BENCHMARKING AND BUSINESS STRATEGY DEVELOPMENT

Hall (1980) observed that certain industry leaders had exceptional performance even in the bad times of 1979 “1980. For example:

	Company ROE	Industry ROE
Goodyear	9.2	7.4
Inland Steel	10.9	7.1
Paccar	22.8	15.4
Caterpillar	23.5	15.4
General Motors	19.8	15.4
Maytag	27.8	10.1
G. Heilman Brewing	25.8	14.1
Philip Morris	22.7	18.2
Average	20.2	12.9

How can this be so? What strategy did the more successful competitors follow?

LEAST COST AND DIFFERENTIATION

Hall's study itself is an early example of successful benchmarking. By extensive interviewing and data analysis, Hall reached conclusions based on the performance and the experience of a group of highly successful companies.

As determined by Hall and also described in the book Competitive Strategy by Michael Porter, the successful competitor tends to follow one of two strategies:

• Least cost

• Differentiation

Those competitors who do not explicitly follow one strategy or the other tend to get "stuck in the middle" and do not have the highest return on investment. Hall's findings do, however, indicate that some firms can successfully manage both strategy options. The generic strategies identified by Hall and Porter have been supported by a number of research studies (see Higgins and Vincze, 1989).

For a successful business strategy to be developed, a company must decide what course it will follow. It must also be certain that it is, in fact, realistically able to pursue that alternative. Some questions to be asked include the following:

• Does a company really have the least cost? How do they know? What is the basis for the claim?

• Is the company really differentiated in the eyes of the customer? How do they know? What is the basis for the claim?

• How might competitive conditions change in the future?

Benchmarking can provide ” in part ” the information necessary to answer these questions by providing focus and insight on what the best companies are doing.

In addition to making a choice relative to least cost versus differentiation, an important strategy choice is that of being a mass marketer versus supplying the needs of a specific market segment. Therefore, when benchmarking is performed the following must always be present:

• Build a relationship with your benchmarking partner.

• Establish trust and mutual interest.

• Be worthy of trust.

• Make it last.

• Be open to reciprocity.

• Follow a code of conduct.

  • Principle of confidentiality

  • Principle of first party contact

  • Principle of preparation

  • Principle of third party contact

CHARACTERISTICS OF A LEAST COST STRATEGY

A firm following the least cost strategy must be able to deliver a product or service with acceptable quality at a lower total cost than any of its competitors. Note that total cost is the critical concern. The company does not have to be least cost in every aspect of the business. The fact that the total cost is the lowest does not necessarily mean that the price that is charged is the lowest. To determine if the least cost strategy is viable , it is necessary to perform competitive benchmarking and gain information relative to the following:

• What is the relative market share of the company? Does the experience curve have a significant effect on cost reduction?

• Is the industry one that can be affected by automation possibilities, conveyorized assembly, or new production technology? Is the capital available for investment in efficient scale facilities and product and process engineering innovation?

• Do competitors have a different mix of fixed and variable costs?

• What is the percent capacity utilization by competitive firms?

• Are the competitive firms using activity-based accounting?

• How critical is raw material supply? Does the firm have preemptive sources of supply?

• Does the firm have a tight system of budgeting and cost control for all functions?

• Are productions designed for low cost productions ? Are products simplified and product lines reduced in number? Are bills of material standardized?

• What is the level of product/service quality versus competition?

• How labor intensive is the process? How effective are labor/management relations?

• Are marginal accounts minimized?

Improved quality through benchmarking can lead to lower costs. The cost of quality ” really the cost non-quality ” consists of the costs of prevention, appraisal (inspection), internal quality failures, and external quality failures. This cost can amount to as much as 30 “40% of the cost of goods sold. Costs include the following:

Costs of prevention

• Training

• Equipment

Costs of appraisal (inspection)

• Inspectors

• Equipment

Cost of internal quality failures

• Scrap

• Rework

• Machine downtime

• Missed schedules

• Excess inventory

Cost of external quality failures

• Warranty expense

• Customer dissatisfaction

Studies have shown that the average quality improvement project results in $100,000 of cost reduction. The associated cost to diagnose and remedy the problem has averaged $15,000. Consequently, the payout from benchmarking in this area can be significant. Velcro reported a 50% reduction in waste as a percentage of total manufacturing cost in the first year and an additional 45% decrease in the second year of its quality program.

Motorola achieved a quality level in 1991 that was 100 times better than it was in 1987. By 1992, this company was striving for six sigma quality. That means three defects per million or 99.9997 percent perfection . Motorola believes that super quality is the lowest cost way of doing things, if you do things right the first time. Their director of manufacturing ” at that time ” pointed out that each piece of equipment has 17,000 parts and 144,000 opportunities for mistakes. A 99 percent quality rate is equivalent to 1,440 mistakes per piece. The cost to hire and train people to fix those mistakes would put the company out of business.

CHARACTERISTICS OF A DIFFERENTIATED STRATEGY

A firm following the differentiation strategy must be able to provide a unique product or service to meet the customer's expectations. The challenge of being unique is that of providing a sustainable source of differentiation. It is very difficult to create something that is totally sustainable. This may depend upon a corporate culture producing a positive attitude toward quality and customer service or perhaps the value of information or computer-to-computer linkages.

Following a differentiation strategy does not mean that a company can be inefficient relative to costs. Although cost is not the primary driving force, costs still must be minimized for the degree of differentiation provided. To determine if the differentiation strategy is viable it is necessary to perform competitive benchmarking and gain information relative to segmentation .

When developing corporate or marketing strategy, it is important to identify the different market segments that make up the total market. A market segment is a group of customers with similar or related buying motives. The members of the segment have similar needs, wants, and expectations. A focus on market segments allows a company to tailor its products, services, pricing, distribution, and communication message to meet the specific needs of a market. The opposite of market segmentation is mass marketing.

Segmentation allows a smaller company to successfully compete with a larger company by concentrating resources at the specific point of competition. Any market can be segmented. The toothpaste market, for example, can be segmented into the sensory segment (principal benefit sought is flavor or product appearance), the sociable segment (brightness of teeth), the worriers (decay prevention), and the least cost buyer. To segment a market you need to know who the customers are, what they buy, how they buy, when they buy, why they buy, and where they buy. Some typical questions in this area are:

• How do you segment your market?

• What do you do differently for each of these segments?

• How does the competition segment the market?

• What new segments are likely to develop due to changes in sociological factors, technology, legislation, economic conditions, or growing internationalism?