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Benchmarking and businessparadigm shiftsKostas N. DervitsiotisPublished online: 25 Aug 2010.

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TOTAL QUALITY MANAGEMENT, VOL. 11, NO. 4/5&6, 2000, S641 ± S646

Benchmarking and business paradigm shifts

Kostas N. DervitsiotisEuropean Master’s Programme in Total Quality Management, Department of Business

Administration, University of Piraeus, 80 Karaoli & Dimitriou, Piraeus 18534, Greece

abstract It is the purpose of this paper to develop a better understanding of benchmarking, not

only based on possible advantages, but also in terms of its serious limitations as a performance

improvement option. For limited rates of change in the past, it was suYcient for management to seek

incremental improvements in performance for existing products and processes. This is generally the

domain in which benchmarking has been most eVective. However, change in the business, social and

natural environment has been accelerating. A major concern for top management, especially in large

and established companies, is the need to expand its scope to ensure not only survival and success in

the present competitive arena, but also on how to make an eVective transition to a turbulent future

environment. Such a transition of an established organization from the present to the future

competitive environment is often described in terms of a `paradigm shift’ . This concept is similar to

the dramatic change experienced in physics, when physics as a science moved from a Newtonian

mindset to one shaped by the theory of relativity and quantum physics. Under such conditions present

in several industries, the usefulness of benchmarking is seriously limited.

Introduction

In recent years much has been written in the management literature about the multitude ofadvantages an organization might enjoy from the systematic use of benchmarking. Severalbooks and articles make quite a case for the contributions that benchmarking has made insaving some companies such as Xerox, a pioneer in its development and application, fromextinction, as well as the bene® ts in performance improvements for many others (Camp,1989;Zairi & Leonard, 1994). In this context, benchmarking is de® ned as the systematic study andcomparison of a company’s key performance indicators with those of competitors and othersconsidered best-in-class in a speci® c function, such as quality management, inventory control,orders processing, etc. The purpose of benchmarking is to identify performance gaps andpotential areas of improvement at the strategic or business process levels. Based on thesigni® cance of such gaps for competitive success, the management of a company can initiateproperly targeted eVorts for improvements in performance indicators, i.e. quality, cost,delivery time, or customer service and satisfaction that impact its competitive advantage.

It is noticeable that not only consulting ® rms but also organizations such as theAmerican Quality and Productivity Centre (AQPC) and the European Foundation for QualityManagement (EFQM) are seriously engaged in the promotion of and training of managersin benchmarking as a fundamental approach to achieve business excellence.

This paper aims to develop a better understanding of benchmarking, based not only onits potential advantages, but also in terms of its serious limitations as a performance

ISSN 0954-4127 print/ISSN 1360-0613 online/00/04S641± 06 � 2000 Taylor & Francis Ltd

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S642 K. N. DERVITSIOTIS

improvement option. In this way, those who decide to apply it are aware of its proper useand eVective range. This is essential to know because ongoing changes suggest that mostbusinesses competing in international markets are presently in the midst of an importantmanagement `paradigm shift’ , for which benchmarking cannot provide adequate guidelinesfor survival and success. Several elements of this development have been identi® ed bymany authors with total quality management (Barker,1994; Deming,1986; Juran ,1988;PfeVer,1994).

The important challenge for management

The rapid change in the business environment caused by an increasing rate of technologicaland social innovations requires top management to adopt a bifocal perspective in strategydevelopment and implementation. First, it must focus on those aspects that concern itssuccess in the present environment, as this is shaped by its current competitive advantage, interms of its products and processes, its competitors and the existing rules for competing inits industry. These aspects are reasonably well known and predictable. Second, managementmust also focus on the emerging but not fully known or well-understood requirements forsuccess in the future business environment. This is the most diYcult and critical challenge,especially for the top management of large successful companies that have invested muchand pro® ted greatly from the way things are currently done. Yet, only a few of the big andsuccessful competitors under one set of conditions are likely to make an eVective transitionto the new diVerent ones that will prevail in the new economic landscape (Utterbach,1994).

