THE HALO EFFECT

. . . And the Eight Other Business

Delusions That Deceive Managers
PHIL ROSENZWEIG

PHIL ROSENZWEIG is a professor at the International Institute for Management Development in Lausanne,
Switzerland. He currently directs and teaches executive development courses for leading companies. Dr.
Rosenzweig is a graduate of the Wharton School, the University of California, Santa Barbara and UCLA. In
addition to spending six years on the faculty of the Harvard Business School, Dr. Rosenzweig worked as
marketing manager for Hewlett-Packard’s leasing unit for six years.
The Web site for this book is at www.the-halo-effect.com.
 The Halo Effect - Page 1

MAIN IDEA
Success in business is actually far more elusive than most business books, gurus and best-selling professors would have us believe.
Every year hundreds of new books are published which basically are variations on the same theme:
• This is the secret of high performing companies which not too many people know.
• Study what makes these companies great, and then go and do likewise by applying these ideas to your company.
• If you do this, you’ll gain a competitive advantage because your competitors won’t know these things.
The problem is even though many of these authors mean well and have worked hard to synthesize the reasons for one company’s
success, they are offering a “quick fix” route to high performance which simply does not exist in the real world. Being successful is
never just a matter of taking what works for someone else and plugging in your own products and people. Instead, you have to do your
own thinking and take a much more clear-eyed and thoughtful approach.
If you plan on achieving superior and lasting business performance, you won’t get there by following a specific set of steps which
apparently worked for someone else. Instead, you need to focus on understanding and acknowledging the fundamental uncertainty
of business performance and then progressively working to improve your probabilities of success. That will take more work than you’d
like, but at least you’ll be focused on the elements that actually drive your company’s performance rather than the common business
delusions which absorb the time and attention of others.

1. The nine delusions of business thinking – why the experts get things wrong so frequently . . . . . . . . . Pages 2 - 6
Business success is never genuinely plug-and play – take what worked for another company and go and
do likewise. Anyone who believes that has had their thinking shaped by one or more of the nine most
common delusions in the business world:

1 The Halo Effect Successful companies must be doing everything right

2 Correlation and Causality It’s possible to definitely say one thing causes another

3 Single Explanations There is just one factor which generates superior performance

4 Connecting the Winning Dots Success lies in whatever successful companies have in common

5 Rigorous Research If you gather enough data, reasons for success can be isolated

6 Absolute Performance Company performance is absolute – competitors don’t matter

7 Lasting Success If you keep doing the right things, you will be a long-term success

8 The Wrong End of the Stick Success comes from pursuing a tightly focused strategy

9 Organizational Physics Business performance can be forecast with the accuracy of science

These combined result of these delusions are two pieces of business fiction:
• That following a few key steps will lead to genuine business greatness.
• Any company’s success is the result of its own actions irrespective of external factors.
The reality is success is more often than not shaped by external factors well beyond the company’s control.
In a competitive business environment, there is no formula which guarantees a company’s success. This
may be disappointing at first glance but it actually is good because it means managers will always be
needed to make the complex decisions. If success could be reduced to a formula, there would be no need
for human input which would mean less opportunities for good people to shine. In short, what business
executives bring to an enterprise matters and they make an important contribution.
2. A better way to approach business management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 7 - 8
Replace looking for plug-and-play formulas to follow with a greater respect for probabilities and the impact
of external market forces. Be willing to make the difficult and complex judgement calls which often end up
being pivotal to your company’s future fortunes. To make those calls as best you can, there are three
general steps you can try to follow:
1 2 3
Recognize the uncertainties Approach problems as Separate inputs
and complexity of business interlocking possibilities from outcomes

If you can gather appropriate marketplace information, evaluate it thoroughly and make the choices which
provide your firm with the greatest possible chance of success, all the time acknowledging the
fundamental uncertainties involved, you’ve done all you can to make an effective decision. This will prove
to be far more fruitful than trying to follow a given formula or set of steps others have used.
 The Halo Effect - Page 2

Some good examples of the Halo Effect in action:

