Executives tend to take the value of best practices as a given. We have an abiding faith in the idea that the most direct route to improved performance is to study what successful companies do and copy them.
Best practices certainly do have their benefits. In Bordeaux, France, for instance, many wineries now follow practices recommended to them by winemaking consultants, such as micro-oxygenation, a technique that involves injecting controlled doses of oxygen into wines during fermentation. Micro-oxygenation softens tannins, which minimizes the need for long-term storage and makes wines easier to drink young. For most vintners, this leads to an improvement in quality. But there is a downside: Micro-oxygenation also makes wines taste more similar, and thereby reduces brand distinction and competitive advantage.
This phenomenon isn’t peculiar to winemaking. After following the outsourcing, franchising, and wine industries closely for the past 15 years, I’ve come to the conclusion that adopting a best practice is a great way to achieve average results. Not only that: Adopting a best practice that is wrong for your company can destroy value.
What’s Really the Best?
Managers often assume that everything a successful company does is a best practice. But many such practices aren’t actually critical to the success of the organizations that embrace them. For instance, a best-selling author once claimed that creative companies such as Pixar Animation Studios all have centralized restrooms. He argued that locating the restrooms in the middle of a company’s offices fosters creativity because it leads to chance encounters among employees from different departments who might not otherwise mix with one another. In reality, the practices that explain a company’s success are rarely that obvious. Nor does correlation prove causation: Many analysts believe that Pixar’s creativity owes more to its nurturing peer culture, which allows employees to get candid feedback on their unfinished work, than to the location of its restrooms.
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Consider also a very different example: In corporate finance, the use of stock options is often viewed as a best practice. CEOs tend to be more risk-averse than shareholders would like them to be, so the boards of many organizations now offer top executives a portion of their compensation in the form of stock options. This encourages leaders to take greater risks on behalf of shareholders because they stand to gain from increases in share price.