This transition of an organization from the present to the future competitive environmentis often described in terms of what is called a `paradigm shift’ . The word paradigm is usedto de® ne how the competitive game, much like in sports, is played in terms of set boundariesand rules for winning, by solving problems eVectively (Barker,1994). Each paradigm may bepictured as an S-shaped curve. This starts out at a slow rate in the initial phase, then movesto a rapid-growth second phase, succeeded by a third phase of progressively smallerimprovements in solving problems, and it terminates with a decline phase, as another moreeVective paradigm gains favour in the market-place and displaces the current one. This takesplace because the emerging new paradigm is recognized as solving problems in a way thatprovides greater satisfaction to all stakeholders in the organization (owners, customers,employees and others).

The eVective range of proper benchmarking

In the management literature there is very little said from proponents of benchmarking aboutits eVective range. There is no doubt that benchmarking can be helpful when properlyapplied. The critical choices are usually related to the choice of level at which it is mostbene® cial (strategic, process, or other) and the reference entities (competitors or best-in-classcompanies) that comparisons will be made with to identify areas for improvement.

With regard to the ® rst choice concerning the level of benchmarking studies, processbenchmarking is often the most appropriate, as it has to do with the more easily measurableaspects of a company’s operation. Each company has critical business processes that ifimproved accrue signi® cant competitive advantages. Flexibility in the use of human and otherresources, rapid new product introduction, reduced defective output, faster delivery time,and lower production and distribution costs (through better inventory management andscheduling) can all contribute in either developing or sustaining a strong competitiveadvantage. Strategic benchmarking is a more diYcult exercise, because each company has to

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BUSINESS PARADIGM SHIFTS S643

cope with a diVerent unique set of internal and external conditions, as identi® ed by a SWOT(strengths, weaknesses, threats, opportunities) analysis. Benchmarking at the strategic levelis further complicated by the need of a company to change strategic posture at diVerenttimes, based on its level of maturity and the speci® c circumstances relevant to its market,available technologies, etc.

With regard to the second choice of the reference companies for comparison, competitors,for obvious reasons, are not especially eager to provide speci® c information, other than publicreports, that might threaten their competitive advantage. The case for industrial espionage isnot an ethical option, and only oblique information can be collected from trade publications.Hiring a competitor’s former employees is the only way valuable information can becollected. For these reasons, best-in-class companies that are not in direct competition canbe approached more easily, especially if there is promise of a mutually bene® cial informationexchange. This was the approach employed by: Xerox, which benchmarked its criticalbusiness processes with those of American Express for accounts payment; L. L. Bean, a mailorder ® rm, for order processing; Florida Power and Light, for quality management, etc.

Another valuable source of information, available to companies with several plants orbranches, is internal benchmarking. It has been reported in the literature that there can be asmuch as a 20± 30% diVerence for critical performance indicators between the best and theaverage performers within the same organization. For multi-plant manufacturing companies,large insurance ® rms, big banks and retail chains the systematic use of internal benchmarkingcan often provide valuable insights. Furthermore, when one takes into account the ease,comparative low cost and speed of collecting needed information, internal benchmarking whenfeasible may be the easiest path to identifying promptly genuine opportunities for improvement.

Limitations in the use of benchmarking

To maintain a more balanced perspective of the potential bene® ts of benchmarking, we willexamine three serious limitations that management must take into account. The ® rst has todo with the size and level of performance already achieved by a ® rm. The second addressesthe need to account for systemic interactions that may lead to misleading conclusions. Thethird refers to the proper phase in the ® rm’s development, i.e. the choice of the correctparadigm for benchmarking applications.

