Benchmarking provides companies with an objective measure of their business, by comparing their performance with that of similar companies. It provides an objective framework for your goals, so you can maintain or obtain a competitive advantage. But which steps should you follow for an efficient benchmarking process?
You cannot judge your performance by just looking at yourself. With benchmarking you can identify the strengths and weaknesses in your own business model in relation to the competition. This helps you determine the right strategic ambitions, in perspective of the market. Benchmarking allows you to see in what areas you are doing well as a company, and where you should focus on improvement. Nowadays, with data publicly available for everyone, benchmarking is essential to stay competitive.
The 6 benchmarking steps
Follow these 6 benchmarking steps for efficient decision-making:
Step 1: Define strategic ambitions
Ambitions largely determine what you want to benchmark on. Benchmarking helps you operationalise those ambitions: for example, before you can grow faster than your competitors you first need to evaluate the growth pace of direct competitors to determine your competitive growth pace.
To be able to determine what is important to you in benchmarking, you can ask yourself in what area you want your company to excel. Moreover, if you think you are already performing well in a specific area, it pays to objectify that assumption through comparison. Is it really the case? The answers lead you to the key ratios you should benchmark.
Step 2: Define ratios
This step has two components: 1. What do you want to know? This depends on past KPIs used in your company and the characteristics of the sector. 2. What depth am I looking for? The level of depth determines the volume and specificity of the ratios you are going to look at. For the growth pace for example it is fitting to look at the average net sales growth per year over 5 years (5-year CAGR). Read more about which benchmarking ratios are most suitable for your business.
Step 3: Select peer group
In a good benchmark, companies shouldn’t be too similar. There are two ways of selecting the right peer group. On the one hand it is possible to compare yourself to companies that do exactly the same, because it allows you to optimise your current way of working. On the other hand it is interesting to compare yourself to companies with a different focus to see the results of different choices and thus form a fresh perspective. The best practice is to make the comparison with your top 5 or top 10 competitors, and include a reference point for the general averages within your industry in which many more companies are active.
Step 4: Collect data
The core of a financial benchmark is the Financial Statement, which is publicly available in a large number of countries. When you have collected the annual reports, you should set up a structure for the data. The most common tool used for structuring and analysing your benchmarking data is Excel. Once you have set up this structure, you can start filling the data fields. When doing so, it is important to consider any reporting differences between companies.
One way of doing this, is by looking at how the profit and loss statement is built up, and by reading the explanations at the back of an annual report. For instance whether the report is using a GAAP or IFRS framework or how the company defined the difference between cost of goods sold and cost of sales. In most instances, it is possible to make the data between companies comparable.
Step 5: Analyse & gain insights
When all the data is collected you can start the analysis with both qualitative and quantitative information. For instance looking at the CAGR over the past 5 years gives insights in the average growth pace of the market, yourself, and your competition, and if it’s accelerating/decreasing.
When interpreting the financial information, the trick is to get it as uniform as possible. You can do this, for example, by looking at the EBIT instead of the net result influenced by exceptional results, or by knowing exactly what is counted as purchasing costs. By analysing data that is as uniform as possible, the observed differences in trends can mainly be attributed to the activities and strategic choices of competitors.
Step 6: Draw conclusions & make actionable
This step is in fact an evaluation of the strategic ambitions formulated in step 1. It is key to integrate the gained insights in your organisation and to make sure they are translated into actions. For example, if your strategic ambition is to grow faster than the market, but the benchmark shows that you are fifth and do not have a competitive growth-pace, you can devise a strategic plan for those areas where you can improve. Hereby it is important to set a goal on a KPI everyone can understand and allows milestones along the way.
Benchmarking can help companies operationalise their objectives. Instead of saying: ‘We want to grow faster than the market’, a company can say: ‘We want to grow XX% in the next year’. One of the key moments for using benchmarking is on strategy days of the Executive Board when multi-year trends and your position relative to the competition can then be translated into objectives for individual departments.
Use benchmarking to your advantage
With all the data that is publicly available, competitive advantage through benchmarking is within reach for any company that takes a step towards data-driven working. Empower your perspective with answers to three essential questions:
- How is my industry performing?
- Who are winners and losers in my market, and why?
- How am I performing compared to my direct peers?
We make it easy for you with our online dashboard the Performance Monitor. We do all the data work, so you can benchmark and incorporate the insights it brings forward into your decision-making processes.
Want to read more about benchmarking? Download our benchmarking whitepaper below and get more insights into key moments for benchmarking and how to implement these steps for efficient benchmarking.