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The Halo Effect: ...and the Eight Other Business Delusions That Deceive Managers (Hardcover)
by Phil Rosenzweig
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Business thinking, Management, Leadership |
| Market price: ¥ 278.00
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¥ 258.00
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| MSL Pointer Review:
This serious book will change the way many people think about the pursuit of managerial excellence and, indirectly, about the criteria they use for managing (and coincidentally) investing. |
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Author: Phil Rosenzweig
Publisher: Free Press
Pub. in: February, 2007
ISBN: 0743291255
Pages: 256
Measurements: 8.5 x 5.8 x 1 inches
Origin of product: USA
Order code: BA01045
Other information: ISBN-13: 978-0743291255
Language: American English
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- Awards & Credential -
A rare good book on management thinking after In Search of Excellence and Built to Last. |
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- MSL Picks -
I read "Good to Great" and "Built to Last" some years ago because they were bestsellers and had good reviews. Although I did enjoy reading them, a voice in my head kept asking questions regarding the reliability of the research and findings. After reading "The Halo Effect", I was relieved and happy to learn that I am not the only person asking these questions.
The world of business is complicated, uncertain and unpredictable. A company's performance depends upon a variety of factors beyond the actions of its managers. These include currency shifts, competitors' actions, shifts in consumer preferences, technological advances, etc. The first delusion is the Halo Effect, the tendency to look at a company's overall performance and make attributions about its culture, leadership, values, and more. Our thinking is prejudiced by financial performance. In good times, companies are praised and their success is attributed to a variety of internal factors. In bad times, companies are criticized and these factors, which may not have changed, are attributed for the failures. The reality is more complicated and dependent upon uncertain and unpredictable factors.
An interesting section of this book is the one on the delusion of absolute performance. Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. For instance, GM today produces cars with better quality and more features than in the past. But its loss in market share is owed to a myriad of factors, including Asian competitors.
This is an excellent book because it will make you THINK. Is an oil company great if its profits soared when oil prices went up? Can the formulas used by successful companies in the 80s or 90s be applied to guarantee success today? A professor once told me that to predict future performance by analyzing past data is like driving a car forward while looking at the rear view mirror. In the appendix of this book there are tables showing the performance of the companies studied in "In Search of Excellence" and "Built to Last". It is interesting to note the difference in performance in the years before and after these studies.
The author, Phil Rosenzweig, is a professor at IMD in Switzerland and former Harvard Business School professor. He wrote this book to stimulate discussion and help managers become wiser - "more discerning, more appropriately skeptical, and less vulnerable to simplistic formulas and quick fix remedies." In my case, this book has given me a new perspective on business books.
The following is a brief summary of the nine delusions:
1. Halo Effect: Tendency to look at a company's overall performance and make attributions about its culture, leadership, values, and more.
2. Correlation and Causality: Two things may be correlated, but we may not know which one causes which.
3. Single Explanations: Many studies show that a particular factor leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.
4. Connecting the Winning Dots: If we pick a number of successful companies and search for what they have in common, we'll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.
5. Rigorous Research: If the data aren't of good quality, the data size and research methodology don't matter.
6. Lasting Success: Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.
7. Absolute Performance: Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.
8. The Wrong End of the Stick: It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.
9. Organizational Physics: Company performance doesn't obey immutable laws of nature and can't be predicted with the accuracy of science - despite our desire for certainty and order.
Overall, I found this to be an excellent book and recommend it to all managers.
(From quoting Avinash Sharma, Canada)
Target readers:
Executives, managers, entrepreneurs, management consultants, academics and MBAs.
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Phil Rosenzweig is a Professor at IMD, the International Institute for Management Development, in Lausanne, Switzerland, where he works on executive development programs for leading companies on questions of strategy and organization.
Phil has a Ph.D. from the Wharton School and was on the faculty of Harvard Business School. He has taught extensively in executive programs around the world, including the United States, Europe, Asia, the Middle East and South America.
