Know Thine Enemy; Know Thyself

Posted: 08/1999

Know Thine Enemy; Know Thyself
By Arik R. Johnson

Benchmarking is best described, and explored, as a
framework for competitive strategic planning. Once the areas of the company to be studied
have been identified, metrics can be applied to the key success factors of the industry or
marketplace.

Everybody remembers when WorldCom Inc. made its move on MCI Communications Co., after
British Telecom plc opened the door by dropping its original offering price, following
less-than-expected earnings news from MCI. MCI shareholders not only found the WorldCom
method of aggressively acquiring and merging with other telecom companies attractive, but
they also liked the offering price far better than the alternatives. The resultant wave of
merger and acquisition (M&A) activity and consolidations has made the telecom world
appear to be headed back toward a strategy of scope and scale to determine the globally
innovative competitors.

But, how do telecom companies know ahead of time if their strategies are working toward
winning the war in the long run, or for that matter, measure the levels of success in
executing the tactical, day-to-day operations that win the skirmishes in the short term?
With so many areas of operations and planning available for comparison, how can firms
discern the factors that can have an impact from those that seem fixed? Competitor
benchmarking, often interchangeably used with competitive intelligence (CI) or as a subset
of strategic planning, can lead the way.

When it comes to knowing your rivals, there exist a few straightforward tools that can
provide for quite sophisticated comparisons of business functions between organizations.
And these formulae can help a company "benchmark" the constituent processes of
the company with its direct or indirect competitors, the ultimate goal of which is
allowing a company to gain the upper hand in a marketplace. But, what is the process for
setting the metrics, methodologies, milestones and comparisons that might be used to
measure the success of a CI/benchmarking function, or the success of a strategic planning
department as a whole?

What Is Benchmarking?

Benchmarking is best described, and explored, as a framework for competitive strategic
planning. Once the areas of the company to be studied have been identified, metrics can be
applied to the key success factors (KSFs) of the industry or marketplace. Then measures or
"benchmarks" are used to develop future quality and market initiatives for the
firm to enhance its overall competitive position.

For example, many telecom organizations will benchmark cost inputs against competitors
to ascertain if they are able to command a better value from vendors or isolate fixed
costs in their operational budgets. However, cost information usually is more important
today than it is tomorrow, due to the very high relative turnover of product and service
value delivered to the telecom customer. And, "tomorrow" is the territory of the
strategic planner. Many telecom companies, for example, prefer instead to put benchmarks
against the relative performance of more future-oriented activities, such as research and
development (R&D) or acquisitions strategy, in which investments may not pay off for
years to come and there remains time to effect improvements in one’s own enterprise.

One regional Bell operating company (RBOC) even benchmarks against the very competitive
intelligence functions of its business rivals, chiefly to support its management
commitment and budget requirements.

It generally is considered that there are seven steps to the benchmarking process that
are continuously used to monitor the relative position of KSFs in the comparison with the
organizations being studied. Furthermore, this analysis of intra- and sometimes
interindustry competitors can form the foundation for future competitor analysis when
greater emphasis is placed upon the goals and financial capabilities of the competitor.
This becomes a question of how the competitor will compete with its particular set of
resources and culture, not today, but tomorrow.

Step 1. Determine which functional areas within your operation are to be
benchmarked. Identification of benchmarking areas includes those that will benefit most
from the benchmarking process, based upon the cost of the process to the value produced,
the relative importance of the process to the ongoing success of the organization and the
potential for real, tangible changes following the study. For example, if your business
competes on the basis of sales and product service built from brand loyalty, you will want
to determine how it compares in terms of new customers returning in the future compared to
competitors. This is especially true if the possibility of changing a poor showing is
apparent.

Step 2. Identify the key factors and variables with which to measure those
functions. These variables are usually in terms of financial resources that will
ultimately provide for the capability of accomplishing the goals of the competitor, but
also would include the product strategy that transforms core competencies of organizations
into successful and profitable products and services. For example, one variable might
include a comparison of dollars spent on R&D and the outcomes in terms of patents
filed as a result, thus measuring capital return on knowledge investments.

Step 3. Select the best-in-class companies for each area to be benchmarked. Your
original areas of study might benefit from analyzing those companies that perform each
function at the lowest cost, or with the highest degree of customer satisfaction, etc.

Best-in-class companies are not necessarily your direct competitors, either. They could
be companies from a different industry altogether, such as parallel competitors with
replacement or substitute offerings such as digital subscriber line (DSL) vs. plain old
telephone service (POTS) or Internet access services, or latent competitors that might
backward- or forward-integrate into your market, such as your customers and vendors.
Best-in-class companies also could include out-of-industry firms with which you do not
compete, but may have best-in-class areas to be studied, such as Federal Express or
Wal-Mart in the area of logistics.

Step 4. Measure the performance of the best-in-class companies for each
benchmark being considered. These measurements might come from sources such as the
Securities and Exchange Commission (SEC), articles in press or trade journals, analysts
involved in the stock market, credit reports, clients and vendors, trade associations, the
government or interviews with other organizations willing to share their prior research or
"swap" it with you. But usually the companies themselves provide the very best
measurements about their operations.

Step 5. Measure your own performance for each variable and begin comparing the
results in an "apples-to-apples" format. This involves the process of
determining the gap between your firm and the best-in-class examples.

One common pitfall companies new to benchmarking encounter is that they don’t always
feel free to estimate measurement results. Companies must estimate variables as best they
can without becoming caught up in exacting the measurements because very precise values
usually are impossibly difficult to obtain.

Step 6. Specify those programs and initiatives to meet and surpass your
competitors. This step is based on a plan developed to enhance those areas that show the
greatest potential for improvement. The firm can choose from a few different approaches or
hybrids of many–from simply trying harder, to emulating the best-in-class studied or,
when all else fails, changing the rules of the industry or leapfrogging the competition
with innovation or by acquiring technology from outside the industry.

Step 7. Implement these programs by setting specific improvement targets and
deadlines. Most importantly, developing a monitoring process to review and update the
analysis over time will enhance implementation. This also will form the basis for future
monitoring, revising and recalibrating measurements in upcoming benchmarking studies.

Measuring the Results

Since most of the measurements in a benchmarking process fall into one of two
categories, either financial resources or product strategy, understanding the seven steps
of the process can be a way of simplifying the framework of analysis.

Return on investment (ROI) really only is measured in documented "wins." We
might describe ultimate success in terms of contracts won due to the effectiveness of a
benchmarking engagement, which then can be thought of in terms of new business signed and
the profitability of that new business. Or, we might describe a problem solved or costs
contained or reduced by the implementation of the CI/benchmarking process. Whatever part
of your business could stand a bit of improvement, use the seven steps to ensure a
complete cycle of competitor comparisons, and remember that often your best bet is to do
what the winners do.

Arik R. Johnson is managing director of the competitive intelligence (CI)
consultancy Aurora WDC, Chetek, Wis. He can be reached at arik@aurorawdc.com or +1 800 924 4249.