Type of company involved

An extensive survey in 1992 by the consulting ® rm Ernst and Young on a large sample ofcompanies in three countries (US, Germany and Japan) identi® ed two more factors thataVect the suitability of benchmarking as an approach for achieving business excellence (Ernst& Young,1992). The ® rst factor is the size of a company, benchmarking being easier for large® rms with suYcient staV and resources to use more sophisticated techniques, and of morelimited use to medium and small ® rms. The second factor was the level of performancealready achieved by a ® rm. Companies in the large sample surveyed were classi® ed as high,medium and low performers, based on criteria of productivity, quality and pro® tability. The® ndings of this research suggested that benchmarking was best suited to high-performancecompanies that were more attuned to the need to adapt best practices. Medium and lowperformers could bene® t more from simpler, faster and less costly improvement eVorts, suchas developing better knowledge and relationships with their customers and employees.

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S644 K. N. DERVITSIOTIS

Taking systemic interactions into account

In the most common and useful kind of benchmarking related to business processes, onecompares performance of the subject ® rm with others (best-in-class or competitors) on somekey metrics for each process of interest in order to identify for each such process signi® cantgaps that point to improvement areas. Such gaps in turn trigger projects and the necessaryinvestments for bringing about desirable performance improvements. A serious trap that abenchmarking team might easily fall into is the omission from the study of the systemicinteractions of the process in which a gap is prominent with other interrelated processes inthe same organization.

When looking at a company as an organic whole, that is as a complete system which isa web of interacting parts, one comes to realize that its management throughout theorganization’s development history has made a series of trade-oVs in the performance ofindividual business processes, for the purpose of achieving a better overall performance forthe entire company. This means that as part of better strategy implementation, managementaccepted enabling one business process to perform at a higher level by making some other(s)interconnected to it operate at less than their maximum possible level. For example, to theextent competitive advantage was thought to depend on reducing order delivery times,management might have decided to maintain larger than previously held inventories atselected points of the supply chain. In another instance, the need to implement a strategywith high priority on quality might have required considerable investments in other functions(in purchasing for better parts or raw materials, in manufacturing for the purchase of state-of-the art equipment, in personnel for extensive employee training, etc.), thus increasingcosts, at least in the short term.

Benchmarking can only yield reliable and useful information to the extent that perfor-mance data for diVerent parts of the system are not looked at in isolation, but in the contextof other key interrelated business processes. Without accounting for key systemic interactions,gaps that point to improvements in one area might not bring out explicitly the trade-oVsmanagement had to make to reach what was best for maintaining its competitive posture(Senge,1990).

Improving within current mode versus innovating for the future

Extensive research has shown that benchmarking works best when applied to the way businessis currently done, i.e. in the context of the current paradigm (Utterbach,1994). This isparticularly true in large successful companies in which top management has made a hugeinvestment over a long time and has been rewarded handsomely, with high pro® ts andrecognition in its industry. Under such conditions resistance to signi® cant change is verygreat, and being part of human nature, the common response is to make further incrementalimprovements mainly on existing products and their manufacturing processes. This is furthersupported by the powerful logic of discounted cash-¯ ow analysis that favours more predictablerates of return with an aversion to risky strategic initiatives. Benchmarking in such casespoints the way only to incremental improvements that with time become smaller, as weapproach the upper ¯ at part of the S-curve that describes the current paradigm (Barker,1994).However, the forthcoming dramatic changes that will lead to a new S-curve for quantumleaps in performance improvement are being brought to the market slowly from small andobscure new ® rms that, in practically all cases, are not readily identi® ed as interesting orrelevant benchmarking reference points. It is those entrepreunerial ® rms that will revolutionizethe industry and create new markets, by creating new rules of competition and changing the

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BUSINESS PARADIGM SHIFTS S645

boundaries of the industry. This is what happened to IBM and DEC when two young men,Steve Jobs and Steve Wosniac, ® rst developed a personal computer and created a newindustry with Apple Computers as the paradigm shifter. This is also what happened to thebig steel companies when the mini-mills were invented, and the same pattern repeats formany other industries (Utterbach,1994).

