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Teaching Business
Benchmarking
A clear guide to benchmarking, covering performance comparison, best practice, quality improvement, data, targets and limitations.
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Created by an experienced Head of Business and examiner
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KEY POINTS
Benchmarking involves comparing a business’s performance, processes or standards against another point of reference.
Benchmarks may be internal, competitor-based, functional or based on best practice from leading organisations.
The aim is to identify performance gaps and learn how to improve quality, efficiency, productivity or customer service.
Benchmarking is most useful when data is reliable, comparable and linked to clear improvement actions.
Its limitations include copying unsuitable practices, using poor comparisons and focusing on measurement rather than real improvement.
KEY DEFINITION
Benchmarking
Benchmarking is the process of comparing business performance, processes or standards with a chosen reference point to identify improvements.
Main Explanation
Benchmarking is a performance improvement method. It involves comparing a business’s results, processes, costs, quality or customer service with another reference point. The purpose is to identify gaps and learn how performance could be improved.
Internal benchmarking compares performance within the same business. For example, a retailer may compare sales per employee, waste levels or customer satisfaction between branches. This can highlight best practice already inside the organisation.
External benchmarking compares performance with other businesses. This may involve competitors, industry averages or organisations known for best practice. A hotel may compare customer reviews, occupancy rates or check-in times with competing hotels.
Benchmarking can improve performance because it gives managers evidence of what is possible. Instead of accepting current performance, managers can set targets based on better performers and investigate why the gap exists.
However, benchmarking only adds value if it leads to action. Managers need to understand why another business performs better, whether the comparison is fair and whether the method can be adapted to their own context.
There are also risks. Copying another business may fail if resources, culture, customers or objectives are different. Data may be unreliable, incomplete or not directly comparable. Benchmarking can also lead to a narrow focus on measurable indicators while ignoring employee morale, innovation or customer relationships.
Overall, benchmarking is most useful when it is part of a wider improvement process: compare, diagnose, adapt, implement and review. The strongest evaluation is whether the benchmark is relevant and whether the business has the capability to act on the findings.
✎ EXAMINER TIP
Do not describe benchmarking as just looking at competitors. The important step is using comparison to identify performance gaps and improve how the business works.
KEY FORMULAS(s)
Profit and Profitability Formulas
These key formulas help you calculate different profit measures and profitability ratios used in business.
Gross Profit
Gross profit = Revenue − Cost of sales
The profit made after deducting direct costs.
!
Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.
DATA TABLE
Income Statement for North Coast Coffee Ltd
This statement shows how revenue is converted into gross profit, operating profit and net profit.
Revenue
£250,000
Output
Fixed Costs
Variable Costs
Total Costs
Revenue
Profit / Loss
0 candles £1,200 £0 £1,200 £0 -£1,200
Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.
Performance Gaps
WORKED EXAMPLE
Worked Example: North Coast Coffee
How many coffees must be sold to break even?
Fixed Costs
£1,800
equity + long-term debt
Break-even output = Fixed costs ÷ Contribution per unit
Contribution per unit = Selling price − Variable cost
£3.50 − £1.10 = £2.40
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Step 1: Calculate contribution
£3.50 − £1.10 = £2.40
Contribution per unit is the amount each coffee contributes towards fixed costs.
BREAK-EVEN OUTPUT:
750 coffees per month
EXAM TIP
Always explain what the number means for the business. Do not just calculate the break-even point.
Benchmarking Improvement Loop
This diagram shows how businesses compare performance, identify gaps, learn from best practice and implement improvements.
APPLICATION
Premier Inn
Premier Inn provides a useful context for benchmarking because hotel chains can compare performance across many sites and against competitors.
Managers could benchmark customer review scores, room occupancy, check-in times, labour cost per room, complaint levels and housekeeping quality between hotels.
Internal benchmarking may identify high-performing sites and spread good practice across the chain. External benchmarking may show whether the business is competitive on price, quality or service.
However, hotel performance depends on location, local demand, building age and customer mix, so comparisons must be interpreted carefully.
This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.
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ANALYSIS
EXAM FOCUS
Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.
How to Approach Analysis Questions
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Identify the key issue or concept
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Break it down
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Explain how and why
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Reach a reasoned conclusion
Read the question carefully and highlight the focus of the analysis.
Consider the different factors, causes or impacts related to the issue.
Provide clear explanations using business terms and links points to context.
Evaluate the overall implications for the business.
Example Analysis Question
North Coast Coffee is considering using break-even analysis before opening a second café.
Advantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Disadvantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Key Exam Tip
If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.
Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.
Avoid These Exam Traps
Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!
1
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Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
2
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
3
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Be precise. Read the question carefully. Show your working.
Small mistakes can cost big marks.
EXAM PRACTICE
Practice Question
Apply your knowledge of profit and profitability to answer this exam-style question.
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MINI CASE STUDY
North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.
The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.
The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.
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EXAM QUESTION
Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.
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HOW TO ANSWER
P
Point
E
Explain
A
Apply
C
Consequence
H
However...
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MODEL ANSWER
P
Point
Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.
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EXAMINER TIP
For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?
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