The Halo Effect The nine delusions of n When Cisco was in the process of growing its market
1
business thinking valuation by $450 billion over a five-year period during the
late-1990s, the company was the subject of dozens of books,
Business success is never genuinely plug-and play – take what
magazine articles and business school case studies which
worked for another company and go and do likewise. Anyone
described what the company was doing right and analyzing its
who believes that has had their thinking shaped by one or more
success. Then, the company’s stock fell from $80 per share in
of the nine most common delusions in the business world:
April 2000 to only $14 a share in April 2001. The same
business press then started running articles about how
The Halo Correlation Single Cisco’s decline was the result of its arrogance and
Effect and Explanation complacency. And, just to complete the cycle, when Cisco’s
1 2 Causality 3
share price began to once again climb sharply in 2003, the
company was hailed as making a “great comeback”. In each
of these three phases, the items about Cisco covered the
Connecting Rigorous Absolute same ground and gave the same business strategies as
the Research Performance justification for why the company was appreciating in value or
4 Winning 5 6 declining in value. The only logical conclusion that can be
Dots reached is journalists and analysts really can’t understand the
basic reasons for a company’s performance with any degree
Lasting The Wrong Organizational of precision whatsoever but they have to say something to fill
Success End of the Physics the magazines and meet their deadlines.
7 8 Stick 9 n When the industrial giant ABB was created in 1988 by the
merger of Sweden’s ASEA and Switzerland’s Brown Boveri,
CEO Percy Barnevik was widely acclaimed as a master
These combined result of these delusions are two pieces of business strategist. By 1996, the new company had profits of
business fiction: $1.2 billion and a market capitalization which surpassed $40
billion. To explain for ABB’s stunning success, the business
n That following a few key steps will lead to genuine business press lauded Barnevik as a visionary leader who had instilled
greatness. a dynamic corporate culture and a complex organizational
n Any company’s success is the result of its own actions design. Then, in 1997, ABB started divesting some of its
irrespective of external factors. engineering businesses and instead moved into financial
The reality is success is more often than not shaped by external services in much the same way as General Electric had
factors well beyond the company’s control. In a competitive previously done. Everyone again lauded the move but annual
business environment, there is no formula which guarantees a revenues declined as the market softened. By autumn 2001,
company’s success. This may be disappointing at first glance but ABB’s share price had fallen by 70-percent. The reason for
it actually is good because it means managers will always be this decline, according to the business press, was the way
needed to make the complex decisions. If success could be CEO Percy Barnevik operated the business. The same
reduced to a formula, there would be no need for human input reporters who had once been very much in awe of Barnevik
which would mean less opportunities for good people to shine. In now revised their storylines and made him the whole reason
short, what business executives bring to an enterprise matters for the company’s decline.
and they make an important contribution. These examples illustrate the fact the reasons for success or
failure in business are never clear without more analysis than
most people are prepared to make. The business press always
The nine delusions of business thinking tries to reduce things to very simple sound bites and in the
process usually gets it wrong. That creates a dilemma when the
company’s direction or fortunes change. In order to not draw
The Halo Successful companies must be doing attention to the fact they were wrong in the first place, the
Effect everything right. If they are generating business press is then forced to save face by continuing with the
1 good results, they must have a good illusion.
culture, strong leadership and values. The Halo Effect comes about because it’s difficult to differentiate
what contributes to company performance from attributes that
are derived from or generated by that performance. Even when
large amounts of data are gathered, the Halo Effect still shows up
The Halo Effect shows up in business news reporting all the time.
and in fact it gets multiplied.
When a company is profitable and has increasing sales,
everyone seems to just naturally assume the company has a “In many ways, the Halo Effect is the most basic delusion of them
strong and vibrant culture, superior and visionary leadership, all. It is a flaw – sometimes compounded by other errors – that
exceptional products and a highly efficient supply chain. turns up again and again, weakening the quality of our data and
Similarly, whenever a company reports a downturn in often diminishing our ability to think clearly about the factors that
profitability, everyone assumes there is an internal lack of shape company performance. We may not really know what
cohesion, poor communication and general lack of motivation. leads to high performance, so we reach for simple phrases to
We have a natural human tendency to make attributions based make sense of what happened.”
on small cues which we assume are reliable. – Phil Rosenzweig
 The Halo Effect - Page 3

The nine delusions of business thinking The nine delusions of business thinking

Correlation There is always a direct one-to-one Single There is one specific and particular
and correlation between doing well on some Explanation factor which leads to superior
2 Causality factor and enterprise success. It’s easy 3 performance. Everyone who improves
to establish these direct linkages. in this area will perform better.

