Benchmarking

The term benchmarking refers to a systematic, quantitative comparison between one or more key aspects of an organization and a referent considered the best example of that type of organization. Its purpose is to enhance the organization’s own performance and competitiveness. Well utilized, benchmarking can contribute decisively to a firm’s reputation by improving the quality of products and services—normally the most important driver of corporate reputation—as well as other relevant reputational drivers, such as innovativeness, a committed workforce, a well-tuned strategy, sound leadership, and a socially responsible governance structure. Additionally, leading companies that excel in one or more relevant aspects of their corporate performance—such as Google, Apple, BMW, or Lego—can become benchmarks in their own right across different industries worldwide, further enhancing their prestige and reputation platform. This entry first covers the key characteristics of benchmarking, the origins of benchmarking, and the pros and cons of benchmarking. It then describes the types of benchmarking most commonly used to determine corporate reputation.

A Strategic Model

Benchmarking outlines the performance gap between the organization and the referent organization, or between units within an organization, and also identifies the causes of the observed differences. Since the main objective is to improve the firm’s competitive advantage, it implies transferring and adapting, but not copying, the observed “best practice” into the firm. This means that, in some cases, benchmarking may lead to dropping the analyzed process or even to shifting the company’s strategy and business model in order to ensure overall competitiveness and sustainability.

The benchmark can be inside the organization (another function or department), inside the industry (a competitor), in another industry (a noncompetitor that shares a relevant aspect to set the comparison with), or at a global scale (“world-class” benchmarks—e.g., those companies ranked atop the different reputation listings).

There is no limit to what can be benchmarked, provided it is properly defined and measured to allow adequate comparisons: products, services, campaigns, processes, policies, decision making, or strategies. The benchmarking exercise can be executed at an operational, functional/tactical, or strategic level. These levels must not be confused, yet they can be integrated in a cascade by means of improving business performance at a specific task/operational level first, then following to the functional/tactical sphere, and finally moving up to the corporate, strategic level of performance.

Benchmarking is both strategic and operational: It is aimed at improving the competitive advantage of the firm by contrasting its own specific processes with those of the benchmark. Due to its outward-looking stance, it can also be categorized as a competitive analysis tool together with other methods such as corporate reputation analysis, critical success factor analysis, supply chain analysis, and SWOT (strengths, weaknesses, opportunities, and threats).

Advocates of this technique emphasize that benchmarking is not an exercise that occurs once and then never again. Rather, it should be a constant learning process, with a genuine concern for quality, efficiency, and innovation, and a drive for measuring performance. Therefore, this technique is sometimes associated with practices and methods such as total quality management, lean production, Six Sigma, reverse engineering, and data envelopment analysis.

Origins of Benchmarking

As with most management techniques, benchmarking emerged from manufacturing. Its origins can be traced to Frederick Taylor’s scientific, positivist analysis of work in the late 1800s that assumed a “best way” to perform it. This required fragmenting, describing, and measuring of all the components of the process from an engineering perspective, a practice that became quite extensive during the 1940s and 1950s in the United States and other advanced economies, when systematic financial ratio comparisons also emerged for competitive purposes. Yet the first proper examples of benchmarking were developed by Toyota in the 1970s and by Xerox in the next decade. The results were outstanding. Thanks to their meticulous comparison with the once-mighty North American carmakers, the Japanese were able to surpass them by considerably improving their own performance. Similarly, Xerox was able to overcome upstart competitors in the office copying business by critically matching its own production processes vis-à-vis those of its more efficient referents.

After the 1990s, “softer” approaches beyond the original hard, engineering focus developed. These perspectives have taken into account wider concerns about a full range of stakeholders (in contrast to the usual triad of shareholders, customers, and employees), society as a whole, and the environment. It is in this context that benchmarking became relevant for corporate reputation, mostly in relation to corporate social responsibility (CSR) due to its wide reach involving many constituencies and their reaction to the social and environmental impact of organizations. Before discussing this softer approach to benchmarking, the next section outlines how benchmarking is performed as well as its main strengths and weaknesses.

How Benchmarking Is Performed

According to a 2010 report from the Global Benchmarking Network, the most popular areas of benchmarking worldwide are customer service, administration, training and human resources, corporate strategy and planning, and CSR. Less frequent are the more specific aspects of product performance, core business processes, employee performance, supplier performance, technology performance, new products, and innovation.

Authors and experts have listed anywhere from 4 to 10 steps that should occur as part of a systematic benchmarking exercise. Despite the wide variety of applications of the method, the following steps are essential.

