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  Inter Firm Comparison

Introduction to Inter Firm Comparison

Inter firm comparison can be described as, "a management method through the use of which it is made feasible for an organization to compare its performance with that of the other units occupied in similar activity."

So, it is a method of evaluation and is relies upon comparison of productivity, efficiency, cost, profit like yardstick between the dissimilar business units in a same industry. There are ways presented for such comparison -

1. In which such comparison is made from freely available published information and

2. in where there is voluntary and authentic exchange of information among the dissimilar units systematically and scientifically.

The first type of comparison is a usual one and can be performed with reference to the data and information that are freely available like published industrial bulletins, annual accounts, and reports, speeches or statements prepared through the key persons in the business, financial journals, newspapers, etc. Though, it is not inert firm comparison in its accurate sense. It has first restriction of the size of the units and after that there are numbers of other limitations like lack of description of accounting policies, methods of treatments, pricing policy, techniques and methods of the productions etc.

The second comparison considered above is the point of our discussion at present. Such type of comparison assists the management to solve several problems like to locate the blocks in the operating efficiencies, the reasons of less profitability and productivity, lacunas in the organization, etc. Budgetary control and standard costing assists the management to know and to control the internal inefficiencies and wastages in the business units but the inter-firm comparison carries on further. It reveals the veil over the external uncontrollable factors and depicts the clear face of the organization in comparison along with the external world.

It focuses the position in which the unit stands in comparison to the other units. It forces the management to challenge the standards adopted and accepted through the external world. The management have to enhance the performances in the light of the current information that are gathered from efficient members of the industry.

The scheme of the internal comparison contains two phases -

a. Exchange of information and Voluntary collection concerning costs, prices, profits, productivity and complete efficiency between the participating firms busy in an identical types of the operation.

b. Making systematic inter firm comparison of the presented data for the idea of enhancement in efficiency and indicating the weaknesses and the strong points.

Certainly such type of exchange poses specific threats to the secrecy and confidential information of individual firms. Therefore there is a systematic exchange of information not in absolute figure but in processed forms such as ratios, ranks, grades, that is why the individual secrecy should be maintained and privacy of the firm should not be disturbed.

For this reason a central organization is established. A code number is given to every member unit. All units need giving of data to this organization honestly and frequently. The team of professional accountants and consultants usually used to look after the administration and processing of collected data the results out of the processed data is made presented in the form of ratio, grades, ranks in respect of code number of unit and not in any absolute form with particular name of the individual firm. The outcomes are commented and supplied to all members at request. Such outcomes are in respect of whole industry and individual units (but in code numbers). Certainly for effective execution of such type of scheme there should be uniform costing accepted through all concerned member units. Inter firm comparison with no uniform costing has no relevance and effectiveness in their true meaning.

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