Analysis of the Halo Effect, and other managerial delusions.

At the end of last years financial period, the company where I work announced record year in terms in profit and revenues. With this announcement the company also announced new strategy and restructuring. Most of my colleagues were little shocked and we had this question in mind why after many successful years the companys strategy changed suddenly? Now after reading this article I got some answers to that question. Ironically, McKinsey was our strategy consultant. The company restructured, lay off few unproductive employees, stopped almost all of capital expenditures and launched new marketing offensive with low prices. The success, my company had in past, was not sustainable due to the fact the environment have changed. For example, at one major metropolis market where our company has big presence has unexpected 10% unemployment rates. Naturally the management felt the need to change strategy. I felt that the management clearly saw beyond the halo effect. They didnt become enamored with their long successful run. They were willing to get new ideas and hired competent strategist McKinsey to face the upcoming storm. Even the budgeted revenue figures were cut down to more realistic and achievable numbers, the numbers our management thought was possible if all the employees execute the new plan. What is this halo effect in the business world? It is the tendency to infer that a company has a sound strategy, a visionary leader, motivated employees, an excellent customer orientation, a vibrant culture, and so on if the company is successful for long time in all measureable matrices. But when things go wrong for the company with same set of elements, then the

conclusion is that the companys strategy went wrong, the employees became complacent, the customers were neglected and so forth. But in fact none of these things actually changed. Rather it is companys performance good or bad which creates an overall impression a halo that shapes how its strategy, leaders, employees, culture and other elements are perceived. Most of the corporations are heavily influenced by the slew of articles, research papers and guidance many management books and publications provide. Often many management books claim to provide blueprints for major success. But most of these conclusions are based on questionable data and hence implementing these could lead to erroneous conclusions. A wrong sentiment has been built that business success spring forth when the key articulated steps are followed. These publications obscure the fact that businesses exist in uncertain and uncontrollable environment. In real world because of uncertainty good moves do not result in favorable outcomes. To overcome these influences the management needs to think critically about the research claims to detect some of the egregious errors that pervade the business publications and community. Here the capacity to think clearly becomes great asset as it allows the management to cut through the clutter and to discard the delusions, instead acknowledging more realistic understanding of business success and failure. The first step will be to identify some of the existing misperceptions and delusions. Once identification is done, flawed thinking can be replaced with more acute method of strategic thinking. Example of Cisco systems is sited. Cisco had become much admired company during the 90s internet boom era. All kind of superlatives were

applied to the company and its management for its continued success and expansion. Once the internet tech bubble burst and Cisco lost most of its business, the same critics became busy applying opposite superlatives to the company. In fact nothing had changed in Ciscos management. They were still creating superior products and providing top quality customer services. Later when environment changed Cisco bounced back due to its inherent strength and market demand. Many concepts in business such as leadership, customer care, etc. are difficult to define and are ambiguous. So what happens is the things which we believe are contributions to companys success are actually attributions. In other words, outcomes are mistaken for inputs. Many a times these inputs are used in business publications to attribute success. Thus halo effect compromises the quality of data used in business research. This over reliance on wrong data creates two other delusions- of absolute performance and lasting success. If a company follows a given formula, success will not be guaranteed. Because in competitive markets performance is relative, not absolute. Success and failure depends not only on the companys actions but also on its competitors. A company can follow the success recipe but if its competitors do same at faster rate, the company will suffer. In US, GM kept on improving over last thirty years but the Japanese and Korean competitors improved even at faster rate. The GM indeed became better automaker but didnt help the company. Hence the notion that company could gain success by simply following a simple formula leads to the absolute performance delusion.

In free markets, long term success is difficult to maintain. Profits decline due to imitation and competition. Few companies do stand out in terms of long term success. Now studies can be done on these companies and one can arrive at success keys. Here the problem is that the conclusions only these keys only describe the successful companies. If one objectively studies these companies, it will be found that the long term success was made up of strings of incessant small successes. The small successes tells us that the need of hour is to keep winning more immediate battles than implementing framework to achieve enduring greatness. The conclusion is that there is no shortcut and there are no winning formulas for long term success. To overcome this, the management needs to recognize the role of uncertainty and see the world through probabilities. The real world is unpredictable. Just following well publicized winning formula will not translate to success. The managers need to take cognizance of this fact. The business environment does not allow certain outcomes for specific decisions. Success companys new products or services depend on consumers choices and competitors actions. It is difficult to correctly measure these critical components. Third source of uncertainty is from pace of technological change. For lot of companies the demand of their products and services change rapidly and in unpredictable ways. The last source of uncertainty is internal capabilities, such as employee skills and talents; which again is difficult to measure. Executives need to look at these uncertainties and should take decisions which improve the odds of success. It requires thoughtful consideration of the

factors described. The goal should be to gather accurate information and subsequent careful scrutiny of it. Greater knowledge and understanding will refine the probabilities. Hence business is about finding ways to improve the odds of success but never to conclude that it is certainty. The halo effect makes clear the fact that in uncertain world input actions and outcome results are imperfectly linked. It is possible that good choice may not culminate in success and it does not mean that it was a mistake. In this scenario the critical thing to analyze will be to examine the factors which went into the decision. There is need of rigorous analysis and taking an extra mental step of judging actions on their merits rather than simply making after the fact attributions. The urge to make attributions based solely on out comes need to be avoided and avoid the halo created by performance. The insistence should be on independent evidence.