The halo effect and other managerial delusions

The latest issue of The McKinsey Quarterly contains a fascinating article entitled The Halo Effect, and Other Managerial Delusions. It suggests that many executives look in the wrong places for the insights that will deliver a competitive edge. I believe many executives fall prey to the same flawed thinking as they search for opportunities for innovation.

The latest issue of The McKinsey Quarterly contains a fascinating article entitled The Halo Effect, and Other Managerial Delusions. It suggests that many executives look in the wrong places for the insights that will deliver a competitive edge. I believe many executives fall prey to the same flawed thinking as they search for opportunities for innovation.

The author, Phil Rosenzweig, believes that executives rely too much on books and articles that claim to be based on extensive study and reams of data, but are actually fundamentally flawed by the “halo effect.” This is the tendency to make specific inferences on the basis of a general impression. For example, when we see a company that has rising sales, successful products and increasing profits, we ascribe that to its visionary leadership, innovative culture, commitment to its customers and other positive factors. On the other hand, if the same company runs into a spell of poor performance, the media and book authors often say that’s due to poor leadership, a flawed culture, its ignorance of its customers and other negative factors. In fact, neither scenario may be absolutely true. In fact, a myriad of factors contribute to why a company is succeeding and struggling at any point in time, Rosenzweig points out.

Another flaw in business literature, according to the author, is to believe that a company can achieve success if it follows a specific set of steps – which he calls “the delusion of absolute performance.”

“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. Success and failure 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… High performance comes from doing things better than rivals can, which means that managers have to take risks. This uncomfortable truth recognizes that some elements of business performance are beyond our control, yet it is an essential concept that clear-thinking executives must grasp.”

The final flaw that savvy executives need to watch out for is something that Rosenzweig calls “the delusion of lasting success.” Typically, this comes from authors who look at a group of companies that have been successful over time, and then try to generalize the factors they have in common that have supposedly been key to their ongoing success.

“What the authors claim to be the causes of long-term performance are more accurately understood as attributions made about companies that had been selected precisely for their long-term performance… In fact, lasting success is largely a delusion, a statistical anomaly… Corporate longevity is neither very likely nor, when we find it, generally associated with high performance. On the whole, if we look at the full population of companies over time, there’s a strong tendency for extreme performance in one time period to be followed by less extreme performance in the next. Suggesting that companies can follow a blueprint to achieve lasting success may be appealing, but it’s not supported by the evidence.”

So what’s a savvy executive to do? Rosenzweig recommends spending less time reading and more time developing critical thinking skills. “Wise executives should be able to think clearly about the quality of research claims and to detect some of the egregious errors that pervade the business world. Indeed, the capacity for critical thinking is an important asset for any business strategist – one that allows the executive to cut through the clutter and to discard the delusions, embracing instead a more realistic understanding of business success and failure.”

This is a thought-provoking article, and I highly recommend that you read it!

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