Saturday, August 25, 2007

What REALLY Works..umm..well, sort of..!

Is there a secret sauce for corporate success?

The Halo Effect is a cognitive bias whereby the perception of a particular trait (for example, of an individual) is influenced by a general impression (of that individual). This effect was first postulated by Edward L. Thorndike, an American psychologist who conducted research into how World War I soldiers were appraised by their superiors. He found high cross-correlation between all positive and all negative traits - in plainspeak, that means that soldiers who were found to be good on one or two traits were rated as good on all other traits as well, while those who were seen to be bad on one or two traits were rated poorly on all other traits as well.

Lest we think that this is an affliction confined to senior World War I army officers, it isn't. Pretty much all human beings suffer from this bias - apparently it is a mechanism used by the human brain to manage the complexity of the world. This, for example, is why celebrity endorsement of products works, even when it is fairly apparent that the celebrity has no credentials - or credibility - to endorse those products.

Most of us also seem to intuitively realize the existence of this effect - for example, this is why people go to extraordinary lengths to put on their best behavior in the presence of somebody in authority.

Now, a book called The Halo Effect ... and the Eight Other Business Delusions that Deceive Managers, published in February 2007 by Free Press, sets out show how this effect may color our perceptions of company performance. At first glance, this is the book the business world was waiting for, and didn't know it. It's a good, down-to-earth look at the various studies, scholarly and otherwise, that have claimed over the years to uncover the secret sauce that drives great companies. This is a book full of solid horse sense - the most refreshing book in years in a genre notorious for pompous claims and buzzphrases.

It dedicates itself to debunking simplistic "theories" that purport to answer the core question of what really determines corporate performance. The core argument of the Halo Effect is that when a company performs well, we shower glowing ratings on every one of it's management traits such as leadership, culture, strategy, execution, et al. When the company performs poorly, we promptly buckle over to the other extreme, demonizing the very same leadership, culture, etc.*!

Along the way, the book unveils eight other "delusions" that frequently afflict attempts to answer this question. In buttressing its arguments, the book quotes from authorities as varied as George Bernard Shaw and the legendary Nobel Laureate Richard Feynman.

The book comes with cast-iron credentials - the author is Prof. Phil Rozenzweig, who is a PhD from the Wharton School at the University of Pennsylvania, and has taught at Harvard Business School and IMD, Switzerland. His candor is incredibly refreshing, and the fact that most of the authorities on this subject that he takes on are people of his "own" - business school professors - shows admirable boldness.

The other delusions include the old statistician's chestnut - mistaking correlation for causality. Another one relates to the quest for single, over-arching explanations for good performance where in reality there may be multiple factors at work. Yet another delusion deals with the fact that company performance is often seen in absolute terms (reduction of inventory costs, for example) while it should really be seen in relative terms (for example, market share, or change in inventory costs relative to those of the competition).

I thought one delusion, the 'delusion of rigorous research' is rather inaptly named. It holds that it doesn't matter how rigorous our research methodology is if it uses data that isn't of good quality. True enough, but this delusion would probablybe better named so as to direct the focus on the poor data quality.

Personally, perhaps the best takeaway from this book was the exhortation that one should not select a sample for study based on the dependent variable - for example, if you want to study if a new technque for teaching mathematics to children works, you should study how kids who were taught using that technique fared, but you should also look at children who weren't taught that technique! **

One criticism that may be leveled at the book is that it is sometimes too quick to assume that the data used by various studies were "contaminated" by halos; it seems to me that this is too facile, and perhaps unfair, a conclusion. We should probably credit the authors of those studies, the references they consulted, and the subjects they interviewed with a greater degree of discretion and diligence than that. Another thing I found myself wishing the author would refrain from is the extent to which he bases evidence for the delusions on news reports in the business press, such as BusinessWeek, Fortune and The Wall Street Journal. These are written by reporters under stifling deadlines, often under pressure to sensationalize the mundane - a fact that does not escape most discerning readers. There can be a smattering of these, but the author would probably have done better to focus his considerable energies on well-funded studies done over a long period of time, with purport of scholarly rigor, and papers and books*** based on such studies. The readers of such reports, papers and books are typically asked to suspend common sense and prior experience, and submit to scholarly authority derived from apparent academic rigor, and it is these for which the greatest disapprobation should be reserved.

So, what does work, according to the author? Well, he concludes, somewhat disappointingly, that it's the right strategic choice, and good execution!

But this is not to take away from the otherwise excellent content of the book. It's job is not to give us formulas. It's purport is to caution us that business performance is far more complex, and far less amenable to simplistic analysis than we tend to think, and it achieves that goal with admirable panache!
* I have referred to this "binary" thinking as the Extreme Tendency elsewhere, albeit in a somewhat different context - that of foreseeing the prospects of emerging technologies!

** Later in the book Rozenzweig shows that even observing this precept doesn't help much in uncovering what drives corporate success, but it's a very important principle to keep in mind nonetheless.

*** That, without openly claiming anything of the kind, actually intend to expand the fame of their authors as management Gurus, not to say anything of their pockets!