Gregory H. Watson is an independent business advisor to Fortune 500 senior management teams. An experienced expert in quality and benchmarking, he has been vice president of quality at Xerox Corporation, vice president of benchmarking at the American Productivity & Quality Center, and director of corporate quality at Compaq Computer Corporation.

Strategic Benchmarking Reloaded with Six Sigma

Improving Your Company’s Performance Using Global Best PracticeBy Gregory H. Watson

John Wiley & Sons

Copyright © 2007 Gregory H. Watson
All right reserved.
ISBN: 978-0-470-06908-0

Chapter One

Stimulating Business Improvement by Benchmarking

Competitive innovation works on the premise that a successful competitor is likely to be wedded to a “recipe” for success. That’s why the most effective weapon new competitors possess is a clean sheet of paper. And why an incumbent’s greatest vulnerability is its belief in accepted practice. -Gary Hamel and C. K. Prahalad

Introduction

Benchmarking is a process of comparing in order to learn how to improve. Motivation for a benchmarking study is the desire to improve and become more competitive. But benchmarking is not the silver bullet of performance improvement!

Ever since 1990 when Roger Milliken declared that “benchmarking is the art of stealing shamelessly,” many executives have thought that the process of benchmarking is a “quick fix” for making business performance improvements. However, benchmarking is not a quick fix; it is a rigorous process that requires both sweat equity-learning about one’s own processes and coordinating study missions to other organizations-and analytical thoroughness-measurement and analysis of work process performance as well as the detailed mapping of processes and side-by-side assessment of process differences.

Benchmarking uses the analytical information contained in a benchmark, a comparative measure of process or results performance, to establish which organization is candidate for a best practice in a specific business process. Then the business process must be thoroughly defined in order to understand how benchmark performance was achieved and to identify enablers of this successful performance. Finally, a cultural adaptation of the learning must be made in order to apply this new knowledge to your own organization. In order for benchmarking to be successful, it must heed the warning of Dr. W. Edwards Deming who said, “It is hazard to copy. One must understand the theory of what one wishes to do” (1982). Cultural adaptation and business model adaptation are necessary to assure that lessons observed from one place can be successfully transferred someplace else. As Deming also cautioned, “Adapt, don’t adopt. It is error to copy” (1982). So how can we more carefully describe what is meant by benchmarking?

Benchmarking Defined According to Categories of Practice

Benchmarking has been described as a search for best practices-indeed, it is the process of comparing the performance and process characteristics between two or more organizations in order to learn how to improve. However, a problem that began early in the game of benchmarking was a lack of clarity in the meaning of the term. In Bob Camp’s first book on benchmarking, he described four ways to approach the problem of data collection that were distinguished using the logic of where information was obtained. The way that he distinguished these categories was classified according to the source of the benchmarking data. One problem with this breakdown of benchmarking is that it focuses too narrowly on where data is obtained, rather than on the objective of the study itself-in other words, the focus of the definition is on the process of benchmarking rather than on the lessons that must be learned. A different approach is required to understand the context of benchmarking and how it fits into business. This was the approach that was initiated in my second book on the subject of benchmarking, and we will present a complete definition of benchmarking in this chapter.

First, the starting point of benchmarking is measurement-the benchmark is after all a measurement. However, we must distinguish between the act of measuring performance and the process of benchmarking. A benchmarking process uses a common measurement standard to compare across organizations to determine where a best practice exists based on the results it produces. After the performance has been measured, then a further investigation is conducted to characterize the practices that lead to the observed performance and the root causes of the performance advantage are documented as a best practice. Thus, the first distinction that must be drawn is the difference between performance measurement and process benchmarking. Each of these ways to improve addresses a different set of questions (see Figure 1.1):

All benchmarking is process benchmarking. To understand the dynamic characteristics of a benchmarking study, the different terms that identify the choices that can be taken in the design of a study must be identified and defined. The first term that must be defined is process benchmarking.

Process benchmarking: A method for studying work process performance between two unique or distinct implementations of the same fundamental activity. Process benchmarking includes internal inspection of an organization’s own performance as well as the external study of another organization that is recognized for achieving superior performance as evidenced by an objective standard of comparison (the benchmark). The objective of process benchmarking is not to calculate a quantitative performance gap, but to identify best practices that may be adapted for improvement of organizational performance.

There are two categories of process benchmarking studies that may be differentiated according to their application as strategic or operational studies. These two categories are further divisible into performance and perceptual benchmarking studies depending on the type of data that is being compared. The relationship among these distinctions is clarified in the following:

Strategic Benchmarking: A benchmarking study whose objective is to discover ideas for improvement that will trigger breakthrough changes and may be leveraged across the business to enhance an organization’s competitive advantage.

Strategic benchmarking studies challenge management to move from a current state to a desired state of business performance by identifying potential breakthrough opportunities that can generate significant profitability or productivity improvement. A strategic study focuses on critical business areas that must change to attain or maintain the competitive advantage of a business, including the validity of critical business assumptions, options for improving core competence areas, concepts for development of business processes, alternative ways to approach technology inflection points, or ways to strengthen business fundamentals that define the organization’s operational strategy.

A strategic benchmarking study may change the total framework of an organization by assessing topics such as strategic direction; structure or governance of the business; decisions supporting capital acquisition or investments in research and design (R&D); decisions affecting management choices regarding either business or product line positioning; or change management strategies (e.g., pursuit of a specific strategy such as implementation of an enterprise software product or management’s choice of an improvement methodology-for example, ISO9000, Total Quality Management [TQM], or Six Sigma) as a way to induce change in the organization. These types of benchmarking projects can act as triggers for greater change that may be leveraged across the entire organization.