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From Publisher
Much of our business thinking is shaped by delusions -- errors of logic and flawed judgments that distort our understanding of the real reasons for a company's performance. In a brilliant and unconventional book, Phil Rosenzweig unmasks the delusions that are commonly found in the corporate world. These delusions affect the business press and academic research, as well as many bestselling books that promise to reveal the secrets of success or the path to greatness. Such books claim to be based on rigorous thinking, but operate mainly at the level of storytelling. They provide comfort and inspiration, but deceive managers about the true nature of business success.
The most pervasive delusion is the Halo Effect. When a company's sales and profits are up, people often conclude that it has a brilliant strategy, a visionary leader, capable employees, and a superb corporate culture. When performance falters, they conclude that the strategy was wrong, the leader became arrogant, the people were complacent, and the culture was stagnant. In fact, little may have changed - company performance creates a Halo that shapes the way we perceive strategy, leadership, people, culture, and more.
Drawing on examples from leading companies including Cisco Systems, IBM, Nokia, and ABB, Rosenzweig shows how the Halo Effect is widespread, undermining the usefulness of business bestsellers from In Search of Excellence to Built to Last and Good to Great.
Rosenzweig identifies nine popular business delusions. Among them:
The Delusion of Absolute Performance: Company performance is relative to competition, not absolute, which is why following a formula can never guarantee results. Success comes from doing things better than rivals, which means that managers have to take risks.
The Delusion of Rigorous Research: Many bestselling authors praise themselves for the vast amount of data they have gathered, but forget that if the data aren't valid, it doesn't matter how much was gathered or how sophisticated the research methods appear to be. They trick the reader by substituting sizzle for substance.
The Delusion of Single Explanations: Many studies show that a particular factor, such as corporate culture or social responsibility or customer focus, leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.
In what promises to be a landmark book, The Halo Effect replaces mistaken thinking with a sharper understanding of what drives business success and failure. The Halo Effect is a guide for the thinking manager, a way to detect errors in business research and to reach a clearer understanding of what drives business success and failure.
Skeptical, brilliant, iconoclastic, and mercifully free of business jargon, Rosenzweig's book is nevertheless dead serious, making his arguments about important issues in an unsparing and direct way that will appeal to a broad business audience. For managers who want to separate fact from fiction in the world of business, The Halo Effect is essential reading -- witty, often funny, and sharply argued, it's an antidote to so much of the conventional thinking that clutters business bookshelves.
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Chapter One: How Little We Know
How little we know, how much to discover...
Who cares to define what chemistry this is?
Who cares, with your lips on mine, how ignorant bliss is?
"How Little We Know (How Little It Matters)"
Words by Carolyn Leigh, music by Philip Springer, 1956
In January 2004, after a particularly disastrous holiday season, Lego, the Danish toy company, fired its chief operating officer. No one doubted that Poul Plougmann had to go. Miserable Christmas sales were the last straw at the end of a terrible year - Lego's revenues were down by 25 percent, and the company lost $230 million for the year, the worst in its history. What went so badly wrong? Chief executive Kjeld Kirk Kristiansen, grandson of the founder, explained it simply: Lego had "strayed too far from its roots and relied too heavily on merchandising spin-offs, such as Harry Potter figures, which proved unpopular this season despite the continuing success of J. K. Rowling's books." The solution? Lego announced that it would "return to basics." Kristiansen vowed: "We will focus on profitability, especially the attractive potential of our core products."
There's nothing especially remarkable about a story like this. Every day we read about companies that are doing well and someone gets promoted, and other companies that fail and someone gets the ax. Today it's Lego, and tomorrow it'll be someone else. The beat goes on.