The key question in business is always: “What leads to high Humans just naturally look for a single explanation of business
performance?” Very smart people – including consultants, performance. We automatically assume there is just one factor
business school professors, authors and many others – have which, if properly isolated and understood, can be used to
been trying to answer this question forever. It’s basically the “holy generate success for any company in any industry. This all
grail” of Wall Street. sounds so alluring we convince ourselves there must be a grand
The problem is in business, it’s difficult to say what are the underlying secret which would be pure gold if we could just
causes of high performance and what are the attributes. To take understand it and get very good at it.
a simple example: The problem is for anything good which happens to a company,
there are always a number of alternative sound and viable
Highly motivated When a company does explanations. So many things contribute to a company’s
employees treat well, it can afford to pay performance that it’s hard to know definitively how much of the
customers so well their above-average wages so overall performance is generated by one specific input and how
companies prosper its people are motivated much has been generated by an entirely different input. Even if
an attempt is made to control many of the external factors, there
are still a large number of things which can go on inside a firm
Does having satisfied employees lead to high performance? which will affect the end result.
This sounds logical, but it may well be when a company is highly
To take some examples:
successful, it pays its employees so well they cannot help but
become more highly motivated. The challenge in business is to n One study concluded a change in the CEO of a company will
untangle the direction of the causality. And just to keep things affect the firm’s performance by around 15-percent.
interesting, this causality may also vary from one industry to n Another separate study found 25-percent of a firm’s
another as well as from one company to another within the same performance is dictated by whether or not it is market
industry. Also just because two factors might show a high degree oriented, regardless of any other marketplace conditions.
of correlation, that doesn’t necessarily mean one of these factors
n A third study found whether or not a firm is socially responsible
caused the other.
– in terms of pursuing the interests of all stakeholders and not
Separating correlation and causality are real challenges in just seeking to maximize profits exclusively – can explain
analyzing companies. Often it’s difficult to tell which is the about 40-percent of any changes in a company’s financial
dependant variable and which is the independent variable. We performance over time.
can refine our thinking by gathering data at different points of
Armed with these three studies (each of which was based on
time so the impact of one variable on a subsequent outcome can
sound analysis methodologies), we might conclude that together
be more clearly seen but it’s vary rare for a business to only
these three factors account for 80-percent of a firm’s
change one variable at a time. In practice, it’s likely a large
performance. That sounds good until we pause to wonder
number of different inputs are being changed all the time,
whether these are separate effects and therefore additive, or
meaning the resultant changes may in fact be derived by some
whether there are some cross links involved. Could it be that
completely unexpected change elsewhere in the business.
those firms which are socially responsible are also more likely to
“Science is a method for trying to answer questions which can be be market oriented? Or could it be that whenever a new CEO
put in the form: If I do this, what will happen? How should we comes on board, you would expect to see market orientation
answer a scientific question? The technique of it, fundamentally, being high on the agenda? Or do these effects overlap to such a
is: Try it and see. Then you put together a large amount of degree a shortfall in one area can be compensated by an above
information from such experiences.” average performance in another?
– Richard Feynman, physicist Whenever a study tries to isolate a single explanation for firm
performance, there are so many other factors which could also
“Inferring causality from correlation trips up many studies about be used to explain the same results that it is impossible to know
business. The challenge is to untangle the direction of causality. what’s really going on with any degree of certainty. Of course,
Knowing which leads to which is critical if managers want to this is not what the average person wants to hear. They aren’t
know what to do – how much they should invest in greater levels interested in hearing about partial causation or incremental
of satisfaction versus other objectives.” factors which might also be involved. They want a simple
– Phil Rosenzweig cause-and-effect relationship – do this better and your business
“The margin between success and failure is often very narrow, will flourish or ignore this factor at your own peril because your
and never quite as distinct or as enduring as it appears from a competitors will use it to bury you.
distance.” Whenever a business study has claimed to isolate an important
– Tom Lester, columnist, Financial Times driver of performance, pause and consider whether they have
fallen for the delusion of a single explanation.
 The Halo Effect - Page 4

The nine delusions of business thinking The nine delusions of business thinking

Connecting If we search for what winning Rigorous If you study enough companies
the companies have in common, we can Research systematically and scientifically, then
4 Winning isolate the reasons for their success. 5 you’ll be able to identify the reasons
Dots We then just have to follow their lead. behind their successes.

