External Benchmarking and Comparison Costs: Insights from a Process of Bringing the Market inside the Firm

Academics and consultants have for decades advocated for the use of market information inside organizations to increase motivation by exposing employees to the competition from the market. Only scant empirical research, however, investigates the comparison problems that arise when internal performance is compared with market performance (external benchmarking). This paper examines the comparison problems that occurred in a tender process in a Danish manufacturing company. We illustrate how distorted belief mechanisms in terms of ‘wishful thinking’ and the ‘grass is always greener fallacy’ (Elster, 2007; 2010), which work without much knowledge of how suppliers calculated the prices, to a large extent were co-constructors of the comparison problems. The paper contributes by providing more insight to the construction of comparison problems in practice. Furthermore, this insight adds to extant research on social comparison, which argues that proximity, interaction and information sharing increase comparison costs. Finally, we illustrate that the comparison problems were embedded in ‘harder’ elements such as accounting regulation, formal contracts and the choice of supplier strategy. Extant research focuses on ‘soft’ relations such as sociality and identity in understanding comparison costs.