The Halo Effect by Phil Rosenzweig
The thesis of this book is to challenge the reader to think critically about business and more specifically about how to define high performance and why this is so difficult to do given the tendency for pomposity the authors of many business books exhibit in the distillation and identification of deep and profound secrets of a company's success. Editors of major business magazines and newspapers add hype and rationalization of performance without much understanding of the real underlying factors.
Take the story of Cisco Systems. During the internet bubble, Cisco made 73 acquisitions and grew it's revenues, profits and market capitalization to record levels- for a brief moment in 2000, Cisco was the number one company in the world in market capitalization at over $550 billion. Cisco and in particular its' CEO, John Chambers was lauded as being just about perfect in every way.
"It could close it's books in a day and made perfect financial forecasts. It was an acquisition machine, ingesting companies and their technologies with aplomb. Cisco had flattened the corporate pyramid, outsourced capital-intensive manufacturing, and forged strategic alliances with suppliers that were supposed to eliminate inventory almost entirely. Sophisticated information systems gave its managers real-time data, allowing them to detect the slightest change in current market conditions and to forecast with precision. If anyone had the vision thing nailed for the digital era, it was supposed to be Cisco's CEO, John Chambers".
Oops, just one year after the apex of its glory, Cisco had written off $2.2 billion in inventory and lost more than $400 billion in market capitalization proving it was just as vulnerable as any other company to an economic slowdown.
Now the same business writers who were over accentuating Cisco's high performance now claimed that just about every strength that was previously lauded was now a weakness.
Cisco was not good at forecasting, had lost its customer focus and had made a mess of the scores of acquisitions made over the past ten years.
So where is the reality? Why is it so hard to define high performance?
Because it is easier to succumb to "delusions" than to do the hard work of determining what causes high performance and to admit that there many times there is no simply answer or secret formula to success.
Consider the following delusions:
1) The Halo effect delusion- so many of the things that we- managers, journalists, professors, and consultants- commonly think contribute to company performance are often attributions based on performance.
2) The Delusion of correlation and causality- take the classical assertion that satisfied employees drive superior financial performance; you can make just as strong a case, if not stronger, that superior financial performance drives employees satisfaction.
3) The delusion of single explanations- So many things contribute to company performance that it's awfully hard to know exactly how much is due to one particular factor versus another. Even if we try to control for many things outside the company, like environmental turbulence and competitive intensity and industry and firm size, we can't control for all the many different things that go on inside the company.
4) The delusion of connecting the winning dots- Only five out of thirty five companies profiled In Search of Excellence improved their performance five years after the book was published! Same result for Built To Last- only eight out of seventeen companies profiled outperformed the S&P 500 five years later. The authors simply looked for commonality among successful companies and connected the dots.
5) The delusion of rigorous research- notwithstanding the quantity of data gathered, beware of research corrupted by the Halo Effect!
6) The delusion of lasting success- We can tell ourselves that our handful of companies, selected by a rigorous and objective process, are a breed apart, somehow better than the rest (and the more rigorous the selection process appears to be, the more we can persuade ourselves these companies are somehow really better than the rest). But it's a delusion. We are kidding ourselves. If we start with the full data set and look objectively at many years of company performance, we find the dominant pattern is not one of enduring performance at all, but one of rise and fall, of growth and decline. Managing for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders. In fact the opposite is true. In the long run, the markets always win. The basic force at work in capitalism is that of competition through innovation-whether of new products or new services or new ways of doing business -(attributed to Austrian economist Joseph Schumpeter.
7) The delusion of absolute performance- diverts our attention from the fact that success and failure take place in a competitive environment- you can improve in absolute terms and still fall further behind your competitors in relative terms.
8) The delusion of the wrong end of the stick- a look at the Fox-Hedgehog parable.
9) The delusion of organizational physics- The most important questions in the business world do not lend themselves to the predictability or replicability of physics.
Business performance may actually be simpler than it is often made out to be but may also be less certain and less amenable to engineering with predictable outcomes.
Michael Porter of Harvard Business School said that company performance is driven by two things- strategy and execution. Strategy is about performing different activities from those of rival companies or performing similar activities in different ways. Execution involves critical thinking about our priorities. For our company, at this time, competing against our rivals, which of the many dimensions of execution are most important? Which are the most vital for us at this time? It is always easier to bang the drums about execution than to address fundamental questions of strategy. Both are equally important.