Now, I'm really not very interested in Lego. As Rick might have said in Casablanca, the problems of one family-owned Danish toy maker don't amount to a hill of beans in this crazy world. What does interest me is how we explain Lego's performance, because the way we think about what happened at Lego is typical of how we think about success or failure in countless other companies. We don't want to read just that Lego's sales were sharply down, we want an explanation of what happened. It can't just have been bad luck - there must have been some reason why a proud company, a fixture on toy store shelves all around the world, a faithful playtime companion to generations of children, suddenly did so badly. So how did the business press explain Lego's downfall? A few newspapers reported that Lego was hurt by the fall of the U.S. dollar against the Danish kroner, which meant that North American sales - about half of Lego's total - were worth less on Lego's books. Some reporters also noted that a strong new rival, Montreal-based Mega Bloks Inc., was chipping away at Lego's dominant market share. But these were side issues. The main explanation for Lego's losses? Lego had strayed from its core. It lost sight of its roots. That's what Lego's chief executive said, and that's what the media reported, including the Financial Times, The Wall Street Journal, the Associated Press, Bloomberg News, Nordic Business Report, Danish News Digest, Plastics News, and about a dozen others. Depending on the source, Poul Plougmann was variously sacked, fired, axed, ousted, removed, dismissed, replaced, or simply relieved of his duties. But aside from the verb used to describe his departure, not much differed among the articles. Lego's big blunder was straying from the core.
Consider for a moment the word stray. The American Heritage Dictionary of the English Language defines to stray as "to wander beyond established limits," "to deviate from a course that is regarded as right," and "to become lost." A guided missile can stray off course and hit the wrong target. A dog that runs away from home is called a stray. A company can stray, too, if it goes off on a foolish adventure, if it wanders off course, if it gets lost. Apparently that's what Lego did - it chased merchandising spin-offs when it should have been focusing on its core product line. It strayed.
Chris Zook at Bain & Company argued in his 2001 book, Profit from the Core, that companies often do best when they focus on relatively few products for a clear segment of customers. When companies get into very different products or go after very different sets of customers, the results often aren't pretty. But here's the catch: Exactly how do we define a company's core? Zook identifies no fewer than six dimensions along which a company can reasonably expand its activities - into new geographies, new channels, new customer segments, new value chain steps, new businesses, and new products. Any one of them might be a sensible step into an adjacent area, radiating out from the core and bringing success. It's also possible that any one of them might be fraught with danger and lead to disaster. So how do we know which path to take? Where does the core end and where does straying off course begin? Of course, it's easy to know in retrospect - but how can we know in advance?
Which brings us back to Lego. For years, our friends at Lego did just one thing: They manufactured and sold construction building blocks for children. That was the core. Lego made millions of blocks thanks to modern injection molding manufacturing techniques, it turned out blocks in plenty of different colors, and it made them in different shapes and sizes so they could be easily manipulated by little hands. Children could build just about anything out of Lego blocks - the only limit was their imagination. Lego was always about construction building blocks, nothing else. It built a dominant market share and had huge power over distributors and retailers. In this segment, Lego was king.
Unfortunately, nothing in the business world stands still - customer preferences change and technology marches on and new competitors appear. The market for traditional toys stagnated as kids shifted to electronic games at an earlier and earlier age. By the 1990s, simple plastic building blocks were a mature product and, in a world of video games and electronic toys, well, a bit boring. If Lego wanted to grow, or even if it wanted to stay the same size, it would have to try some new things - the question was what. Of all the things Lego might try, what would make the most sense? If Lego decided to expand into, say, financial services, that would be straying from its core. No one would be surprised if the venture flopped - "What's a toy company doing trying to become a bank? What do they know about banking?" - and the responsible manager would have been removed without a second thought. What if Lego launched a line of children's clothing? That one's not so clear - Lego knows a lot about kids, and it understands consumer products. It has plenty of power over retail distribution, just not in clothing, at least not yet. Maybe it could succeed, maybe not. What about electronic toys? Again, debatable -- maybe Lego could build on its experience in toys, and with all the growth in video games, why not? And in fact, Lego had developed Bionicle CD-ROM games and Mindstorm robots made of building blocks controlled by personal computers. But Harry Potter figures? Little toys with little plastic parts that snap together? That should be smack inside Lego's core. If Harry Potter figures are outside Lego's core, we ought to ask exactly how broad Lego's core really is. Because if Lego's core is nothing but traditional blocks, we'd have to wonder how it could possibly provide sufficient growth opportunities for a company with revenues of $2 billion.
