Chapter 6 The Voice of the Market S. Thomas Foster, Jr.

Chapter 6 The Voice of the Market S. Thomas Foster, Jr.
Boise State University Slides Prepared by Bruce R. Barringer University of Central Florida ©2001 Prentice-Hall

Chapter Overview Slide 1 of 2
What Do We Mean by the Voice of the Market? Gaining Insight through Benchmarking Purposes of Benchmarking Difficulties in Monitoring and Measuring Performance Commonly Benchmarked Performance Measures

Chapter Overview Slide 2 of 2
Best-in-Class Benchmarking Business Process Benchmarking Leading and Managing the Benchmarking Effort Base-lining and Reengineering Problems with Benchmarking

Introduction Different people have different ideas about how to perform similar work. We can benefit by exploring different perspectives in designing products and processes. Different organizations solve problems differently and take different approaches toward their work. It can be helpful to observe how different firms perform tasks. A wiser approach would be to benchmark external customer service units in other companies first.

What Do We Mean By The Voice of the Market?
Strategy formation results from understanding the customers and the marketplace, as shown in Figure 6.1 The marketplace includes immediate customers as well as competitor, the customers of competitors, potential competitors, and potential customers. Each firms strives to introduce new products, develop innovative processes, and find better ways to satisfy the customer.

Customers can be good sources of information about competitors. This type of data gathering should include both strengths and weaknesses of your competitors. Information from lost customer can also be externally useful for targeting weaknesses and improving products and services.

What Do We Mean By The Voice of the Market? Slide 1 of 2
In Chapter 5, we considered how customers shape markets and how information about customers is obtained. However, customers are not the only source of information about the market. One of the best sources of information can be other companies.

Gaining Insight Through Benchmarking Slide 1 of 5
A benchmark is an organization recognized for its exemplary operational performance. There are many benchmarks in the world including Toyota for processes, Intel for design, Motorola for training, Scandinavian Airlines for service, and Honda for rapid product development.

Gaining Insight Through Benchmarking
A benchmark is an organization recognized for its exemplary operational performance. There are many benchmarks in the world including Toyota for processes, Intel for design, Motorola for training, Scandinavian Airlines for service, and Honda for rapid products development. To be benchmark, a company must be willing to open its doors and allow others to view its own operations and tour its facilities.

Two rationales explain why benchmarking is good business. The first originates from Deming’s thought that “ the worst thing for a business is a weak competitor. As such, openness provides an impetus to continual improvement. An opposite view is that openness can create a competitive advantage through creating psychological barriers to competition.

Benchmarking is the sharing of information between companies, so that both can improve. The first step a benchmarking firm must take is to document current performance. If the managers in firm are unsure that they are pursuing a useful plan of action, benchmarking can help them understand how what they are doing stacks up against the master.

Parties to Benchmarking Relationships There are two parties to each benchmarking relationship: an initiator firm and a target firm. The initiator firm is the firm that initiates contact and studies other firms. The target firm is the firm that is being studied (also called the benchmarking partner).

The role of benchmarking are not static roles. As is shown in Table 6.1, there are several types of benchmarking. Note that they are not all mutually exclusive.

Types of Benchmarking ( Table 6.1) Process Benchmarking Financial Benchmarking In process benchmarking, the initiator firm focuses their observations and investigation on business processes. The goal of financial benchmarking is to perform financial analysis and compare the results in an effort to assess your overall competitiveness.

Types of Benchmarking ( Table 6.1) Performance Benchmarking Product Benchmarking Many firms perform product benchmarking when designing new products or upgrades to current products. Allows initiator firms to assess their competitive position by comparing products and services with target firms.

Types of Benchmarking ( Table 6.1) Strategic Benchmarking Functional Benchmarking Involves observing how others compete. Involves a company focusing its benchmarking efforts on a single function to improve the operations of that function.

In process benchmarking, it can involves studying process flows, operating systems, process technologies, and the operations of target firms or departments. The goal is to identify and observe the best practices from one or more benchmarking firms. Xerox is the famous process benchmarking firms. Xerox has benchmarked against many companies in an effort to improve its processes.

In Financial benchmarking, it need not involve direct interaction between initiator firm and the target firms. There is interaction between the initiator and third party that gathers this information. AS more companies place annual reports on-line, the Internet has become an important tool for benchmarking financial performance.

In performance benchmarking, it may include such things as cost structures, various types of productivity performance, speed of concept to market, quality measures, and other performance evaluations.

In product benchmarking, it often includes reverse engineering or dismantling competitors’ products to understand the strengths and weaknesses of their designs. By observing the designs of others, the initiator firm can develop new ideas for product and service design.

