It is not uncommon to find a company whose primary measure of success stems solely from bottom line profitability or their financial performance against prior figures. In fact, years of advising underperforming companies has shown me that a company’s measure of success often focuses too much on past results and not nearly enough on forward thinking. Strategic planning, including financial budgeting, requires a broader perspective beyond just the internal data points of one’s past results. This simplistic methodology ignores certain critical questions, amongst others — What are the company’s key performance indicators (KPIs) relative to its strategic goals and how do these KPIs measure against the results of its peers and industry leaders?
There are countless moments in life when our performance is measured against the baseline standard. In sports or academia, for example, you must surpass the baseline to be considered the best. Generally, the criterion is made up of on a variety of factors measuring you against a peer group considered to be leaders in their class. In the business world, this external approach to performance measurement has developed into a methodology know as “benchmarking”. Benchmarking is formally defined as “a measurement of the quality of an organization’s policies, products, programs, strategies, etc., and their comparison with standard measurements, or similar measurements of its peers”i.
Benchmarking took on a prominent role in the business world back in the late 70’s and 80’s. The Xerox Corporation, amongst other companies, used the methodology to measure itself against Japanese rivals with the goal of identifying shortcomings and guiding itself to improvement as a more competitive global manufacturer and distributor of copiersii. Today, benchmarking is prevalent in a variety of industries, but in Clear Thinking Group’s experience rarely (if at all) do we come across an underperforming enterprise that actively benchmarks itself against best in class peers to improve its strategic planning and bottom line results.
Benchmarks focus on a myriad of key business indicators, as determined by a company’s industry type and strategic goals. A retail company, for example, may measure such variables as average transaction size, sales per square foot, and inventory turn as key metrics for success. A seller of branded goods will have different objectives than one selling private label merchandise. Whatever the strategy, the relevant key financial and operational factors need to be identified and measured not only internally (i.e., against past performance) but also against standards set by industry leaders. At times it’s obvious where a company’s performance is lacking — financial results often speak volumes. But rarely does management understand the level they need to be at and practices that need to be adopted to assure continued future success.
Benchmarking provides a critical baseline measurement to help guide a company toward its target objectives. Management sets strategic goals, and in formulating a plan to achieve those goals utilizes relevant benchmarks as targets needed for success. However, while benchmark figures set critical standard marks, they don’t in and of themselves reveal best industry practices. In conjunction, management needs to also observe and understand the underlying processes employed by others to achieve their success.
As an advisory firm, Clear Thinking Group has come into contact with numerous companies who found success in the past but clearly have lost their way. It’s not always as simple as cutting costs or investing additional capital to shore up the business. Most often, quick win opportunities — so called “low hanging fruit” — require broader strategic thinking and planning for sustained success. This broader perspective includes understanding the success of its peers and setting target goals for achieving similar success or better.
Clear Thinking Group advises numerous companies in a variety of industries with a core focus on the retail and consumer product/wholesale industries. The fiercely competitive environment our clients constantly find themselves in demands they look beyond their own walls to study best practices within their respective industries. This broad thinking and analytic approach will help companies establish more effective strategic goals and financial plans. As a firm, we continually gather data from a variety of sources to create relevant benchmarks regularly utilized when working with clients. We champion benchmarking, amongst other tools, when advising companies on financial and operational improvement strategies. When executed properly, this comprehensive approach has benefited companies in insuring long term success by implementing more effective and targeted strategic planning.
1) BusinessDictionary.com. October 1, 2015. <http://www.businessdictionary.com>.
2) Frances Gaither Tucker, Seymour M. Zivan, and Robert C. Camp, “How to Measure Yourself Against the best”, excerpt from the Harvard Business Review, January 1987 Issue.