Some of the greatest business breakthroughs happen when ideas or best practices are borrowed from one industry and applied to another completely different industry. For example, FedEx borrowed the spoke-and-wheel business model from the Federal Reserve banking system. This can also be applied to the financial industry. For example, you could borrow Xerox's comeback strategy to help improve your personal finances.
In the 1970s, Xerox dominated the copying market, controlling more than 80 percent of the market. However by the 1980s, Xerox's dominance was being challenged by intense competition from U.S. and Japanese companies. New entrants like Ricoh and Canon were consolidating their positions and gaining a lot of transaction in the lower-end market and in niche segments. By 1984, Xerox' share in copier market plummeted to just 17 percent.
David T. Kearns became the CEO of Xerox in 1982 and started to focus on quality control. Kearns immediately implemented a benchmarking campaign to regain market share. Through benchmarking, Xerox learned that it took twice as long to bring a product to market and had three times the design costs than its competitors. As a result, Xerox started finding ways to reduce its manufacturing costs.
Xerox went on to become one of the best examples of successful implementation of benchmarking. While family business owners may already be using benchmarks in their business management, very few are using the strategy for their wealth management. For example, benchmarking can serve as an invaluable tool to determine if you are receiving an acceptable rate of return on your investments.
Just like Xerox, family business owners may choose to benchmark a few different things. On the first level, a comparison can be made between the returns needed to achieve a goal and the returns actually achieved. You see, there is no reason to take additional risk and chase returns if it is not needed to achieve an owner's financial goals. This type of analysis can show the owner the progress being made and where changes need to be made.
At the next level, the family business owner can compare the overall portfolio returns to a suitable underlying benchmark. One possibility is to compare the returns and volatility of the portfolio to a similar portfolio of indexes. An index is a small sample of a category that is representative of the whole, it represents the average of the whole. A simplified hypothetical example is that if we have a portfolio of 50 percent bonds and 50 percent stocks we could compare the returns and risk to a portfolio consisting of 50 percent of Lehman Aggregate Bond Index and 50 percent to the Russell 3000 Index.
An additional evaluation can be made by benchmarking the volatility and returns of individual investments in the portfolio. Not only could comparisons be made to indexes, but also to category averages. An appropriate goal would be to have investments that are in the top 50 percentile of their class and beating the relevant indexes over some meaningful time frame.
Comparisons of this nature will shed some light as to whether a particular investment should continue to have a place in the account. This will lead to more accurate decisions about investments and portfolios. To conclude, family business owners should enlist the help of their advisors in developing a benchmarking strategy for their portfolios.
In the 1970s, Xerox dominated the copying market, controlling more than 80 percent of the market. However by the 1980s, Xerox's dominance was being challenged by intense competition from U.S. and Japanese companies. New entrants like Ricoh and Canon were consolidating their positions and gaining a lot of transaction in the lower-end market and in niche segments. By 1984, Xerox' share in copier market plummeted to just 17 percent.
David T. Kearns became the CEO of Xerox in 1982 and started to focus on quality control. Kearns immediately implemented a benchmarking campaign to regain market share. Through benchmarking, Xerox learned that it took twice as long to bring a product to market and had three times the design costs than its competitors. As a result, Xerox started finding ways to reduce its manufacturing costs.
Xerox went on to become one of the best examples of successful implementation of benchmarking. While family business owners may already be using benchmarks in their business management, very few are using the strategy for their wealth management. For example, benchmarking can serve as an invaluable tool to determine if you are receiving an acceptable rate of return on your investments.
Just like Xerox, family business owners may choose to benchmark a few different things. On the first level, a comparison can be made between the returns needed to achieve a goal and the returns actually achieved. You see, there is no reason to take additional risk and chase returns if it is not needed to achieve an owner's financial goals. This type of analysis can show the owner the progress being made and where changes need to be made.
At the next level, the family business owner can compare the overall portfolio returns to a suitable underlying benchmark. One possibility is to compare the returns and volatility of the portfolio to a similar portfolio of indexes. An index is a small sample of a category that is representative of the whole, it represents the average of the whole. A simplified hypothetical example is that if we have a portfolio of 50 percent bonds and 50 percent stocks we could compare the returns and risk to a portfolio consisting of 50 percent of Lehman Aggregate Bond Index and 50 percent to the Russell 3000 Index.
An additional evaluation can be made by benchmarking the volatility and returns of individual investments in the portfolio. Not only could comparisons be made to indexes, but also to category averages. An appropriate goal would be to have investments that are in the top 50 percentile of their class and beating the relevant indexes over some meaningful time frame.
Comparisons of this nature will shed some light as to whether a particular investment should continue to have a place in the account. This will lead to more accurate decisions about investments and portfolios. To conclude, family business owners should enlist the help of their advisors in developing a benchmarking strategy for their portfolios.
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