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2007/09/20

The Halo Effect: Eight Other Business Delusions

Linking: The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers  (中譯本: 光環效應:科學分析成功模式的九大陷阱)
Author: Phil Rosenzweig
Hardcover: 256 pages
Publisher: Free Press (February 6, 2007)
ISBN-10: 0743291255
Book Reivew:



The author-Rosenzweig tells us that our beliefs about business success are largely, perhaps entirely, wrong, distorted by the halo effect — in this case, the idea that once we consider a company successful, we tend to see it as doing everything right. Business gurus, he charges, chart a flat, comfortable world in which a handful of top firms are to be emulated, no questions asked.

Among the follow-the-leaders classics that the author condemns as fatally flawed: Tom Peters and Robert Waterman's In Search of Excellence, John Kotter and James Heskett's Corporate Culture and Performance, Bruce Robertson's What Really Works, and Jim Collins' Built to Last and Good to Great. Their glib assurances about the path to corporate success are satisfying, but the stories are not necessarily helpful or accurate. We have no way of knowing whether to believe their analyses of why their case-study champions achieved success: Rather than factual, objective metrics, the gurus rely on anecdotes, retrospective impressions, and press reports.

That irresponsible but supremely confident analysis — boiled down to a magic three (or is it eight? or fifteen?) secrets to making your company a winner — is what all too many people are looking for. By contrast, the author leaves readers with little solace: The world is full of uncertainty, and the wise understand the limits of their knowledge.

For those raised on the-eight-secrets-of-success programs, the author's message may be tough to take, and it helps that his style is reminiscent of Warren Buffett, without the cornpone. He writes with a relaxed sense of mastery, uses simple but compelling examples, is rigorous without being pedantic, and bends over backward to be fair to the so-called experts he demolishes.

Rosenzweig focuses on what he feels is the fundamental question in business: What leads to high performance? And he finds a disturbing pattern. Most research on both individuals and organizations has been hopelessly tainted by the halo effect.

In World War I, psychologist Edward Thorndike asked commanding officers to rank their subordinates on a series of qualities. He found the answers to be highly correlated; in other words, the officers saw the soldiers in broad-brush positive or negative terms, as either all good or all bad. (Consider that we generally view physically attractive people as more intelligent than ugly people. If we see one positive attribute, we tend to attribute other positive attributes, relevant or not, to the same person — or company.) Have you ever heard of a company with falling profits lauded for excellent customer service? But clearly this lakes place. In fact, a company might be doing badly because it over invested in customer care.

To illustrate his point, Rosenzweig goes through case studies of Lego, Cisco, and ABB. For example, when its fortunes were rising, Cisco was praised for "extreme customer focus," skill in acquisition and integration, and highly motivated employees. Yet when performance fell, critics saw many of these previously admirable attributes as causes of failure. Cisco's problem wasn't that it had ridden a bubble that collapsed — no, it had "a cavalier attitude toward customers." Its deals had been haphazard, employees had been "too busy taking orders and cashing stock options to bother with efficiency, cost-cutting, or teamwork." Academics joined the media in this reputational pump-and-dump. As the author explains: "No one was saying that Cisco had changed between 2000 and 2001. It was just that now, in retrospect, Cisco was described through a different lens — one of failing performance.…. Placing these accounts together, the impression is nothing short of Orwellian — a rewriting of history that thrusts facts into the past, rearranging the record … reinterpreting the past to suit present needs."

Indeed, much of what passes for research into performance is halo effect writ large: "So many of the things that we — managers, journalists, professors, and consultants — commonly think contribute to company performance are often attributions based on performance."

The author sets forth the impossibility of subjecting corporations to scientific research — for one thing, you can't con duct experiments. But with a well-chosen sample, you can come close by isolating the impact that certain factors, called independent variables, have on an outcome, called a dependent variable. You need to measure the variables objectively (merely identify distinctive qualities of your sample, and you can get what Rosenzweig calls the Delusion of the Wrong End of the Stick). You need to be sure of causality — that action A led to result B — which means that measurements must take place over time (violate that, and you get the Delusion of Correlation and Causality). And even high-quality studies can have limited value, Rosenzweig tells us, because they look at only one variable in isolation (the Delusion of Single Explanations), so we still don't know how this factor interacts with other things we might do.

Most investigations of corporate performance have at least two major failings. First, winners-only studies such as In Search of Excellence tell us little that's useful (the Delusion of Connecting the Winning Dots): "The scientific term for this is sample selection based on the dependent variable — this is, based on outcomes," the author writes. "It's a classic error. Suppose we want to find out what leads to high blood pressure. We'll never find out if we only examine patients who suffer from high blood pressure; we'll only know if we compare them to a sample of patients who don't have high blood pressure."

But the second, glaring error is that much of the data in these studies is garbage. They rely on news items, retro spective interviews, case studies, Fortune Most Admired Company ratings, and other information sources hopelessly tainted by the halo effect. And efforts to add yet more bad data don't make the results any more credible (the Delusion of Rigorous Research).

Yet possibly the most important of Rosenzweig's delusions is the one that tells us not about the limits of what we can learn but the limits of what we can achieve: the Delusion of Lasting Success. Two-thirds of In Search of Excellence's showcased companies underperformed shortly alter that book was published, as did more than halt the Built to Last firms. Rosenzweig cites a McKinsey study: "the corporate equivalent of El Dorado, the golden company that continually performs better than the markets, has never existed. It is a myth. Management for survival, even among the best and most revered corporations, does not guarantee strong long-term performance for shareholders."

What does the author prescribe instead? It's cold cheer. While companies may be able to improve their odds of success, nothing is assured. The best that companies can hope for is to string together a series of short-term achievements, and those depend in turn on strategy and execution. The performance gurus focus entirely on execution, even though good tactics cannot salvage a bad strategy. Rosenzweig urges managers to recognize and understand the uncertainty of their environments, to think in terms of probabilities rather than absolutes, and gives us U.S. Treasury Secretary Robert Rubin, Intel's Andy Grove, and Logitech's Guerrino De Luca as managers who recognize the limits of information and frame decisions in that context.

Much of what passes for research into corporate performance is halo effect writ large.


~adapted from Webber, Susan. Conference Board Review, Mar/Apr2007, Vol. 44 Issue 2, p67-69.



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