How Not to Benchmark Your Way to the Bottom

April 2, 2019 4 min read

Opinions expressed by Entrepreneur contributors are their own.

The following excerpt is from Benjamin Gilad and Mark Chussil’s book The New Employee Manual: A No-Holds-Barred Look at Corporate Life. Buy it now from Amazon | Barnes & Noble | Apple Books | IndieBound

Benchmarking addicts never figure out where they failed. They’ll say, “Our process was an exact replica of Kodak’s! OK, not Kodak, Merck! OK, not Merck, Vodafone, Pfizer, P&G, you name it, we benchmarked and replicated them all! Why did we fail?”

The thing is, benchmarking the best companies isn’t bad in itself if you know what “best” really looks like . . . and if you know how to distinguish analysis, decisions, and thinking from process, mechanics, and results. Cause and effect are hardly ever clear-cut.

So how would you benchmark making decisions for your business’ strategy? Strategy is the most important element in the skill of competing. A company will live and die by the superiority of its strategy relative to its competitors and relative to alternative offerings (substitutes). Nothing else matters if the strategy is wrong. All the implementation gurus, change agents, organization-behavior practitioners, motivational speakers, and armies of MBAs can’t help a company if the strategy is ineffective.

Executing the wrong strategy perfectly is like riding a stationary bike truly fast to get to where you’re going earlier.

A Different Kind of Benchmarking

Corporate consultants and coaches will advise you to “learn from the best!” They’ll urge you to use benchmarking to improve operations. We, on the other hand, being mavericks, tell you to question mindless benchmarking and, if relevant, to propose competitive benchmarking instead.

Best-practice benchmarking learns from companies inside or outside your industry (typically outside, as those inside won’t cooperate with you) on processes that can improve your operations: best inventory system, best IT infrastructure, etc. Competitive benchmarking compares strategies.

Competitive failure is about competitors’ strategies vs. yours. Learning from the competitive failures of your own company, for example, involves understanding how competitors might have had more effective strategies than yours because of what they do differently. A technique called “win-loss analysis” is a specialty within the field of competitive intelligence. It’s especially popular with defense contractors, where a single lost bid can cost billions of dollars . . . billions gained by a competitor. So defense contractors spend days analyzing (benchmarking) bids once the winner is declared, not only to understand their strategy vs. the winning bid but, as important, to understand the mindset of the customer/decision-maker. That understanding may serve to win the next one, assuming the same decision-makers are in place.

Studying failure can be depressing, but failure teaches us a lot if we objectively ask, “Why did we fail? What did competitors do that we didn’t?” The fact is, strategic failure that goes without insightful analysis is bound to repeat itself, only on a larger scale. Even if failure is just bad luck, can you plan, the next time, for the contingency?

Competitive benchmarking supplants “best practices” with a focus on strategy, not operations, and if done right, calls for magnifying differences, not eliminating them. A technique called relative cost analysis (RCA), described in a Harvard Business Review case study by Jan Rivkin and Hanna Halaburda, compares your costs with those of your competitors, focusing on what competitors do differently. It doesn’t mean you should imitate the competitor (or that they should imitate you). It means you should understand the reasons for their or your success or failure, and you should find ways to make the difference work for you. For example, Dell’s cost structure in its early days was far cheaper than its competitors’ because it sold direct to its customers and didn’t have to keep inventory. Compaq couldn’t imitate Dell because it had commitments to third-party sellers. But if it had understood the magnitude of Dell’s advantage, claims a 1999 case study out of Harvard Business School by Jan Rivkin et al., it would have never started a price war (which it did and lost). Instead, it could have gone for differentiation.