Benchmarking is an important business tool that allows companies to improve their operations by staying updated with trends and developing a deeper understanding of their markets.
However, as any business manager or strategist will tell you, benchmarking is far from a simple task. For starters, gathering the data required for effective benchmarking (both internally and externally) can be time-consuming and costly. Second, the data you collect is only valuable if you can extract insights from it through proper analysis.
Furthermore, when executed incorrectly (or when an inappropriate benchmarking method is used), it can encourage a sense of mediocrity inside the business and lead to inferior results.
Industry benchmarking, also known as competitor benchmarking, compares and contrasts one’s business processes and performance metrics to industry best practices from leading competitors. This means looking to the top performers within any given sector to learn from their success by understanding what propelled them to the top – and what keeps them there. For example, think of it like a small-scale car manufacturer comparing their operations to Mercedez Benz or Audi.
The overarching goal of industry benchmarking is to assist businesses in optimizing their company strategy, or, on a lesser scale, their marketing strategy, business operations, web presence or financial planning. Competitor benchmarking also helps identify areas of strength and weakness in comparison to industry competitors.
Armed with this information, business leaders can refine their future business operations, improve their processes, and drive more value to buyers.
Let’s look at some of the primary benefits of industry benchmarking and what companies stand to gain from implementing it effectively.
Industry benchmarking can be used to measure a wide array of business operations against top-level competitors. In doing so, you will be holding your company up against the gold standard, which should make it fairly simple to highlight your shortcomings and the areas where you can improve.
In most cases, businesses will assess products, services, and processes from industry leaders so they can evaluate their position within the market. This is a great way to plan out the path ahead, and it can also force you to think strategically about bridging the gap with these companies.
Naturally, benchmarking is all about focusing on what leaders do, why they do it, and seeing the results they bring to their businesses. Therefore, observing industry leaders can often yield insights into important trends, such as the latest product offerings or even how companies communicate and engage with customers. To accomplish this, you can’t look at what’s happening across all business verticals – you need access to data that’s specific to your niche.
For example, one of the best examples of successful implementation of benchmarks by industry is how traditional brick and mortar retail stores learned from their ecommerce counterparts during the pandemic. Since face-to-face sales were not permitted, companies such as Walmart were forced to quickly improve their online presence by looking at their primary ecommerce rivals, Amazon and eBay, to attract more marketplace sellers and capture more of the digital consumer market.
When performing industry benchmarking, your company can obtain a competitive advantage by researching the practices and standards of similar organizations to match or, preferably, exceed the industry status quo.
Thus, being able to more accurately identify strengths and shortcomings compared to your competitors puts you in position to differentiate your brand’s offering. With a feedback loop in place, you can create a culture of continuous improvement and helping your business capitalize on its strengths while addressing its shortcomings.
While there are clearly numerous advantages to executing an industry benchmarking strategy, there are always two sides to every coin. With that in mind, let’s look at some of this process’s major drawbacks and pitfalls.
Most of the time, your competitors aren’t going to be very forthcoming with their information regarding internal processes. This means that a large portion of your industry benchmarking strategy may have to rely on an element of guesswork, which takes away from the accuracy of your final assessment.
As a result, the data you acquire and the final interpretation may be misleading and lead your company astray. Trusted sources of alternative data on your niche can make a big difference here.
Some businesses rely heavily on industry benchmarking when defining their business strategies. If you aren’t careful, benchmarking of this kind can easily turn into a copycat strategy, which means that your company will continue to remain second best and won’t ever be able to generate a competitive advantage.
Furthermore, companies that operate on a limited budget may be better suited to funding internal research and development rather than focusing on their competitors. The process of following the market leaders can often sacrifice individuality and innovation, which may be harmful to the business doing the benchmarking.
Just because a company is in the same industry does not always imply that it is a good candidate for benchmarking. Businesses are sometimes too dissimilar to draw useful comparisons, and attempting to do so might result in misleading results and poor benchmarks that can be detrimental to the business.
Of course, this is dependent on the processes against which you are measuring. However, due to economies of scale and a wide range of other key variables, comparing a small to medium-sized business to a global corporation in terms of production standards or employee salaries, for example, may not be appropriate.
Overall, it’s easy to see the value that industry benchmarking can bring to companies seeking to enhance their performance. That said, it is critical to strike a healthy balance between benchmarking and pro-actively creating a unique value proposition for your target market. After all, following a competitor’s strategy may be a good way to drill down into performance gaps and discover areas for development, but it won’t help you establish a competitive advantage unless your company retains its individuality.