When you look only at companies which are performing well, it Logically, it makes sense that if you’re thorough and exhaustive,
becomes very difficult to show what makes them different from you should be able to speak about something with authority.
the companies which are performing less successfully. You’ve Thus, if you can collate the data from large enough samples of
biased your database by selecting participants on the basis of successful and not-so-successful companies, then it should
the outcomes you want to see. You can then say all of these become obvious what the successful companies are doing right
companies do one thing or another but this is never an accurate and what the unsuccessful firms are doing wrong. This is the
picture because you don’t know whether the average companies essence of the Delusion of Rigorous Research.
do the same things that way or not. So why does this concept not work out in practice? There are
When you “connect the winning dots” by studying only those several reasons:
companies which meet your specific definition of success, then n The Halo Effect means you’ll never really be able to find out
it’s not surprising you find some commonalities. To then suggest what drives high or low performance by talking with the
those same commonalities could be applied to any company to managers involved. They will merely trot out the usual
make it become more successful just isn’t logical. What isolates explanations for success which they’ve read about
a successful company from a less successful one can’t be elsewhere. Good managers don’t know what they’re doing
uncovered in this way in just the same way as you can’t find what right because they don’t know in detail what the bad
causes high blood pressure solely by studying those who suffer managers are doing differently.
from high blood pressure. You have to compare what you’ve
n When it comes to data, quality trumps quantity every time.
found out about those who have high blood pressure to a sample
The unspoken message of a rigorous research project is the
of those who don’t have high blood pressure.
authors are trying to say they have collected large amounts of
The other problem with this delusion is the fact managers are data meticulously and therefore only someone who has done
unlikely to be able to actually articulate the reasons for their an equal amount of work will be in any position to challenge
success. When asked, they will feel the pressure to respond and their findings. That’s all well and fine but if your source data is
will resort to restating the usual ideas which run in the business not of a high quality, then it really doesn’t matter how much
press all the time. They will happily talk about “focusing on goals” quantity you have, the findings will be inferior.
and “working hard” and so forth because it sounds right rather
n Regardless of the amount of information about successful
than because it’s what they actually do.
companies which is studied, it is still impossible to say
So how can this natural instinct to want to try and connect the whether the common factors seen lead to high success in and
winning dots be avoided? It’s really quite straightforward: of themselves or whether all high-performing companies tend
n Take 100 well established companies with audited financial to be described using the same established terminology.
results at random.
“In the South Seas there is a cult of people. During the war they
n Ask half of those companies to manage their businesses saw airplanes land with lots of materials, and they want the same
according to one set of principles and the other half to manage thing to happen now. So they’ve arranged to make things like
by an entirely different set of principles. runways, to put fires along the sides of the runways, to make a
n Compare the results once the companies have had say about wooden hut for a man to sit in, with two wooden pieces on his
10 years or so of application of the different management head like headphones and bars of bamboo sticking out like
philosophies. antennas – he’s the controller – and they wait for the airplanes to
n Don’t allow any fine-tuning or changing of the management land. They’re doing everything right. The form is perfect. But it
during the entire study so the results will be able to be isolated doesn’t work. No airplanes land. So I call these things Cargo Cult
and seen, even if that means companies with unhelpful Science, because they follow all the apparent precepts and
management practices have to be closed down. forms of scientific investigation, but they’re missing something
essential, because the planes don’t land.”
That’s really all there is to it. Of course, no business study has
– Richard Feynman, physicist
ever been conducted along these lines for a number of very
sound and practical reasons. First and most obviously, the cost “The business world is full of Cargo Cult Science, books and
of this type of experiment would be enormous. The fact the articles that claim to be rigorous scientific research but operate
management teams could not make changes in their practices mainly at the level of storytelling. Now, there’s nothing wrong
during an extended period of time is also completely untenable. with stories, provided we understand that’s what we have before
And obviously the question of whether the right management us. Some of the most successful business books of recent years,
practices have been grouped together correctly in the first place perched atop the bestseller lists for months on end, cloak
would have to be addressed. But this is the only way the human themselves in the mantle of science, but have little more
tendency to connect the winning dots of high performance could predictive power than a pair of coconut headsets on a tropical
actually be avoided completely. island.”
– Phil Rosenzweig
 The Halo Effect - Page 5

The nine delusions of business thinking The nine delusions of business thinking

Absolute Company performance occurs in a Lasting Once a company figures out how to be
Performance vacuum. If a company gets better, it Success a high performer, it has a blueprint for
6 will grow and prosper, irrespective 7 long-term success. It’s just got to keep
of anything its competitors do. doing what it has always done.

