Benchmarking is about comparing the company to historial information and directly to its competitors
Benchmarking could be part of a case interview, for instance, as part of the solution to a profitability question (e.g. your interviewer might hand you a sheet that compares your client's cost positions with the competition). However, each time you ask the interviewer how a company has developed compared to the market, you are doing a mini-benchmarking.
Based on the benchmarking of internal processes, there are different benchmarking techniques
Generally benchmarking is understood as the process of comparing data from one’s own company (e.g. processes/ products/ services) to comparable data in order to determine whether there is an improvement potential.
If data of the clients’ company is used, the process is called internal benchmarking. Such data can be for instance from another department or another site involved in the same production process. For example, Company A can compare its manufacturing process from a plant in Europe with the process efficiency from a plant in the USA. The advantage of such an internal benchmarking is the sheer availability of data. The disadvantage is that it does not necessarily demonstrate the best practice of an industry.
If data from outside the company is used, the process is called an external benchmarking. An advantage of external benchmarking is the larger spread of available data points. The biggest disadvantage is the limited data availability (competitors usually don’t provide their data publicly) and data comparability (are we really comparing apples to apples?).
Finding the right data for comparison is usually the hardest part of benchmarking
One of the challenges in benchmarking is to find the right indicator to compare with each other. Common indicators include:
- Manufacturing time, customer support time, delivery time etc.
- Various positions of cost
- Number of people in a department
- Features of products (e.g. price is the easiest one to compare)
Once you have found a good indicator and good benchmark data, you have to make sure that the results are really meaningful. Ideally figures differ because of a better process rather than because of external factors. For example, simply comparing manufacturing costs of different plants might disguise the fact that labor cost in one plant is higher because of higher wages.
Lastly, to have a successful business and to keep up with competitors, benchmarking should be seen as a continuous process rather than a one-time task.