The Halo Effect: . . . and the Eight Other Business Delusions That Deceive Managers Paperback – June 17, 2014

A BRIEF BACKGROUNDCONSULTING FIRMS HAVE THEIR PLACE IN THE BUSINESS WORLD. These organizations abound with brainpower armed with advanced academic degrees. That's wonderful. Most of the time, these firms do a great job of providing insightful answers to problems that bedevil management. When management is too close to the trees to be able to objectively evaluate the challenges confronting them, consultants can be a big help.WHAT'S THE CONNECTION? "Good to Great" and its companion follow-up best-seller, "Built to Last," were written by consultants. Mr. Jim Collins, a former McKinsey consultant, authored this singlehandedly and, for the second, co-authored it with Mr. Porras.NOW THAT YOU KNOW...IN "The Halo Effect," it's author, Professor Phil Rosenzweig held "Good to Great" and "Built to Last" as the primary subjects of his argument about the "halo effect."THE GOOD PROFESSOR points out that both tomes used hindsight to unearth the success factors that made the companies in their respective lists such standouts. The problem with that approach, Rosenzweig points out, is that hindsight--as the saying goes--is 20/20.TAKE TWO BOYS who grow up in the same village. One becomes the company president while the other never rises beyond the rank of a junior manager. From the vantage point of the villagers, could they have foreseen who was going to become what? Maybe but probably not. On the other hand, if that question was tackled by starting from the present and then having their careers retraced back to their youth, the factors that made them into what they are can be easily discovered.THAT'S THE FALLACY inherent in basing analysis on hindsight. You'll always come up with the answers.ARE THEY THE CORRECT ANSWERS? Not necessarily. Assume, for example, that the president rose through the financial ranks of the company. Does the fact that he graduated with an accounting degree constitute a valid success factor? Of course not. If that accounting degree was present in the biographies of 99 other company presidents, does that now make it a valid success factor? I still think not. And yet that's how the authors of both books presented their case. They used an expanded sample population and retraced the path of each company that made it to each book's list. They then isolated the factors that appeared in every company's path. Aha!, they said. These are the common factors that propelled these companies into our list. Now, they stated, we know what works. From that, the authors proceeded to make broad extrapolations about how the reader might use these factors to make their own companies successful.I DID WHAT THE PROFESSOR DID. I checked the standing of most of the companies in the first book, "Good to Great." I came up with a review of mixed results. Using the same measure that the book used, some companies were doing well, most had become average, and a few were lagging.TAKE CIRCUIT CITY, FOR INSTANCE. Back in March 2007, less than five and a half years after it became "great," Circuit City was in doo-doo. Here's a quote from The Motley Fool:1. Nice going, Circuit City (NYSE: CC). You may have just axed some of your top store associates -- and deflated the aspirations of the rest.2. The consumer-electronics superstore's move to fire some of its pricier employees makes sense on the surface. The company announced that it was letting go 3,400 unit-level associates who were earning salaries well above the market average. They will be replaced by more nominally salaried hires.3. So make a note to call your slacker nephew and let him know that Circuit City is hiring. But am I the only one worried about the implications here? Nobody gets their pay bumped higher because they're incompetent. Whether they're seasoned associates who know the stores inside out, or employees whose hard work has helped them get aggressively promoted, they're paid