insights could come along and put them out of business.
There are plenty of examples of companies that were once footholds in their respective industries that have gone out of business. Companies like Amazon.com have upended many existing businesses, for instance. And few saw it coming.
Benchmarking is no savior, but it can enable businesses to have keen insight that enables them to better prepare for their futures. It’s one piece of a larger strategy to keep organizations competitive and ahead of the game.
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