Beyond_Best_Practice.pdf

Beyond Best Practice

S P R I N G 2 0 0 5 V O L . 4 6 N O. 3

R E P R I N T N U M B E R 4 6 3 1 1

Lynda Gratton and Sumantra Ghoshal

P l e a s e n o t e t h a t g ra y a re a s re f l e c t a r t w o rk t h a t h a s
b e e n i n t e n t i o n a l l y re m o v e d . T h e s u b s t a n t i v e c o n t e n t
o f t h e a r t i c l e a p p e a rs a s o ri g i n a l l y p u b l i s h e d .

SPRING 2005 MIT SLOAN MANAGEMENT REVIEW 49

avvy executives recognize that a company’s core

organizational and operational processes are cru-

cial to realizing its competitive potential. These organi-

zational processes integrate the goals of the business

into its employees’ day-to-day activities via routines.

Executives also know that a primary route to the devel-

opment of such processes and practices is the study of

best practice. The enterprise’s capacity to flourish

depends in part on their ability to capture and embed

best practices from their own and other companies.

Without mechanisms that facilitate the sharing of best-

practice knowledge — such as visits to exemplar com-

panies, communities of practice and the use of experts

— companies would be consigned to reliving the same

mistakes day after day. Searching for and then articu-

lating, refining and embedding best-practice ideas

brings companies in a sector to a level playing field.

Those companies that fail to adopt best-practice

processes rapidly become complacent laggards.1

But our research into high-performing companies

shows that while the search for and adoption of best-

practice processes is indeed necessary, it is not suffi-

cient. (See “About the Research,” p. 50.) Other types of

processes, which we call “signature processes,” also can be crucial. We find that a unique

bundle of signature processes combined with industry best practice ultimately enables a

company to prosper and compete.

We use signature to describe how these processes embody a company’s character and sig-

nify their idiosyncratic nature. Signature processes arise from passions and interests within

the company; by contrast, concepts of best practice arise outside the company. So while one

task of every executive is to find and adapt best practice, in a sense bringing the outside in,

an added critical task of management is to learn to identify and preserve the company’s sig-

nature processes. This added duty might be thought of as the need to bring the inside out.2

The distinction between a signature process and an industry best practice is not absolute,

however. If a company’s signature processes prove especially advantageous, they may be

imitated by other companies so often that they eventually become known as best practices.

Toyota Motors Corp.’s lean production is an example of a process that began as a signature

for the company. It espoused the values and aspirations of Toyota’s leaders and has brought

Beyond Best Practice

Many companies adopt

industry best practices

to stay competitive.

But high-performing

companies do more:

They also embrace unique

“signature processes”

that reflect their values.

Lynda Gratton and

Sumantra Ghoshal
Lynda Gratton is professor of management practice at the London Business School and a Fellow of
the Advanced Institute of Management. Contact her at [email protected]. Sumantra Ghoshal was
a professor at London Business School and a Fellow of the Advanced Institute of Management. Sadly,
Sumantra Ghoshal passed away in March 2004, while he was working on this research project.

S

50 MIT SLOAN MANAGEMENT REVIEW SPRING 2005

the company significant competitive advantage over a long

period of time. Many other companies have sought, sometimes

with limited success, to adopt the process of lean manufacturing.

In this article, we use the term signature processes to refer to

processes that have evolved internally from executives’ values and

aspirations, and the term best practice for ideas developed outside

the boundaries of a business unit or company.

The subtle but crucial differences between standard best-

practice processes and unique signature processes first became

clear in our research. We found surprising and intriguing prac-

tices and processes in many of the high-performing companies.

Here are three examples:

■ The CEO of a large, fast-moving company requires that all

members of the senior executive team meet every morning of

the workweek between 9:30 and 10:30 Greenwich Mean Time

to discuss the previous day’s events. There are about 10 mem-

bers of this team; those who are not physically present take

part via videoconferencing. The meeting is without a prior

agreed-upon agenda, instead addressing the issues uppermost

in the minds of the executive team.

■ Employees of a second multinational company are part of an

organizational modular structure that is realigned frequently.

These restructurings typically take place over the weekend.

While these realignments result in new business groups, they

leave intact many of the working relationships that take place

within the modular teams.

■ The business unit heads of a third large company are required

to spend considerable amounts of time supporting the per-

formance of their peers in other businesses, particularly those

businesses that are underperforming. A significant pro-

portion of the bonuses of the more successful business unit

heads is dependent on improved results by the underper-

forming businesses.

