Benchmarking Meaning, Definition, Reasons, Types, Importance

Table of Contents:-

  • Benchmarking Meaning
  • Benchmarking Definition
  • What is Benchmarking?
  • Reasons for Benchmarking
  • Types of Benchmarking
  • Importance of Benchmarking

Benchmarking Meaning

A benchmark is a point of reference against which measurements can be made. In surveying, a “benchmark” (two words) refers to a post or other permanent marker placed at a known elevation, serving as the standard for measuring the elevation of other topographical points. Benchmarking is a process of comparing and measuring one’s business processes with those of business leaders anywhere in the world to gain information and understanding of their methods and procedures and then adopting it in their organisation to improve performance to a higher level.

Robert C. Camp Tirst coined the term “Benchmarking” in 1980 while studying the improvement program at Xerox Corporation, USA. Xerox Corporation pioneered the establishment of this technique in industries. With its tremendous success at Xerox, this powerful technique won instant recognition from the industry, and since then, it has been enthusiastically adopted and practised by all Fortune 500 companies.

Benchmarking Definition

According to Camp, “Benchmarking is finding and implementing best practices in the business”.

Prescott States, “Benchmarking which is an objective, ongoing search for best practices and processes, is an essential tool for organisations committed to achieving world-class standards of performance”.

According to Macneil et al., “A method for continuous improvement that involves an ongoing and systematic evaluation and incorporation of external products, services and processes recognised as representing best practices”.

What is Benchmarking?

Benchmarking is continuous internally and externally, and comparisons against established external best practice leaders to obtain knowledge to improve performance. It is the price of paring the cost, productivity, cycle time, or quality of a specific process or method to another that is widely considered to be a best practice or an industry standard. Essentially, benchmarking provides the performance of the business and helps to understand where the business is about particular standards.

The result is often a business case for making changes to make required improvements. The term benchmarking was first used by cobblers to measure one’s foot for shoes. They would place the foot on a “bench” and mark it to make the pattern for the shoes. Benchmarking is the best word to measure performance using a specific indicator (productivity per unit of measure, cost per unit of measurement, cycle time of x per unit of measure or defects per unit of measure), resulting in a performance metric compared to others.

Reasons for Benchmarking

The following are the reasons for benchmarking

1) Objectivity

A significant reason is that benchmarks tend to be quantified (i.e., a number) rather than qualitative, which are more objective. For example, operational benchmarking may produce a clear goal of having 15 widgets per hour per worker. Alternatively, financial management benchmarking may have a $2,000,000 per client portfolio goal or a 10 per cent return goal. It is obvious whether these goals are met, leading to more streamlined performance management and, in many cases, employee evaluation.

2) Improving Product Quality

Companies may also use benchmarking to enhance product quality. Engineers sometimes purchase leading competitors’ products. They may then take them apart, study them and determine how the competitors’ products outlast or outperform others in the industry. Chemical engineers may similarly analyze food or cleaning products. They can compare the components of competitive products with those in their product line. Subsequently, enhancements can be made to the quality of the products.

3) Clarity

One of the biggest reasons for benchmarking is its clarity. By benchmarking or comparing performance markers, such as revenue or number of pieces produced per minute, the company’s relative performance is apparent, as is an individual worker’s performance. This clarity in managerial goals makes them highly actionable. It can also increase motivation for the same reasons and name-building.

4) Lowering Labour Costs

One reason for benchmarking may be lower labour costs. For example, a small manufacturing company may study how a leading competitor uses robots for several basic plant functions. These robots may help the competitor in saving a significant amount of money on labour costs. Company managers may obtain information about these robotics systems from online articles or competitor’s websites. They may also identify the company that supplied the competitor with the robots. Consequently, the benchmarking process may involve reaching out to the robot manufacturer to aid in setting up its system.

5) Immediate Application

Benchmarking also carries the advantage of being immediate; comparing one company’s performance to another is straightforward and can be accomplished relatively quickly. This allows the benchmarking results to be applied immediately. Still, it also means that the company may be afforded new ideas immediately for better processes, products, or performance tracking.

Types of Benchmarking

Benchmarking can be classified effectively based on a particular statement, i.e., when one is interested in finding out:

1) What is to be Compared

When one is interested in finding out what is to be compared there are three types of benchmarking:

i) Performance Benchmarking

It is to compare one’s performance with that of some other organisation to determine how good one’s organisation is. Businesses consider their position regarding performance characteristics of key products and services. Benchmarking partners are selected from the same sector. This type of analysis is often undertaken through third parties or trade associations to protect confidentiality.

