Executive Summary – ‘The Halo Effect and the Eight Other Business Delusions That Deceive Managers’ written by Phil Rosenweig is a reality check on the business books, journals and articles we read. The author says that many of these written works suffer from delusions. If a company does well, some conclusions are drawn on the positives of the company which may not be factually correct.
Most business books or management books give us information on how business organizations become successful. The books have examples of companies that have achieved greatness and tie-up the management processes and theories to the success examples. In the book, ‘The Halo Effect…and the Eight Other Business Delusions That Deceive Managers’, Phil Rosenweig gives incisive insight into how business books and business journalism are coloured by the perception with which events are witnessed. According to the book, there is not much empirical evidence to support the success of examples, theories and processes written about in the business books or newspapers.
He has listed down 9 delusions which can cloud our perception –
He has listed down 9 delusions which can cloud our perception –
1) Halo Effect – It is the perception that if one aspect of a person, thing, organization is good, then all other aspects must be good. For example, if a company is profitable, people conclude that the leadership and processes must be competent. But without research and conclusive evidence, one cannot assume that all business measures are good. It is just like good looking people tend to earn more because people perceive good looking people to be better at work.
2) Delusion of Correlation and Causality – When there are positive results, certain factors are correlated and are assumed to be the reasons for success. There is less emphasis on the causes for the success and research on different variables that might or might not be success factors. He gives the example of LEGO whose profits grew by 15% in 2014. 60% of its sales came through new products and its expansion into different areas of business was praised. But in 2004 too, LEGO tried to expand its product line and market. But LEGO failed miserably and experts said that the company should focus on its core products! LEGO took similar actions in 2004 and 2014. It was successful once and failed another time. Analysts attributed the same reasons for the success as well as failure biased by the results.
3) Delusion of Single Explanations – Success cannot be usually attributed to one factor. Just like while choosing a life partner, you look at a combination of different things, a company achieves its goals due to a successful combination of many factors. Attributing it only to 1 factor like a great CEO or one great tactic is simplifying it too much. For example, ABB was a successful company for long. Progressive organizational culture and corporate strategy were cited as the reasons for its winning ways. But in 2005, the same reasons were given when it was on the verge of a collapse.
4) Delusion of Connecting the Winning Dots – Looking at companies that are successful and list down the factors without comparing these factors with the not so successful research can give inaccurate results.
2) Delusion of Correlation and Causality – When there are positive results, certain factors are correlated and are assumed to be the reasons for success. There is less emphasis on the causes for the success and research on different variables that might or might not be success factors. He gives the example of LEGO whose profits grew by 15% in 2014. 60% of its sales came through new products and its expansion into different areas of business was praised. But in 2004 too, LEGO tried to expand its product line and market. But LEGO failed miserably and experts said that the company should focus on its core products! LEGO took similar actions in 2004 and 2014. It was successful once and failed another time. Analysts attributed the same reasons for the success as well as failure biased by the results.
3) Delusion of Single Explanations – Success cannot be usually attributed to one factor. Just like while choosing a life partner, you look at a combination of different things, a company achieves its goals due to a successful combination of many factors. Attributing it only to 1 factor like a great CEO or one great tactic is simplifying it too much. For example, ABB was a successful company for long. Progressive organizational culture and corporate strategy were cited as the reasons for its winning ways. But in 2005, the same reasons were given when it was on the verge of a collapse.
4) Delusion of Connecting the Winning Dots – Looking at companies that are successful and list down the factors without comparing these factors with the not so successful research can give inaccurate results.
5) Delusion of Rigorous Research – Data quality and quantity are equally important when it comes to research. If one takes a wrong assumption and backs it up with some numbers, the conclusion cannot be taken seriously. Research has to be thorough and data should be properly analyzed.
6) Delusion of Lasting Success – A company cannot be successful forever on the basis of a few traits. Many external and internal factors affect a company and the company has to continually work towards achieving short term and long term success. He points out that six of sixteen top performers from 1991 to 2000 mentioned in the book, ‘Built to Last’ failed to match S&P 500 index returns during the five years after the book’s publication.
7) Delusion of Absolute Performance – A company’s performance should be measured relative to other similar companies’ performance as it is a competitive environment. Measuring the company in isolation in absolute terms is not of much use.
8) Delusion of the Wrong End of the Stick – Some companies have a focused strategy and some change their strategy based on competition, market and internal factors. Some are successful and some are not due to internal and external factors.. But this is not dependent on the type of strategy alone. For example, Intel decided to move to processors from memory chips and was successful. The Intel leadership was praised for this visionary move. But if the processors had not been successful, the leadership would have been criticised.
9) Delusion of Organisational Physics – We wrongly believe that there are certain rules or a formula for success and if a company follows the rules or the steps of the formula, it will see all its goals being achieved. But in the real world, success is not because of a few controllable factors. There are many variables that determine the success or failure of the organization.
6) Delusion of Lasting Success – A company cannot be successful forever on the basis of a few traits. Many external and internal factors affect a company and the company has to continually work towards achieving short term and long term success. He points out that six of sixteen top performers from 1991 to 2000 mentioned in the book, ‘Built to Last’ failed to match S&P 500 index returns during the five years after the book’s publication.
7) Delusion of Absolute Performance – A company’s performance should be measured relative to other similar companies’ performance as it is a competitive environment. Measuring the company in isolation in absolute terms is not of much use.
8) Delusion of the Wrong End of the Stick – Some companies have a focused strategy and some change their strategy based on competition, market and internal factors. Some are successful and some are not due to internal and external factors.. But this is not dependent on the type of strategy alone. For example, Intel decided to move to processors from memory chips and was successful. The Intel leadership was praised for this visionary move. But if the processors had not been successful, the leadership would have been criticised.
9) Delusion of Organisational Physics – We wrongly believe that there are certain rules or a formula for success and if a company follows the rules or the steps of the formula, it will see all its goals being achieved. But in the real world, success is not because of a few controllable factors. There are many variables that determine the success or failure of the organization.
When the going is good, people search for reasons and attribute the company’s success to them. When the company’s performance is downhill, the same are considered to be the cause for downfall. But when you dig deeper, many times there is not much good quality research and analysis done to get to these conclusions.
The book is quite different from the usual business books. The author believes that we should be aware of misconceptions and be rational while making important decisions for the company.
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