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What Are Industry Benchmarks?
Industry benchmarks are the points of comparison of businesses within the same industry. Common points of comparison include financial performance, inventory turnover and percent defects. Businesses use industry benchmarks to gauge where they stand against the competition and identify potential weaknesses and areas of improvement. Industry benchmarks can be broken down into business, market, manufacturing and production categories. When industry benchmarks are not available, a business can rely on benchmarking itself against its own historical performance.
Business benchmarks refer to ratios and figures based on sales, inventory and customers. These industry benchmarks are important for businesses to assess their performance in areas such as its cost per sale, inventory turnover and customer retention. When reviewing benchmarks set by competitors within the industry, a business needs to keep in mind specific circumstances or strategies that affect the numbers being compared. For instance, if a competitor has a higher inventory turnover ratio, it could be because it sells products at a significantly lower price, or it is offering a newer model that has a higher demand. The key is to find out why the differences exist, to determine if the business should undertake a different strategy to be more competitive.
Market benchmarks are the comparative figures used to compare something against the average of the market. For example, investors use them to compare a financial instrument’s performance against the overall performance of the Dow Jones Industrial Average (DJI). Other markets used as benchmarks include the Standard and Poors 500 (S&P 500), National Association of Securities Dealers (NASDAQ), and the Toronto Stock Exchange 300 Composite Index (TSE 300).
Manufacturing benchmarks are usually meant for specific types of jobs or equipment within the industry. This type of benchmark can include numbers on materials, cutting speeds, and welding deposition. Since the numbers may sometimes not be readily available, businesses can use its own benchmarks to compare its current performance against that of various periods. In the United States, manufacturing benchmarks are provided by the Society of Manufacturing Engineers (SME), Fabricator Magazine and a select number of other manufacturing publications.
Production benchmarks are useful for determining how a producer's benchmarks compare with others within the industry. For example, the North Dakota Beef Cattle Improvement Association provides the average performance of certain producers to help these businesses compare their herd values and evaluate their performance. Production benchmarks are available for various production sectors, ranging from ranchers to vegetable growers.
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By: .shockIndustry benchmarks can be broken down into business, market, manufacturing and production categories.
Discussion Comments
@nony - There’s only one problem with finding out industry ratios for some companies. Not all companies are public, which means that kind of information may not be readily available.
For example I work for a small software company. We do have competitors, but I don’t know much about how much they’re selling or revenue streams. We have general ideas about market share based on internal metrics of who’s buying what software from where.
So in our case we do have to use historical data against our performance. It’s served us well so far, but there is always the impending fear that our competitors would gain a unique competitive advantage that leaves us behind, or forces us to seek out a suitor for a merger. Those options have been considered in the past.
@miriam98 - That’s good advice. It’s hard to heed sometimes because past track records are very persuasive as you said, but it’s still true. Anything can shake the market and end a good run for a particular mutual fund. I think even problems in customer retention can turn things south.
I worked in the telecommunications industry for ten years, and during the boom cycle of that industry, the telecoms were busting at the seams. Then something terrible happened – it was called competition.
Customers began dropping like flies. The industry averages for customer retention in residential phone service was only about six months. We couldn’t keep up.
So eventually we got to the point where we simply stopped signing up new residential customers (while continuing to serve existing customers) and instead focused our attention on signing up business customers instead. They proved to be more reliable and steady revenue streams.
I notice that in a lot of investor portfolios they use benchmark data to illustrate how certain funds fare against other funds with similar portfolios.
I have to admit the comparisons are not only very useful but very persuasive. The advertising copy likes to point out that the fund being sold has “outperformed” industry averages. However, while it’s useful information I’d like to remind all investors of this one very important point.
Past performance is no proof of future results.
They tell you that too in the investor prospectus, in the very fine print. So I think you should use the benchmark data, but always be sure to conduct your due diligence before you invest.
I work in the accounting department of a steel manufacturer and we pay attention to industry benchmarks all the time. It is the best way to judge your successes and failures.
We pay a consulting firm to provide us with data on industry benchmarks. This is based on a number of metrics and comes in a comprehensive package. We compare all of our own numbers to other companies in the steel industries. My department prepares reports on the state of the industry that we present to the CFO every quarter.
Business is more competitive than ever, particularly in this economy. It has never been more important for businesses to compare themselves to others in their industry.
This is just the nature of competition. You have to be an industry leader if you hope to survive. Competition from new labor markets in China, India and the rest of the developing world means that no one can rest on their reputation.
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