Benchmarking firm performance

Abstract

PurposeThe aim of the paper is to provide a framework for benchmarking firm performance (profitability) using panel data. Further, to illustrate how the estimation results can be used for simulation (what if?) exercises.Design/methodology/approachThe authors apply the econometric techniques used in panel data to estimate profit functions, thereby enabling us to compute measures of firm efficiencies which can subsequently be used as benchmarking tools.FindingsThe results suggest that both large firms and those highly specialised, enjoy higher profit margins, whereas the more capital intensive a firm is, the lower is its profitability. As with previous studies there is strong evidence of the U‐shaped relationship between market share and profitability. The authors present an analysis of the distribution of firm efficiencies across industries as a whole, and by a number of industry groups.Research limitations/implicationsOnly a limited sample (with regard to the time span) of Australian firms is used. A major assumption of the procedure is that firm efficiencies are constant over time. Given the short time period used in the empirical application, this does not appear to be unrealistic.Practical implicationsThe paper provides firms with easy‐to‐use tools with which to benchmark their performance relative to other firms, conditional on their base characteristics.Originality/valueThis is the first time that this type of benchmarking exercise has been applied to firm profitability using relatively simple panel data techniques: it will be of use to market analysts, managers and shareholders alike.