Each of these processes is highly idiosyncratic. We have not wit-

nessed any of them in scores of other companies we have studied

over the last decade. In fact, these processes fly in the face of what

is generally accepted as best practice. For example, best practice

suggests that the CEO’s role is to meet, perhaps on a weekly or

even monthly basis, with the executive team and proceed through

a previously agreed-upon agenda. So why tie up the whole senior

team in daily morning meetings without set agendas? Similarly,

best practice in organizational restructuring suggests that

restructurings should take place as infrequently as possible in

to create relatively stable organizational structures and

minimize confusion. So why restructure frequently? Finally, best

practice in performance management requires that managers be

responsible for what they can personally affect. So why reward

people on the basis of the performance of others who are outside

their direct line of accountability?

Yet the three companies in which these processes flourish are

not corporate laggards: Each has outperformed many competi-

tors over the last five years. Nor are they clustered in a single sec-

tor known for eccentricities, such as a creative industry or IT. The

companies in question are in retail banking, high-technology

equipment manufacturing and marketing, and oil exploration

and distribution. Nor are these processes and practices that top

executives would like to be rid of. On the contrary, executives in

each company view the practice in question as unique; its idio-

syncrasy is celebrated and seen as a key aspect of the company’s

success. The procedures in question are believed to serve as one

of the crucial links between the processes of the organization and

the vision, values and behaviors of top management. They are

imbued with energy and passion.

The morning meetings take place in the Edinburgh headquar-

ters of the Royal Bank of Scotland Group with group chief exec-

utive Fred Goodwin. Founded by royal charter in 1727, RBS was

This article is based on our case research over the last five

years into how dynamic capabilities lead to competitive

advantage. We focused on companies that had demon-

strated superior performance from 1997 to 2002, com-

pared to their peers. However, superior performance can

be a result of other factors, such as a monopoly, extensive

regulations or heavy use of patents. We chose companies

whose success was not due to those factors. We studied

eight firms and use data from three of them in this article.

We collected data in two stages for each company. First, a

broad array of secondary sources was used to create a pre-

liminary picture of the company and the industry. Next,

we conducted structured interviews with the CEO and 20

to 30 members of the company’s executive committee

and other significant staff. In addition, we interviewed

executives in different functions and at different levels,

including the operating-level managers who actually were

involved in day-to-day activities connected with the focus

area we had chosen.

Both authors were present during all interviews and

were supported by a research assistant. Ours was collabora-

tive and participative research. We engaged in discussions

with managers as competent and trusted co-researchers,

attempting to arrive at a shared interpretation of data.

Having identified the key practices, we sought to build a

historical perspective and discussed this in depth with the

executives.

About the Research

SPRING 2005 MIT SLOAN MANAGEMENT REVIEW 51

a small bank until the early 1990s, even by U.K. standards. By

2003, however, RBS had grown to become the fifth-largest bank

in the world by market capitalization, ahead of such familiar

names as Merrill Lynch, Goldman Sachs and UBS. This was facil-

itated by a spate of acquisitions, including the acquisition of Lon-

don-based National Westminster Bank Plc and Citizens Financial

Group of Rhode Island. RBS’s record organic growth from 1997

to 2002 was the best of all major banks in Europe. At the same

time, its cost-income ratio — perhaps the most widely used

measure of efficiency and productivity in the banking business

— was, at 45%, one of the lowest among comparable companies.

The frequent restructurings occur at Nokia Corp., whose

senior team is led by chairman and CEO Jorma Ollila. The com-

pany’s history stretches back more than 140 years. Until the

early 1990s, Nokia was a conglomerate with businesses as

diverse as rubber products, paper, consumer electronics and

computers. The company transformed itself during the 1990s

into a focused telecommunications business supplying telecom-

munications network equipment and systems and mobile

phones. Nokia’s performance from 1997 to 2003 was superior to

its competitors, and its brand — practically unknown a decade

earlier — has been ranked as one of the 10 most valuable

brands in the world by Interbrand Corp., a global branding

consultancy based in New York.

The “peer assist” policy exists at BP Plc, the United Kingdom’s

largest industrial enterprise, under the guidance of group chief

executive John Browne. In 1992, facing rapidly deteriorating

business results because of rising debts, rising unit costs and

falling oil prices after the Persian Gulf War, BP’s board cut the

company’s dividend and replaced the chief executive. The situa-

tion had changed dramatically by 2003. BP had successfully

acquired and integrated Amoco, Arco and Castrol, and had

achieved the lowest unit cost of operations among comparable

firms and the highest return on capital employed. It delivered

after-tax profits of more than $1 billion per month.

