Sources of Information

The digital age has resulted in a plethora of data that is readily available from multiple sources on the Internet. In fact, the challenge has shifted from the availability of data to evaluating and selecting the most credible and relevant information to utilize.

Quarterly Update on Customer Competitor

A one‐page quarterly performance recap for a competitor or customer is presented in Figure 11.1.

This recap is a very effective way to summarize and communicate the performance and recent events of a competitor, customer, or investment.

Process or Functional Benchmarks

For many years consultants and trade organizations have collected cost and performance data on various business processes or functions. Examples include:

• Finance costs as a pertentage of sales
• Cost of processing an invoice
• Length of time to close books
• Duration of budget or plan cycle
• Product development – time to market
• Revenue process management
• Supply chain management
• Information technology

For example, these studies allow you to compare the cost of finance and key processes in your organization to the costs of companies included in the study. Most surveys emphasize the importance of using consistent definitions, since the scope of finance functions may vary from organization to organization. These surveys are very useful in identifying performance gaps and improvement opportunities, especially in transaction processing (e.g. payroll, accounts payable, and accounts receivable). They also should allow you to understand the mix of functions (e.g. transaction processing vs. FP&A) relative to average and best practices companies. The better benchmark surveys enable you to compare organizations of similar size and allow you to ascertain the reasons for gaps between your company's performance and the benchmark averages. In my experience, the most useful aspect of benchmark studies is the identification of best practices and trends. When utilizing benchmark surveys, select one that considers the overall effectiveness, not simply efficiency and cost.

Evaluating Overall Performance

In Chapter 3, we introduced the expanded view of the business model. The expanded view of the business model is a useful tool to benchmark performance across value drivers. We can compare performance on key elements such as revenue growth, margins, expense levels, and return on investment.

Many managers limit benchmarking to a peer group of similar companies or competitors. Their logic is that it is meaningful to compare performance only across companies in the same industry, so‐called comparables. Companies in the same industry tend to adopt similar business practices. In addition, their financial performance is shaped by the same market forces, since they typically would share common customers and suppliers. While benchmarking comparable companies is useful, it does not capture many of the potential benefits of a broader benchmarking process.

The potential for learning can be greatly expanded if the universe of companies in the benchmark is expanded, as shown in Figure 11.2. If you want to identify the best and the most innovative practices in supply chain management, do you want to study a competitor that has achieved a mediocre level of performance, or a best practices or wild card company like Apple or Amazon? While these companies may be in a very different business from yours, understanding the business practices that they have employed and the resultant impact on the business model is very enlightening and may lead to potential improvements for your business.

It is also helpful to look at the performance of key customers and companies in related or adjacent industries. A primary factor in a company's success will be the performance of key customers. How fast are they growing? Are they profitable? Are they cash strapped or cash flush? Comparing your company's performance to these companies on key metrics such as sales growth, operating costs, and capital requirements can be useful in evaluating your company's performance on a relative basis and in setting future performance targets. In addition, you may find it meaningful to contrast your business to other models. Understanding the different financial results in light of varying business practices may identify potential improvement opportunities as well as potential vulnerabilities. A comprehensive benchmark approach is illustrated in Table 11.1.

This one‐page summary will allow managers to easily compare critical elements of their company's financial performance and valuation to those of competitors and customers as well as most admired and best practices companies. The summary was prepared using the sources identified in the beginning of the chapter and analyzed using the assessment model introduced in Chapter 2.

In the example in Table 11.1, let's assume we want to evaluate the performance and opportunities of RA Outdoor. The company is considering an aggressive growth strategy in the sports apparel market. We compared performance to two notable direct competitors, Nike and Under Armour. In addition, we included retailers that carry sports apparel, Dick's Sporting Goods and Cabela's. It is also worth including mass merchandisers such as Target and Walmart, since they also have a significant market share in sports apparel. These large retailers are worth studying since they employ best practices in merchandising and are impacted by the current turbulence in the traditional retail market. Also included are two wild card or most admired companies, Amazon and Apple. These companies have practices and track records that warrant our attention.

