A tool to be best-in-class.

• Author: Schmidt, Jeffrey A.
• Position: Benchmarking - Chairman's Agenda: Governing for Shareholder Prosperity

Benchmarking is becoming an essential process for sustaining competitive advantage and surpassing the value creation of one's leading competitors.

Benchmarking has been growing rapidly since the mid-1980s as a result of intensifying global competition. Effective benchmarking programs are difficult to implement, but there are successful examples of such programs among large and small companies in most industries, including Xerox, Motorola, Ford, and AT&T.

In research conducted with the American Productivity and Quality Center, we discovered that 60% of the companies surveyed are already practicing benchmarking, and 10% more report that they will begin formal benchmarking in the next three years. Benchmarking is clearly becoming an essential management tool for sustaining competitive advantage and establishing standards by which "premier" companies are judged.

Like other popular business trends of the 1980s benchmarking will undoubtedly fail to solve all of the problems facing American industry. Nevertheless, it is a useful tool when it is well-conceived and well-executed. Due to its growing popularity, benchmarking has matured as a business process; it will be particularly relevant in this era of global competition and short-lived competitive advantage.

Benchmarking:

What Is It?

There are as many definitions of benchmarking as there are practitioners. Most of these definitions share several features: * Benchmarking is a process of discovery and examination of the "best practices" within the world's "best companies." * Applying benchmarking successfully means treating it as a continual process and focusing it wherever best practices and best companies are to be found, even beyond a company's own industry and geographic scope of operations. * Benchmarking is relevant only if it leads to superior competitive performance that is reflected in a company's operating margins and capital returns.

Benchmarking is not a new concept. In fact, related analytical techniques have been a staple of effective competitive analysis. In many industries, peer companies have participated in third-party benchmarking surveys of compensation and benefits practices, organizational arrangements, pivotal job designs, staffing levels, and the like, for decades. What, then, is fueling its growing popularity?

Interest in benchmarking is derived from intensifying global competition. With declining government protection and limited domestic growth prospects, economic survival requires that companies understand their relative performance and raise that performance standard to the level of existing international competition or better.

Through benchmarking, entire industries can boost their competitiveness. This is accomplished when all competitors focus their improvement efforts on closing the gap between their own performance and that of the "world-class" company with respect to things that are truly important to their competitive success. The Malcolm Baldrige National Quality Award includes benchmarking among its criteria for demonstrating that a company is indeed world-class.

Even in companies with less ambitious goals than winning the Baldrige Award, benchmarking has become a standard feature of continual quality improvement processes. These processes seek better and lower-cost ways of doing essential work, thereby improving competitive performance.

Benchmarking's

Enormous Potential

Benchmarking has the potential to be revolutionary in the 1990s; at the very least, it could become a standard business practice and maybe a key to revitalizing our domestic industries.

Benchmarking reveals gaps between a company's perceived and actual competitive performance, both with respect to its best industry peer and to the absolute standard set by the world's best companies. These gaps can be stunning in magnitude, amounting to as much as a threefold difference in important performance parameters, such as cycle time. As a result, management's initial reaction to them is often denial - senior executives often cannot believe that any competitor could be so clearly advantaged.

The large performance gap may also be discouraging, causing managers to feel that they can't possibly catch up to, let alone overtake, the performance of their best competitors. Nonetheless, benchmarking can be extremely useful in overcoming management complacency about the status quo and in exposing incorrect perceptions about the company's and its competitors' strengths and weaknesses.

In addition, particularly when competitive analysis and benchmarking are done in tandem, a company can analyze the sources of a leading competitor's advantage and develop strategies to achieve a competitive performance breakthrough. Even if the company is already the best-in-class in its own industry, the combination of competitive analysis and benchmarking can give it an early warning of when its relative advantages begin to erode in cost structure, customer satisfaction, technology, or business processes.

Furthermore, once a company...