Cost Benchmarking Against Competition – Success Factors and Pitfalls

A foreign market and dwindling sales - the need for cost benchmarking
The problem seems to be even more pronounced for family-owned companies, which have built a legacy on the claim that their technology and processes are better than anyone else's, and this ideology is ingrained in the mindset of every employee.
As a result, when they suddenly start losing market share to local competitors in other countries, who they may not have believed to have the same level of quality and processes as themselves, they are clueless (blinded) as to how a local company can produce and sell a comparable product at half the price, or in some cases even less. Reverse engineering of products is usually the first response to such competition, but rarely yields results as the difference is rarely in the product specifications.

Choosing a competitor to benchmark against
A knee-jerk reaction to declining performance is to benchmark against others who are doing better in the market. This can happen in 2 ways:

• Attempting to replicate the product/business model success of local market leaders seems easy, but the bias towards one's own products/services and the reluctance to accept that an alternative design/strategy of a local competitor is better than one's own prolongs the time companies take to react and often leads to market exercises conducted by middle management who, in an attempt to mask their own inefficiency, often announce local companies/products as non-competitors to global management, portraying the difference between mass and premium offerings.
  
  
• The second push is to find other international companies in the category that are doing comparatively better and to understand how they operate and what their cost structures are, and the result that trickles down through the hierarchy to management is that the identified company is similar in terms of perceived quality and brand value, but has been able to optimise its costs over a period of continuous operation.

In both cases, the real problem remains and is overlooked: does the market really need everything you offer in a product, and at what extra cost? It's the difference in process and vision towards a particular customer need, not just the product specification, that needs to be evaluated to understand the gap and the expected price premium that can be commanded.

Realisation and Correction

After several iterations, and often after bringing in an external consultant to carry out a market-wide, unbiased assessment, companies realise the cost elements of the process (in design, manufacturing, overheads, etc.) and reluctantly decide to develop localised products for the country. The critical aspect here is to be able to remove certain additional elements of one's own costs, even if they have traditionally been a USP/differentiator for the company in other markets.

As they say, "value is always customer-centric and seldom dependent on inherent product specifications and features", and willingness to pay (especially a premium) is subjective; cost benchmarking, if done well, leads to the identification and exploitation of value creation points.