In strategic benchmarking, it typically involves target firms that have won prestigious honors such as the Baldrige Award, the Shingo Prize, or the Deming Prize. The focus of this type of benchmarking is to identify the mix of strategies that make these firms successful competitors. Such benchmarking can be very time consuming and costly. Quality Highlight 6.1 is an example of Lucent Technologies’ strategic benchmarking.

In functional benchmarking, an example of this type of benchmarking occurs in purchasing. The NAPM provides a framework for networking purchasing professionals, which facilitates the sharing of information about the purchasing function.

Purposes of Benchmarking
There are seven primary purposes for benchmarking. This purposes require different levels of involvement in the benchmarking activities. Time consumption and costs may vary according to the purpose of benchmarking. The purposes of benchmarking range from basic learning to achieving world-class leadership. The life cycle in Figure 6.2 shows that benchmarking purposes evolve as the firm becomes more mature in its quality journey.

Purposes of Benchmarking Slide 2 of 2
Figure 6.2 Benchmarking Purpose and Quality Maturity Quality Maturity World-class Leadership Life Cycle I Learning from success II Borrowing ideas III Best-in-firm IV Beating industry standards V Best-in-class VI National leadership VII Best-in-world

Difficulties in Monitoring and Measuring Performance
Financial Measures Many times firms desire to compare financial measures between companies when benchmarking. This can be a useful activity; however, there can be problems. One of the most significant problems stems from limitations of accounting systems across companies.

Often companies have variations in the way they compute their measures that affect the results. Consider the computation of scrap in which a company computes the ratio of cost of goods sold to scrap. Scrap efficiency = Cost of goods sold/scrap by company A (6.1) The higher the ratio, the more efficient is the use of these materials.

Scrap efficiency = Cost of goods sold/(scrap – recovery) by company B (6.2) If the cost of goods sold is the same for both companies, the ratio will be higher for company B. The ratio we have focused on is a type of productivity ratio. One remedy for the effects of accounting differences on productivity ratio is to compute total factor productivity measures.

To understand total factor productivity measures, we first must understand single factor productivity measures. Single factor productivity measures are computed as equation (6.3).

Difficulties in Monitoring and Measuring Performance -- Productivity
Single factor productivity = Output/(a single input) (6.3) Single factor productivity focuses on scrap material alone. Multiple factor productivity = Output/ (the sum of multiple inputs) (6.4) Multiple inputs might include scrap, labor, energy, materials, equipment, and other measures of inputs. Total factor productivity = Output/ (Sum of all inputs to production) (6.5)

Notice that if you focused on plant and equipment productivity, the conclusion would be that the competitor is lagging in productivity. Also, notice that labor productivity may be a small part of total productivity.

Example 6.1: computing productivity Input Firm A Competition Labor $ 20, $ 15,000 P & E , ,000 Energy , ,500 Material , ,000 Sales , ,000

The productivities for the two firms in Example 6.1 is computed as: Productivity Firm A Competition Labor P & E Energy Material Total factor

As can be seen, the total factor productivity measure provides a more complete picture of firm productivity as shown above.

Another caveat for comparing measures between companies is based on the Deming arguments such things as work measurement and Management By Objective (MBO). To concentrate too much on comparative measures might focus managers on results and not causes. This could result in the unfortunate development of numerical goals that ignore the necessity of improving the system of production.

Because of the possibility of serial correlation of data, even greater care should be taken when analyzing longitudinal ( time series ) data. For example, company researchers might want to compare rates of growth for two companies in assets, sales, and other measures. If the data have serial correlation, they might reach the wrong conclusions.

The cost accounting conventions and accepted accounting principles can vary greatly between countries. For this reason, it is best not to compare accounting figures with foreign companies.

Commonly Benchmarked Performance Measures
The measures a firm chooses depends on the Key Business Factor ( KBFs ) of each particular firm. The KBFs are those factors that are significantly related to the business success of the firm. Table 6.2 shows the categories of measures that are often gathered in benchmarking studies.

Commonly Benchmarked Performance Measures Slide 1 of 5
Table 6.2 Benchmarking Data 1. Financial ratios Productivity ratios 3. Customer-related results Operating results 5. Human resource measures 6. Quality measures 7. Market share data Structural measures

Financial Ratios Such as ROA or ROI are probably the easiest to obtain and compare. Generally, senior management is keenly interested in these measures to guide their decision making.

Productivity Ratios Are useful in measuring the extent to which a firm effectively uses the scarce resources that are available to it. These include single factor, multifactor, and total factor productivity measures.

Customer-Related Results Include customer satisfaction and comparisons of customer satisfaction relative to competitors. These measures may be in the form of retention, gains, losses, customer perceived, competitive awards, competitive customer ratings, and independent organization evaluations.

Operating Results These are important for monitoring and tracking the effectiveness of company operations. These might include cycle times, waste reduction measures, value-added measures, lead times, time for concept-to-market, setup times, present reduction in setup times, and myriad other operating results.

