"For all the secrets and formulas, for all the self-proclaimed thought leadership, success in business is as elusive as ever."
- The Halo Effect, page xvi
"I confess, we faked the data."- Tom Peters, quoted in The Halo Effect, page 87
Business owners, managers and executives alike hungrily devour books about company performance, hoping to learn and apply the secrets of success. However, these books are largely stories, not science.
These success stories are created by looking at companies that have performed well and then imposing a narrative as to how that happened. This is exactly how In Search of Excellence, by Tom Peters and Robert H. Waterman, was written.
Rosenzweig reveals that Peters and Waterman talked to leading academics and managers to discover what makes companies successful. Then they created a seven hundred slide deck which featured examples and stories of business practices from successful companies. While preparing to present for an executive who favoured brevity, Peters intuitively picked eight qualities of top-performing organizations. He and Waterman then used these ideas as the basis of his book.
Peters admitted that the quantitative data came after they reached their findings. The Halo Effect implies that the data itself was flawed; that it likely came from newspapers, books, interviews and magazines featuring successful companies and biased stories on what created that performance.
Though the principles described in books such as In Search of Excellence intuitively seem like sound advice, the reality is it doesn’t give us a complete or reliable roadmap to create strong performance.
"The improved performance we attribute to the CEO almost certainly overlaps with one or more other explanations for company success."- The Halo Effect, page 80
One study, from the University of Texas, shows that market orientation accounts for 25 percent of performance variance. Another study, out of the University of Delaware, shows that corporate social responsibility accounts for 40 percent of performance variance. Does this mean the two factors together account for 65 percent? Or is it more likely that the figures overlap? If they do overlap, by how much? These tricky questions are not often addressed when presenting studies that show how certain actions or qualities led to good performance.
Also, if a company demonstrates good corporate social responsibility, might it be reasonable to assume that they also treat their employees well? And if that is the case, how much of the success of the company should be attributed to that factor?
Many articles describe the impact that a CEO can have on the fortunes of a company. Others discuss the importance of having a collaborative culture. But how much effect does the CEO have on creating a collaborative culture? How can we separate these two factors and see how much each one helped the company to do well in the market place?
The questions posed here are not answered in articles and books claiming to show how to create business performance. What we are left with is this: no single strategy, quality or action will lead us to market success. Business books and articles have yet to prove the impact that any single factor will have on the fortunes of organizations.
"Once we see that performance is relative, it becomes obvious that companies can never achieve success simply by following a given set of steps, no matter how well intended; their success will always be affected by what rivals do."- The Halo Effect, page 116
A study called the Evergreen Project set out to investigate what really works in business. It provided examples of practices at different companies, categorized as Winners, Climbers, Tumblers or Losers.
Kmart was profiled as a “Loser”. At first glance, this seems to be a fair choice. After all, Kmart’s market performance dropped over many years until they finally headed to bankruptcy court in 2002.
However, looking more closely we discover that in fact Kmart made many innovations in the 1990s, including:
Despite these improvements and many others, Kmart’s financial returns did not get better. Why not? Because its competitors improved at a faster rate. For example, though Kmart installed point-of-sale scanning in stores by 1990, Wal-Mart had done this two years before. In many aspects of business, Wal-Mart was faster or better than Kmart.
For those of us looking to learn how to improve returns for organizations using the advice in business books, beware! Most books describe strategies to improve performance without reference to the importance of keeping up with or outstripping your competitors.
Phil Rosenzweig is a Professor at IMD, the International Institute for Management Development, in Lausanne, Switzerland, where he works with leading companies on questions of strategy and organization.