Some commentators like to create the illusion business When we isolate what makes companies successful, then it’s
performance exists in a vacuum. Under this scenario, reasonable to assume those companies which have figured this
companies succeed or fail on the merits of their own actions out for themselves should be able to use those principles to stay
alone. If they do the right thing, they prosper. If they get things very successful indefinitely. That seems to be a reasonable idea.
like strategy, execution, culture or focus wrong, then it’s obvious The problem is in the corporate world, lasting business success
they will fail miserably. is essentially a delusion.
This is a wonderful illusion because it discounts entirely the fact Study after study has shown over the long haul, all companies
companies operate in a competitive market economy. The end up generating average returns which match the
performance of any one company is always affected by what its performance of the market as a whole. Companies may enjoy
competitors do, by the emergence of new technologies which brief periods of time where they generate exceptional returns
confer a temporary advantage on another company, and so and profits but sooner or later they get cut back to size by the
forth. It is conceivable, therefore, that even when a company various forces which characterize free markets. These forces
significantly ups its own game, it may in fact fall still further are powerful and would include:
behind its competition if they are simultaneously improving their n New rivals who will enter the same markets and set up similar
own performances by an even greater percentage. style businesses.
A good example of this phenomena is found in the automotive n Existing companies who will change their product mixes to try
industry. The cars General Motors is selling to the public in 2005 and access the same markets.
are far superior to those it produced and sold in the 1980s. They
n Consulting companies who will disseminate to rivals best
have better quality, added features, superior dynamics and
practices and other operational information.
enhanced safety features. Yet GM’s share of the U.S. market
has slipped from 35-percent in 1990 to 25-percent in 2005. The n Employees who will move from company to company or start
real problem is Japanese and Korean automakers have their own businesses to compete.
improved their products by an even greater rate of progress than n At some point, even highly successful companies will offer
GM. Thus, although GM has upped its own game in absolute things which are inferior to what competitors offer. No
terms, it has moved backwards because its competitors have company can be right 100-percent of the time about
moved forward even faster in relative terms. everything for years and years on end.
The Delusion of Absolute Performance is important because it n Technology always changes. This will give some companies
means success in business can never be reduced to a simple an advantage and disadvantage others.
fail-safe formula. The actions of competitors will always play a
n Companies regularly get acquired, restructured, merged and
role in deciding whether your enterprise moves ahead or falls
go through various other structural changes.
behind. The dynamics of your industry will influence what
happens. There is no one set of “enduring principles” which can As tempting as it is to look at a subset of companies which are
possibly guarantee success because events will always be currently in the ascendancy and conclude they must be doing
affected by what your rivals do. In fact, the greater your own something right, this is a combination of the Delusion of
success, the more rivals you’ll have and the more difficult it will Connecting the Winning Dots and the Halo Effect. At the very
become to sustain your success. This doesn’t even take into least it’s a case of making selections based on the outcomes you
account the impact of the arrival of new competitors or new want to see rather than on the inputs or decisions being made by
technology. each company. When you look at the full picture, the dominant
pattern of commerce is not enduring greatness at all but ongoing
Ultimately, some elements of business performance will always
rise-and-fall, growth-and-decline. Anyone who says otherwise
be outside your own control. As appealing as it may sound to
has an appealing story which, unfortunately, doesn’t match the
weave a story where a company is the master of its own fate and
true facts.
the author of its own success, this just isn’t realistic.
“The Delusion of Lasting Success promises that building an
“The Delusion of Absolute Performance diverts our attention
enduring company is not only achievable but a worthwhile
from the fact that success and failure always take place in a
objective. Yet companies that have outperformed the market for
competitive environment. It may be comforting to believe that our
long periods of time are not just rare, they are statistical artifacts
success is entirely up to us, but a company can improve in
that are observable only in retrospect. Companies that achieved
absolute terms and still fall further behind in relative terms.
lasting success may be best understood as having strung
Success in business means doing things better than rivals, not
together many short-term successes. Pursuing a dream of
just doing things well. Believing that performance is absolute can
enduring greatness may divert attention from the pressing need
cause us to take our eyes off rivals and to avoid decisions that,
to win immediate battles.”
while risky, may be essential for survival given the particular
– Phil Rosenzweig
context of our industry and its competitive dynamics.”
– Phil Rosenzweig
 The Halo Effect - Page 6

The nine delusions of business thinking The nine delusions of business thinking

The Wrong Very successful companies often follow Organizational Success in business follows various
End of the a tightly focused strategy. Therefore, to Physics immutable laws like those found in
8 Stick succeed, all you need to do is become 9 science. Find those laws, obey them
highly focused on whatever you do. and you must be successful.