Human Resource Measures These provide important insights into how effectively the business is being run. May include employee satisfaction measures, training expenditures, training expenditures , training hours per year, work system performance, employee effectiveness measures, turnover, safety statistics, absenteeism, and many other data might be important measures for benchmarking.

Quality Measures These can include conformance-based quality information such as reject rates, capability information, performance information, or other measures. These also can include scrap and rework measures, percent defectives, field repairs, costs of quality, and many other metrics.

Quality Measures (continued) These also may include data concerning the performance of process and time-related statistics. Where customer service quality is important, the types of data that are captured often include such things as percentage of customers whose phone calls are answered within seven seconds, average response time for phone inquires, number of people a caller must contract to get a problem resolved, and many other metrics ( or measures) .

Market Share Data As markets are segmented, market share includes shares in the different markets served by the firm. Market share comparisons also are made to determine where the initiator firm ranks in the market.

Structural Measures Include objectives, policies, and procedures followed by a firm. They may include safety, production, accounting, financial, engineering, and other types of structural measures that are used in determining competitiveness.

Why Collect All of these Measures? - Management by Fact dictates that decisions are made based on the sound collection and analysis of data. - The MBNQA criteria are clear about this. - The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance.

Best-In-Class Benchmarking
Generally, initiator firms will choose to benchmark the best-in-class. Best-in-class refers to those firms or organizations that have been recognized as the best in an industry based on some criterion. The objective of best-in-class is to provide a basis for continual improvement. By continually improving, initiator firms can be become best-in-class too.

Best-Of-The-Best Benchmarking
After becoming a best-in-class firm, it may be difficult to gain new insight and information from direct competitors. Therefore, the next level of improvement is called best-of-the best or best-in-the-world. It has been suggested that the best-of-the-best benchmarking can lead to breakthrough improvement by causing individuals within firms to look at other industries and to visualize the business in new and different ways.

Best-Of-The-Best Benchmarking
One of the greatest impediments to seeking a benchmarking relationship is the belief that an initiating company or firm is so unique that it cannot learn from other firms because they are different. To break this mold, it is useful to see other philosophies and ideas.

Business Process Benchmarking Slide 1 of 4
Business process benchmarking is based on the concept of 5W2H developed by Alan Robinson. The 5W2H concept is labeled as such because a business process benchmarking project should result in answers to seven questions (see Table 6.3). Five of the question begin with the letter W ( Who, What, When, Where, Why) and the remaining two being with the letter H ( How and How much).

Business Process Benchmarking Slide 2 of 4 ( Table 6.3)
Type 5W2H Description Countermeasure Subject matter What? What is being done? Can this task be eliminated? Purpose Why? Why is this task necessary? Clarify the purpose. Location Where? Where is it being done? Does it have to be done there? Sequence When? When is the best time to do it? Does it have to be done then? People Who? Who is doing it? Should someone else do it? Why am I doing it? Eliminate unnecessary tasks Change the sequence or combination

Business Process Benchmarking Slide 3 of 4 ( Table 6.3) (continued)
Type W2H Description Countermeasure Method How? How is it being done? Is this the best method? Is there some other way? Cost How much? How much does it cost now? What will the cost be after improvement? Simplify the task Select an improvement method

Business Process Benchmarking
The 5w2h concept is a good starting point because it focuses the participants in the benchmarking process on the nuts and bold of what is being done. The 5w2h questions should be viewed in the context of a process. Figure 6.3 contains a diagram of a generic process.

Business Process Benchmarking Slide 4 of 4
Figure 6.3 Process Model Conversion Process After- Sales Processes Inputs Output Control Process Loop Customer Feedback Loop Benchmarking Feedback Other Firms

In Figure 6.3 Inputs include the equipment, people, machines, materials, and design that combine to form a product or service. Conversion process might include turning sheet steel into chimney pipes or turning wood pulp into paper or, for a shipping service, moving materials from point A to point B.

In Figure 6.3 The conversion process results in outputs that are eventually sold to customers. Notice in Figure 6.3 that there are two feedback loops in the process. The first feedback loop results from gathering data from the process. This is known as the control process. The second feedback loop in the process is the customer feedback loop and results from gathering data from the customers. A third feedback process can be added by gathering information from competitors through benchmarking.

Figure 6.4 shows what to benchmark at each stage . The questions asked are similar to the 5W2H questions posed earlier.

Figure 6.4

The Xerox Business Process Benchmarking Process
Xerox applies a formal 10-steps process to benchmarking. These steps are shown in Table 6.4 The process was originally developed by Camp at Xerox but is now used widely by many different organizations.

