benchmarking

(noun)

A technique that allows a manager to compare metrics, such as quality, time, and cost, across an industry and against competitors.

Related Terms

Examples of benchmarking in the following topics:

  • Benchmarking

    • Comparing the financial ratios of a company to those of the top performer in its class is a type of benchmarking.
    • Benchmarking can be done in many ways, and ratio analysis is only one of these.
    • In benchmarking as a whole, benchmarking can be done on a variety of processes, meaning that definitions may change over time within the same organization due to changes in leadership and priorities.
    • Benchmarking using ratio analysis can be useful to various audiences.
    • Describe how benchmarking can be used to assess the strength of a company

  • Introduction to Pure Competition

    • Purely competitive markets are used as the benchmark to evaluate market performance.

  • Employee Pay Decisions

    • External measures such as benchmarking (salary surveys) and ongoing reporting that constitute a market survey approach.
    • Benchmarking is when an organization compares its own pay practices and job functions against those of its competitors.
    • Non-key jobs are unique to their organizations and are therefore not useful in benchmarking.
    • Benchmarking uses external measures to make internal pay decisions.
    • Managers benchmark the metrics of their company against those of industry competitors.

  • Expected Risk and Risk Premium

    • Betas equal to 0: Movement of the asset is uncorrelated with the movement of the benchmark.
    • Beta between 0 and 1: Movement of the asset is generally in the same direction as, but less than the movement of the benchmark.
    • Beta equal to 1: Movement of the asset is generally in the same direction as, and about the same amount as, the movement of the benchmark.
    • Beta greater than 1: Movement of the asset is generally in the same direction as, but more than, the movement of the benchmark.
    • Beta is a measure that relates the rate of return of an asset, ra, with the rate of return of a benchmark, rb.

  • Risk Adjusting the Discount Rate

    • This benchmark is generally the overall financial market and is often estimated via the use of indices, such as the S & P 500.
    • Beta can be found by dividing the covariance between the return of the investment and the return of the benchmark–either the market or the overall return on capital for the firm –by the variance of the return on the benchmark.
    • The Sharpe Ratio is defined as: where Ra is the asset return, Rb is the return on a benchmark asset, such as the risk free rate of return or an index such as the S & P 500.
    • E[Ra - Rb] is the expected value of the excess of the asset return over the benchmark return, and $\sigma$ is the standard deviation of this expected excess return.
    • When comparing two assets versus a common benchmark, the one with a higher Sharpe ratio provides better return for the same risk (or, equivalently, the same return for lower risk).

  • Ratio Analysis

    • Ratio analysis is a useful tool for benchmarking the financial and operational efficiency of a project compared with other projects.
    • These are typically used to determine a company's financial health relative to industry benchmarks, but they can also be used to maintain financial control of specific projects by assessing their financial health.
    • The goal of process control is increased efficiency; ratio analysis uses a wide variety of point in similar projects as benchmarks to denote where efficiency can be enhanced, and underlines differences in profitability and efficiency that may sway resource allocation for the organization in the future.

  • Market Structure

    • Pure competition provides the benchmark that can be use to evaluate markets.
    • The physician who attends you knows that 98.6o is a benchmark.

  • Overview of Strategic Planning Tools

    • By benchmarking this situation against reality, strategists can see in which situations value can be captured.
    • Benchmarking can be done qualitatively or quantitatively, and it is a comparative approach to strategy.
    • Benchmarking usually requires the identification of a close competitor with similar strategic prerogatives so that the strategist can compare and contrast the two companies' strengths and weaknesses, identifying strategies for improvements or competitive advantages.
    • Incorporating concepts such as forecasting and benchmarking in conjunction with larger corporate strategy frameworks such as SMART goals and MBO will equip strategists with a strong short-term and long-term approach.

  • Beta Coefficient for Portfolios

    • Beta is a normalized variable, which means that it is a ratio of two variances, so you have to compare the volatility of returns to the benchmark volatility.
    • The Beta for this portfolio, when compared with the S&P 500 benchmark, would be -0.5.
    • A Beta of zero in this situation doesn't necessarily mean a risk free asset, it simply means that it is not correlated with the benchmark.

  • Comparisons Within an Industry

    • Most financial ratios have no universal benchmarks, so meaningful analysis involves comparisons with competitors and industry averages.
    • Ratios of risk such as the current ratio, the interest coverage, and the equity percentage have no theoretical benchmarks.