Chapter 8

Benchmarking

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 Chapter Objectives

• Defining benchmarking and understanding its need

• Understanding the process of benchmarking
• Identifying the critical factors to success
• Understanding the current performance
• Planning the benchmarking exercise
• Studying and analyzing the results
• Understanding limitations and pitfalls

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 Benchmarking
Benchmarking is the systematic search for best practices,
innovative ideas, and highly effective operating procedures.
Benchmarking considers the experience of others and uses it.

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 Reasons to Benchmark
Benchmarking is a tool to achieve business and
competitive objectives. It is powerful and extremely
effective when used for the right reasons and aligned
with organization strategy. Some of the reasons are:

• Benchmarking can inspire managers (and organizations) to

compete.
• Benchmarking allows goals to be set objectively, based on external
information.
• Benchmarking partners provide a working model of an improved
process, which reduces some of the planning, testing, and
prototyping effort. As the old saying goes, Why reinvent the wheel?
• Benchmarking enhances innovation by requiring organizations to
constantly
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scan the external environment and to use the 4
 Process

Organizations that benchmark, adapt the process to best

fit their own needs and culture. Although the number of
steps in the process may vary from organization to
organization, the following six steps contain the core
techniques.
1. Decide what to benchmark.
2. Understand current performance.
3. Plan.
4. Study others.
5. Learn from the data.
6. Use the findings

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 Deciding What to Benchmark
Benchmarking can be applied to virtually any business or production
process. Improvement to best-in-class levels in some areas will contribute
greatly to market and financial success, whereas improvement in other
areas will have no significant impact. Most organizations have a strategy
that defines how the firm wants to position itself and compete in the
marketplace.

• Some other questions that can be raised to decide high impact areas to
benchmark are:
1. Which processes are causing the most trouble?
2. Which processes contribute most to customer satisfaction and which are not performing
up to expectations?
3. What are the competitive pressures impacting the organization the most?
4. What processes or functions have the most potential for differentiating our organization
from the competition?
• In deciding what to benchmark, it is best not to choose too large a scope
• Pareto analysis can be a helpful technique for deciding what processes to
investigate.
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 Understanding Current Performance
To compare practices to outside benchmarks, it is first
necessary to thoroughly understand and document the
current process. It is essential that the organization’s
performance is well understood

• Several techniques, such as flow diagrams and cause-

and-effect diagrams can be used
• When documenting the process, it is important to
quantify it
• Special care should be taken when using accounting
information. Most accounting systems were developed
to satisfy external reporting requirements to the tax and
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 Planning
• The Benchmarking Team should do planning considering following:
– what type of benchmarking to perform: internal, competitive, and
process.
– what type of data are to be collected
– the method of data collection.
– candidates to serve as the benchmark to be identified. Identifying
the best firms to find a benchmark is a research project.
– timetables for each of the benchmarking tasks : Techniques like
Gant Chart, PERT, etc. can be effectively used
– The desired output from the study.

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 Studying Others
Benchmarking studies look for either description of how best-in-class
processes are practiced or the measurable results of these practices.
For this purpose, internal sources, data in the public domain, original
research, or—most likely—a combination of sources are used.

• Three techniques for conducting original research are:

– Questionnaires: Questionnaires are particularly useful to ensure respondent
anonymity and confidentiality, when data are desired from many external
organizations and when using a third party to collect information.
– Site visits: Site visits provide the opportunity to see processes in action and for
face-to-face contact with best-in-class operators. Site visits usually involve a tour of
the operation or plant followed by a discussion period.
– Focus groups: Focus groups are simply panels of benchmarking partners
brought together to discuss areas of mutual interest. Most often the panels
are comprised of people who have some previous joint benchmarking
activity.
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 Learning from the Data
Benchmarking studies can reveal three different outcomes.
• External processes may be significantly better than internal processes (a
negative gap). Negative gaps call for a major improvement effort.
• Process performance may be approximately equal (parity).
• The internal process may be better than that found in external
organizations (positive gap). The finding of a positive gap should result in
recognition for the internal process.

Following steps should be taken in in case of negative gaps

• Identifiable benchmark gaps must be described and quantified.
• Once best-in-class practices are described and understood, key process
measures should be quantified.
• When best-in-class processes have been described and quantified,
additional analysis is necessary to determine the root causes of the gaps

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 Using the Findings
When a benchmarking study reveals a negative gap in performance, the
objective is to change the process to close the gap.

• The findings must translate to goals and objectives, and action plans must be developed to
implement new processes.
• Process changes are likely to affect upstream and downstream operations as well as suppliers
and customers. Therefore, senior management has to know the basis for and payoff of new
goals and objectives in order to support the change.
• These changes have to be considered and incorporated into the strategic planning process.
• When acceptance is gained, new goals and objectives are set based on the benchmark
findings
• The generic steps for the development and execution of action plans are:
1. Specify tasks.
2. Sequence tasks.
3. Determine resource needs.
4. Establish task schedule.
5. Assign responsibility for each task.
6. Describe expected results.
March 7. Specify methods for monitoring results.
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 Pitfalls and Criticisms of Benchmarking

• The most persistent criticism of benchmarking

comes from the idea of copying others.
• Benchmarking isn’t very helpful if it is used for
processes that don’t offer much opportunity for
improvement.
• Benchmarking is also not a substitute for
innovation

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 Summary
• The organizations which have intentions to grow and perform well
should measure themselves against the best industry practices.
Benchmarking provides a systematic approach to achieve this
purpose.
• It primarily contains two elements, first, doing comparative
performance measure on the basis of well-established metrics and
second, understanding why their own performance differs from the
targeted values.
• Benchmarking can be adapted to any business or production
process. The organization must indentify critical processes or
business measures, which it wants to benchmark and at the end
achieve it.
• Several techniques are available to carry out the benchmark
studies.
• Organizations must ensure that business ethics are maintained in
obtaining such data and should avoid copying the processes blindly.
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