Phase 1: Planning

In this phase, the company should define whether to benchmark a process, practice, product, service, strategy, or other business aspect. The benchmark(s) is also defined in this step. To avoid useless comparisons, the organization’s critical success factors, or elements necessary for success, should be identified, and details of the measurement process, such as whether to set the analysis on the strategic, tactical, or operational level, should be determined. Traditionally, areas with the biggest budgets or those critical for customer satisfaction have been the most obvious candidates for benchmarking. Yet CSR and corporate reputation concerns have expanded the scope of this method to involve performance and processes concerning the 3Ps of people (many stakeholders, even society as a whole), planet (the environment), and profits (which cannot be ignored).

Phase 2: Data collection.

Valid, reliable, accessible, and accurate data at a reasonable cost, from inside and outside the firm, are required for benchmarking. Secondary and publicly available information is indispensable and cost-effective. Yet for really worthy comparisons, original data are required. In the reputational field, customized surveys of the different constituencies affecting the business are likely needed, along with the typical reputation ratings. Due to the intangible nature of reputation, this usually requires both qualitative and quantitative data collection techniques, which can be quite challenging.

Phase 3: Analysis.

Gathered quantitative data about the firm and the benchmark(s) are normalized and processed to make meaningful comparisons, bearing in mind the pros and cons of what basically is a snapshot of contrasted performances. The idea is to identify performance gaps by asking, for instance, where, when, and how these differences occur. Drivers and causes of the gaps should be identified so as to effectively devise ways of improving. This can be relatively straightforward in manufacturing, in contrast to the intangible aspects related to reputation. Indeed, some authors have challenged the “questionable assumptions about the legitimacy of psychometric assessment” involved in reputation measurements and benchmarking (Bromley, 2002, p. 49). In any case, the output of the analysis phase should be a plan of improvement by means of (a) bettering current practices, (b) emulating the benchmark, or (c) surpassing the referent (leapfrogging).

Phase 4: Implementation.

The previous steps are not a purely analytical or theoretical exercise; they should become a practice to ensure competitive advantage and sustainability. This phase is the natural culmination of the previous three and should be established along clear performance goals and procedures to fill the performance gap previously identified. Again, in manufacturing and in standardized services, the literature shows many successful examples dating back to Toyota in the 1970s and Xerox in the 1980s. The corporate reputation field is understandably less developed.

Pros and Cons of Benchmarking

A report by the Global Benchmarking Network, which surveyed firms across 44 countries in 2010, confirmed a worldwide interest in benchmarking across 20 different business improvement tools, led by customer surveys (77%) and SWOT analysis (72%). Despite the structured, quantitatively oriented definition of benchmarking, the most popular version of this technique proved to be the informal one (68%), facilitated by the availability of information on the Internet. The more systematic approaches, performance benchmarking (49%) and best-practice benchmarking (39%), were less widespread.

Although the respondents admitted significant benefits from applying this method (a fifth declared an average financial return of $250,000 per benchmarking project), almost a third of the companies did not report any significant benefit due to problems of training, methodology, lack of codes of conduct, and poor project management skills when executing the technique. Furthermore, a third of the respondents admitted that most of their benchmarking projects did not lead to practical implementation in their organizations. This suggests that any benchmarking exercise must be taken seriously, be well-defined from the beginning, be oriented to generate improvements, and follow the steps outlined earlier. This applies also to softer approaches related to CSR or corporate reputation, even though they may be harder to measure and quantify.

The main benefit of benchmarking is process performance improvement. But there are other advantages as well: commitment to quality, the technique’s outward-looking and realistic stance, its enhancement of cooperation and team spirit, its deep understanding of the processes behind the business, and even enhanced media visibility and better corporate reputation if the firm reaches its aim of excelling (companies can become a referent, a benchmark for other firms to compare themselves with). Well applied, its outward-oriented, innovative perspective helps avoid complacency and managerial blind spots. In particular, CSR and reputation-related exercises bring into the firm a serious examination of the ways different stakeholders assess a firm in contrast to competitors and referents.

At the same time, critics and experts have outlined that benchmarking is expensive, time-consuming, slow to show results, backward-looking, and not future oriented. Besides, selecting the benchmark is still a rather informal process and can lead to ultimately useless (and costly) comparisons.

