The Halo Effect

2 February 2017

In business world, things happen fast, markets emerge, markets disappear, and competition is keen. Therefore, business managers would like to find a formula, or at least some factors, to explain the success and failure of corporations and companies. But as the business world is so complicated, and becoming more complicated and uncertain in today’s globalized world, it is hard to determine factors and solid solutions to business problems. Even massive data are gathered and with long time of studies, secrets of success are still not easy to uncover.

So it is tempting for giving the promise of breakthroughs and secrets and quick fixes. From journalists to academics, people are searching for ready-made answers, plug-and-play solutions and marriage of convenience. When a company adopts a new initiative, a new strategy, it would a brilliant strategy if it is successful, and would be concluded as a bad move when it fails. So when Lego, the toy firm, failed its launching of Harry Potter figures, people criticized it was drifting from its core. But when GE successfully went to launch the financial services then, nobody criticized it was straying from the core.

The Halo Effect Essay Example

So whether it is a good thing or bad thing to stray away from one’s core business? There are lots of business writings, no matter they are from press or academic journals, use the ends to justify the means. We see what we want to see. And we are deceived by delusions. The fundamental problem is we all like to read stories, not only reports. Many good researches about company performance, which are carefully done, tend not to provide clear and definitive guidelines for action. These are reports to show the facts we don’t like to read. We want clear implications for action, we want to explain things.

A bestselling business book, Good to Great, which brings fame and fortune to the co-author Jim Collins, is one of those business books full of halo effect. One of the “great” companies focused by the book is Fannie Mae. But we can see from Figure 2, its stock price soared sharply before the book was written and reached its peak during when the book published. But after that, the performance of Fannie Mae was quite disappointing. Even we don’t include the current sub-prime mortgage crisis which made its stock price dived to new low, the stock price was in a downward trend.

The good to great strategies featured by Jim Collins wasn’t effective at all. Are all those promises, strategies and focuses suggested by one of the best selling business books are only delusions? Figure 2. The stock price of Fannie Mae from 1999 to 2008 (Source: Bloomberg) The Halo Effect provides the answers. It is a book to show the common delusions of the business writings. And to show us how to avoid these delusions and be critical to read the business researches. Most management book ask the first-order question: What leads to high performance?

But this book tries to answer a different question: Why is it so hard to understand high performance? A message like, “you, too, can transform your good company into a great one,” is very comforting. But the business world is not as simple as that. In this report, we will show that how The Halo Effect leads us to an uncomfortable war against cliches and delusions. What Does This Book Talk About The story of Cisco From the Bloomberg graph in Figure 1, we can see that by the end of 1999 and the beginning of 2000, the stock price of Cisco sky-rocketed to US$80 from around US$30 in few weeks.

Then the business press and the academics all praised that Cisco was doing everything right — Cisco had a great and visionary leader, John Chambers (who is still the CEO of Cisco currently); Cisco was remarkably skilful in acquiring companies (Fortune observed Cisco excelled at digesting acquisitions smoothly); and Cisco was credited with extreme customer focus. Fortune wrote that, “no net-workers have ever had the laser focus on customers that Cisco has had from day one. ” And John Chambers became the best CEO in the information age.

However, the reversal at Fortune arrived in less than one year. Tech stocks began to slide in mid 2000. By November, Cisco stock was trading at just US$50 and by April 2001, Cisco’s stock worth only US$14. More than US$400 billion vanished in just one year. Now Fortune reported Cisco was doing everything wrong – Cisco had exhibited a cavalier attitude toward potential customers; Cisco was failing at acquisitions and forecasting; and its senior management, including “best” CEO John Chambers, were arrogant and basking in a culture of confidence.

From the story of Cisco we can see that, for all the attentions that Cisco received, for all its prominence in the press over several years, even experienced journalists and respected academics had trouble identifying with any precision the reasons for Cisco’s outstanding success or its stunning decline. Figure 1. Stock Price of Cisco from 1999 to 2008 (Source: Bloomberg) The Halo Effect As George Bernard Shaw said, “The difference between a lady and a flower girl is not how she behaves, but how she’s treated”, the business press offered reasonable explanations for Cisco when it was successful or when it failed.

The same management style or technique can be good but suddenly turns bad in less than one year. Obviously, the business reporters’ descriptions of the company were colored by the stories they want to tell. Facts were assembled and shaped to tell the story of the moment, whether it was about great performance or collapsing performance. Journalists have deadlines, they have to file their stories in short timeline. So it is hard to blame them for convenient opinions. Sometimes journalists will have their conclusion first and then find the facts to support this conclusion.

And they will surely try to write things people love to read. And people love to read story, things with clear causal relationship. The Halo book explains, it is a natural tendency to make inferences about specific traits on the basis of a general impression. Like the Cisco case, as long as it was growing and profitable and setting record for its stock price, journalists and professors inferred that it had wonderful abilities to listen to its customers, a cohesive corporate culture, and a brilliant strategy. And when the bubble burst, observers were quick to make the opposite attribution.

