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Executive Times |
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2008 Book Reviews |
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The Halo
Effect: ... and the Eight Other Business Delusions That Deceive Managers
by Phil Rosenzweig |
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Rating: |
**** |
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(Highly Recommended) |
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Click
on title or picture to buy from amazon.com |
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Duped 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 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 URL for this review: http://www.hopkinsandcompany.com/Books/The Halo Effect.htm For Reprint Permission, Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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