Many business theories can be distilled down to one concept: This is a wonderfully reassuring and appealing delusion. It
Successful companies slowly and methodically stay focused on assumes the world of business runs with precision and
one product or one industry until they learn how to become truly even-handedness. All you need to do to prosper is to find the
great in that field. Less successful companies scatter their universal principles of good management and obey them with
resources and efforts over a number of different endeavors and exactness. Do that and your future success is locked in.
thereby end up only becoming average performers in each. If ever you find yourself leaning towards accepting this delusion,
This idea appeals because it draws on our sense of fair play. The pause and consider:
only problem is it doesn’t have any genuine or factual basis in n Do these universal laws apply to both the huge corporations
reality. To be specific: and very small businesses alike? Can the same principles of
n A number of companies which currently excel got their first big success be followed by a huge multinational organizations
break by making a “bet the ranch” punt on what would happen with billions of dollars in resources and a small start-up which
in the future. They have generated huge and immediate is bootstrapping itself with minimal resources?
payouts because they made good investments in the future n What happens if both the incumbents in an industry and
and not because they gradually refined what they were doing. challengers follow these same principles to the same degree?
Whether those big investments were carefully made or the Do these two actions cancel each other out, or who moves
result of happy circumstances is open to conjecture but the ahead?
fact remains big investments can sometimes turn out to be
n Do the same laws of success apply to a growing company
stellar successes.
which is desperately seeking capital to fund its growth and a
n Companies that are resilient and which adjust to changing well established company which generates substantial cash
circumstances usually do better than those which do not. This flows from very mature products? Do following these rules
is true whether the companies are tightly focused or dabble in offset the advantages of access to more capital?
a number of different industries.
It should be reasonably obvious even to a casual observer the
n When we look only at successful companies and note they business world really doesn’t run with clock-like precision. For all
had narrow focuses, there is an inbuilt Halo Effect at work. We sorts of different reasons, sometimes the bad guys win. In fact,
find only what we expect to find and subconsciously dismiss most of the time, it isn’t even possible to tell who are the good
anything which does not align with our point of view. Less guys and who are the bad guys anyway.
successful companies may be even more tightly focused but
we don’t study them that closely because they are either out of “The Delusion of Organizational Physics implies that the
business or obviously struggling. business world offers predictable results, that it conforms to
n Company performance is always relative rather than precise laws. It fuels a belief that a given set of actions can work
absolute. Perhaps it’s true that those companies which have a in all settings and ignores the need to adapt to different
narrow focus will win out over the long haul. This sounds conditions: intensity of competition, rate of growth, size of
reasonable and could be studied, but even the firms which competitors, market concentration, regulation, global dispersion
excel in a declining industry will still never perform as well as of activities, and much more. Claiming that one approach can
average performers in an emerging industry. The state of the work everywhere, at all times, for all companies, has a simplistic
industry can have a huge bearing on results achieved. appeal but doesn’t do justice to the complexities of business.”
– Phil Rosenzweig
“The Delusion of the Wrong End of the Stick lets us confuse
causes and effects, actions and outcomes. We may look at a “We people in organizationland are fascinated with science, I
handful of extraordinarily successful companies and imagine think, because we seek to minimize the feeling that our world is
that doing what they did can lead to success – when in fact it governed not by laws of nature but by mad, impetuous
might lead mainly to higher volatility and a lower overall chance barbarians driven by greed, need, and the desire for maximum
of success. Unless we start with the full population of companies power and booty. In such a cosmos the stately dance of physical
and examine what they all did – and how they all fared – we have science is reassuring.”
an incomplete and indeed biased set of information.” – Stanley Bing, columnist, Fortune 2004
– Phil Rosenzweig “The most important role of managers is to create an
“I work on a daily basis with executives from a wide variety of environment where people are passionately dedicated to
industries. What I’ve observed, over and over, is a tendency by winning in the marketplace. Fear plays a major role in creating
managers and professors alike to embrace simple answers, and maintaining such passion. Fear of competition, fear of
some of them patently simpleminded and wrongheaded, and to bankruptcy, fear of being wrong and fear of losing all can be
latch on to quick solutions rather than to question and think for powerful motivators.”
themselves.” – Andy Grove, former CEO, Intel
– Phil Rosenzweig
 The Halo Effect - Page 7