Why did these three highly successful companies adopt

processes that differ significantly from general views of best

practice? And, perhaps even more surprisingly, why do the exec-

utives involved believe these processes are a key part of their

company’s success?

The answers lie in the idiosyncrasy of these signature

processes and their potential to create the energy to drive high

performance. This idiosyncrasy is a direct embodiment, a “signa-

ture,” of each company’s history, values and top executive team.

The combination of values, experiences and passion enables

these idiosyncratic processes to flourish against all odds.

Adopting best-practice processes gets a company to a level

playing field. But the very nature of best practice, drawn as it is

from a common pool of industry knowledge, means that the

adopters of best practice are always susceptible to being copied

by other companies that catch up with them. In contrast, the

signature processes at these three companies are so idiosyn-

cratic and so much a part of their organizational heritage and

values that competitors would have difficulty replicating them.

These signature processes certainly look fascinating to the

observer; for example, the peer groups at BP have been widely

discussed across the multinational best-practice community.

But although they may be the stuff of exciting presentations and

intriguing book chapters, the peer-assist process is apparently

unpalatable to most companies, and we know of none that have

replicated BP’s peer groups.

Signature processes are acceptable within the companies in

which they develop because very often they have grown as the

company grows and are associated with the executive team’s

passion and values. They are part of the fabric, the way of

behaving, the “way we do things around here.” So while the task

of every executive is to find and adapt best-practice processes

from outside the organization to strengthen the company, an

added critical task of management is to be able to articulate the

company’s signature processes.

This is a difficult task. Executives need skills in developing

and encouraging best-practice and signature processes. How-

ever, much of what executives have been schooled to do in devel-

oping conventional best practice flies in the face of the creation

of signature processes. Our recommendations for creating sig-

nature processes actually reverse some of the very prescriptions

of best practice. To nurture signature-process development,

executives should rediscover their company’s heritage and

unlock the treasures that have been languishing half-forgotten

within their organization rather than search externally, as they

do for best-practice processes. Managers should become sensi-

tive to and elaborate on those processes in the company about

which people are passionate and should become more in tune

with the organization’s values and beliefs.

Why did three highly successful companies adopt processes that differ significantly from
general views of best practice? The answers lie in the idiosyncrasy of the processes.

52 MIT SLOAN MANAGEMENT REVIEW SPRING 2005

Signature processes developed internally by Nokia, RBS and

BP stand in contrast with some of their best-practice processes

based on ideas adapted from outside the organization. In all three

companies, best-practice processes and signature processes differ

in their origins, their development mechanisms and their core.

(See “Understanding Best-Practice and Signature Processes.”)

Best-Practice Origins: External Search One important best-practice
process at RBS is the bank’s approach to day-to-day management

of many of its projects. Over the last decade, its teams have devel-

oped their project management approach by an extensive external

and internal search of best practice in project management. They

have exchanged best practices across the bank, they have occasion-

ally engaged external consultants to add to their knowledge and

they have sent executives to external programs on project manage-

ment. From this sharing of external and internal knowledge, they

have developed and documented the RBS way of project manage-

ment. Project management best practice has been carefully

adapted to something more closely aligned with RBS’s business

goals and context, particularly with respect to conducting projects

with increased speed and a larger number of project teams.

This adaptation of project management best practice paid off

in the firm’s 1999 takeover of NatWest. In 2002, the RBS team

announced that the NatWest takeover had been completed and

that the 446 systems within NatWest’s IT platform had migrated

successfully to the RBS platform, which was a quarter of the size.

This was the biggest IT integration project of its kind in the

financial sector. As analysts at one firm put it, “The integration of

NatWest will become a textbook example of how to do deals.”

Best-Practice Development: Adaptation Nokia uses a strategic plan-
ning process that follows many of the elements of best practice in

strategy creation. Every six months, up to 400 people are hand-

picked from across the company and divided into teams. The

teams are asked to explore five

to 15 themes that senior execu-

tives believe are most crucial to

the company’s future. For a

two-month period, the team

members interview a wide

range of internal and external

experts. The team members

then get together for two days

to consolidate their findings

and identify any additional

information they need. At the

end of the second round of

research, the teams prepare a

report and presentation for the

executive board. The informa-

tion from these reports is incorporated into what Nokia call its

“strategy road maps,” which are then shared with key employees.

