Table of Contents
What is competitive benchmarking?
Competitive benchmarking is the process of analyzing your company or business unit through detailed financial metrics and other analytics to compare it against competitors, peer companies or industry standards. Companies use competitive benchmarking to gauge the effectiveness of their strategic approach versus those of other companies and determine when a course correction is needed. An effective competitive benchmarking study should identify specific areas of improvement that will drive shareholder value creation for public companies.
Competitive benchmarking analysis can delve into many areas, including R&D, customer experience and satisfaction and operational efficiency. This article will focus on competitive benchmarking for market performance and shareholder value creation.
How to use competitive benchmarking to maximize share price
Competitive benchmarking allows you to compare your capital deployment decisions against those of other companies, and to evaluate the results of those decisions. You might choose to benchmark against competitors or peers chosen by external sources such as Marketbeat, SEC filings, or companies that listed your company as a peer.
What’s the value of performing a competitive benchmarking analysis against peer companies? To understand how those companies differ in their approach to shareholder value creation compared to yours.
Say you run an analysis that compares your company to 10 others, and five of them earned a higher Total Shareholder Return (TSR) than your company. TSR is like the grade on your report card, showing if your company has increased in value on the market and how investors responded to your company’s capital deployment decisions. If half your peers are outperforming you in the eyes of investors, that’s crucial knowledge.
The analysis should also go into detail about why those companies earned a higher TSR. By breaking down your capital deployment decisions versus those of the other companies, you get valuable insight into what’s working and what isn’t. These insights should then inform the areas of your company that are worth investing in to drive revenue, decrease costs and inevitably increase share price. Even more valuable, you get a window into the competitors’ playbook to fully understand how they earned a higher share price.
Alternate competitive benchmarking use cases for executives
Competitive benchmarking has uses beyond comparing your company against others. An executive, board member or investor can find numerous ways to get valuable insights from this approach. Here are a few ideas:
- Assess a different company — Instead of benchmarking your company, analyze a tough competitor, or a company you’re considering for a partnership or acquisition. You’ll be able to quickly assess their decisions and how the market reacted to them.
- Evaluate executive performance — A board member can use competitive benchmarking to dig into the performance of the leadership team before a salary negotiation. Conversely, a CEO might run a quick analysis to bolster their case for a pay increase.
- Data-driven talent acquisition — Do a deep dive into a prospective hire to understand their decision-making and how shareholders rewarded those decisions.
- See which peers are “Champions” — With PivotXY’s Segmentation functionality, you can quickly see which peers are outperforming the rest and which are lagging. Use Segmentation to see which rivals have found a repeatable formula for sustainable growth, and you gain visibility into what that formula is.
- Find a new strategic direction — Choosing which peers to benchmark against can illuminate a new product direction that’s working for other companies.
A resourceful executive will no doubt find many other ways to use competitive benchmarking to deliver optimal shareholder value. It’s a flexible tool that, in the right hands, will show its value daily.
Key market performance metrics for competitive benchmarking analyses
Analysts performing a competitive benchmarking study must decide which metrics to use, and the options are many. However, PivotXY uses the following metrics to measure the many drivers of share price performance.
Revenue is the total earnings derived from the sale of a product or service within a specific timeframe. It’s a fundamental measure of a company’s market presence and business performance. A growing revenue stream indicates strong customer demand, effective pricing strategies, and a competitive product or service offering. Comparing revenue across firms helps determine market share, positioning, and the overall industry health. Additionally, revenue trends provide insights into seasonal patterns, economic conditions, and the impact of business strategies such as expansions, acquisitions, or product launches.
EBITDA, shorthand for “Earnings Before Interest, Taxes, Depreciation, and Amortization,” represents a firm’s net earnings before those elements are deducted. Costs like Cost of Goods Sold (COGS) and Operating Expenses are subtracted to calculate EBITDA. Analysts use EBITDA to measure operational profitability and the efficiency of core business activities, isolating the company’s operational performance from financial and accounting decisions. By removing the impact of taxes, financing costs, and non-cash expenses, EBITDA provides a clearer view of a company’s ability to generate profits from its core operations. Investors and analysts use EBITDA in competitive benchmarking to compare companies across industries, particularly those with varying capital structures or tax environments. High EBITDA margins signal strong operational efficiency, while low EBITDA margins may indicate issues with cost control or revenue generation.
Invested Capital is the combined value of equity and debt capital raised. Companies raise capital by issuing securities to equity shareholders and debt to bondholders. Invested Capital is a key metric because it represents the total financial resources available to a company to fund growth, acquisitions, and operational expansion. It helps analysts assess whether a company is effectively utilizing its funding sources to generate returns. By comparing Invested Capital with financial performance metrics such as Return on Invested Capital (ROIC), businesses can determine how efficiently they are converting investments into profits. This metric also plays a key role in evaluating a company’s capital structure and long-term financial sustainability.