well for a reason. How many high-def DVD players will you be able to sell with that green associate who doesn't know the difference between Blu-ray and HD-DVD?4. If I can make the obvious joke, you're a real firedog, Circuit City. It's not just that you're letting go what may be some of your productive associates. What kind of message does this send to your remaining hires? Don't overachieve. Lay low. Do just enough to stay with the pack.5. I'm already dreading my next trip to Circuit City, when I ask for help and everyone runs the other way, as if I just pulled the pin on a grenade.6. To be fair, Circuit City isn't just whittling away on the front line. It's also eliminating about 130 corporate jobs by outsourcing its IT infrastructure needs to IBM (NYSE: IBM). Last month, it announced a regional-level realignment that also trimmed some fat.7. I get it, C.C. Consumer electronics isn't always a cakewalk. Best Buy (NYSE: BBY) is eating your lunch, and now companies like Wal-Mart (NYSE: WMT) and even Home Depot (NYSE: HD) are making an aggressive push in this niche. You have to keep your cost structure in line.8. But do you really know what you're doing? You just handed over 3,401 pink slips at the store level. Yes, I said 3,401. You're canning 3,400 store associates, but you're also handing morale its walking papers.[...]WHAT HAPPENED? After all, Publishers Weekly mentioned Circuit City in its editorial review of "Good to Great":To find the keys to greatness, Collins's 21-person research team (at his management research firm) read and coded 6,000 articles, generated more than 2,000 pages of interview transcripts and created 384 megabytes of computer data in a five-year project. That Collins is able to distill the findings into a cogent, well-argued and instructive guide is a testament to his writing skills. After establishing a definition of a good-to-great transition that involves a 10-year fallow period followed by 15 years of increased profits, Collins's crew combed through every company that has made the Fortune 500 (approximately 1,400) and found 11 that met their criteria, including Walgreens, Kimberly Clark and Circuit City. At the heart of the findings about these companies' stellar successes is what Collins calls the Hedgehog Concept, a product or service that leads a company to outshine all worldwide competitors, that drives a company's economic engine and that a company is passionate about.[...]AN EVEN EASIER WAY to check the validity of these so-called success factors is to compare the list in both books. Surely a company that had transitioned from good to great would stay great enough to ensure that it was built to last. Right?WRONG.I HAVE TO AGREE WITH THE PROFESSOR. There is no success formula embodied in the advice proffered by the book. Those nuggets of advice are misleading. The advice is misleading because their source--the research results--are flawed. The research results are flawed because the research assumption is flawed. What is that assumption? It differs slightly for these two books but it could be roughly stated as such: "Isolate the common factors behind the success of these companies--the ones that made it to our list. Extrapolate the lessons from those few common factors and write a best-seller." Or two.AND THAT'S EXACTLY WHAT HE/THEY DID!SO, YOU MIGHT ASK, after tearing down those two modern-day bibles of business management, what's left? What does "The Halo Effect" think of success formulas? What about everybody's objective, that elusive thing called SUCCESS? Well, you have to read that for yourself but the professor did remind me of something that's overlooked too often and that's the fact that success is relative.I'VE READ THE TWO BS BOOKS and I'm certain the reader will learn from and enjoy each one. However, after reading "The Halo Effect" (and agreeing with it), I know now that neither "Good to Great" nor "Built to Last" reveal any good, great, or everlasting secrets of business success.