Widely held beliefs about best practice in strategy creation

suggest that the process should be both top-down and bottom-

up and should include a focus on the short term, as well as con-

sideration of longer-term challenges and scenarios. The plan

should be written down and communicated to those assigned

to implement it. In other words, the basic elements of Nokia’s

strategy creation process can be found in textbooks of business

strategy and in the practices of companies across the world.

Nokia’s strategy creation process has developed and adapted

this external understanding of best practice to the firm’s business

goals. Adaptation has taken place in two key areas, which, as in

the case of RBS, are about speed and involvement. First, the norm

of best-practice strategy creation is an annual cycle. Nokia

adapted this to a six-month cycle because of the fast cycle time of

its industry. Second, the best-practice norm for strategy creation

suggests the involvement of a relatively small group of people.

Nokia involves more than 400 people across the company, an

adaptation to the complexity of its technology, which requires

multiple technological insights.

Best-Practice Core: Shared Knowledge From Across the Sector BP
also has its share of classic best-practice processes. Take, for

example, BP’s leadership development process. Over the last two

decades, BP’s senior team systematically has identified high-

potential employees and placed them in an “Individual Develop-

ment Programme.” Many members of the current senior team,

including Browne, have come through the IDP process. IDP par-

ticipants are given access to exciting and interesting jobs and have

opportunities to develop a broad range of competencies and

extensive networks. Yet, although this leadership process is

important to BP, it is no more than a reflection of industry best

practice. The executives responsible for the leadership process

Companies need both standard best-practice techniques as well as unique signature processes,

which are developed internally. The origin, development and core of the two differ greatly.

Understanding Best-Practice and Signature Processes

Best Practice Signature Processes

Origin “Bringing the outside in”: “Bringing the inside out”:
Starts with external and internal Evolves from a company-specific
search for best-practice processes history

Development Needs careful adaptation and Needs championing by executives
alignment to the business goal
and industry context

Core Shared knowledge from across Values
the sector

SPRING 2005 MIT SLOAN MANAGEMENT REVIEW 53

frequently meet with their colleagues from other multinational

companies. They attend conferences on leadership development

and read some of the books written on the topic. BP has a lead-

ership process that delivers a constant stream of talented young

people, as it is designed to. The process is a classic one, almost

indistinguishable from leadership programs existing at other

large multinational companies.

Good companies abound with best-practice processes. RBS’s

project management process, Nokia’s strategic planning process

and BP’s leadership development process are but single exam-

ples of broad portfolios of best practice that each company has

developed. These best-practice processes are built from tools

and techniques that are valuable in any organization and are

crucial to the engine of competition. But they are not unique,

and they can be easily replicated by others. In other words, they

are not signature processes.

How Signature Processes Evolve
In our research, we have discovered that best-practice processes

and signature processes develop along rather different paths. The

origin of RBS’s project management, Nokia’s strategy maps and

BP’s leadership development are all grounded in an external and

internal search for best practice. In contrast, we found that the

origins of the signature processes — RBS’s morning meetings,

Nokia’s modular structure and BP’s peer-assist process — were

different. Each of these signature processes was firmly embedded

in the history and values of the company and the executives that

lead it. At the core of best practice is shared industry knowledge,

whether about how strategic plans are created, executives devel-

oped or projects managed. At the core of signature processes are

the values of each company.3

Signature processes are not the same as best practice. Signa-

ture processes have the potential to advance the company’s com-

petitive position beyond just a level playing field. But to harness

this potential, executives have to understand the origin, develop-

ment and core of signature processes. Managers need, in fact, to

develop a whole new way of thinking about processes. (See “How

the Signature Processes Evolved,” p. 54.)

Signature Process Origins: A Company-Specific History When execu-
tives at BP, Nokia and RBS described and mapped how their sig-

nature processes developed, the descriptions were deeply rooted

in each company’s heritage and their own beliefs and values.

Take, for example, the origin of the morning meetings at

RBS, which the senior team can trace back to the bank’s found-

ing in 1727. The bank originally was one of many regional

banks serving local citizens, in this case in the Scottish city of

Edinburgh. Banking was a gentlemanly and leisurely business in

the 18th and 19th centuries: Bankers typically met with their

team in the mornings, and the afternoons were reserved for

more leisurely pursuits. The practice of morning meetings died

out in the 1930s at most banks, victim of a faster, more dislo-

cated time. However, the practice remained at RBS and has

evolved into a signature process.

The origin of Nokia’s modular structure can be traced back to

the software technology heritage the firm began to develop in

the 1980s. At that time, Nokia’s software technology was built

from two core elements: the software mantra of reusability, and

standardization through the creation of a shared common plat-

form. Reusability is considered crucial to software development.

