Most large companies are highly complex entities, operating across a wide range of business areas and a wide range of geographies. The market and competitive influences they are subject to are often subtle and hard to unravel. What distinguishes the good companies from the average companies is that they have to discern where overall value is being added and where it is being detracted and take action accordingly.

In order to understand a company’s strengths it is necessary to understand its direct competition, in all its finer aspects, with equal clarity. In marketing this is called  “benchmarking”. Benchmarking has become a huge area of planning in marketing and advertising, and now PR too. Its importance is furthered still more with the present day newer concepts of “best practices” and “core competency”. Subjected to continuous scrutiny by the markets, most companies are becoming alive to the need to emulate best practices of market players rather than operating in a vacuum. Benchmarking has thus grown as a strategic planning function because it is important for managers to gain insight of how competitors are performing, and how they are doing it successfully. For instance, if a company is achieving a 15% return on equity, it does not mean a thing if some of its major competitors are achieving a 25% return! Knowing this fast and fully, and then working on it for your own performance is a task in benchmarking and planning.

The key for a benchmarking company is to ensure that you compare the like with the like, both in terms of the companies you have chosen and the parameters you use. Ideally the competitor companies you are benchmarking with should have a similar range of businesses, competing in similar segments, and be of a reasonably comparable size and geographical spread. This is often not the case. Hence, you may sometime need to break it down to the SBU level. By conducting your analysis at the SBU level you will be able to get more accurate benchmark information. Then when you aggregate these SBUs and compare one whole company with another, the basis of comparison will almost certainly be more clear. If you were benchmarking Maruti with Hyundai it will be better if you compare Maruti car segments with those of Hyundai. For example, with those of Hyundai, for example, it would make more sense to benchmark the car segments such as Zen with Santro, and Balero with Ascent, rather than the companies. While the companies overall image and performance may have a legitimate role to play in the minds of the consumers, but again the two companies do not necessarily compete for the mind of the consumer. The consumer will be thinking of the brands in the segments. The consumer will not be weighing one entire company with the other, but the preference of the brands of each company in the segment of their choice.

In addition to the mix of SBUs being compared, in benchmarking, there is the issue of qualitative and quantitative numbers being used. Different companies will treat many items in their financials quite differently which will affect the ratios with  respect to the benchmark analysis. One company may choose to use an accelerated depreciation schedule, to write off goodwill or have a number of other exceptional charges against profits. Another may have recently absorbed a few acquisitions that affect its profit statement and gives another picture. Similarly, items such as inventory and provisions for liabilities may be accounted for differently, depending on the approach the company adopts. The largest distortions are likely to result when comparing companies that report their results in a different market where the generally accepted accounting practice will differ. The acceptable treatment of many items may vary dramatically. All these factors will compromise the validity of any comparison between two profit statements and balance sheets of two companies without adjustments being made to ensure that the reported numbers are constructed on a comparable basis.

Comparing different and unrelated companies often is an acceptable approach if you are looking simply at the
operating features of the business rather than their financial performance. It is often the case, for example, that one company can learn good things from another even though operating different markets. Therefore, while a pattern often emerges among those companies that succeed and those that fail in an industry, in reality there is not usually a single right way to gain competitive advantage.

One should also be aware that the relative performance of companies might also have exogenous explanations that are quite independent of the underlying competitiveness of the company. A CEO may have been involved in an insider trading scandal which will have left the markets skeptical of the company’s claims and image. The company may also have been subject to an anti-trust suit or involved in other legal problems (crisis and controversies) that may not be reflected in the financial performance. Thus, when looking at a company it is worth doing a quick review of the publicity it may have received for indications that such events may have influenced its market performance and stock market valuation.

Most companies today, therefore, engage in ongoing benchmarking. In its most detailed form it takes the form of competitor analysis, which can involve everything from on-line searches about competitor news, interviews with clients of competitors, to false job interviews and rifling through competitor’s waste paper bins.  Major companies now often have a single professional or a cell dedicated to competitor research, and many of them even employ consultants to help them with benchmarking. Obtaining data is tough, and ensuring its correctness and comparability is an art in planning. Therefore, don’t be dismayed if you often can’t do this with great precision. As long as it is, a seminal consulting phrase, “directionally correct”, you will be on course and be in a better position in taking  right decisions. Data is power. Well processed it is gold! There is no reason why armed with the right information you shouldn’t go a long way.