The Halo Effect

How Little We Know

What leads to high performance? Is the mother of all business questions. It’s hard to know exactly what why one company succeeds and the other fails. We don’t want to admit how little we know so we seek explanations
Many questions in business don’t lend themselves to scientific examination: try and see because there’s no way to run a large enough experiment to test the results. However we can use quasi-experimentation to answer some business questions
We need to make the distinction between reports and stories. Reports are responsible for providing the facts. Stories are ways people try to make sense of their lives and experiences in the world. We need to watch out for stories dressed up as science.

There’s a tendency to over-exaggerate company high’s and low’s and to rely on simple phrases to explain a company’s performance
Cisco story illustrates how difficult it is to understand a company performance even as it is unfolding before us

The Delusion of the Halo Effect: So many of the thing that people think contribute to performance are actually attributes of performance
There are a few kinds of Halo effect: a tendency to make inferences about specific traits on the basis of a general impression
It’s difficult for most people to independently measure specific features so they tend to blend them together
The halo effect is also a way people makes guesses about things that are hard to assess directly
Brand building is about creating halos so customers are more likely to think favorably of a product or service
Most people don’t recognize good leadership when they see it unless they also have clues about performance. Once they have evidence on good performance the confidently make attributions about leadership, culture, customer focus, and quality of people

The Delusion of Correlation and Causality: Two things may be correlated but we may not know which one causes which
Easy to find data on the dependant variable (company performance) from financial statements, Bloomberg, Factset, etc. However, it’s very difficult to find data on the independent variable that isn’t “contaminated with halos.” In this case research on leadership, culture, customer focus, quality of people, etc. must be carefully selected
You cannot measure the strength or fit of a certain characteristic just by asking people who already have an opinion on company performance. Instead you have to look for specific actions or policies or behaviors that are not shared by perceptions of performance.
Inferring causality from correlation trips up many studies of business. Correlation, by itself, explains nothing
One way to improve our ability to explain causality is to gather data at different points of time, so that the impact of one variable on some subsequent outcome can be more clearly isolated (longitudinal design)
The Delusion of Single Explanations: It’s difficult to know which independent variables are correlated and how/if they contribute to causality. Many university departments do not represent meaningful divisions of knowledge so they are unaware of these rival explanations.

The Delusion of Connecting the Winning Dots: if we only compare successful companies, we can connect the dots any way we want but will never get an accurate picture.
The Delusion of Rigorous Research: The quantity of data is beside the point if the data is not of good quality
The Delusion of Lasting Success: Companies that last the longest usually aren’t the best performers. Performance is not random but persists over time, however there is a tendency to move toward the middle, a clear regression toward the mean

Retrospective interviews are full of halos as people take cues from performance and make attributes accordingly
The Delusion of Absolute Performance: Companies are described as succeeding or failing on their merits alone. This delusion does not take into account competitive forces. This delusion suggests that companies can achieve success buy following a simple formula, regardless of the actions of their competitors.
The Delusion of the Wrong End of the Stick: Companies need to be focused and pursue one single goal to succeed (hedgehog concept), rather than pursue multiple strategies and exercise flexibility (fox concept)
The Delusion of Organizational Physics: Business is not all a science based on mathematical formulas. We cannot put companies in petri dishes and run neat experiences. Therefore all claims of isolated immutable laws of organizational performance are unfounded.

Recent studies have shown that personal management styles affect company performance anywhere between 4-10%. These studies were performed in a halo free manner by addressing certain procedures and including a double-blind study. These can be considered “good science.”
These business “stories” expose the principal fiction that a company can “choose to be great,” which implies that there were some management missteps along the way that resulted in not “being great”

If so many of the things we observe are not drivers of performance but attributions based on performance, then what brought about the high performance in the first place?
Michael Porter of HBS declared that company performance was driven by strategy and execution. Strategy is about performing different activities from those of rival companies, or performing similar activities is different ways. Execution is about carrying out those choices by people working together to achieve effective operations.
Strategy always involves risk because we don’t know for sure how our choices will turn out
Strategic decisions are so uncertain because of 1) Unknown customer preferences 2)Decisions from competition 3) Technological change
Execution isn’t as risky as strategic choice. Execution takes place entirely within the company, there are fewer unknowns.
The ways people and processes work together in complex organizations are hard to understand and transplant elsewhere with the same results. This is why execution, like strategy, doesn’t lend itself to predictable cause –and-effect relationships.
Managers should identify their company’s specific execution challenges and address them individually
Managers try to hide poor strategy by blaming problems in execution.

Managers must recognize that good decisions don’t always lead to favorable outcomes, that unfavorable outcomes are not always the result of mistakes, and to resist the natural tendency to make attributions based solely on outcomes.
Smart companies assess their options and do their best to raise the probabilities of success, even when their fortunes are still uncertain