Our evaluations depend on whether we think we’re seeing a lady or a flower girl. Sometimes we may not know whether it is an attribute that makes a company successful, or it is because the company is successful, so it could afford that attribute. Like good people, we don’t know whether it is the good people lead to a successful company or it is a successful company which could recruit good people. As so many things we commonly think contributing to company performance are often attributions based on performance.

Beside this halo effect, there are other kinds of delusions which are quite common in business writings described by the book which listed in Appendix 1. The author concluded, for a company to perform, only two things matter – strategy and execution. But there are no “sure-win” strategies, as strategy always involves uncertainty and risk. Each company must formulate its own least risky strategies base on its internal and external situations. For execution, there is also no “flawless” execution in the world. And what works in one company may not work in the others.

And real life is much more complicated than just few simple steps. Critiques of The Halo Effect This book itself is a critique itself, pointing out that there are no quick fixes and winning formulas in the business world. And it makes us rethink how much a business bestseller, like Good to Great and Built to Last could really tell us. We must say the contents are very insightful and critical. However, after all the finger-pointing, this book doesn’t clearly show us the way what should we do next. The just pointed out what we should not do and what we would not be possible to do.

He didn’t show what he would do differently or how should the business research should be conducted. He only said it would be very difficult to eliminate the halo effect. It seems the Halo book try to point out that most of the business books and business press don’t tell use much, if not useless. But we think spending time to do some researches with possible biases, is better than not doing any research at all. Flaws maybe in most articles and researches, yet they still could give us some stimulation and reference, if not insights.

What we should do is to read them carefully and critically, not ignore them at all. Conclusion The Halo Effect is a rare category of business book. It has no solutions to business problems. It doesn’t provide comfort for managers. Yet it is a very important business book. After reading it, we have to rethink what we have learnt in this course, such as the Judo Strategy or the Growth Strategy, could really help our companies. They could, maybe, or they are not suitable to us. This book tells us not to blindly apply what we read and learned, but to think critically whether we could benefit from them.

Those books may be the result of halo effect researching. And it shows that there are no winning formulas, no quick fixes and winning strategies in the real world. But we must point out that, even we know some researches or business articles are full of halo effect, it doesn’t mean that they are of no use to us. We just need to be careful in distilling those researches and apply what could be suitable for us critically. To conclude, even strategic management requires thorough analysis and calculation before making decision, it is a subject more of an art than science.

And it is much more complicated than reading few business bestsellers. Appendix 1 1). The Delusions of Correlation and Causality Two things may be correlated, but we may not know which one causes which. The challenge is to untangle the direction of causality. Does lower employee turnover lead to higher company performance or does higher performance lead to lower employee turnover? 2). The Delusions of Single Explanations Many studies show that a particular factor leads to improved performance.

But since many of these factors are highly correlated, the effect of each one is usually less than suggested. E. g. If market orientation explains 25 percent of performance, and corporate social responsibility explains 40 percent, does that mean that together they explain 65 percent? Are these separate effects and therefore additive? 3). The Delusions of Connecting the Winning Dots If we pick a number of successful companies and search for what they are in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

E. g. In In Search of Excellence, Peters and Waterman’s studied a sample made up entirely of outstanding companies. Therefore their sample selection based on outcomes, and which is a classic error. The business bestseller, Built to Last, was committing this same classic error, though Jim Collins said they did a very thorough study. 4). The Delusions of Rigorous Research If the data aren’t good quality, it doesn’t matter how much we have gathered or how sophisticated our research methods appear to be. No matter how horough the research, quantity of data is entirely beside the point if the data aren’t of a good quality. 5). The Delusions of Lasting Success Almost all high-performaning companies regress over time.

The promise of a blueprint for lasting success is attractive but not realistic. From a McKinsey study, the golden company that continually performs better than the market, has never existed. High performance is difficult to maintain. In a free market system, high profit tends to decline thanks to what one economist called “the erosive forces of imitation, competition, and expropriation. Suggesting that companies can follow a blueprint to lasing success may be appealing, but it’s not supported by the evidence. 6). The Delusions of Absolute Performance Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time. Companies are often described as succeeding or failing on the merits of their actions alone, as if performance were absolute. But in a competitive market economy, the performance of one company is always affected by the performance of other companies, or rivals.

Just like Kmart, a retail chain, was performing brilliantly from 1994 to 2002, but it was one of the losers, because if compared with Walmart, its performance was poor indeed. 7). The Delusions of the Wrong End of the Stick It may be true that successful companies often pursued a highly focused strategy, but that doesn’t mean highly focused strategies often lead to success. 8). The Delusions of Organisation Physics Stanley Bing wrote in Fortune in 2004, “We seek to minimize the feeling that our world is governed not by laws of nature but by mad, impetuous barbarians driven by greed, need, and the desire for maximum power and booty.

Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science, despite our desire for certainty and order. Like Built to last, it examined a long time period in a single gulp but could not show how actions taken at one moment led to results at a later time. If the business world really did run with clocklike precision, some promise in the business book like Good to Great would be reasonable. Yet the most important questions in the business world don’t lend themselves to the predictability or replicability of physics.

How to cite The Halo Effect essay

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The Halo Effect. (2017, Feb 04). Retrieved July 30, 2021, from
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