Many business books and articles have been written about what Phil Rosenzweig calls “the mother of all business questions… What leads to high performance?” This book explains why much of this analysis is “riddled with errors.”Using the examples of Cisco, ABB, and others, the author demonstrates the phenomenon. When times were good—strong revenue growth and a soaring stock price—these companies were praised for their exemplary strategy, culture, and CEO. When financial performance fell, the same strategy, culture, and CEO were ripped apart as severely flawed.Why does this happen? Because we love stories. “As long as Cisco was growing and profitable and setting records for its share price, managers and journalists and professors inferred that it had a wonderful ability to listen to its customers, a cohesive culture, and a brilliant strategy. And when the bubble burst, observers were quick to make the opposite attribution. It all made sense. It told a coherent story.”“Yet there’s a bit more to it. Our desire to tell stories, to provide a coherent direction to events, may also cause us to see trends that do not exist or infer causes incorrectly. We may ignore facts because they don’t fit into our story.”How does this happen? Introducing the Halo Effect. “During World War I, an American psychologist named Edward Thorndike was conducting research into the ways that superiors rate their subordinates. In one study, he asked army officers to rate their soldiers on a variety of features: intelligence, physique, leadership, character, and so on. He was struck by the results. Some men were thought to be ‘superior soldiers’ and were rated highly at just about everything, while others were thought to be subpar across the board… Thorndike called it the Halo Effect.”The Halo Effect is “a tendency to make inferences about specific traits on the basis of a general impression. It’s difficult for most people to independently measure separate features; there’s a common tendency to blend them together. The Halo Effect is a way for the mind to create and maintain a coherent and consistent picture to reduce cognitive dissonance… It’s also a heuristic, a sort of rule of thumb that people use to make guesses about things that are hard to assess directly.”“Fortune claims that the World’s Most Admired Company survey is ‘the definitive report card on corporate reputations.’ … For all the appearance of rigorous research—thousands of executives providing responses to nine separate questions, which are then combined for an overall ranking—there’s a serious Halo Effect. Respondents may be asked nine questions, but it’s unlikely that they have nine different opinions about the company. More likely is that one or two general impressions are expressed nine times. Moreover, the most important opinion is likely to be based on overall financial performance. Look at any company with healthy revenues and strong profits, and it’s likely that I’ll infer it has good management, high quality products, and more… Two different studies showed that a company’s financial performance explained between 42 and 53 percent of the variance of the overall rating.”“So many of the things that we—managers, journalists, professors, and consultants—commonly think contribute to company performance are often attributions based on performance.”This leads us to the Delusion of Correlation and Causality. “If we want to test whether customer orientation leads to high performance, the last thing we should do is ask managers: ‘How customer oriented is this company?’ We’re likely to get an attribution based on performance. To have any validity at all, we need to rely on measures that are independent of performance.”“But suppose we look at a measure that is not tainted by Halos—say the rate of employee turnover—and we find a high correlation with performance. Now the challenge is to untangle the direction of causality… As long as we gather data at one point in time—cross-sectionally—we won’t know.”“One way to improve our ability to explain causality is to gather data at different points of time so that the impact of one variable on some subsequent outcome can be more clearly isolated. This approach, called, longitudinal design, is more time-consuming and expensive to carry out, but it stands a better chance of avoiding mistaken inferences from simple correlation.”Next, there’s the Delusion of Absolute Performance. “Companies are often described as succeeding or failing on the merits of their actions alone, as if performance were absolute. But in a competitive market economy, the performance of one company is always affected by the performance of other companies.” It’s all relative.Kmart is a good illustration of this point. Kmart improved inventory turns from 3.45 in 1994 to 4.56 in 2002, a 32% improvement. Impressive, right? “Over the same eight years, Wal-Mart’s inventory turns went from 5.14 all the way to 8.08, up 63 percent. Wal-Mart had faster turns at the start of the eight-year period than Kmart had at the end. Kmart got better in absolute terms and yet fell further behind at the same time—and the gap between the two retailers was growing ever wider.”“The Delusion of Organizational Physics implies that the business world offers predictable results, that it conforms to precise laws. It fuels a belief that a given set of actions can work in all settings and ignores the need to adapt to different conditions: intensity of competition, rate of growth, size of competitors, market concentration, regulation, global dispersion of activities, and much more. Claiming that one approach can work everywhere, at all times, for all companies, has a simplistic appeal but doesn’t do justice to the complexities of business… Execution, like strategy, doesn’t lend itself to predictable cause-and-effect relationships.”The Delusion of Lasting Success: “In a free market system, high profits tend to decline thanks to what one economist called ‘the erosive forces of imitation, competition, and expropriation.’ Rivals copy the leader’s winning ways, new companies enter the market, consulting companies spread best practices, and employees move from company to company.”The book also includes: the Delusion of Single Explanations, the Delusion of Connecting the Winning Dots, the Delusion of Rigorous Research, and the Delusion of the Wrong End of the Stick.Rosenzweig hopes this book will “help managers think for themselves.”

