Benchmarking and Profitability - Essay Example

This paper takes the assertion that benchmarking for purposes of achieving greater efficiency should lead to higher profits. Benchmarking refers to a process in which business personalities compare the performance metrics, and business processes of an industry, to the business best practices emanating from other companies. Orr and Orr (2014) explains that the dimensions that are always measured include cost, time, and quality. In this process of benchmarking, the management of a business organization would identify the best firms within their industry, or in other industries, which have similar processes as theirs, and thereafter compare the results of these processes, with that of theirs. Through this method, Young (2003) explains that business personalities are able to know how well their competitors perform within the industry, and the reason as to why these companies are able to perform in a manner identified. Wöber (2002) further explains that benchmarking is always used to measure the performance of a business organization/industry by using specific indicators, e.g. cost per unit of the substance, productivity per unit, etc. Benchmarking is a process that is used in strategic management, whereby business organizations are able to evaluate different aspects of their business organization, in relation to the best practices of the industry. Orr and Orr (2014) maintains that this helps managers of business organizations to come up with the best policy that can help them improve the performance of the business organization. Furthermore, benchmarking as a process normally helps managers of a business organization to adapt some of the best practices of an industry into their operations. This can be social responsibilities, or marketing procedures. Benchmarking is always a continuous process, and this is mainly because organizations seek methods of improving their performances, and best practices. However, there is a considerable debate on whether benchmarking helps in improving the profitability of a business organization. Orr and Orr (2014) explains that because benchmarking is a method of understanding the best practices of an industry, and implementing those practices, it will most definitely lead to an increase in the profitability of a business organization. This is an assertion that Kerimodou (2013) is against. In their research concerning benchmarking, the authors denoted that organizations which have high technical efficiency are not always the best performers regarding profitability. In their research, Kerimodou et al (2013) were able to denote that there was a poor performance in terms of profitability during their periods of study. They were able to analyze the performance of companies in the Greek meat market, between the years 1994 to 2007. Through this research, Kerimodou (2013) denoted that meat companies that are able to make low profits normally provide poor services, or they have poor marketing strategies. However, this does not mean that organizations which are highly efficient are always profitable. By contrast, organizations with the capability of manufacturing their products by using best practices do not have the capability of making maximum profit. Kahan (2013) defines profits as ability of an organization to make extra revenue after paying of all the costs of doing business. The results of the study Kerimodou et al (2013), has two major implications. The first implication is the need of improving the performance of a business organization has two major implications. The first implication is that in as much as business organizations would effectively use their resources, it is not a guarantee that they would manage to make profits. Another major implication identified from this study is that the main purpose of business organizations in improving their efficiency is for purposes of generating profits. On this basis, firms should not rely entirely on the process of benchmarking if they want to make profits. Firms should develop a profit enhancing-strategy that would help them to satisfy the needs of customers, hence achieve profitability. In this study by Kerimodou et al (2013), the authors were talking about technical and scale efficiency. Technical efficiency refers to the effectiveness that is gained when an organization effectively uses a set of inputs for purposes of producing an output. Kahan (2013) explains that an organization is technically efficient if it has the capability of producing maximum output from its minimum quantity of inputs, and examples include technology, capital, and labor. Kahan (2013) denotes that the assertion of Kerimodou et al (2013) that a technically efficient organization would not lead to profitability is not true. In supporting his assertions, Feeny and Rogers (2001) gives an example of Wal-Mart. Wal-Mart is the biggest retailing unit in the world, and the most profitable. However, the company uses minimum capital in doing its operations. For example, Wal-Mart is one of the blue chip companies in the United States that has a poor pay for its workers. Due to this poor pay, the company does not have the capability of retaining its workers for long. Despite this practice by Wal-Mart, it has managed to increase the growth of its business organizations, making it the largest retailing unit in the world, and the most profitable. Furthermore, during the periods of recession, most firms and organizations were engaged in laying off of workers. This was for the main purposes of reducing the costs of production, and hence helping them in increasing their profits. An example of an organization that was engaged in this activity is General Motors, which was forced to retrench some of its employees because it impacted on increasing the high costs of its production. Based on these examples therefore, Effelsberg (2013) asserts that technical efficiency is an important method that organizations can use in increasing their profits. This is because it helps in cost reduction, leading to an increase in the profitability of a business organization. Feeny and Rogers (2001) therefore explains that technical efficiency is an important benchmarking strategy that would most definitely improve the profitability of a business organization. Effelsberg (2013) denotes that companies that have failed to improve on their technical efficiency normally have low returns, and hence they are unable to make great profits, or increase their market share. A good