Benchmarking: What It Is, Its Types, and Principles

Business does not exist in a vacuum. Companies analyze not only their previous experiences but also the results of competitors and other organizations. This approach helps to avoid mistakes made by others, adopt best practices in the market, and grow confidently.

However, it's important to compare your business with companies that have achieved success in their field. This led to the development of competitor benchmarking in the second half of the 20th century (benchmarking — derived from the English word "benchmark"). Rules and clear criteria emerged, which are now followed when analyzing one's own company and competitors.

In this article, we will explain what benchmarking is, why it's needed, its types, and the principles it uses.

What is benchmarking and why it’s important

Benchmarking is the analysis of the best businesses in similar and other niches to apply successful practices and correct mistakes in your company. Open information about competitors' activities, including processes, approaches, products, production, and customers, is studied.

The goal of benchmarking is to catch up with and surpass other brands in your niche, improve your product or service, and grow revenue. When a company conducts this comparative analysis of competitors, it gains insight into its direction, its weaknesses, and how to fix and improve them.

For example, your online store delivers products within two days. This may seem like excellent performance if you only evaluate your own metrics. But suppose competitors deliver the same order within a day. Suddenly, your result doesn't seem as good because this factor may be decisive for customers when choosing where to make a purchase. In such cases, the company should study the approaches and processes of competitors to maintain or increase the number of orders.

Benchmarking is used by established companies aiming to boost their competitiveness. It is also useful when starting a business, as you enter the market. Learning from those who have already succeeded helps set benchmarks and direction. Additionally, evaluating others' experiences provides an opportunity to avoid mistakes already made by others.

Advantages of benchmarking

• Improving the company's market position.

• Enhancing business processes to increase their efficiency.

• Gaining new ideas for company development.

• Correcting business management mistakes.

• Understanding how direct and indirect competitors operate to "stay in the loop."

• Implementing proven practices from others and saving time on developing your own.

• Reducing costs by optimizing processes based on other companies' examples.

• Developing your own criteria for assessing work efficiency.

• Tracking and predicting industry trends.

• Improving customer service and user experience.

Disadvantages of benchmarking

• Incomplete information about competitor companies. Even a detailed description of processes and practices doesn't provide the full picture of why a company has been successful. Sometimes, the reason for high performance is a strong and talented top manager or another standout individual, without whom the company could never have reached the same level. For example, the house of Gucci was revitalized by the talented designer Tom Ford, whose name later became a successful brand in itself.

• Difficulty in integrating others' experiences into your own processes. The specifics of businesses can differ so much that benchmarking examples from other companies may turn out to be unsuitable or useless.

How benchmarking differs from KPIs

The results of benchmarking are sometimes confused with key performance indicators (KPIs). While both are reference points, there are differences. Benchmarking provides a direction for development and serves only as an example for future changes. KPIs assess effectiveness based on already set goals, making them a more specific measure.

Want to learn more about key performance indicators? Read the article "Key Performance Indicators: What They Are And How to Use Them."

Types of benchmarking

Benchmarking practices not only focus on other businesses but are also applied within the company itself. It analyzes both processes and the end product. Therefore, there are several types of benchmarking.

Principles of benchmarking

Conducting benchmarking is a specific type of analysis that follows certain principles:

• Verification of information is mandatory. Only reliable data from trustworthy sources should be used.

• Agreement on interaction. Experience exchange happens legally, without data theft or "spying." Management and employees must know that their information is used by third parties.

• Process comparability. Benchmarking analysis compares similar indicators and directions for the most accurate results.

• Quantitative evaluation. Indicators must be clearly and transparently measured to ensure accurate results.

Benchmarking: stages

The organization of benchmarking begins with setting goals. Answer the question of which aspects of competitors you want to study and what benefits this will bring you. Possible goals include process improvement, increased efficiency, sales growth, etc. You can choose not only large-scale goals but also test hypotheses in specific areas of work or product features, such as evaluating the effectiveness of packaging design.

After selecting benchmarking goals, several stages must be completed.

1. Identify the specific processes for comparison and analysis: management, marketing, production, finance, etc. Understand which areas in your company are lagging or what you would like to improve.

2. Develop evaluation criteria to eliminate vague and inaccurate comparisons. Ideally, provide quantitative or scale-based assessments wherever possible.

3. Collect data from your own business. This is important for the accuracy and clarity of comparisons. To analyze other companies’ practices, you must thoroughly understand your own.

4. Select the companies you will analyze. This depends on your goals and resources. Benchmarking can involve market leaders (not necessarily in your field), direct and indirect competitors. For internal analysis, choose successful departments within the company.

5. Define the type and methods of data collection. Depending on the openness of companies to analysis, data can be obtained from public sources (media, websites, social media), interviews, or surveys agreed upon with businesses. You may also use secret shoppers or communicate with suppliers. Another option is direct and open exchange of experience, though not all companies are willing to reveal internal processes, especially to competitors. Some companies, however, make sharing their business model part of their marketing, like Setters agency did. In global practice, Netflix shared their approaches and rules for building their business model.

6. Analyze the collected data. Evaluate the product, pricing, processes, personnel management, customer service, and other aspects (depending on your goals). This analysis is conducted by comparing the collected data with your own.

7. Adapt the experience to your business. Make changes and corrections to your company’s processes where weaknesses were identified. Avoid simply copying others' methods. Always consider the broader context, including other factors that contributed to the good results.

8. Conduct a post-implementation analysis of the new practices and draw conclusions. Don’t stop there — keep revisiting the changed processes. As the market evolves, you must continually monitor these changes to maintain and grow your position. In other words, benchmarking should become a regular part of your work.

Summary

Benchmarking is the process of comparing a company's efficiency with competitors or businesses that have become market leaders in their fields. It also involves analyzing and comparing results within the company: departments, divisions, and branches.

Benchmarking is conducted to identify and implement the best practices that have proven successful, correct mistakes, and adjust operations to improve service, generate new ideas for growth, and increase revenue. Despite its benefits, benchmarking doesn’t always allow for the easy transfer of others' experiences into your own processes, and not all companies are willing to share their business secrets openly.

To conduct the analysis, you need to set goals, identify information sources, develop evaluation criteria, and then draw conclusions and implement the practices. It’s also important to regularly reassess and repeat benchmarking to stay up-to-date and grow.