Final answer:
The process is known as benchmarking, which involves comparing a company's performance to competitors to improve performance and gross margins. Benchmarking relates to cost/benefit analysis, where sacrifices are weighed against expected gains to make informed decisions.
Step-by-step explanation:
The process of comparing one's own costs and performance to competitors to see how to improve one's own performance and gross margins is called benchmarking. This business practice involves evaluating a company's performance metrics with those of industry leaders or direct competitors. Benchmarking serves as a tool for continuous improvement in cost-efficiency and performance enhancement. It lets a company set performance goals based on the best industry standards. Often used in strategic management, benchmarking can identify areas where a company can reduce costs and optimize processes to increase its gross margins.
Benchmarking also relates to the decision-making process involving a cost/benefit analysis. This analysis involves comparing the potential sacrifices and the expected gains to assist in the decision-making process. The analysis typically presents costs, such as money, effort, and other sacrifices on one side, and benefits, such as monetary gains, time saved, experience gained, and other improvements on the other side. It's a foundational tool for assessing whether the marginal benefits of adding an extra unit of output exceed the marginal costs.
Understanding various measures of costs, such as fixed cost, marginal cost, average total cost, and average variable cost, provides insights that are essential for effective benchmarking since they allow a firm to compare its cost structures with those of its competitors.