The Xerox Business Process Benchmarking Process Slide 1 of 2 ( Table 6
Step 1: Decide what to benchmark Step 2: Identify whom to benchmark Step 3: Plan and conduct the investigation Step 4: Determine the current performance gap Step 5: Project future performance levels

The Xerox Business Process Benchmarking Process Slide 2 of 2 ( Continued) ( Table 6.4)
Step 6: Communicate benchmark findings and gain acceptance Step 7: Revise performance goals Step 8: Develop action plans Step 9: Implement specific actions and monitor progress Step 10: Recalibrate the benchmarks

Figure 6.5 combines these 10 benchmarking steps into five phases of development: planning, analysis, integration, action, and maturity. The steps they contain define all of these phases. At this stage, benchmarking is an ongoing process that supports continual improvement efforts.

Figure 6.5

The Xerox Business Process Benchmarking Process Slide 1 of 7
Camp’s Five Phases ( Figure 6.5) Phase 1: Planning: Identify what to benchmark; identify who to benchmark; and gather data. A plan for benchmarking is prepared Decide what to benchmark Identify who to benchmark Plan the investigation and conduct it - Gather necessary information and data - Observe the best practices

Camp’s Five Phases (continued) Phase 2: Analysis: Examine the performance gap and project future performance. The gap is examined and the performance is assessed against best practices. Determine the current performance gap Project future performance levels

Camp’s Five Phases (continued) Phase 3: Integration: Communicate the findings and develop new goals. The goals are redefined and incorporated into the planning process. Communicate benchmarking findings and gain acceptance Revise performance goals

Camp’s Five Phases (continued) Phase 4: Action: Take actions, monitor progress, and recalibrate measures as needed. Best practices are implemented and periodically recalibrated as needed. Develop action plans Implement actions and monitor progress Recalibrate the benchmarks

Camp’s Five Phases (continued) Phase 5: Maturity: Achieve the desired state. Leadership may be achieved. Determine when leadership position is attained Assess benchmarking as an ongoing process

Leading and Managing the Benchmarking Effort
Management must have an understanding of the benchmarking process, the participants involved, and the objectives of the exercise. Managing the benchmarking process involves establishing, supporting, and sustaining the benchmarking program. To begin the management process, a strategy statement outlining the goals and strategies to be used is developed.

Other activities for management include providing management awareness training, establishing a benchmarking competency center, developing guidelines for information sharing, and overseeing the development of a visit protocol. Table 6.5 outlines additional management process steps that are included in the Xerox benchmarking model. The Xerox process is a very mature and successful benchmarking process.

Leading and Managing the Benchmarking Effort Slide 6 of 7
Table 6. 5 Process Benchmarking Management Process Strategy statement Document process Set expectations Qualify partners Management and training Follow 10-step process Benchmarking competency center External assistance Guidelines and protocol Benchmarking handbook Network Share successes Champions identification Inspect for benchmarking use Established benchmarking teams Rewards Team skills training

Leading and Managing the Benchmarking Effort Slide 7 of 7
Training Training is the key to success in all quality management approaches. This is especially true for benchmarking. Participants must have project management skills and be familiar with benchmarking approaches and protocols.

Benchmarking carries with it legal liabilities that should be address during the training ( see A Closer Look at Quality 6.1). Training should include managerial training, cross-function benchmarking skills training, team training, and documentation training ( flow charting).

Outside consultants can be useful in providing training and coaching on benchmarking and other quality-related efforts. However, it is best for the firm that is interested in benchmarking to perform the benchmarking with its own employees rather than through consultants, because a self-perpetuated approach creates the best platform for organizational learning.

Base-lining and Reengineering
Many firms are facing the important decision to reengineering business processes to enhance productivity, to reduce cost, to improve quality, and to achieve better customer service. Two factors are critical to achieving success through reengineering: breadth and depth. Breadth refers to the impact of the reengineering process to the entire organization. Depth refers to organizational elements such as responsibilities, measurement, information technology, and skills.

Base-lining and Reengineering
These dichotomous factors imply that business process reengineering will result in both localized and generalized performance impacts. A methodology that can be applied in assessing business process reengineering impacts is base-lining. The base-lining process involves identifying measures, establishing time frames for future data collection, gathering data, and analyzing data on an ongoing basis to identify performance trends and changes ( see Figure 6.6).

Base-lining Process (Figure 6.6)
Identify Measures Establish Time Frames Gather Data Analyze Data to Identify Trends

Problems With Benchmarking Slide 1 of 2
1. There is an enormous difficulty obtaining cooperation from other firms in your own industry, unless you happen to be a Fortune 100 firm. 2. The predominance of functional benchmarking with firms in non-competing industries makes it difficult to benchmark these firms.

Problems With Benchmarking Slide 2 of 2
3. Your efforts will be wasted unless you fully understand your own processes before you benchmark against someone else. 4. Benchmarking is time consuming and costly.

Chapter 6 The Voice of the Market S. Thomas Foster, Jr.

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Chapter 6 The Voice of the Market S. Thomas Foster, Jr.

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