Peer companies are chosen to support the case for change, usually the leaders the company wants to resemble, and the gap becomes the reason to move.
Borderline: whether this move is justified depends on the situation, and only the person in it can judge.
An example
Customers were moving orders to the most automated suppliers in the industry, and the chief executive of a brake and suspension parts maker wanted a $220 million automation program to keep up. The board had turned down large bets twice. The chief executive commissioned a benchmark against the eight most automated manufacturers, chose them deliberately, and said so on the first slide: these are the companies we will compete with in ten years. The company finished last on labor productivity in every chart. An appendix showed the same measures against two domestic competitors with similar margins, where the gap was small. An independent director asked why the main peer set was so demanding. The chief executive answered with the list of contracts lost to automated suppliers in the past two years. The board approved a first phase of $60 million, with the rest tied to results.
Why it works
Aspirational peers fill the top of the chart with companies doing what the sponsor wants, so the change looks better, and they make staying the course look like complacency, so the status quo looks worse. Defending current practice then means arguing against external data, which carries a cost of its own. The upstream choice of peers decides most of the conclusion, so a sponsor who chooses them openly and gives the reason can carry an argument that a comparison with the closest competitors would not.
The thinking behind it
Leon Festinger Leon Festinger's A Theory of Social Comparison Processes (1954) holds that people evaluate their opinions and abilities by comparing themselves with others, especially when no objective standard exists, and usually with others similar to themselves. A benchmark is a formal social comparison, and the choice of peers decides the verdict. Choosing more demanding peers than the similar ones changes how the company judges itself, which is why the clean form states the reason for the choice and shows the similar peers too.
Daniel Kahneman Prospect Theory: An Analysis of Decision under Risk (1979), by Kahneman and Tversky, shows that people judge outcomes as gains or losses relative to a reference point, and that the reference point can be moved by how a choice is described. A peer set of industry leaders makes the company's current position a shortfall to be made up, where a comparison with similar competitors would make it look satisfactory. That shift in the reference point is what makes the change look necessary.
When it fits
Sponsors who believe the company must move toward a different class of competitor, and who have the data to show the gap, are the natural users. It needs a credible source of comparative data, the standing to commission the analysis, and a real reason for the peers chosen, such as where customers are going.
How to use it well
Choose the peers for a stated reason and put that reason on the first slide.
- Show at least one comparison against the closest competitors as well, even if the gap there is smaller.
- Keep measures, time windows, and adjustments consistent across peer sets, and publish them.
- Tie the gap to something the board already worries about, such as lost contracts.
- Ask for a first phase tied to results.
Offer the underlying data to anyone who wants to rebuild the analysis. A benchmark that survives a skeptic's rebuild carries more weight than one that was never tested.
What it costs and where it backfires
Any demanding comparison invites the obvious question of why these peers, and a sponsor who cannot answer it loses the room. A demanding peer set also sets a bar you will be measured against later. Disclosure is the boundary: hiding the reason the peers were chosen, leaving out comparators someone asks for, or adjusting the data to widen the gap is concealment or falsification.
When it is used on you
Read the peer-set rationale before the gap analysis. Ask who chose the peers, on what criteria, and which close competitors were left out. Have someone rebuild the analysis with an alternative peer set from the same data, and bring both versions to the decision.