The Halo Effect

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The Halo Effect
Critical Thinking in the Business World The Halo
Effect and Other Delusions Executive Stretch
Programme NHS North West Leadership
Academy Prof. Phil Rosenzweig September 2009
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1. Group Experiment by Barry Staw

• Groups of students asked to predict financial
  performance
• High Performance groups reported significantly
  higher scores
• Group cohesion
• Enjoyment of working together
• Quality of group communication
• Openness to new ideas
• ... individuals attribute one set of
  characteristics to a work group they believe is
  effective and another, different, set of
  characteristics to an ineffective work group.
• Barry M. Staw, Attribution of the Cause of
  Performance A General Alternative
  Interpretation of
• Cross-Sectional Research on Organizations,
  Organizational Behavior and Human Performance,
  1975

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2. Pres. Bush Approval Ratings

• After Sept. 11, 2001, Bushs overall approval
  rose sharply
• So did ratings for handling of the economy,
  from 47 to 60

• Aug. 2005
• Overall approval 41
• Economic policies 37
• Handling of Iraq war 38
• Fighting terrorism 54
• Leadership qualities 54

Oct. 2005 (after Katrina) 37
32 32 46 45
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3. Call Centre Waiting Time
How long did you have to wait for customer
service?
Immediately or Very Quickly
Too Long

• Customers whose problem
• was solved right away

58
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• Customers whose problem
• was not solved right away

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About the Halo Effect

• A general impression that leads to specific
  judgments
• Identified by Edward Thorndike, 1920
• Study of army officers and their evaluations of
  soldiers
• Common in many walks of life
• Job interviews, brand preference
• Often found in the business world
• Perceptions of less tangible are based on what
  seems to be concrete and reliable often
  financial performance

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Fortunes Most Admired Survey
Annual survey of Most Admired Company since
1983 Eight different measures Quality of
management Quality of products and services Value
as a long-term investment Innovativeness Soundness
of financial position Ability to attract,
develop, and keep talented people Responsibility
to the community and the environment Wise use of
corporate assets The Fortune Most Admired
survey results are influenced by a strong halo,
which renders the use of any single attribute
ratings questionable. Example ExxonMobil
in 2006
Brad Brown and Susan Perry, Removing the
Financial Performance Halo from Fortunes Most
Admired Companies, Academy of Management
Journal, 1994
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Corporate Culture and Performance
Does a strong corporate culture lead to high
performance? Thousands of managers surveyed at
hundreds of companies Does your company have a
strong culture? Rated on a score from 1 (low)
to 5 (high) High performing companies scored
significantly higher Does your companys
culture fit the environment? Rated from 1
(terrible fit) to 7 (superb fit) High
performers averaged 6.1, low performers
3.7 Conclusion Building a strong corporate
culture leads to high performance
John Kotter and James Heskett, Corporate Culture
and Company Performance, 1992
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Cisco Systems
1996 to 2000 Fastest ever to 100 billion In
March 2000, valued at 450 billion Brilliant
strategy Outstanding management of
acquisitions Superb customer focus Visionary
leader
2001 to 2003 Share price collapse thanks to
internet bubble Now Strategy was
wrong Mismanaged its acquisitions Forgot
about its customers Arrogant leadership
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ABB, 1990 - 2000

• When ABB was on the way up
• Brilliant strategy
• Vanguard of global business
• Great matrix organization
• A post-industrial organization
• Widely respected
• Top of Financial Times poll six years in a row
• Charismatic and brilliant CEO, Percy Barnevik
• Award for Most Awards!
• 1998 ABB a Dancing Giant!
• Full of praise, based on articles and case
  studies
• ABB on Corporate Mount Olympus, with GE and
  Microsoft
• ABB managers were said to be a new breed of
  superhumans.

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ABB, 2000 - 2004

• ABB in free-fall
• Revenues down, profits down, share price falls
• New economy bust, asbestos claims, and more
• Now
• Strategy said to be misguided and lacking
  imagination
• Organization said to be too complex and chaotic
• Percy Barnevik now vilified as arrogant
• Culture now said to be complacent
• No one said ABB had changed!
• ABB was seen through a different lens

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Many books about high performance
2001, Jim Collins
1994, Collins and Porras
2006, Marcus
2002, Joyce, Nohria, and Roberson
have serious shortcomings !
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Lessons so far

• Beware the Halo Effect
• Many things that we believe explain performance
  are in fact explained by performance
• Data independence is critical
• Be sure that independent variables are truly
  independent of what is being explained
• If a research study is based on biased data,
  the findings will be questionable, too
• Using questionable data leads to a number of
  follow-on errors
• More data does not solve the problem!

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Discussion question
Are there examples of the halo effect in your
field? Where do you find it, and what are the
consequences? Please discuss with colleagues
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With my new club, you will add 5 meters to your
drive.
With my new club, you will win your next
tournament.
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Explaining Kmart
Widely criticized for Bad strategy, bad
execution, bad leadership In fact, during the
1990s Kmart improved on many objective
measures Faster inventory turnover Better
point of sale information for re-ordering Lower
administrative costs Improved central
purchasing More frequent inventory counts And
more Kmarts failure is relative, not absolute
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Delusion of Absolute Performance
Formulas can never predictably lead to success
because, in the business world, company
performance is relative, not absolute Although
not necessarily zero-sum High performance is a
moving target, not a stationary one! Even if all
companies in an industry follow a formula, they
will not all become high performers Performance
is about being different from competitors which
also entails risks Toward a Theory of High
Performance, HBR, 2005, missed the point
entirely.
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General Motors
Wuality, features, and safety are better than 10
years ago. Yet market share keeps slipping and
the company loses money. GMs problems are
relative, not absolute The threat of Asian
competition stimulated GM to improve in the first
place.
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Daimler and Chrysler

• After years of red ink, in May 2007,
  Chrysler was sold to a private equity group at a
  huge loss.
• Mr. Zetsche, head of Chrysler from 2000 to
  2005, denied he should take any responsibility
  for the US carmakers troubles
• I am convinced that Chrysler today is in
  much better shape than it was six to seven years
  ago, and you have quite a lot of parameters to
  prove that quality, productivity, and
  portfolio.

Richard Milne and John Reed, Daimler to focus on
driving revenues, Financial Times, May 29, 2007
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Delusion of the Wrong End of the Stick
Also called Survivor Bias Some companies may
have pursued a Blue Ocean with great success
but many others may have failed We need to
examine the entire population that sought Blue
Oceans and monitor eventual outcome, not only
select survivors
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Delusion of Correlation and Causality
Do satisfied employees lead to high performance
? Or does high performance lead to
satisfaction? Findings? High performance leads
to employee satisfaction more than the
reverse. Employees want to play for a winning
team. Make choices that drive success, and high
employee satisfaction tends to follow.
Benjamin Schneider et al. Which Comes First
Employee Attitudes of Organizational, Financial,
and Market Performance? Journal of Applied
Psychology, 2003
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So, is there any good business research ?
Yes, absolutely! Many excellent studies
are Well designed Based on valid data And
draw appropriate conclusions But they rarely
make inspiring stories!
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Lessons for Managers
In business, performance is relative, not
absolute Companies have to do things differently
from rivals Strategy means choice, made under
conditions of uncertainty Even good decisions
may turn out badly But that does not necessarily
mean they were bad decisions! Assessing actions
cannot be done only on the basis of outcomes
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Finally
In all fields and functions, managers should
develop their capacity for rigorous thinking
When reading articles, books, and case
studies When receiving advice from consultants
And when making business decisions There are
huge opportunities to raise the level of
critical thinking in our organizations!