A benchmark is something that serves as a standard by which others may be measured or judged. This is general dictionary definition of benchmark.

In the context of business, there are no pre-set static 'standard' by which a company's performance (e.g. sales growth) can be measured. Hence, most appropriate 'standard' in most cases are the corresponding metrices of other comparative players in the same space. Let's say, company ABC is a pharmaceutical company and its sales have grown by 20% in a given year. In itself, this 20% doesn't tell you whether it's good or bad or ugly because you don't have the right benchmark to compare it against and decide. 

Now if you're told overall sales growth of the industry is 35%, your whole perspective changes and you may be tempted to look down upon the '20%' clocked by ABC because now you're comparing 20% against a benchmark.

Extending the above definition of benchmark in business context, benchmarking is the process of comparing a company's financial performance or other business metrices against appropriate benchmarks.

If it sounds so simple to you, it's not. The operative words above are 'appropriate benchmarks'. The process of benchmarking involves the following steps.

• Identifying the right Peer Group or Competitors- Again, this part may sound simple but it's not, depending on how precisely or broadly you want to match the characteristics of the peer group with those of the company whose performance you want to benchmark. In the above example, if you are content with comparing the sale performance of ABC against pharmaceutical industry as a whole, it may be rather simple. It may not be right though in all situations. If let's say ABC is primarily into medicines in Cardiology, it would make more sense to identify other players in Cardiology. This is just a small example of so many characteristics you should take into account while identifying the peer group. For example, ABC may be into bulk drug segment, not formulation. ABC may be only operating in certain geographies, not others. 
• Getting the data pertaining to the Peer Group- This step in the business performance benchmarking can also be full of challenges. Some data may be just a Google search away but even then, they may not all be together. If you have identified 20 different competitors to benchmark your business against, you may have to search for data pertaining to each of them. In fact, all data pertaining to even the same competitor may not be in the same place or format. You may have to look up Sales in one URL, Capital Employed in another URL and business segment information in yet another and then, buried peacefully in a 200 page PDF. At the end of 20 players, you have data from multiple sources in all possible formats. And this is the best case scenario in most situations. We've not even started talking about data that are beyond Google's reach.
• Collating all the gathered data- You have to get all the data from so many diverse sources and formats into one place, e.g. one Excel file.
• Standardizing and structuring the collated data- In one case, Years may be across columns and different elements (e.g. 'Sales', 'Profit') across rows. One company may have reported in EUR, another in USD. Similarly, one competitor may have expressed in millions, another in thousands.
• Combining the above data with host company's data
• Reporting and visualizing