Benchmarking and Corporate Reputation

Benchmarking is linked to corporate reputation through its engineering and manufacturing origins and its emphasis on quantifiable, standardized processes. Indeed, there are comparatively few authors who relate it to softer approaches to business practice. CSR has a particular advantage in this respect, considering its international endorsement and recognition by practitioners, academia, and institutions such as the United Nations and World Bank. Although CSR is tricky to quantify and lacks a unique definition and measurement, CSR’s internationally recognized standards, frameworks, and indexes are useful for making meaningful comparisons relevant for corporate reputation management. The most relevant guidelines to corporate reputation are the following:

• AA1000 Assurance Standard: According to the London-based AccountAbility (2008), a body that promotes corporate responsibility and sustainable development, this method “provides a comprehensive way of holding an organisation to account for its management, performance, and reporting on sustainability issues.”
• Dow Jones Sustainability Index: It assesses companies according to their CSR practices, oriented to investors.
• FTSE4Good: This index series was developed by the Financial Times Stock Exchange and, similar to the Dow Jones Sustainability Index, is also oriented to investors.
• Global 100: This includes the top 100 “most sustainable corporations” worldwide, according to the World Economic Forum.
• ISO14001: It is a widely used, environmentally related standard developed by the Geneva-based International Standardization Organization.
• SA8000: It deals with supply chain labor standards—developed by Social Accountability International.
• The Global Reporting Initiative: It is based on the “triple bottom line” (profits, persons, planet).
• World Business Council for Sustainable Development: It is an association of 180 companies committed to sustainability.

All these frameworks and standards provide useful guidelines for companies to benchmark against relevant referents using quantitative data covering the 3Ps—persons (i.e., all relevant stakeholders) and planet (the environment), without dismissing profits. This is undoubtedly useful for reputation management. Yet there are important shortcomings due to the variety of indicators and standards available, the representativeness of the companies that are measured (many of these standards are voluntary), the difficulty of comparing companies in different industries and sectors, as well as the capability (and desirability) of translating intangible, complex, and volatile social phenomena into a reduced set of numbers to generate quantifiable comparisons.

Furthermore, CSR reporting itself sometimes affects the public’s perceptions about a firm, thus altering the organization’s perceived performance within stakeholder groups. Apart from CSR reporting’s effect on perceptions of performance, there is also the suspicion among the public that such reporting is misused to “greenwash” the reputation of many firms.

The literature is rich with proposals and case studies oriented toward generating satisfactory and comprehensive CSR benchmarking frameworks comparable with those used to gauge manufacturing performance. But they have not reached universal acceptance. Most are limited to a handful of firms in a few sectors that are hard to compare with other industries, frequently within a single rich country only. Considering these difficulties in generalizing and comparing, authors such as Jan Bebbington, Carlos Larrinaga, and Jose M. Moneva propose concepts such as “reputation zones” shared in a specific time or space by a set of firms to enable adequate benchmarking. Future research and practice will eventually demonstrate whether their proposal becomes truly generalizable.

Few authors explicitly link reputation with benchmarking in a systematic, comprehensive way, apart from the very basic comparisons between companies ranked in reputation listings. An interesting case in this respect was a proposal by Australia’s Department of Education to comprehensively benchmark universities. The chapter on reputation considered a 5-point scale to compare the stakeholder appreciation enjoyed by the organizations under comparison. This framework assumes a variety of data sources (e.g., positive and negative press coverage, rankings by external agencies, public opinion polls, quality of staff) as well as good practices underpinning stakeholder appreciation (e.g., effective stakeholder and media relations consistent with a sound strategy, a committed staff, etc.), as reputation without substance is inviable.

Conclusion

Benchmarking is a competitive analysis tool that can lead to substantial process or product performance improvement. If done properly, which is not always the case, it can tackle the main drivers of reputation and thus trigger increased stakeholder appreciation for the organization or its products. It needs to be a committed effort, highly structured, purpose driven, and applied at the required level (whether strategic, tactical, or operational but not mixing them). While its origins lie in manufacturing and standardized processes, wider concerns about society and the environment, apart from economic performance, can be approached by referring to CSR standards and indexes. Their more complex and comprehensive scope allows a richer approach to benchmarking and, therefore, a more sustainable base for corporate reputation because it deals with social and environmental standards as well, not just industrial processes or product and service performance. This advantage counterbalances all the methodological, conceptual, and practical problems related to drawing quantifiable comparisons from soft reputational/CSR variables and drivers.

In any case, benchmarking is not always the most adequate tool for reputation management. Its costs, complexities, timeliness, and other features should be evaluated within the context of each case. It requires considerable effort and resources, it takes time to yield results, and it cannot be a single, isolated exercise.