Review written by Professor Andre de Waal MBA
“One of the most important management books of all time,” claims the book jacket. A bit of an exaggeration perhaps, but it would not be going to far to say that The Halo Effect is a book that should be read by managers as well as scientists, and especially consultants. Rosenzweig, who teaches strategy at the IMD in Lausanne, points out the dangers of indiscriminately embracing the results of all kinds of studies, especially those that focus on high performance organizations and profess to have discovered what it is that distinguishes excellent organizations from their lesser-performing brothers in the sector. The most significant shortcoming of these studies, according to Professor Rosenzweig, is the ‘halo effect’: the tendency to conclude that the results of an organization are owed to a variety of underlying characteristics of that organization, such as its culture, leadership, people and values. When an organization performs well, people tend to evaluate these underlying characteristics positively and even claim that these traits must be the reason the company excels. The exact opposite occurs with poor-performing organizations: the culture must be rotten, the leadership weak and the values totally wrong. Rosenzweig illustrates this effect with the two (somewhat too elaborately described) examples of Disco and ABB. During their heyday, these organizations were often quoted in the trade press and praised to the skies in all kinds of studies, in which the CEOs, John Chambers and Percy Barnevik, were worshiped almost as gods. When both companies encountered difficult times in the 90s, those same trade journals gradually started claiming that these organizations had in fact always been rotten within and that their CEOs had caused their difficulties with arrogant and headstrong behavior. In both cases, Rosenzweig convincingly shows that both the strategy and leading men of these companies had not changed in essence, only that our perception had made a 180 degree turn.
Rosenzweig claims that most studies into the success and failure of organizations, including a number of famous ones, suffer from this shortcoming. The works he criticizes include Built to Last by Collins and Parras, Good to Great by Collins and Corporate Culture and Performance by Kotter and Heskett, since these studies do not sufficiently take into account the halo effect and have too much confidence in perception research…only to subsequently claim to have discovered the most important success factors. The latter claim in particular receives no mercy from Rosenzweig because, in addition to the halo effect, these studies can lead to another eight misconceptions…and often do. In brief, these misconceptions are:
- The misconception of correlation and causality, i.e. that the correlation between two things is confused with causality. It is claimed that the ’one’ inevitably causes the ’other’ (well-trained individuals ensure good results), while this is not necessarily the case whatsoever (it is good results that provide the money to train people).
- The misconception of single explanations, i.e. that there is only one factor that explains the excellent performance of an organization (such as a strong customer focus) while, in reality, several factors affect one another, so that no single all-important distinctive factor can be attributed (another study even shows that, if an organization is heavily dedicated to corporate social responsibility, the results will improve significantly…which of course is inconsistent with the earlier determined decisiveness of customer orientation!).
- The misconception of connecting the winning dots, i.e. only looking at the similarities of successful organizations. If a comparison is not made to less successful companies, it is impossible to determine whether the similarities were the reason for the good results (all good companies have attractive landscaping... So what?!).
- The misconception of rigorous research, by which a lack of good data is ‘drowned out’ by a strong emphasis on the amount of research conducted. According to Rosenzweig, when the halo effect occurs, it will not matter how much statistical research has been conducted, since the path will be downhill from there.
- The misconception of lasting success, i.e. the claim that the researcher has discovered the recipe for eternal success - a claim that should be taken with a huge grain of salt since there are few things in life with eternal value, certainly in the exceptionally dynamic business world of the 21st century.
- The misconception of absolute performance, by which the success of an organization is viewed completely separately from the situation in the sector, while, in reality, the one organization profits from the adversity of the other ("One man’s bread…”).
- The misconception of the wrong end of the stick, by which cause and effect are reversed. Jim Collins, for example, claims that all great organizations are tremendously focused on one core competency (the hedgehog principle), so, to become great, an organization must excel at one thing. But there is no evidence whatsoever that a strong focus on a single item will guarantee success. In other words, Collins has cause and effect backwards here.
- The misconception of organizational physics, by which this type of research into business success, i.e. social research, is equated with, for example, physics research, thereby insinuating that the results of social research have the same precision and categorical detail as those in the sciences. But this is simply not true, since there are far more uncertainties and eventualities in the social sciences by definition, so the results should be handled and interpreted carefully.
Rosenzweig’s remedy is to search more pointedly for objective performance information (preferably financial), which can then be linked to more subjective information. The results should not be too exact and should be considered as merely indications of the right direction. This is an important message to both researchers and managers. To the first group, Rosenzweig is saying that they should conduct and analyze their research more rigorously and that the second group should be more critical about the results of this research. At the same time, however, Rosenzweig’s argumentation is not watertight. In business economic research, the halo effect has been a familiar concept for some time and the reason why conscientious researchers always make sure to use independent data, in addition to data gathered by means of questionnaires. They realize that, however good their research may be, the halo effect can never be ruled out completely. All the same, it is virtually impossible to determine how strong, and therefore how influential, the halo effect is on the research results. The fact that Rosenzweig dismisses the studies in question without scruples due to the halo effect is not quite proper, especially since he has not personally examined the underlying research data. It makes for good reading to drive famous researchers like Collins into a corner, but, in doing so, Rosenzweig is not giving them their due, since their research is not under par by definition, merely that the results could be presented in a less categorical fashion. That is why I recommend that readers read Rosenzweig’s book as the author himself suggests, i.e. with a critical eye, to which I’d like to add: but without closing their eyes to the valuable insights provided.
André de Waal is the Director of the HPO Center. His latest book is titled Strategic Performance Management, a Managerial and Behavioural Approach (Palgrave MacMillan, 2007). André can be reached through e-mail (dewaal@hpocenter.com).
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