For anyone who's had to sit through a company's decision that "we're going to do what those companies in 'Good to Great' or 'In Search of Excellence' did only to see results fall flat, this book is a welcome dae of reality. The writer points out the logical fallacies and often flat out useless attempts of many experts to create a template for business success. This writer doesn't purport to have all the answers but he exposed the methodological flaws of the corporate gurus.

As a business coach and advisor, I read a lot of business books looking for extra ideas on how to improve businesses.This book provides a major warning that recipes for success in these books are often misleading. It's particularly critical of best sellers like "In Search Of Excellence", "Built To Last" and "Good To Great" for their research methods and extravagant claims.The problem is the title of the book - the halo effect. It seems that generally people assess successful, growing, profitable companies as having a wide range of virtues while struggling companies must be weak at many things. It sounds sensible but problems occur when a good company becomes bad, despite carrying on with all the virtues.The book correctly identifies as a big issue that companies don't operate in a vacuum. A company can improve in many different ways but still fall behind an existing competitor or new entrant to the market. It then goes on to talk about the importance of both strategy and execution. Getting one right isn't enough and strategic choices are inevitably uncertain. I welcome this focus on strategy although the development of that body of knowledge isn't without its difficulties.The book also briefly looks at something that is the focus of Goldrat's Theory Of Constraints. At any time, there is one big leverage point - the constraint - and improvements away from that area will have a disappointing impact.The author then goes on to look at three successful executive who do things the right way because of their process of recognising opportunities and the associated risks.I can understand why people give the book a five star rating. I haven't because I'd have liked to have seen more discussion on doing the right things in the right way. Much more time is spent knocking down than building up. I feel this might give people the wrong impression. There is plenty to learn from reading business books and they can inspire people to question what they are doing and what they need to be doing in the future. Many books are bought and not even started, probably more are started and not finished.I believe you can learn from what people have done to create business success and what others have done or not done that leads to failure. You don't have to keep reinventing the wheel. However the right things to do are dependent on your own situation. Just like in medicine, applying the right cure to the right situation is likely to work, the wrong prescription to a problem won't solve it and may make things worse.Paul Simister, a business coach who helps business owners who are stuck, get unstuck.

Struggling to build a significant business in a competitive world, I try and gather ideas on best practice from talking to people I respect, from seminars and training courses and from books. But unforeseen events in the external environment, for example, the BSE crisis in 1996, or competitor action, or a fire burning down my warehouse, have caused dramatic hiccups in my achievements. The business classic books which strongly influence modern business thought (In Search of Excellence, Built to Last, Good to Great) do not adequately account for such factors.So Rosenzweig's scepticism of the established approach, of describing the attributes of successful companies as a primary means of answering the question why some companies prosper while others fail, is convincing. He argues the case well for scepticism of a number of common delusions, the most basic of them all being the Halo Effect - a natural human tendency to make attributions based on cues we think are reliable. But beauty is in the eye of the beholder. When times were good ABB was a New Age wonder with a great corporate culture, a futuristic organisation and a hero at the helm. When it collapsed ABB was remembered as having a complacent culture, a chaotic organisation and an arrogant leader. ABB had not changed much but the conventional wisdom changed rapidly.With a wide assortment of specific references to individual companies and people, which maintains the interest in the book, he takes us through the delusions of correlations and causality, single explanations, connecting winning dots, rigorous research and lasting success.He credits many of the classic business books and deluge of autobiographies of iconic business leaders as being good stories but claims as science they are deeply flawed. They focus attention on the wrong priorities and lead managers in dangerous directions.Rosenzweig is strong on sceptiscm. But that is the easy bit. What does lead to high performance?His answers are firstly the risky business of strategic choice - fundamental decisions that set a company apart from its rivals. Strategic decisions are inherently risky - the risk of customer appeal and acceptance, of competitor reaction, of technological change. And it is the assessment and acceptance of this risk with the consequent possibility of failure which sets companies apart. Many fail and the fear of failure is one of the strongest motivators.And secondly the uncertainties of execution. Flawless execution is, of course, applauded in many books. But Rosenzweig argues it is not the importance of flawless execution across the board, it is the identification of the few elements of execution that are most important to deliver a chosen strategy.The thrust of the book certainly resonates with my business experience, if underestimating the importance of time, effort and imagination in formulating and constantly revisiting strategic choices. But it is an engrossing read. If it helps you think for yourself then it must be a worthwhile read.