So what does lead to high performance in a business? In the

A better way to approach absence of any set formulas, there are three approaches which
The Halo Effect 2
business management just may help:

Replace looking for plug-and-play formulas to follow with a 1

greater respect for probabilities and the impact of external
Recognize the uncertainties
market forces. Be willing to make the difficult and complex
and complexity of business
judgement calls which often end up being pivotal to your
company’s future fortunes. To make those calls as best you can,
All companies face an array of uncertainties:
there are three general steps you can try to follow:
n In what markets should we compete?
1 2 3 n What products or services should we offer?
n What will our current competitors do?
Recognize the Approach problems Separate
uncertainties and as interlocking inputs from n Will any new competitors emerge?
complexity of business possibilities outcomes n Will customers embrace what we offer or prefer some
alternative instead?
n How will new technology impact on our industry?
If you can gather appropriate marketplace information, evaluate
n How can we stand out from our rivals?
it thoroughly and make the choices which provide your firm with
the greatest possible chance of success, all the time n If we choose to move in a new direction, how will our company
acknowledging the fundamental uncertainties involved, you’ve cope with the necessary internal changes?
done all you can to make an effective decision. This will prove to n Should we grow by making acquisitions or through organic
be far more fruitful than trying to follow a given formula or set of growth initiatives?
steps others have used.
n Would it better for us to emphasize low prices or innovation?
The point is business is always going to be complex. What might
make excellent commercial sense in one setting may be
The nine delusions of business thinking commercial suicide in another. Get comfortable with the fact
whatever you do will involve risks because you won’t be able to
1 9
Business tell in advance precisely how things will turn out.
2 Books 8 All you can do to respond is factor in as much information as
and possible into your decisions. Don’t worry about following some
3 Theories 7 universal rules of success – they don’t exist. The best you can do
is gather all the information you can, evaluate it thoughtfully and
4 5 6 thoroughly, and then make those choices which provide you with
the best possible chance of success.
2
When you pause and look at the central message of most
business books and management theories, you come up with Approach problems as
the same points expressed in a number of different ways: interlocking possibilities
n Any company can choose to be great.
n Following a few easily described steps will always predictably Once you acknowledge the basic and inherent uncertainties of
lead to greatness. business, you can then approach problems as sets of
interlocking possibilities. Your objective now becomes finding
n Every company’s success is entirely of its own making and is
ways to improve your odds of success rather than fruitlessly
not dependant on factors outside its own control.
searching for guaranteed success.
This is actually not far off all the various self-help books which tell
More often that not the way to improve your chances of success
people how to become millionaires in five easy steps, or how to
is to gather more information and subject it to careful analysis.
lose twenty pounds in two weeks or less. In addition, if one
With a little bit of luck, buried somewhere within that data will be
accepts the notion success in business follows a formula
some practical things you can do to enhance your odds of
approach, then it follows the converse is also true. That means if
success in the messy world of business. This may be a matter of
a company never becomes great or successful, it will be because
any number of different things:
the managers have inadvertently or purposely disregarded
these steps or moved off the well marked path. n Working to reduce your manufacturing cycle time.
The simple fact is there is no genuine plug-and-play formula n Lowering defect levels.
which can guarantee success in the competitive environment of n Enhancing customer satisfaction and retention.
business. This may be disappointing to acknowledge at first but it n Improving your on-time delivery performance.
does mean strategic thinking becomes a valued necessity. If
Obviously everything will sound desirable but some trade-offs
success were simply a matter of ticking the boxes rather than
will be required. You have to ask: “For our company at this time,
making all the hard judgement calls, business executives really
competing against who we can currently see, which dimensions
wouldn’t be able to command much remuneration. The absence
of better execution will be the most vital”? This is a tough
of guarantees is a blessing, not a curse.
question but necessary to develop good priorities.
 The Halo Effect - Page 8

