It is important for organizations to measure their performance. Evaluating performance is the essence of benchmarking. Benchmarking enables organizations to determine if their performance is in line with the set standards and objectives (Zairi, 2010). An organization may choose to compare itself against other firms in the industry. When a firm measures its performance against that of its competitors, it may encounter challenges. Recognizing that the competitors use techniques and strategies that are not worth emulating is the main challenge (Tucker, Zivan & Camp, 1987). When a firm realizes that the competitors use underhand techniques, the entire benchmarking exercise becomes pointless. The mere fact that a company will face challenges when it benchmarks against competitors does not mean that it should abandon benchmarking. Instead, the firm should try to overcome these challenges. To overcome the challenge identified above, a firm could simply target its benchmarking operation at practices that it finds acceptable and would like to emulate. For example, a firm could investigate how its competitors are able to treat their employees well.
While benchmarking against competitors allows a firm to gauge its performance, comparing its performance against industry standards is far more effective. Benchmarking by the industry involves extending the comparison beyond a company’s immediate competitors. When a firm benchmarks by industry, it uses industry averages, standards and best practices to evaluate its performance and operations (Fleisher & Bensoussan, 2015). It is vital for firms to benchmark by industry when analyzing key financial ratios. The reason for this is that as a company compares its ratios against the industry average, it is able to determine how it compares against the other players in the industry (Marcinko & Hertico, 2013). Essentially, benchmarking by industry enables firms to understand that they do not operate in a vacuum and that they need to strive to outdo the other players in the industry.
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References
Fleisher, C. S. & Bensoussan, B. E. (2015). Business and Competitive Analysis: Effective Application of New and Classic Methods. Upper Saddle River, NJ: FT Press.
Marcinko, D. E. & Hertico, H. R. (2013). Financial Management Strategies for Hospitals and Healthcare Organizations: Tools, Techniques, Checklists and Case Studies. Boca Raton, FL: CRC Press.
Tucker, F. G., Zivan, S. M. & Camp, R. C. (1987). How to Measure yourself against the Best. Retrieved 13 th November 2017 from https://hbr.org/1987/01/how-to-measure-yourself-against-the-best
Zairi, M. (2010). Benchmarking for Best Practice. Milton Park: Taylor & Francis.
