Image Source: Min An via Pexels

Avoid Being Tricked by Business Success Stories

In their efforts to achieve high performance, managers look to books and articles that claim to provide the formula for success. In the last years, some of the most popular business books have claimed to offer the principles for excellence, or the blueprint for enduring success, or the way to go from good to great. Many of them seem to be very persuasive. They are based on large sets of data, and the findings are presented in a way that seems authoritative and credible. Unfortunately, a great deal of research about company performance is fundamentally flawed. Their promises of success are based on serious misconceptions, and steer managers in directions that are at best incomplete, and at worst utterly wrong.

This article will identify one of the most widespread problems that undermine business research – the halo effect. It will then describe a further error that afflicts management thinking – which I call the delusion of absolute performance. My hope is that managers can become more discerning, able to exercise rigorous thinking, and become less vulnerable to some of the misperceptions and delusions that are commonly found in the business world.

The Halo Effect

First identified by psychologist Edward Thorndike in 1920, the halo effect refers to the basic human tendency to make specific inferences on the basis of an overall impression. It is found in walks of life, including the way we evaluate job candidates, to the way brands influence our perception of product quality, and much more.

Here’s how it often works regarding company performance. Imagine a company that is doing well, with rising sales, high profits, and a sharply increasing stock price. Most people naturally infer that it has a brilliant strategy, an inspiring leader, a capable workforce, superb execution skills, solid values, and more. But when that same company suffers a decline in performance — when sales fall and profits shrink — people quickly infer that the strategy went wrong, the leader became arrogant, the people were complacent, the company forgot how to execute, and so forth. In fact, these things probably did not change much. Rather, a company’s financial performance creates an overall impression — a halo — that shapes how we perceive its strategy, leaders, employees, culture, and other elements. Many of the things we normally believe drive company performance are, instead, attributions based on performance.

Many everyday concepts in business — including leadership, corporate culture, core competencies, customer orientation, and more — are rather ambiguous and difficult to define objectively. As a result, we often infer perceptions of them from other things that appear to be more concrete and tangible, namely financial performance.

Guarding Against the Halo Effect

What can managers do about the halo effect? First, they should become more alert to the halo effect in their daily jobs. Take employee evaluations. Many companies have recently put in place elaborate performance evaluation systems that identify a desired set of competencies, including things such as “sound business judgment,” “drives for results,” “high creativity,” and more. But unless these competencies are measured in ways that are objective and independent of overall performance, it is likely that the results will be a reflection of an overall positive assessment. Despite the appearance of a detailed and precise set of measures, we may only have a general assessment that leads to specific attributions.

Second, managers need to become more critical and discerning consumers of management research. As they read articles and books about business, managers need to develop their powers of discernment and be appropriately skeptical of the sources of data. Rather than merely accept what they are told, managers need to ask about the validity of underlying data. They should look for independent evidence rather than merely accept that a successful company has a visionary leader and superb customer orientation, or that a struggling company must have a poor strategy and weak execution.

The Delusion of Absolute Performance

Many studies of business performance — including some bestsellers of recent years — rely on data that are contaminated by the halo effect. They pride themselves on the vast amounts of data that they gathered but overlook the fact that it’s the quality of data that matters, not just the quantity. Unfortunately, if the data are biased by the halo effect, the results will be misleading, too.

One of the most appealing claims of business best-sellers is that a company can achieve success if it follows a specific set of steps. Some recent books have claimed that companies can virtually guarantee success by following these six steps, or that four-point formula, or those five principles. These studies may appear to show a predictable relation between actions and high performance, but in fact, they do nothing of the kind. If companies are selected on the basis of part performance, and data are then gathered from sources that are undermined by the halo effect, such as articles in the business press, interviews with managers, and other such sources, we won’t isolate the drivers of performance at all. The resulting analysis may suggest that a given set of factors leads predictably to success, but the logic is backward: it would be more accurate to say that successful companies tended to be described in a common way.

Following a given formula can’t ensure high performance, and for a simple reason: in a competitive market economy, performance is fundamentally relative, not absolute. Revenues and profits depend not only on a company’s actions but also on those of its rivals. A company can improve its operations in many ways — better quality, lower cost, faster throughput time, superior asset management, and more — but if rivals improve at a faster rate, its performance may suffer.

Thinking Clearly About Probabilities

Despite our desire for certainty and predictability, formulas can never predictably lead to high performance, and for a simple reason: In a competitive market economy, it’s not enough to do things well – a company must do things better than rivals. Doing things better, in turn, demands that we make decisions to be different, and that entails risk. Therefore, rather than search for simplistic formulas that promise success, but are based on flawed data and faulty logic, managers would do better to adjust their thinking.

First, they must recognize the fundamental uncertainty of the business world. Doing so does not come naturally. People want the world to make sense, to be predictable, and to act according to clear rules of cause and effect. Managers want to believe their business world is similarly predictable, that specific actions will lead to certain outcomes. Yet strategic choice is inevitably an exercise in decision making under uncertainty.

As managers, our goal should not be to attempt to find perfect formulas that claim to guarantee success, but to gather accurate information and subject it to careful scrutiny in order to improve the odds of success. Wise managers know that business is about finding ways to improve the odds of success — but never imagine that it is a certainty.

Tharawat Magazine, Issue 2, 2009