“When it comes to managing a company for high performance, a

3 wise manager knows:
Separate inputs • Any good strategy involves risk. If you think your strategy is
from outcomes foolproof, the fool may well be you.
• Execution, too, is uncertain – what works in one company with
Once you’ve made risky strategic choices with your eyes wide one workforce may have different results elsewhere.
open and then have pushed for great execution of that strategy, • Chance often plays a greater role than we think, or than
you then have to acknowledge in the world of business actions successful managers usually like to admit.
and outcomes are imperfectly linked. It’s always easy to assume • The link between inputs and outcomes is tenuous. Bad
that good outcomes come from good decisions and bad outcomes don’t always mean that managers made mistakes;
outcomes come from faulty decisions. That’s wrong. Instead, get and good outcomes don’t always mean they acted brilliantly.
into the habit of regularly critiquing your decision making process • But when the die is cast, the best managers act as if chance is
itself. irrelevant – persistence and tenacity are everything.
Will all of this guarantee success? Of course not. But I suspect it
Check that when you’re making decisions:
will improve your chances of success, which is a more sensible
n You have gathered all the right information and have not goal to pursue. And you won’t find yourself on the shore of a
overlooked some other important data. tropical island, wondering why, despite all your earnest efforts to
n You’ve made reasonable assumptions. follow the formula of success, the cargo planes still haven’t
n You’ve made logical projections and calculations on the basis landed.”
of those assumptions. – Phil Rosenzweig
n You’ve factored in and accounted for all eventualities. “The physicist Richard Feynman once remarked that many fields
n You’ve considered your firm’s risk preferences and strategic have a tendency for pomposity, to make things seem deep and
position. profound. It’s as if the less we know, the more we try to dress
things up with complicated-sounding terms. We do this in
In other words separate your inputs from the outcomes and
countless fields, from sociology to philosophy to history to
judge your decisions on the basis of their merits rather than
economics – and it’s definitely the case in business. I suspect
making after-the-fact attributions. If you can take this step of
that the dreariness in so much business writing often stems from
refining your decision making processes over time, you should
wanting to sound as though we have all the answers, and from a
get better at it in the future.
corresponding unwillingness to recognize the limits of what we
“That brings us to the best answer I can provide to the question: know. Well, this is my best guess. This is the way I see it. I’m
What leads to high performance? If we set aside the usual convinced that a clear-eyed and thoughtful approach is a better
suspects of leadership and culture and focus and so on – which way to think about management – better, anways, than the kind
are perhaps better understood as attributions based on of casual thinking that characterizes so much of what’s on
performance rather than causes of performance – we’re left with business bookshelves today.”
two broad categories: strategic choice and execution. The – Phil Rosenzweig
former is inherently risky since it’s based on our best guesses
“The fundamental impulse that sets and keep the capitalist
about customers, about competitors, and technology, as well as
engine in motion comes from new consumers, goods, the new
our internal capabilities. The latter is uncertain because
methods of production or transportation, the new markets, the
practices that work well in one company may not have the same
new forms of industrial organization that capitalist enterprise
effect in another. In spite of our desire for simple steps, the reality
creates. Every piece of business strategy acquires its true
of management is much more uncertain than we often would like
significance only against the background of that process and
to admit – and much more so than our comforting stories would
within the situation created by it. It must be seen in its role in the
have us believe. Wise managers know that business is about
perennial gale of creative deconstruction; it cannot be
finding ways to improve the odds of success – but never
understood irrespective of it or, in fact, on the hypothesis that
imagining that success is certain. If a company makes strategic
there is a perennial lull.
choices that are shrewd, works hard to operate effectively, and is
– Joseph Schumpeter, Austrian economist
favored by Lady Luck, it may put some distance between itself
Capitalism, Socialism and Democracy (published in 1942)
and its rivals, at least for a time. Success at one moment doesn’t
ensure success in the next moment, because success invites “There will always be books that try to discover the elements that
new challengers, some of them willing to take greater risks than separate the best companies from the rest of the pack and that
the incumbents. All of which explains why, selective stories advise managers on what they might do to lead their companies
notwithstanding, there’s simply no formula that can guarantee to loftier heights, to join the ranks of the great, the winners, the
success.” outstanding successes. Some of these books will be good, some
– Phil Rosenzweig not. Managers will continue to read them, eager to learn any new
insights, hoping to discover new things they can apply. That’s not
“Once you’ve internalized the concept that you can’t prove
only inevitable, that’s healthy. My central idea is that our thinking
anything in absolute terms, life becomes all the more about odds,
about business is shaped by a number of delusions. My hope is
chances, and trade-offs. In a world without provable truths, the
that managers will read business books a bit more critically, free
only way to refine the probabilities that remain is through greater
from delusions, their deepest fantasies and fondest hopes
knowledge and understanding.”
tempered by a bit of realism.”
– Robert Rubin, former secretary of the U.S. Treasury
– Phil Rosenzweig