In fact, Plougmann had been brought in from Bang & Olufsen, a Danish maker of high-quality audio equipment, in part to go after new opportunities. His hiring was seen as a coup, symptomatic of Lego's commitment to new avenues of growth after the company posted its first loss ever in 1998. Under his guidance, Lego began to branch out into electronic toys and merchandising spin-offs, and the initial response was good. At the time, no one said Lego was moving outside its core. But when sales fell sharply in 2003, Kristiansen lost patience and pulled the plug on Poul Plougmann. "We have been pursuing a strategy based on growth by focusing on totally new products. This strategy did not give the expected results." So in 2004, Lego decided to "return to its core" and "focus on profitability." Strange, because profitable growth was presumably what Lego had in mind when it went after those new opportunities in the first place.
Imagine, if we could turn the clock back to 1999, that Lego had decided to stick to plastic building blocks, nothing more. Nope, we're not interested in a tie-in to Harry Potter, which was only the most popular children's book of all time, whose first two movies racked up box office receipts of $1.2 billion worldwide. Next year's headline? Probably something like this: executive sacked as lego sales flat. And the story line? Something like this: "Danish family firm stays too long with a mature product line and misses out on growth opportunities to more innovative rivals." Analysts will comment that Lego failed to go boldly forward. It lacked vision. It was inward looking. Its managers were timid and complacent - or maybe even arrogant. |
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| View all 10 comments |
Nassim Nicholas Taleb, author of Fooled by Randomness, USA
<2007-11-05 00:00>
I was taken by this book. It destroys myths concerning the attribution of success in the management literature using potent empirical arguments. It should stand as one of the most important management books of all time, and an antidote to those bestselling books by gurus presenting false patter and naive arguments. |
John R. Kimberly, Henry Bower Professor of Entrepreneurial Studies, The Wharton School, USA
<2007-11-05 00:00>
In The Halo Effect, Phil Rosenzweig has done us all a great service by speaking the unspeakable. His iconoclastic analysis is a very welcome antidote to the kind of superficial, formulaic, and dumbed-down matter that seems to be the current stock in trade of many popular business books. It's the right book at the right time.
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John Kay, Financial Times columnist and author of Everlasting Light Bulbs, UK
<2007-11-05 00:00>
Rosenzweig doesn't only poke fun at the mass of bad writing and bad science in the management world. He explains why it is so bad - and how you can learn from it, despite the efforts of the authors. |
Publishers Weekly (MSL quote), USA
<2007-11-05 00:00>
This tart takedown of fashionable management theories is a refreshing antidote to the glut of simplistic books about achieving high performance. Rosenzweig, a veteran business manager turned professor, argues that most popular business ideas are no more than soothing platitudes that promise easy success to harried managers. Consultants, journalists and other pundits tap scientifically suspect methods to produce what he calls "business delusions": deeply flawed and widely held assumptions tainted by the "halo effect," or the need to attribute sweeping positive qualities to any company that has achieved success. Following these delusions might provide managers with a comforting story that helps them frame their actions, but it also leads them to gross simplification and to ignore the constant demands of changing technologies, markets, customers and situations. Mega-selling books like Good to Great, Rosenzweig argues, are nothing more than comforting, highbrow business fables. Unfortunately, Rosenzweig hedges his own principles for success so much that managers will find little practical use for them. His argument about the complexity of sustained achievement, and his observation that success comes down to "shrewd strategy, superb execution and good luck," may end up limiting the market for this smart and spicy critique. |
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