Executive Times






2008 Book Reviews


The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig




(Highly Recommended)




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There are plenty of reasons to like Phil Rosenzweig’s book, The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers. One is the facile way in which he pokes fun at some of the most popular business books in recent decades. Another reason in how clearly he describes the scientific shortcomings of the methods used by many management gurus. Finally, he helps managers be more discerning in following the advice of others, and he presents no success formula of his own. Here’s an excerpt, from the beginning of Chapter 5, “Research to the Rescue?” pp. 65-68:


A famous statistician once showed a precise correlation be­tween arrests for public drunkenness and the number of Baptist preachers in nineteenth-century America. The correlation is real and intense, but we may assume that the two increases are causally unrelated, and that both arise as consequences of a single different factor: a marked general increase in the American population.

Stephen Jay Gould
 Full House: The Spread of Excellence from Plato to Darwin,

The Halo Effect shapes how we commonly talk about so many topics in business, from decision processes to people to leadership and more. It shows up in our everyday conversations and in newspaper and magazine articles. It affects case studies and large-sample surveys. It's not so much the result of conscious distortion as it is a natural human tendency to make judgments about things that are abstract and ambiguous on the basis of other things that are salient and seemingly objective. The Halo Effect is just too strong, the desire to tell a coherent story too great, the tendency to jump on bandwagons too appealing.

The Halo Effect shapes much of the way we think about business, yes, but by no means all of it. There's nothing inevitable about the Halo Effect. If we're aware of the tendency to bestow Halos, we can take- corrective measures. For example, we know that one way to evaluate a job candidate more accurately is to insist that some assessments are made without any knowledge of the applicant's school-to use standardized tests or to conduct some interviews blind. Similarly, we might expect that careful research conducted by serious scholars trained in scientific methods can avoid the Halo Effect. Maybe then we can find a satisfactory answer to the most funda­mental of all business questions— What leads to high performance?

The good news is that there are many people at business schools and consulting firms who conduct very good research about com­pany performance. They may not be able to run experiments with the rigor of natural science, but they can carry out solid research using quasi-experimental designs. That sort of study tries to isolate the impact that some variables, called independent variables, have on a given outcome, called the dependent variable. By carefully gather­ing data and then testing hypotheses with precise statistical tests, by isolating the effect of independent variables on dependent variables, these researchers can hope to distill the drivers of company perfor­mance.

What's needed, for starters, is good data about the dependent variable—namely, company performance. Luckily, that's usually not a problem. Every publicly traded company publishes its revenues and profits. There's plenty of information compiled neatly into databases like Compustat or DataStream, which can give us ac­counting measures of performance (profitability or return on assets) as well as market measures (cumulative stock returns, or Tobin's q, the ratio of asset replacement cost to market value). As for the driv­ers of performance, the data we need depends on what we're trying to test. For some hypotheses—say, diversification or research and de­velopment (R&D) spending or acquisition strategy—the same data­bases are relatively complete and not affected by Halos. Much trickier are studies about what goes on inside a company, like the quality of management, or levels of customer orientation, or com­pany culture. Here, Compustat or DataStream aren't much help. Nor has Bloomberg put together a powerful online database that can tell you which companies are well managed, or innovative, or ethical, or environmentally responsible. These data have to be gath­ered by the researcher.

Since gathering data is hard work, a natural tendency is first to look to other studies whose data might serve as useful proxies. But be careful: If these studies are contaminated with Halos, they won't do much good. Want to study whether companies that are strong in corporate social responsibility outperform the rest? The temptation is to check Fortune's Most Admired list for "responsibility to the com­munity and environment" and see if it's related to performance. (Answer: It is.) Want to test whether the most innovative companies outperform the rest? Just check the Fortune list for innovativeness and see if it correlates with .performance. (Same answer: It does.) Of course they do. But all we're really measuring is the strength of the Halo. What if we avoid proxies altogether and take the time to gather data directly? That's moving in the right direction, but even then we might have a problem with Halos—it all depends on how the data are gathered.

Halos of Customer Orientation

Suppose we want to test whether customer orientation leads to high performance. From what we saw at Cisco, we know to be wary of the Halo Effect. As long as sales and profits were up, Cisco was held up as a shining example of excellent customer ori­entation. It was described, at its pre-bubble peak in 2000, as hav­ing "extreme customer focus," and John Chambers was "the most customer-focused human being you will ever meet." A year later, as performance fell, Cisco was said to have exhibited "a cavalier attitude toward potential customers," and its sales tactics had been "irksome." Unless we believe that Cisco actually got worse—and no one suggested that was the case—all we have are changing attributions about customer orientation made on the basis of worsening financial performance. We know, therefore, to avoid relying on magazine and newspaper articles and to gather data in a different way.

One study, by John Narver at the University of Washington and Stanley Slater at the University of Colorado, set out to study the link between customer orientation and company performance. They defined performance as business unit profitability. No problem there. But to capture customer orientation, they asked managers to rate their companies on six criteria: overall customer commitment, cre­ating customer value, understanding customer needs, setting cus­tomer satisfaction objectives, measuring customer satisfaction, and providing after-sales service. When they ran their statistical tests, they found that, sure enough, there was a significant correlation be­tween performance and customer orientation. That's no surprise at all—it's exactly what we'd expect given the Halo Effect. If we want to test whether customer orientation leads to high performance, the last thing we should do is ask managers: "How customer oriented is this company?" We're likely to get an attribution based on perfor­mance. To have any validity at all, we need to rely on measures that are independent of performance. None of this, by the way, suggests that customer orientation doesn't lead to higher performance—I sus­pect that if we measure it carefully, we'll find that it does, at least to some extent. But passing out a survey where responses are likely to be shaded by the Halo Effect is not the way to go.


Rosenzweig is a former Harvard professor who now teaches at IMD in Switzerland. The Halo Effect is worth the time and attention of any executive.


Steve Hopkins, March 21, 2008



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The recommendation rating for this book appeared

 in the April 2008 issue of Executive Times


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