Performance Targets and External Benchmarking: Exploring the Process of Bringing the Market Inside the Firm

Research on relative performance measures, transfer pricing, beyond budgeting initiatives, target costing, piece rates systems and value based management has for decades underlined the importance of external benchmarking in performance management. Research conceptualises external benchmarking as a market mechanism that can be brought inside the firm to provide incentives for continuous improvement and the development of competitive advances. However, whereas extant research primarily has focused on the importance and effects of using external benchmarks, less attention has been directed towards the conditions upon which the market mechanism is performing within organizations. This paper aims to contribute to research by providing more insight to the conditions for the use of external benchmarking as an element in performance management in organizations. Our study explores a particular type of external benchmarks - external suppliers’ bids on sub-components (which can be produced either in-house or by the external suppliers) in a Danish manufacturing firm – and we study the conditions that determine the success of the mechanism in the manufacturing firm which include issues related to the calculation of the ‘inside’ costs of the sub-component, technical specifications of the product, opportunistic behavior from the suppliers and cognitive limitation. These are all aspects that easily can dismantle the market mechanism and make it counter-productive in the organization. Thus, by directing more attention towards the conditions for the use of the external benchmarks we provide more insights to some of the issues and challenges that are related to using this mechanism for performance management and advance competitiveness in organizations.