Economic Profit is a company’s earnings after deducting both operational expenses (explicit costs) and opportunity costs (implicit costs). Opportunity costs represent the intangible profits a firm foregoes when choosing one business venture over another. Economic Profit is a powerful indicator of a company’s ability to generate value beyond just covering costs. Unlike accounting profit, which focuses solely on revenue and expenses, economic profit accounts for the cost of capital and alternative investment opportunities. A positive economic profit suggests that a firm is efficiently using its resources and outperforming competitors, whereas a negative economic profit signals that the company might be wise to allocate capital elsewhere. Investors and executives use this metric to assess long-term sustainability, market competitiveness, and strategic decision-making.
Total Shareholder Return (TSR) is the total gain on a stock investment over a given period, combining capital gains from stock price appreciation with income from dividends. TSR provides a comprehensive view of the financial rewards delivered to shareholders, making it a critical measure for assessing investor value. It reflects the market’s confidence in a company’s future growth, profitability, and strategic direction. A consistently high TSR signals strong business performance, effective capital allocation, and competitive positioning. Companies with strong TSR tend to attract more investors, driving stock demand and valuation. Moreover, TSR comparisons across competitors help gauge relative performance within an industry.
Sources and Uses of Cash provides a detailed breakdown of how a firm generates and allocates its financial resources, offering critical insights into its liquidity, operational priorities, and investment strategy. Sources of cash typically include:
- Cash from operations
- Net debt issued
- Equity issued
- Divestments
- Total cash
- CAPEX
- M&A
- Share buybacks
- Dividends
- Held as cash
- Pensions
- Interest paid
- Miscellaneous
By aggregating and comparing Sources and Uses of Cash across competitor firms, analysts can assess industry norms and identify potential inefficiencies or strategic advantages. Charting these metrics helps determine whether the Target Company is effectively deploying its financial resources to drive growth and sustainability. A company that consistently reinvests in innovation, expansion, or productivity-enhancing initiatives, for instance, is more likely to sustain competitive advantage, whereas excessive spending on debt servicing or shareholder payouts may indicate financial strain. Additionally, examining a firm’s funding strategy — whether it relies more on debt or equity — can provide valuable insights into its long-term financial health, risk exposure, and ability to navigate economic downturns or market fluctuations. Understanding how a company manages its sources and uses of cash is essential for investors, lenders, and executives seeking to evaluate financial stability and strategic decision-making.
There are numerous other metrics that a particular analyst might favor, and the metrics you choose will offer different perspectives. Part of the challenge of doing an effective competitive benchmarking analysis is knowing which metrics to use to reveal the insights that are relevant to your company and its situation.
Competitive benchmarking best practices
There are several steps to take, and missteps to avoid, when conducting a competitive benchmarking study to analyze your company’s market performance. Follow these best practices to ensure that you end up with a relevant and accurate analysis.
- Identify key business goals — Determine whether the study aims to improve market share, capital deployment strategy or operational efficiency.
- Select relevant competitors — Choose direct competitors (those offering similar products/services), indirect competitors (alternative solutions in the market) or other peer companies recognized by professional analysts.
- Set performance indicators (KPIs) — Define clear metrics. Although opinions vary on which KPIs to use, professional finance consultants often favor the following::
- Revenue
- EBITDA
- Invested Capital
- Economic Profit
- Total Shareholder Return (TSR)
- Sources and Uses of Cash
- Gather reliable data from multiple sources —These should include trusted public sources such as annual reports, government databases and SEC filings.
- Use benchmarking tools and software — Technology can make easy work of the extensive research and number crunching required.
- Assess competitor performance — Determine which competitors are outperforming you and which aren’t.
- Find performance gaps — Identify specific areas where competitors outperform your company.
- Develop actionable strategies — Use insights to refine capital deployment choices, expansion plans and other decisions.
- Set improvement goals — Define short-term and long-term strategies to enhance market performance.
- Regularly update your analysis — Market conditions and competitors evolve, so revisit the study quarterly or annually, or more often when circumstances present the need to reassess.
An example of competitive benchmarking
Here's an example of a thorough competitive benchmarking analysis. We randomly chose Wynn Resorts and ran a report comparing them to industry peers. The report begins with a summary of the findings:
"Wynn Resorts, Limited, classified as a Chaser, delivered a TSR of 68, below the Champions' average TSR of 76. Champions focused on capital deployment towards balanced growth strategies, resulting in superior Economic Profit of 289 in 2023. Conversely, Wynn Resorts prioritized debt repayment and equity issuance, achieving an Economic Profit of 237. These choices led to Champions experiencing higher Invested Capital growth, stronger Revenue growth of 252, and more robust EBITDA growth of 5,901. Despite these differences, investors rewarded Champions with a higher TSR. Wynn Resorts' strategic focus on debt reduction and external financing over reinvestment and divestment contrasts with Champions’ more balanced approach, impacting its relative financial outcomes. Wynn Resorts, Limited vs. Champions: Wynn Resorts' focus on debt repayment and equity issuance resulted in an Economic Profit of 237, lower than Champions' 289. This strategic contrast highlights Wynn's emphasis on financial discipline and growth through external financing, impacting its overall TSR performance."
That's a detailed breakdown of Wynn's TSR and the capital deployment decisions they made to achieve it. The analysis then goes into detail about each of those decisions.
