What is benchmarking?
This video provides a definition of benchmarking, examples of benchmarking, and some advice
on what to watch out for when performing a benchmarking study.
What is benchmarking?
My definition of benchmarking is: making meaningful comparisons to others, and identifying opportunities
to improve.
If you are the one doing a benchmarking study, then you need to decide what is meaningful,
you need to decide what the peer group is that you want to compare to, and you need
to dig into the drivers of the performance to find opportunities to improve.
Very often, benchmarking is done to compare to others that are “best in class”, so
benchmarking is often seen as a way to identify the current leader in a field, identify the
gap with that leader, and take action to close the gap.
There are many different areas where you can apply benchmarking.
A good example is product benchmarking.
If you are a product manager for pressure washers, or a consumer looking to buy a pressure
washer, you probably want to compare competitive products along at least the
following four areas.
Performance: what is the area efficiency in terms of square meters per hour you can clean,
what is the minimum and maximum pressure in terms of bar that you can use, what is the
water flow rate in liters per hour, what is the power rating in Watts.
Accessories: does the product have a power gun, what is the length of the cables, is
a water filter pre-installed, is a special surface cleaner included.
Features: does the product have a hose reel for easy storage, does it have a telescopic
handle for moving the product around.
And last but not least: what is the pricing for the product versus its main competitors,
versus basic or premium products in the same range, and versus the value or functionality
of the product.
If you are a process manager, then process benchmarking
may help you to find meaningful comparisons.
For example, when analyzing the order-to-delivery process, you could compare (versus relevant
peers) the time aspect of the process, the quality of the process, or the cost (per unit,
or per period) of the process.
Many benchmarking studies involve some form of financial benchmarking.
For example, you could compare the Gross Margin and Operating Margin of your company to others,
either in absolute or relative terms.
Are your Gross Margin and Operating Margin higher or lower
than those of your direct competitor?
Are your Gross Margin and Operating Margin percentages higher or lower than those of
a large multinational company like Apple?
When doing financial benchmarking, it is important to ask yourself which industry you are in,
and whether a comparison within or between industries would be meaningful.
What is the size of your company, do you want to compare to others at the Dow Jones Industrial
Average level, or to smaller companies?
Which of the many financial metrics (or KPI’s) that you could measure, are the ones that
are the most meaningful to measure given your strategy and competitive position?
Once you have performed the comparison on the level of financial outcome data, what
are the underlying business drivers that explain the performance?
It is important to understand the context of the numbers, and the limitations of applying
benchmarking, when doing financial benchmarking.
For example, in my video on research and development expense benchmarking, I have compared the
R&D spending as percentage of revenue for the Dow Jones Industrial Average companies.
In a summary graph, I plotted this percentage for the 15 companies with an R&D spend of
more than 1% of revenue.
But that comparison is not necessarily the end of the benchmarking study.
For example, some companies could be doing all their R&D themselves, while others might
depend mostly on buying smaller innovative companies that have developed new technologies.
That second strategy would not be reflected in the R&D spending percentage.
In addition to that, what does it mean to have a certain level of R&D spending today?
Probably today’s R&D spending at t=0 might lead to benefits in incremental revenue and
margin five or ten years from now, depending on the development and commercialization cycle
of the product or service.
A good benchmarker understands the context as well as the limitations of applying benchmarking!
Thank you for watching!
This video walked you through a definition of benchmarking, examples of benchmarking,
and some advice on what to watch out for when doing benchmarking.
If you want to see examples of financial benchmarking, I would recommend the Gross Margin and Operating
Margin video on my channel, and the R&D expense benchmarking video.
Please subscribe to the Finance Storyteller YouTube channel!
Thank you.