Playing to Win
Benchmarking is for Losers
OK, this will be one of my rant-y pieces. I am totally exhausted with talk about benchmarking. So many executives believe that it is the key to success and make it a core part of their strategy work. It is time to be clear on what benchmarking really is — and is not. That is why my 4th Year III Playing to Win/Practitioner Insights piece is Benchmarking is for Losers: Don’t Let it Crowd-Out Strategy. You can find the previous 114 PTW/PI here.
What is Benchmarking?
Benchmarking is an analytical technique that explores what competitors who are best at a given thing are doing and identifies the gap between that and what the benchmarker is now doing. Sometimes the effort defines a single competitor as ‘the benchmark’ but more often it involves the identification of the common best practices of the lead group.
Role of Benchmarking in Strategy
Over time, benchmarking has taken a central role in strategy. It may not have reached the ubiquity of SWOT, but it comes close. Most strategy processes that I see these days involve a benchmarking phase in which everything that appears to be important (whether it is or not) is benchmarked.
Benchmarking is beloved by strategic planners because it involves lots and lots of analysis, and it is very linear and doable. For outside consultants, it means lots of billings. For internal strategy people, it means keeping busy doing something that is exceedingly straightforward. It is very hard to screw up a benchmarking analysis — and any difficulty is easily overcome with a little more work and time.
Additionally, the output tends to be easy to explain. “Here is what the benchmark group is doing and here are the specific ways in which we trail the benchmark.” Boards love benchmarking because it is easy for them to declare to management that the identified benchmarking gaps must be closed — with highest priority. And that tends to become the de facto strategy: close the gaps identified by the benchmarking exercise! The financial gains from closing the gap and achieving the benchmark tend to be easy to model and are generally baked into the ‘strategic plan.’
And off they go! Management has a ‘strategic plan’ that involves closing the gaps to the benchmark. The board is happy that it has been appropriately tough on management and is content that its job is to monitor the progress toward benchmark — and it doesn’t have to think any more about strategy.
Understanding the Fundamentals Behind Benchmarking
The best way to frame and understand benchmarking is with a concept from economics called the Production Possibility Frontier, or PPF. The idea of the PPF is with the resources readily available to it, an entity has the potential to produce a given maximum level of outputs. Those resources include financial capital, human capital, raw materials, technology, know-how/experience, etc. A PPF is generally depicted in two dimensions (as illustrated above) with the idea is that the entity can choose to produce at any point along the curve of the frontier from 100% of one good (on the x-axis) to 100% of the other good (on the y-axis), or a combination along the frontier in between. The key is that with the current resources, it can’t produce more than the outputs defined along the PPF. That is why it is referred to as the frontier of possible production.
In economics, it generally is used to refer to the economy as a whole and, in introductory economics courses, the two goods discussed are often guns and butter, indicating that the economy has the capacity to produce both and needs to make tradeoffs as to how much weaponry versus food it should produce. But it can equally apply to an industry or a single firm when used in a business context.
Of course, real life has many more dimensions than two. Trade-offs across three products would make the frontier the surface of a sphere. Four products becomes too hard to visualize. But the concept of the PPF is helpful even in its simplest form.
When thinking about a company in its industry, if the company in operating on the PPF, it is using all the available resources of the day to operate as optimally as any other competitor. It can choose A, B, C, or any other point on the curve and perform as well as any competitor. (Though for PPF geeks, the optimal point to pick along the PPF depends on the relative prices of the two goods.)
A company operating in a position inside the PPF, like L, has accessible to it the means to be out on the PPF but doesn’t take advantage of the available resources — including know-how. That is why it is a loser. It is lazy or complacent or incompetent and for that reason isn’t out on the PPF with the leading companies in its industry.
Benchmarking is a tool for figuring out how to move a company from a position inside the PPF, like L, out to the PPF, like A, B, or C. That is why benchmarking is for losers. If instead, like A, B, or C on the PPF, you are not a loser, benchmarking does very little for you. You might learn things about going from A or B or from B to C, but that is of little importance or value.
Saying that benchmarking is for losers doesn’t mean it isn’t useful. If you are a loser, it is helpful to become less of a loser. If you are in that position and use benchmarking assiduously, you might get all the way to mediocre!