Thus, strategic benchmarking studies tend to seek out business leverage opportunities and change trigger points that can cause an organization to make a breakthrough change that results in competitive advantage. A leverage opportunity is a business improvement concept that may be applied across the organization in a variety of areas and that will create a big performance difference. For instance, transformation of a core business process can achieve this result. A change trigger point is a single event that will create a sequence of changes-like a ripple effect as a pebble is thrown into a calm lake. These two different changes will become clearer in the context of a case study of a series of strategic benchmarking studies that is contained in Chapter 7.

Examples of strategic benchmarking studies include evaluation of options for the design of an organization’s governance structure; assessment of approaches used to implement advanced technology (e.g., enterprise management software or paperless document handling); or strategic business issues that are faced by the organization (e.g., creating a web-based business capability; managing the technology transition across generations of advancement; or managing the routine work of the organization through management methods such as balanced scorecard, performance management, and business excellence assessments).

Operational Benchmarking: A benchmarking study that is focused on the way that a specific work process is performed with an objective of improving the performance of that specific process (e.g., improving a sales process, printed circuit board production process, or distribution process).

Operational benchmarking will provide productivity improvement by concentrating on specific activities that will improve the effectiveness, efficiency, or economy of routine business operations. Operational benchmarking focuses on specific work activities that need to be improved and seeks to identify the work procedures, production equipment, skills or competence training, or analytical methods that result in sustained performance improvement as indicated by objective measures of process productivity (process throughput, cost per unit, defect opportunities, cycle time, etc.).

Examples of operational benchmarking studies include analysis of invoicing procedures to determine the most productive process; evaluation of production methods to determine the highest throughput methods that deliver lowest cost and least defects; and study of logistics distribution methods that result in both high delivery service performance and low levels of finished goods inventory.

Both strategic and operational benchmarking studies may focus on either performance or perceptions as the type of data that is being evaluated. Performance data consists of a set of measures about results or outcomes, while perceptual data comes from the feelings or reactions of an individual to the outcomes or results of the process. These two different focus areas for studies may be clarified further.

Performance Focus of Benchmarking: At a strategic level of organization, a performance benchmark seeks to determine which organization performs best according to an objective standard that is typically financial, like return on capital employed (ROCE) or earnings before interest and taxes (EBIT). At an operational level, benchmarking product or service outcomes using a standard comparison or test under known operating conditions is also called performance benchmarking.

A performance benchmarking study seeks to answer the following question: Which organization, product, or service is better based upon rigorous assessment using objective performance criteria? Examples of performance benchmarking studies include consumer product analysis that evaluates products on a head-to-head basis using a fixed set of criteria for performance; the evaluation of product performance using a standard test, such as operating time, to run a specific application; or endurance tests that identify the ability of a product to perform over a fixed period of time under comparable operating conditions. What sets a performance-focused study apart from its opposite is the type of data that is used to make a comparison in the study.

Perceptual Focus of Benchmarking: Perceptual benchmarking is a study using the process benchmarking approach but focused on feelings or attitudes about process, product, or service performance by the recipient of the process output. Perceptual benchmarking seeks to answer the following question: How do you perceive the delivery of service, performance of product, or execution of process by the people who are recipients of these outputs?

Perceptual benchmarking uses attribute or categorical data to quantify subjective feelings and establish relative performance rankings using criteria like timeliness of performance, goodness of knowledge transfer, soundness of information, courtesy of delivery agents, and so on. Examples of perceptual benchmarking include surveys of training satisfaction at the completion of a training event, employee satisfaction surveys to determine either the work climate or structural issues regarding compensation and benefits, or customer satisfaction with the product or service delivery to the market place.

These different categories of benchmarking are related in Figure 1.2, which shows how strategic and operational studies map against performance or perceptual data.

The way to differentiate benchmarking studies is to consider the different ways that they seek our various sources of data.

Benchmarking Defined According to Sources of Data

This second group of terms to be defined is terminology that identifies the sources of data used in conducting a specific benchmarking study. This is an older and somewhat less helpful way to identify benchmarking studies that has its roots in the first set of studies that were conducted by Xerox.

Competitive Benchmarking: An approach to benchmarking that targets specific product designs, process capabilities, or administrative methods used by one’s direct competitors (e.g., the study of performance in the laptop computer industry that features only those companies that produce these products). The most stringent types of competitive studies will assess head-to-head competing organizations in the same industry and market.

Functional Benchmarking: An approach to benchmarking that seeks information from a functional area in a particular application or industry (e.g., benchmarking the purchasing function must determine the most successful approach to manage a supplier base). In this type of study, information is compared for the same work process or business function either across industries or within the same industry, but the focus is always on the functional area.

Internal Benchmarking: An approach to benchmarking where organizations learn from sister companies, divisions, or operating units that are part of the same operating group or company (e.g., the study of internal research and development groups to determine best practices that reduce time to market for the new product introduction process). In this type of study, performance information is compared for the same work process or business function within the same organization (perhaps looking at unique production lines, different plants, separate divisions, or distinct business units).

Generic Benchmarking: An approach to benchmarking that seeks process performance information that is from outside one’s own industry. Enablers are translated from one organization to another using an interpretation of their analogous relationships (e.g., learning about reducing cycle time in production operations by the study of inventory management methods used in stocking fresh vegetables in grocery stores). In this type of study, performance information is used through the development of an analogy that permits learning with broad comparisons for a specific process (e.g., studying distribution of food supplies to learn how to control automobile manufacturing logistics).

There is another refinement on this classification scheme that decomposes benchmarking studies into categories of data source. The second classification scheme distinguishes among the types of studies by the way a project is conducted: an internal study, industry study, benchmarking exchange study, or special interest group study. This way of describing benchmarking studies adds two new perspectives to the sources of data approach. These categories may be defined as follows:

Internal Study: Same definition as an internal benchmarking study.

(Continues…)

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