example is Nokia Corporation. Eden and Long (2014) explains that in the 1990s, Nokia was one of the leading mobile companies in the world. However, in the 2000s, because of an increase in the costs of its production, and failure to effectively market its products, Nokia was unable to maintain its market, being surpassed by companies such as Apples, and Samsung. This almost destroyed Nokia, and it was forced to enter into a merger with Microsoft for purposes of survival. On this basis, Eden and Long (2014) explains that the assertion advanced by Kerimodou that technical benchmarking does not lead to profitability is untrue. Kerimodou et al (2013) also talk about scale efficiency. Scale efficiency refers to the method of reducing the unit costs of a company or organization, when producing a high volume of products. This is a term that can be used to efficiency in achieving economies of scale. In defining economies of scale, Effelsberg (2013) explains that it is an increase in the efficiency of production, because of an increase in the manufacture and sale of more products. On most occasions, a company that has the capability of achieving economies of scale normally has a low average cost per unit (Raa, 2009). This is because of an increased production that makes it possible to share fixed costs. Based on this fact, Cain and Cain (2004) explains that large business organizations have an advantage over small business organizations mainly because they have a low production cost. This would be reflected in the pricing of their products, which would be more affordable, hence increasing sales, and achieving profitability. Eden and Long (2014) therefore argues that the assertion by Keramidou et al (2013) that scale efficiency does not increase profitability is not true, and it is unfounded. There are two major types of economies of scale, namely external economies, and internal economies. Under external economies, the cost of producing a unit is heavily dependent on the size of the industry, and not the size of the organization. On the other hand, internal economies refer to a situation whereby the cost of production per unit, is heavily dependent on the size of an individual organization (Raa, 2009). In a bid to achieve scale efficiency, most organizations normally engage in mergers or acquisitions. An example is Nokia and Microsoft. In 2012, Microsoft was able to acquire Nokia, and this is mainly because Nokia was on a brink of bankruptcy. This acquisition was possible, because Nokia wanted to take advantage of size of the company after the merger. This would enable the company to increase its production, but based on a lower cost. Furthermore, due to the large size of the new organization, Nokia would take advantage of the distribution channels of Microsoft, to distribute its products. Cain and Cain (2004) further explains that it would be easy for Nokia to get cheap and affordable loans due to its large size. Eden and Long (2014) argues that financial institutions feel more secure to advance loans to large business organizations, when this is compared to small business organizations. However, some argue that large business organizations are not necessarily efficient when it comes to cost per unit production. This is because of an increase in costs and capital, due to their expansionist strategies. This is referred to as diseconomies of scale. However, Cain and Cain (2004) argues that in the short run, a company that engages in an expansionist policy will be faced with high running costs, however, in the long run, the company will manage to stabilize its costs of production, and thus achieving efficiency in the reduction of its production costs per unit. Based on this fact, this company will be profitable when compared to a company whose costs of production are high. Based on these arguments therefore, the assertion that benchmarking does not lead to profitability is incorrect. Benchmarking is a tool of management, and by following the best practices of an industry, there is no way an organization can fail to make profits. In conclusion, efficiency is central and important to both profitability and benchmarking. Benchmarking involves analyzing and using the industries best practices for purposes of improving the performance of a business organization. It is important to denote that when the management of an organization are not efficient, then they cannot achieve the aims and objectives of benchmarking. Take for instance mergers and acquisitions as examples of scale efficiencies. When a company poorly handles this process, it would most definitely lead to the failure of the merger. An example is the merger between Daimler and Chrysler, which was a failure partly because of inefficient managerial practices. Furthermore, it is next to impossible for an organization to make profits when it is not efficient in its production and marketing. There, it is important to conclude that efficiency is central to profitability and benchmarking. Furthermore, benchmarking is key in ensuring that an organization is able to make profits. References: Cain, C. T., & Cain, C. T. (2004). Performance measurement for construction profitability. Oxford: Blackwell Pub.. Eden, J., & Long, T. (2014). Low-Hanging Fruit 77 Eye-Opening Ways to Improve Productivity and Profits.. Hoboken: Wiley. Effelsberg, W. (2013). Benchmarking peer-to-peer systems: understanding quality of service in large- scale distributed systems. Berlin: Springer. Feeny, S., & Rogers, M. (2001). Innovation and performance: benchmarking Australian firms. Melbourne, Vic.: Melbourne Institute of Applied Economic and Social Research, University of Melbourne. Kahan, D. (2013). Farm business analysis using benchmarking. Rome: Food and Agriculture Organization of the United Nations. Keramidou, I., Mimis, A., Fotinopoulou, A., & Tassis, C. D. (2013). Exploring the relationship between efficiency and profitability. Benchmarking: An International Journal, 20(5), 647-660. Orr, L. M., & Orr, D. (2014). Eliminating Waste in Business Run Lean, Boost Profitability.. Dordrecht: Springer. Raa, T. t. (2009). The economics of benchmarking: measuring performance for competitive advantage. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Wöber, K. W. (2002). Benchmarking in tourism and hospitality industries: the selection of benchmarking partners.. Wallingford: Cabi Pub.. Young, S. D. (2003). Profits You Can Trust Spotting and Surviving Accounting Landmines.. New York, NY: New Age International (P) Ltd.. Read More