Take the story of Cisco Systems. During the internet bubble, Cisco made 73 acquisitions and grew it's revenues, profits and market capitalization to record levels- for a brief moment in 2000, Cisco was the number one company in the world in market capitalization at over $550 billion. Cisco and in particular its' CEO, John Chambers was lauded as being just about perfect in every way.
"It could close it's books in a day and made perfect financial forecasts. It was an acquisition machine, ingesting companies and their technologies with aplomb. Cisco had flattened the corporate pyramid, outsourced capital-intensive manufacturing, and forged strategic alliances with suppliers that were supposed to eliminate inventory almost entirely. Sophisticated information systems gave its managers real-time data, allowing them to detect the slightest change in current market conditions and to forecast with precision. If anyone had the vision thing nailed for the digital era, it was supposed to be Cisco's CEO, John Chambers".
Oops, just one year after the apex of its glory, Cisco had written off $2.2 billion in inventory and lost more than $400 billion in market capitalization proving it was just as vulnerable as any other company to an economic slowdown.
Now the same business writers who were over accentuating Cisco's high performance now claimed that just about every strength that was previously lauded was now a weakness.
Cisco was not good at forecasting, had lost its customer focus and had made a mess of the scores of acquisitions made over the past ten years.
So where is the reality? Why is it so hard to define high performance?
Because it is easier to succumb to "delusions" than to do the hard work of determining what causes high performance and to admit that there many times there is no simply answer or secret formula to success.
Consider the following delusions:
1) The Halo effect delusion- so many of the things that we- managers, journalists, professors, and consultants- commonly think contribute to company performance are often attributions based on performance.
2) The Delusion of correlation and causality- take the classical assertion that satisfied employees drive superior financial performance; you can make just as strong a case, if not stronger, that superior financial performance drives employees satisfaction.
3) The delusion of single explanations- So many things contribute to company performance that it's awfully hard to know exactly how much is due to one particular factor versus another. Even if we try to control for many things outside the company, like environmental turbulence and competitive intensity and industry and firm size, we can't control for all the many different things that go on inside the company.
4) The delusion of connecting the winning dots- Only five out of thirty five companies profiled In Search of Excellence improved their performance five years after the book was published! Same result for Built To Last- only eight out of seventeen companies profiled outperformed the S&P 500 five years later. The authors simply looked for commonality among successful companies and connected the dots.
5) The delusion of rigorous research- notwithstanding the quantity of data gathered, beware of research corrupted by the Halo Effect!
6) The delusion of lasting success- We can tell ourselves that our handful of companies, selected by a rigorous and objective process, are a breed apart, somehow better than the rest (and the more rigorous the selection process appears to be, the more we can persuade ourselves these companies are somehow really better than the rest). But it's a delusion. We are kidding ourselves. If we start with the full data set and look objectively at many years of company performance, we find the dominant pattern is not one of enduring performance at all, but one of rise and fall, of growth and decline. Managing for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders. In fact the opposite is true. In the long run, the markets always win. The basic force at work in capitalism is that of competition through innovation-whether of new products or new services or new ways of doing business -(attributed to Austrian economist Joseph Schumpeter.
7) The delusion of absolute performance- diverts our attention from the fact that success and failure take place in a competitive environment- you can improve in absolute terms and still fall further behind your competitors in relative terms.
8) The delusion of the wrong end of the stick- a look at the Fox-Hedgehog parable.
9) The delusion of organizational physics- The most important questions in the business world do not lend themselves to the predictability or replicability of physics.
Business performance may actually be simpler than it is often made out to be but may also be less certain and less amenable to engineering with predictable outcomes.
Michael Porter of Harvard Business School said that company performance is driven by two things- strategy and execution. Strategy is about performing different activities from those of rival companies or performing similar activities in different ways. Execution involves critical thinking about our priorities. For our company, at this time, competing against our rivals, which of the many dimensions of execution are most important? Which are the most vital for us at this time? It is always easier to bang the drums about execution than to address fundamental questions of strategy. Both are equally important.
Labels: Book Review
posted by Thomas D. Harris | 5:43 PM
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