Even in this simple example, several takeaways are evident:

The traditional retail market is under siege, primarily from online companies such as Amazon. Brick‐and‐mortar participants have seen declining sales (or declining growth) and are forced to change the in‐store experience as well as add online capability to complement the physical stores.

One retail player, Sports Authority, didn't survive the current market challenges. Its successful stores and website were taken over by the remaining retailers, including Dick's.

The business models are similar across apparel companies and traditional retailers, including gross margins, SG&A levels, and working capital requirements (DSO and DSI). Similarly, there are patterns across most of the retailers. There are also differences in the performance of these companies that are worth exploring. For example, Nike maintains substantially lower inventories than Under Armour (96.9 DSI vs. 129.5).

The lines between apparel suppliers and retailers is blurring. Under Armour, Nike, and other suppliers sell directly to consumers in physical stores and online. Many retailers are developing private labels (store brands) to offset some of this trend.

Many of the successful subjects have extended their brands to related areas. For example, many apparel companies have added footwear and digital products, and are expanding to additional geographic markets. The Apple brand started in computers and extended to music, phones, watches, and other devices. Amazon started in books and now offers just about everything!

Brand is an important driver of growth and value. Even those who do not follow sports could recognize logos and products offered by Nike and Under Armour.

While this top‐level benchmarking provides a view into the performance of all companies selected, it does not always provide detailed insight into the practices and drivers of the financial results. Without an understanding of the businesses practices and other factors, it provides limited benefit. For example, in the early 2000s, it was useful to observe that Dell turned computer inventory nearly 100 times per year. But just how did it do that? Are there best practices here that can be considered for use in your company?

The second and more meaningful method of benchmarking requires us to climb under the numbers to understand the practices and drivers of one firm's performance versus others'. This requires detailed knowledge of the market, business model, processes, and practices of the firm. For example, Dell's performance in inventory management is a result of creating a breakthrough business model with significant attention to managing the supply chain, assembly, order fulfillment, and distribution processes. Much has been written and published about best practices at Dell and other innovative companies. It is also possible to enhance insight by reviewing the disclosures in the company's reports and presentations. Many of these companies have also been open about sharing the methods they employed in achieving breakthrough performance in a particular area. In addition, many consulting firms have developed practices in this area or offer training courses in implementing best practices in various business processes. By comparing your performance to competitors' as well as best practices companies, it is possible to identify gaps in your performance that represent significant opportunities to increase shareholder value. Understanding the best practices that lead to extraordinary performance provides a road map to closing these performance gaps.

There are many different business models and combinations of value drivers that will lead to building long‐term shareholder value. For example, some companies operate with very low operating margins, but earn respectable levels of return on invested capital (ROIC) based on effective utilization of assets. Others earn high margins but are very capital intensive. Companies that have built and sustained shareholder value over an extended time period have blended a mix of the two critical ingredients for value creation: revenue growth and ROIC.

Most Admired or Wild Card Benchmarks

Understanding the performance and shareholder value created by most admired or wild card companies can be inspiring and identify opportunities that a company can evaluate for their own use.

Apple has developed one of the most recognized brands and enjoys customer loyalty approaching cult‐like obsession (Figure 11.3). It has developed a steady pipeline of revolutionary and evolutionary products. Apple has worked at developing a culture that fosters innovation. The results are reflected in high sales growth over an extended period, very high margins, and outstanding performance in creating shareholder value.

Starting as a purveyor of books and related products online, Amazon has leveraged its investment in technology and fulfillment to many other markets (Figure 11.4). It has chosen to reinvest most profits into future growth opportunities. Amazon has disrupted many retail markets and seems to announce forays into new markets each week. Unknown to most consumers is Amazon Web Services, a line of business that leverages the competencies Amazon has developed in technology.