Benchmarking is a Tool, not a Strategy

This article from CFO points out a major strategic flaw companies often make.

Best practice. It may be the most readily recognized and widely used of all business management tools. And why shouldn't it be? To executives, modeling a company's performance on its best-in-class competitor is an ambitious but attainable aspiration. To investors, the strategy is a guarantee of the soundness of any company that embraces it. And to consultants, it is the tide that lifts every client's boat.

So why is it killing your margins? Everyone who follows business has seen the fat margins of growing young companies attract scores of new entrants, which eventually crowd the field and drive those very margins down. Why would top executives convert this regrettable fact of business life into a creed, especially when doing so simply hastens the endgame for everyone—first mover and Johnny-come-lately alike?

They act as they do because they don't understand that benchmarking is simply an operational tool. Instead, they all want to occupy the point on the strategic landscape that their most successful competitor has staked out. (See Eric D. Beinhocker, "On the Origin of Strategies", The McKinsey Quarterly, 1999 Number 4, pp. 38-45.

Benchmarking is a good thing to do with your costs, measurements of efficiency, and things like that. It will rarely benefit you to benchmark anything else. You can't look at what another company is doing and follow in kind unless you can kick their ass when it comes to execution. Odds are, you are better to stake out your own strategic territory, one that you can execute better than anyone else and that differentiates you from competitors. This is a great piece, but kind of long. Be sure to set aside some time to check it out. It's well worth it.