Definition and Meaning of Benchmark
Benchmarking is a classic performance measurement tool used to compare similar businesses under similar circumstances with the aim of measuring up with the best performing company. This does not necessarily mean that the business in question is trying to pose competition to other small businesses but it does help in small business competition overall process.
There are 3 main kinds of benchmarking that a company can do. The first is operational benchmarking, the next is performance benchmarking and the third is strategic benchmarking, there are minor categories which we will leave for the academicians. When correctly used, benchmarking help make certain decisions relatively easy as best practices are shared.
Types of benchmark
Internal benchmarking (departmental and divisional): the internal benchmarking is done by comparing divisions, departments and sections of company with the aim of promoting best practices.
External benchmarking (related and unrelated businesses): external benchmarking on the other hand is done by comparing similar activities of similar entities.
7 Important Questions to Answer before Performing small business Benchmarking
- Can we find suitable comparable?
- Are there wide discrepancies between our business and that of the comparator?
- Is it possible and easy to obtain reliable information about comparator?
- Do we have the resource to ensure the safety of the information collected during this process of benchmarking?
- Can similar information be found in non-competing companies?
- Is there sufficient time to complete the benchmarking before it becomes too late to use the information?
- Will it be cost effective?
8 Steps Involved In Benchmarking
- Review and assess current practices
- Set objectives
- Establish KPIs and targets
- Identify and select suitable proxy company
- Measure KPIs
- Compare performances
- Design and implement improvement programmes
- Monitor improvements and make adjustments in areas that needs to be refined
Uses and Advantages of benchmarking
- Helps to identify and eliminate inefficiencies thereby saving cost
- Act as performance measurement and motivational tool
- It adds value because it encourages innovation
- Can ignite dormant creativity
- Highlights or dismiss the clamour for change
Limitations |Disadvantages of benchmarking
- It implies that there is only one right way of doing things
- It could lead to some dysfunctional behaviour
- It is not forward proactive in nature i.e, trying to catch up with the best
- It can sometimes be costly especially when the identified company is far
- Could encourage complacency
Just like other tools like ratio analysis, benchmarking as a tool has to be used with caution. This post is deliberately bulleted so as to make the benchmarking process and methodology not so daunting for small business owners that are most likely in favour of DIY.
I have to highlight at this point the relationship that exists between a mission statement, key performance indicators, critical success factor and benchmarking. Details of these relationships will be explored in another article. Please don’t forget to share this with people in your network.