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Inter Firm Comparison

Inter-firm comparison implies comparison of the results of different firms inter se so that efficiencies or inefficiencies are located and profitability may be judged. Thus, inter-firm comparison is a yardstick of performance evaluation and cost-benefit analysis. The accumulated data regarding costs, prices, profits etc. of different concerns are put in the form of consolidated statements and are made available to all the member-units so that they can make a comparative assessment of their achievements and weaknesses with those of others. Such a type of comparison is possible only when uniform costing is applied by all the concerns. Thus, uniform costing is the foundation stone over which inter-firm comparison is developed and applied in a wider field.

1. Improvement in efficiency: Each member-unit can try to improve its efficiency when on comparison with other member-firms it comes to know about its weak points.

2. Effecting economy: The weaknesses or ineconomies are located and economy may be effected by eliminating them.

3. Maximizing profits: The adequacy of profits may be measured and action can be taken to improve profitability position.

The success of an inter-firm comparison scheme depends on the successful operation of uniform costing system. If uniformity cannot be brought about in costing principles and procedures, the comparison would be farce and futile. However, the following additional points should be kept in mind while implementing the scheme of inter-firm comparison:

1. Information needed: The type of information and the extent to which information is required to be collected for inter-firm comparison has to be determined. As a matter of fact much depends on the needs of management and the purpose of comparison.

2. Centre for inter-firm comparison: A central body should be created to collect and analyse data received from members of the scheme of inter-firm comparison. It will perform the following functions:

(i) Data collection from member units.

(ii) Dissemination of results of study to them;

(iii) Undertaking activities of research and development for the benefit of member units, individually and collectively;

3. Membership: The firms should seek membership of the above central body; otherwise the very purpose of its setting up shall be defeated. The centre can make inter-firm comparisons also, only when firms participate. It does not matter whether firms are of different sizes. But the mutual responsibility – responsibility of providing information on the part of member unit on one hand and responsibility of carrying out of the above mentioned tasks entrusted to the apex body.

4. Method of collection and presentation of information: The time by which and form in which the information has to be submitted by the member units are required to be determined. The various statistical techniques can be used for collection of data, its editing, classification, presentation, drawing conclusions and making interpretations.