"For all the secrets and formulas, for all the self-proclaimed thought leadership, success in business is as elusive as ever."
Forget what you know about how to create business performance. Most business books have been written with a bias toward storytelling and are full of logical problems. Phil Rosenzweig calls these issues “delusions”.
The most salient delusion is the “halo effect”. The term “halo effect” usually means the cognitive bias of attributing positive aspects to people based on other aspects that we can observe. For example, a person who is perceived to be good looking may also be perceived as more intelligent than someone less attractive.
Rosenzweig investigates this bias and eight others, in the context of reporting on business success. The halo effect here means that companies who are seen to perform well financially are often perceived to have qualities such as good communication, strong leadership and customer orientation. On the flipside, companies that don’t perform well financially are said to communicate poorly, manage badly and neglect customers. Business journalists and authors alike seem to overlook the possibility that companies that are doing most things well may fail in the market.
The eight other delusions are:
The Delusion of Correlation and Causality. When two things are correlated, we can’t always say which caused the other. Is performance caused by employee satisfaction or is it the other way around?
The Delusion of Single Explanations. Company performance cannot be attributed to a single quality, such as strong leadership.
The Delusion of Connecting the Winning Dots. If we look for what successful companies have in common, shouldn’t we also compare them to less successful companies?
The Delusion of Rigorous Research. If the data isn’t of good quality, it doesn’t matter how much we have of it.
The Delusion of Lasting Success. Almost all high-performing companies regress over time.
The Delusion of Absolute Performance. Performance is relative, not absolute. A company can improve and fall further behind competitors at the same time.
The Delusion of the Wrong End of the Stick. Following sound management principles may not necessarily lead to success.
The Delusion of Organizational Physics. Studying and predicting company performance is not a science.
The Big Idea
Challenge the Experts
"I confess, we faked the data."
Business owners, managers and executives alike hungrily devour books about company performance, hoping to learn and apply the secrets of success. However, these books are largely stories, not science.
These success stories are created by looking at companies that have performed well and then imposing a narrative as to how that happened. This is exactly how In Search of Excellence, by Tom Peters and Robert H. Waterman, was written.
Rosenzweig reveals that Peters and Waterman talked to leading academics and managers to discover what makes companies successful. Then they created a seven hundred slide deck which featured examples and stories of business practices from successful companies. While preparing to present for an executive who favoured brevity, Peters intuitively picked eight qualities of top-performing organizations. He and Waterman then used these ideas as the basis of his book.
Peters admitted that the quantitative data came after they reached their findings. The Halo Effect implies that the data itself was flawed; that it likely came from newspapers, books, interviews and magazines featuring successful companies and biased stories on what created that performance.
Though the principles described in books such as In Search of Excellence intuitively seem like sound advice, the reality is it doesn’t give us a complete or reliable roadmap to create strong performance.
Don't Accept Simple Explanations
"The improved performance we attribute to the CEO almost certainly overlaps with one or more other explanations for company success."
One study, from the University of Texas, shows that market orientation accounts for 25 percent of performance variance. Another study, out of the University of Delaware, shows that corporate social responsibility accounts for 40 percent of performance variance. Does this mean the two factors together account for 65 percent? Or is it more likely that the figures overlap? If they do overlap, by how much? These tricky questions are not often addressed when presenting studies that show how certain actions or qualities led to good performance.
Also, if a company demonstrates good corporate social responsibility, might it be reasonable to assume that they also treat their employees well? And if that is the case, how much of the success of the company should be attributed to that factor?
Many articles describe the impact that a CEO can have on the fortunes of a company. Others discuss the importance of having a collaborative culture. But how much effect does the CEO have on creating a collaborative culture? How can we separate these two factors and see how much each one helped the company to do well in the market place?
The questions posed here are not answered in articles and books claiming to show how to create business performance. What we are left with is this: no single strategy, quality or action will lead us to market success. Business books and articles have yet to prove the impact that any single factor will have on the fortunes of organizations.
Remember: Performance Is Relative
"Once we see that performance is relative, it becomes obvious that companies can never achieve success simply by following a given set of steps, no matter how well intended; their success will always be affected by what rivals do."
A study called the Evergreen Project set out to investigate what really works in business. It provided examples of practices at different companies, categorized as Winners, Climbers, Tumblers or Losers.
Kmart was profiled as a “Loser”. At first glance, this seems to be a fair choice. After all, Kmart’s market performance dropped over many years until they finally headed to bankruptcy court in 2002.
However, looking more closely we discover that in fact Kmart made many innovations in the 1990s, including:
Improving customer satisfaction due to providing a toll-free customer service number
Saving $240 million due to better technology and merchandise management
Expanding central buying to 75 percent of merchandise, reducing procurement costs
Despite these improvements and many others, Kmart’s financial returns did not get better. Why not? Because its competitors improved at a faster rate. For example, though Kmart installed point-of-sale scanning in stores by 1990, Wal-Mart had done this two years before. In many aspects of business, Wal-Mart was faster or better than Kmart.
For those of us looking to learn how to improve returns for organizations using the advice in business books, beware! Most books describe strategies to improve performance without reference to the importance of keeping up with or outstripping your competitors.
The Halo Effect changed the way I think about business books. It has raised my awareness of the importance of critical thinking and questioning what I read.
How will this make you think differently next time you’re reading a business book or article on company performance?