Another element of PivotXY's Competitive Benchmarking reporting is our segmentation feature, which sorts the target company and the other firms being analyzed into categories based on their strategic approach. Here's the Wynn segmentation chart:
From there, the report goes into detail on which decisions landed Wynn in the Chasers segment. Here's the indexed graph on Total Shareholder Return:
With each chart, a professional competitive benchmarking report will typically include a summary that highlights relevant insights from the analysis.
The report should continue to break down the data further to analyze the company's performance compared to the other companies. It should parse how the companies acquire and deploy funds, such as in this chart:
That shows the decisions Wynn made with its cash. An expert competitive benchmarking analysis should compare that to the other companies being studied, including an overall average and the top companies. Here are examples of both:
By comparing these charts, corporate leaders can see how investors reacted to the different strategies.
Another important financial metric for competitive benchmarking is Economic Profit, which is a company’s earnings after deducting both operational expenses (explicit costs) and opportunity costs (implicit costs). Here's a chart of where Wynn placed in this analysis:
One key element of a professional competitive benchmarking analysis is selectivity: The analysts must distill an overwhelming amount of data into a concise report that shows only what's relevant. Many reports fall short on this score, offering pages and pages of analysis without singling out the details that matter.
Competitive benchmarking versus competitor analysis
Competitor analysis is a process that focuses specifically on a company’s competitors to evaluate their strategies to determine their strengths and weaknesses. This typically includes analyzing their products, services, sales, marketing strategies, financial performance, and more.
Competitive benchmarking often goes beyond specific competitors to compare a company to industry leaders or other leading companies. Through benchmarking, a company can gain valuable strategic insights into best practices by evaluating successful companies in different sectors, not just their direct or indirect competitors.
FAQ: Competitive benchmarking for optimizing share price
What is competitive benchmarking?
Competitive benchmarking is the process of analyzing your company or business unit through detailed financial metrics and other analytics to compare it against competitors, peer companies, or industry standards. It helps companies assess the effectiveness of their strategic approach and identify areas for improvement that drive shareholder value creation.
How can competitive benchmarking optimize a company's share price?
By using competitive benchmarking, companies can compare their capital deployment decisions against those of other firms, evaluating the results to gain insights. This allows them to understand approaches other companies take toward shareholder value creation, identify performance gaps, and make informed investment decisions that drive revenue, reduce costs, and ultimately increase share price.
Which areas does competitive benchmarking focus on?
Competitive benchmarking can explore multiple domains, including:
- R&D
- Customer experience and satisfaction
- Operational efficiency
This guide, however, emphasizes market performance and shareholder value creation.
What’s the value in benchmarking against peer companies?
Benchmarking against peers helps determine how other companies' strategies differ in creating shareholder value. If others achieve a higher Total Shareholder Return (TSR), the analysis will reveal they strategic moves they’re making to do so. This critical knowledge can guide adjustments in your strategies to improve investor perception and financial performance.
What alternative uses does competitive benchmarking have for executives?
Executives may use competitive benchmarking to:
- Assess other companies for partnerships or acquisitions
- Evaluate executive performance for salary negotiations
- Inform data-driven talent acquisition
- Identify "Champion" peers using tools like PivotXY’s Segmentation
- Discover new strategic directions
These are just a few of the potential uses a creative executive might find for this type of analysis.
What are key metrics for competitive benchmarking?
Key metrics include:
- Revenue: Indicates market presence and business performance.
- EBITDA: Measures operational profitability and efficiency.
- Invested Capital: Reflects financial resources for growth.
- Economic Profit: Represents value generation beyond covering costs.
- Total Shareholder Return (TSR): Assesses shareholder value delivered.
- Sources and Uses of Cash: Offers insights on financial strategy and liquidity.
What are some best practices for conducting competitive benchmarking?
- Identify key business goals: Determine study focus areas like market share or operational efficiency.
- Select relevant competitors: Choose direct or indirect competitors or peer companies.
- Set performance indicators (KPIs): Establish clear metrics.
- Gather reliable data: Use trusted public sources.
- Utilize benchmarking tools: Leverage technology for research efficiency.
- Assess competitor performance: Determine competitors’ comparative performance.
- Develop actionable strategies: Refine strategic choices using insights.
- Set improvement goals: Define goals to enhance market performance.
- Regularly update the analysis: Redo studies periodically as market conditions change.
How does competitive benchmarking differ from competitor analysis?
Competitor analysis focuses specifically on evaluating competitors’ strategies, strengths, and weaknesses. In contrast, competitive benchmarking extends beyond direct competitors by comparing a company to industry leaders or other successful firms across different sectors to gain broader strategic insights.
A solution that provides thorough, accurate competitive benchmarking in minutes
An effective market performance competitive benchmarking study helps companies stay competitive by accessing data-driven insights. The key is consistent monitoring, adapting strategies, and leveraging innovation to maintain a strong market position.
PivotXY’s Competitive Benchmarking module generates relevant competitive benchmarking analyses in minutes to inform every corporate strategy session, every board meeting, and every talent acquisition interview. To explore how PivotXY can equip your leadership team with expert insights, schedule a demo or request a free report.