Do not worry about what the Nine Delusions are that the author uses to develop his thesis - they largely overlap and interlock and as you read the book will be seen as a powerful continuum. Why you should read this book is because bottom dollar like me you will have read one of the prior highly successful tomes that is one of the key targets for his thesis.Whether it is "In search of excellence", "Built to Last" or "Good to great", by the end of this book you will I reckon have a more questioning attitude to such works (if not 100% cycnical) because this book challenges many preconceptions and makes you think and look afresh at how one will ever achieve success in business management.The theme is not just "cutting tall poppies" down to size, but more basically that nothing is as simple or easy as many have claimed in writing such books. His chapter on why "strategy" and "execution" are actually so hard to do well, is alone worth the price of the book for me.The core argument of the "delusions" being based on too much retropsective story telling is bought full circle by the three examples at the end of companies and business leaders who have in the authors opinion sought to face reality and do not underestimate the uncertainty that faces everyone.A highly recommended book since it makes its points thoroughly and cogently and as such comes over as thoughtful and provoking of fresh views - as such it is a welcome change from too many of the best selling tirade type books that have come to represent both business but also political and history bestsellers recently. Definitely a book that is long overdue and one hopes will be succesful plus lead to more realism in such future writing.

This is an important book berating the media fixation of attributing success characteristics to business leaders when there is little or no supporting evidence.Rozenzeig, methodically takes apart both the media commentators and business book authors who talk-up certain 'great' features of successful leaders and then quote the very same features as bad if those leaders encounter a downturn in fortune.The litmus test Rozenzweig applies is simple, Do these same writers PREDICT either the success or failure of important business leaders? The evidence shows they do not, they simply create a story to explain the rise or demise of leaders in an effort to have SOMETHING to say about it in order to maintain their 'expert' status.Rozwenzweig clearly demonstrates that all experts can be fooled by randomness especially when its driven by the need to produce a plausible story for a publication deadline or justify a new consulting method to create sales.This book has serious implications for all business media writers and business book authors, but more importantly for the rest of us who read the statements telling us what happened, we must now take what they say with a bucket of salt and look beyond the story for the evidence.The book is well written,informative and logical. Every MBA student needs to study this. This book is now compulsory reading for all my staff

I found this book interesting and the main tenet of the book compelling. Rosenzweig suggests that when organisations are doing well that the business press are keen to make the connection between current practices and the organisation's success. However, when the fortunes are reversed, the same is also true - the business press is quick to blame the downfall on current behaviour. At the time of writing (Feb 2009), this seems more true than ever. This is the so-called Halo Effect - the effect of a succeeding business casts only positive light on an organisation's behaviour.This would not be too bad, except that many academics rely heavily on the business press as the raw data for their research. After all, it is very difficult, if not impossible, to run true scientific experiments in real life business settings. So academics rely on the business press and their own investigations (much of which are also subject to the Halo Effect) and the situation becomes self perpetuating and the Halo Effect becomes even greater.The main tenet of this book is to investigate the rationale that underlie many of our most well known business textbooks (e.g. In search of excellence, Built to last, Good to great) and points out the flaws in the logic that underpin many of these books.Personally, when any business text claims to have the "checklist to success", I always take it with a pinch of salt. The science might be somewhat lacking, however, they do tell a great story (well, the better ones do!). So my faith in business books may not have been that seriously undermined, however, I did find this book a thoroughly interesting read.