The Dangers of Benchmarking

Freek Vermeulen of the London Business School recently penned an insightful blog post titled "Don't Be Fooled By Success."   He explains three key downsides associated with benchmarking the top firms in your industry.   First, he explains that managers often confuse cause and effect.  The "best practices" that they observe might not be the driver of high performance, but instead the result of success.  Second, managers forget that good fortune and the right timing might have had a lot to do with another company's success in the marketplace.  Finally, some efforts to adopt others' best practices might lead to a short term gain at the expense of long run performance.  

I would add a few other thoughts with regard to benchmarking.  First, you should seek to understand what others do well and how you might learn from them.  However, imitation alone will not lead to sustainable competitive advantage.  You have to do things differently, or do different things, if you wish to stand out in the marketplace.  Second, benchmarking can lead to strategy convergence within an industry, which ultimately shrinks the total profit pool.   Why?  Each company can spend too much time "catching up" in areas with they are behind their rivals and insufficient time and attention on how to expand their lead in key domains.  Third, managers forget that competitive advantage does not come from "best practices" but rather "tailored practices."  Managers must adapt processes, techniques, and systems to fit their organizational culture, structure, capabilities, and target market.   Finally, competitive advantage comes from organizational fit/alignment.  You won't necessarily achieve comparable success by copying parts of another firm's system of activities and capabilities.  The whole is greater than the sum of the parts at great firms.   In her book, The Strategist, Cynthia Montgomery makes this point quite clearly with a terrific quote from IKEA's former president:

“Many competitors could try to copy one or two of these things. The difficulty is when you try to create the totality of what we have. You might be able to copy our low prices, but you need our volumes and global presence. You have to be able to copy our Scandinavian design, which is not easy without a Scandinavian heritage. You have to be able to copy our distribution concept with the flat pack. And you have to be able to copy our interior competence – the way we set our stores and catalogues.” - Anders Dahlvig, Former President of IKEA