Suitability: Assessing the relative level of performance in critical areas or activities compared with others in the same sector and finding ways of closing gaps in performance.

ii) Process Benchmarking

It is to compare the methods and practices for performing processes. Process benchmarking focuses on improving specific critical operations and processes. Benchmarking partners are sought from best-practice organisations that deliver similar services or perform similar work. Process benchmarking always involves producing process maps to facilitate analysis and comparison. This type of benchmarking often results in short-term benefits.

Suitability: Achieving improvements in key processes to obtain fast benefits.

iii) Strategic Benchmarking

It is to compare the long-term, significant decisions and actions undertaken by other organisations to achieve their objectives. In strategic benchmarking, businesses need to improve overall performance by examining the general approaches and long-term strategies that have enabled high-performers to succeed. It involves considering high-level aspects such as core competencies, developing new products and services, and improving capabilities for dealing with changes in the external environment. Implementing changes resulting from this type of benchmarking may be challenging and may take considerable time to materialise.

Suitability: Re-aligning business strategies that have become inappropriate.

2) Whom to Compare

When one is interested in finding out against whom to compare oneself then there are three main ways of carrying out benchmarking:

i) Internal Benchmarking

Internal benchmarking is the most straightforward. Because, as the title implies, the activity is conducted within the organization. In looking at its processes, it may be discovered that a particular department can perform more efficiently than others. There may be many reasons for this. It may be that the way that activities are being carried out in this department has been achieved because the processes have been engineered to ensure efficiency is the primary objective. Alternatively, there may be a good team spirit which allows people to cooperate. The challenge to other departments therefore is to consider whether this “best practice” could be transferred.

The main advantages of internal benchmarking are that access to sensitive information and data is easier; standardised data is often readily available and usually needs less time and resources. There may be fewer barriers to implementation since practices may be relatively easy to transfer within the same organization. However, real innovation may be lacking, and best-in-class performance is more likely to be attained through external benchmarking.

Suitability: Several business units within the same organisation exemplify good practice, and management wants to spread this expertise quickly, throughout the organisation.

ii) Competitive Benchmarking

Any business organisation in direct competition with others will be presumed to monitor what those others do and, more importantly, how. Suppose a competitor has suddenly gained a competitive advantage, such as being able to sell its goods cheaper or to a higher specification. In that case, other companies will likely be forced to follow suit. Competitive benchmarking compares competitors’ processes with organisations that produce and sell the same goods or services as their competitors, particularly those with commercial advantages.

Competitive benchmarking has specific problems. The first is obvious: competitors must find out how to beat them. The other issue of competitive benchmarking is that comparison against others in the same sector may result in something other than the belief that radical changes are required in existing processes. In construction, it is rare for organisations to consider doing things very differently from their competitors.

Suitability: Redefining the business strategies which provide competitive advantage and sustainability.

iii) Functional or Generic Benchmarking

Functionalism could be regarded as the form of benchmarking that is likely to result in the most change in an organisation’s processes. Businesses look to benchmark with partners drawn from different business sectors or areas of activity to find ways of improving similar work processes or functions. This sort of benchmarking can lead to dramatic and innovative improvements.

Suitability: Improving services or activities for which counterparts do not exist.

iv) External Benchmarking

It involves analysing outside organisations that are known to be best in class External benchmarking provides opportunities for learning from those who are at the “leading edge”. This type of benchmarking can take up significant time and resources to ensure the comparability of data and information, the credibility of the findings and the development of sound recommendations.

Suitability: When examples of good practices are found in other organizations, there is a lack of good practices within internal business units.

Importance of Benchmarking

Points highlighting the importance of benchmarking are as follows:

1) Satisfy the Customer Needs: It helps to satisfy the customer’s needs for quality, cost, product and service by establishing new standards and goals.

2) Help to Realise Level of Performance: Allows organisations to realise what level(s) of performance is mally possible by looking at others and how much improvement can be achieved.

3) Promotes Changes and Bring Innovation: Promotes changes and delivers improvements in quality, productivity and efficiency, bringing innovation and competitive advantage.

4) Helps to Know the Organisation’s Strengths and Weaknesses: It helps organisations understand where they have strengths and weaknesses depending upon supply, demand, and changes in market conditions.

5) Motivate Employees: Motivates employees to reach new standards and to be keen on recent developments within the related area, and improves the motivation of employees.

6) Improves their Competitive Advantage: Helps organisations to improve their competitive advantage by stimulating continuous improvement to maintain world-class performance and increase competitive standards.

7) Cost-Effective and Time-Efficient: It is a cost-effective and time-efficient way of establishing a pool of innovative ideas from which the most applicable practical examples can be utilised.

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