Most of the time, the large established companies that have been so successful for solong do not have the skills, the agility, the organizational structures, the human behavioursin the workforce and the entrepreneurial spirit that will advance them to the new paradigm.In this age of rapid change, benchmarking that is suitable for incremental improvements onthe current S-curve cannot be relied upon to enable a successful transition to the new one.There are few large ® rms that have managed with success such a transition by recon® guringdrastically their way of doing business, the most notable examples being Motorola andHewlett-Packard.

On the other hand, Xerox, the company that developed benchmarking into a systematictool for seeking business excellence (Camp,1989) and relied on it for its survival from theonslaught of its Japanese competitors, such as Canon, failed to revitalize itself by exploitingsome of its own most ingenious innovations carried out at its Palo Alto Research Centre(PARC). Having developed the ® rst superior personal computer, the fax machine, computernetworking with Ethernet, and the laser printer, it had not the skills needed to exploit themcommercially and to make the transition to a new S-curve, allowing other new entrepreunerial® rms to bring those successfully to the market-place (Utterbach,1994).

As Peter Drucker has pointed out, the winners of the emerging new economic landscapein an era of discontinuous change will be those who will promptly identify and exploit thesources of opportunity for new technological and social innovations (Drucker,1992). Those® rms are unlikely to rely on benchmarking on how to become the future leaders. They willbe ready and in place to develop and conquer the market, with the new S-curves describingnew paradigms of doing business with new rules and new boundaries. In other words, theywill `̀ jump the curve’ ’ on time (Imparato & Harari,1995).

Conclusions

In the pursuit of business excellence, benchmarking as an approach can be valuable inidentifying new and promising areas for improvement. However, any company contemplatingits use must be aware of both its advantages and its limitations. It can be a good searchlightfor improvement in the current way or paradigm of doing business, by showing existing gapsin critical areas for success. In doing so, managers must be aware of its limitations, whichinvolve using it for the right size and type of company and accounting suYciently for existingsystemic interactions among key business processes.

Above all, benchmarking should be viewed as useful for incremental improvements indoing what companies are already doing with success, in terms of their existing products andprocesses. Extensive studies show that it is not the proper tool for a reliable exploration ofthe future competitive landscape. This will be shaped by small, agile and highly innovative® rms that have little or no investment or commitment to the present paradigm, as the largeestablished ® rms have. For business excellence to become sustained excellence it will requiresocial and technological innovations that will address human, social and environmental needsin ways that are not as yet well understood or proven with suYcient data. Only by `̀ jumpingthe curve’ ’ on time from the current paradigm to a new one, based primarily on intuitionand faith and by taking risks on what will prevail in meeting these needs, can long-termsuccess be possible. Unfortunately, the `how to do this’ part is not subject to logical analysisof already available or accessible information.

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References

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(Quality Press).Deming, W.E. (1986) Out of the Crisis (Cambridge).Drucker, P. (1998) The discipline of innovation, Harvard Business Review, Nov.-Dec.Ernst & Young (1992) The International Quality Study: Best Practices Report (American Quality Foundation).Hamel, G. & Prahalad, C.K. (1994) Competing for the Future (Cambridge, MA, Harvard University Press).Imparato, N. & Harari, O. (1995) Jumping the Curve: Innovation and Strategic Choice in an Age of Transition

( Jossey-Bass).Juran, J. (1988) Juran on Quality Planning (Free Press).Pfeffer, J. (1994) Competitive Advantage Through People: Unleashing the Power of the Work Force (Cambridge,

MA, Harvard University Press).Porter, M. (1985) Competitive Advantage (Free Press).Senge, P. (1990) The Fifth Discipline :The Art and Practice of the Learning Organization (Doubleday Currency).Utterbach, J. (1994) Mastering the Dynamics of Innovation (Cambridge, MA, Harvard University Press).Zairi, M. & Leonard, P. (1994) Practical Benchmarking: The Complete Guide (Chapman & Hall).

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