When programmers at Nokia built new software programs, up

to 75% of the program typically was built by reconfiguring mod-

ules of previously developed software. This sped up the develop-

ment process, reduced the cost of making new programs and

ensured that knowledge could be rapidly shared. The technolog-

ical leverage Nokia achieved by reusability and reconfiguration

depended on the programmers’ skills in slicing and sequencing

the modules of previous programming.

This competence and philosophy of reusing modules, which

began in the 1980s as an element of its technology, became the

design foundation of the modular architecture of the company

structure. In the software programs, the modular units that were

reconfigured were pieces of written software. In the company

architecture, the modular units that were reconfigured were

modular teams of people with similar competencies and skills.

In the same way that modular reconfigurations ensured that

valuable software was not lost, the modular architecture ensured

that valuable skills, competencies and team relationships that

were held within teams of people were not lost or dissipated. In

effect, the signature process of structural modularity has its

roots in the software production process of reusability through

modularity and reconfiguration.

Nokia’s signature process of structural modularity also has its

roots in a technology philosophy of shared common platforms

The origin of the morning meetings at Royal Bank of Scotland [can be traced] back to the
bank’s founding in 1727, [when] banking was a gentlemanly and leisurely business.

54 MIT SLOAN MANAGEMENT REVIEW SPRING 2005

and standardization. Reconfiguring different modules of soft-

ware requires that each module be developed in a similar way

with a similar underlying architecture. That is, it requires a high

degree of standardization. For more than 20 years, a mindset, dis-

cipline and philosophy of reusability and standardization had

pervaded Nokia. It was well understood that only through com-

mon tools, platforms, technologies and languages could speed be

achieved. This became the backdrop to Nokia’s signature process:

the capacity to build modular corporate structure.

The quality of this signature process was tested in January

2004, when Nokia announced and then implemented what would

represent a fundamental organizational shake-up for most com-

panies. In to focus more closely on changing customer aspi-

rations, Nokia’s nine business units were restructured into four. At

the same time, in to ensure speed of innovation and pro-

duction across the globe, all the customer and market operations,

product development operations, and manufacturing, logistics

and support activities were reorganized on a companywide basis

into three horizontal business units. This organizational change

was made fully effective within one week and involved about 100

people assuming new jobs. The rest of the employees had no such

change because the modular teams to which they belonged were

simply reconfigured. The discipline, philosophy and mindset of

reconfiguration through standardization and shared platforms,

which had initially developed from the company’s technology his-

tory, ensured that Nokia could skillfully and rapidly reconfigure

its human resources to meet changing customer needs.

Signature Process Development: Championing by Executives Signa-
ture processes develop from the heritage and values of the com-

pany and are shaped by the philosophy and wisdom of the

executive team. BP’s peer-assist signature process was not con-

structed from an amalgam of best practices. Instead, it sprang

more than 15 years ago from the mind and philosophy of a young

business-unit head who passionately believed that businesses

could and should be more focused on cooperation and respect

and less on hierarchy and control. This young executive began to

put his ideas into practice over the years — initially in his own

small part of the business, then in a major business area and,

finally, when he became chief executive, across the whole of BP.

The signature process of peer assist has its heritage not in indus-

try best practice but in the values and beliefs of chief executive

Browne and his team.4 Browne explained the three core premises

of his philosophy: “that people worked better in smaller units …

that any organization of scale should create proprietary knowl-

edge through learning … that there is a very different interaction

between people of equal standing.”

Peer groups were created by breaking the monolith of the old

BP into 150 business units, which enabled people to work in

smaller units. The peer-assist process created unprecedented

opportunities for learning, as people from different parts of the

company shared ideas and knowledge. By creating an organiza-

tional structure that was more horizontal than vertical, Browne

was able to transform many previous interactions — which

would predominantly have been from senior executive to middle

manager — to interactions among peers of equal standing.

Browne’s philosophy and passion is clearly evident in BP’s

peer process. The same degree of philosophy and passion is

apparent in how Nokia’s executive team had talked about and

then designed their signature process of structural modularity,

which reflects the personal heritage, knowledge and philosophy

of the company’s senior team.

Unlike best-practice ideas adopted from outside the organization, signature processes are rooted in a company’s history and values.

How the Signature Processes Evolved

Company

Signature Process

Origin
(Company-specific)

Development
(By executive champion)

Core
(Values)

RBS

Morning meetings

Banking tradition dating back
to 1727

■ CEO is rigorous manager
■ Executive team values

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