So, benchmarking is not a terrible thing. But it is widely overestimated. Companies tend to believe that benchmarking and striving to meet the benchmarks will be financially transformational. My experience is that it rarely does, as I have discussed before in this series. That is in part because while you are working hard to get to the PPF, those at the PPF are working assiduously at figuring out clever and innovative ways to get beyond the PPF. Consequently, by the time you get to the targeted PPF, the actual PPF will have moved. And there are very few financial rewards to be reaped by operating inside the PPF.
I call this the Ackman Paradox, named after activist hedge fund founder Bill Ackman of Pershing Square. To convince investors to get on board for his raids, he puts together detailed PowerPoint decks showing how his target’s financial performance will improve if it just hits the industry benchmarks across numerous dimensions. There is always a summary chart showing the walk-up from current EPS to the ending EPS with each block depicting the value of achieving each benchmark. I remember vividly his decks for JC Penney. He took control of the company, worked at hitting all the benchmarks, but the financials never improved in the way he forecasted. It is because at the end of his work, JC Penney was still a completely mediocre company in an industry of relatively low structural attractiveness. And that isn’t a recipe for attractive financial results. He exited with a $500 million loss. More recently, it has been a similar story for Ackman seems to be taking shape at Universal Music, Lowe’s and Chipotle.
What is Winning?
Winning means finding an innovative way to push beyond the current PPF, like W, to demonstrate that there is a new and better PPF possible. That is strategy. That is making choices that are different from the benchmarks. It is impossible to achieve via benchmarking. In fact, every moment spent benchmarking takes away from the work necessary for strategy.
The practice of strategy is the opposite of benchmarking. It is not analysis heavy. It is not linear. Hence it is unattractive for business bureaucrats who can’t be assured that they will produce an answer that they like. It is also uninviting for ‘strategy consultants’ because it is hard to convince clients to pay them millions of dollars for getting into a room and being creative. It is much easier to convince clients to do all of the analysis and PowerPoint deck writing involved in a long and laborious benchmarking exercise.
It is not as though learning what others do has zero value if you are already a well-performing company. I believe that excellent companies can learn things from entirely different industries and contexts from their own — that is, utilizing diverse situations to inspire analogical insights. But this just underscores the fact that every moment you spend benchmarking in your industry/context is time taken away from the creative act of strategy, of moving the PPF out.
That is why the decision during the 1990s for all (not most, all) ‘strategy consulting’ firms to move to industry practices was so consequential. This caused them to double-down on benchmarking, because the only thing that consultants who work in one industry for their entire consulting career know is how the other firms in the industry do things. I don’t call the shift a dumb idea, just a consequential one. Clients loved it because there are many more L clients than clients on the PPF committed to shifting out the PPF. And the one thing that L clients want is for industry experts to give them the benchmarks for their industry.
But it renders the ‘strategy consulting’ firms largely if not entirely incapable of helping clients who aspire to be a W company. But that doesn’t matter much to the ‘strategy consulting’ firms because real strategy consulting is a tiny market for them.
It helpfully creates a great opportunity for me to be distinctive. Currently, I work for executive teams in clients across a wildly diverse set of industries from toys to mining to hospitals to professional services to business software to apparel to packaging to tech hardware to pension funds to auto OEM, and more — but only one per industry. The one thing they have in common is that they all want to be a W and are willing to work hard and creatively on being just that.
If you are a loser, there is merit in driving your own regression to mean. Do it. But don’t confuse it with strategy. You will likely get a financial lift from getting to mediocre. But it is likely that it won’t be long until you are back to being a loser.
That is what many folks (though not all, thankfully) at University of Toronto/Rotman School of Management wanted me to do when I was appointed Dean of Rotman. They wanted me to close the embarrassingly wide gap with the leading Canadian business schools, especially with the widely acknowledged leader. When I argued for pursuit of a strategy to leapfrog them all entirely and create Canada’s only globally consequential business school, I was begged to be sensible and just try to close the gap with the acknowledged leader so that we wouldn’t be so terribly far behind. Rotman is only where it is today because I completely refused to have anything to do with catching up. And I most certainly did not waste my time and resources on benchmarking.
It is critical to recognize that time spent benchmarking is time not spent on unique strategy choice. Even worse, time spent on benchmarking focuses the mind on the status quo — how the best players do it today. It becomes a trap. You are inclined to become what you study. It draws you like a proverbial moth to the flame.
Unique strategy choice is the only path to winning, which is the path to the greatest reward.
Virtually everyone, including your ‘strategy consultants,’ will try to keep you engrossed in benchmarking. You just have to resist. That is very hard and very lonely. But life is too short to waste it on benchmarking.