… The most basic problem that I identify is an example of what is known as the Halo Effect. When a company is doing well—when its revenues and profits are up, and its share price is strong—it’s natural to infer that the company has a good strategy, an effective leader, excellent customer focus, and a vibrant corporate culture. When that same company falters, it’s easy to say that the strategy was misguided, the leader became ineffective, the culture became complacent, and the customer was neglected.
In fact, very often the company did not change much at all. Rather, people made different attributions based on its changing performance. Unfortunately, so much that we read about companies—in the business press, case studies, and even large sample research studies—is based on data that are undermined by the Halo Effect. These studies appear to have described the factors that lead to high performance, but are more correctly understood as identifying the ways that high performing companies tend to be described.
Relying on data that are undermined by the Halo Effect leads to several further errors of thinking, one of which is particularly relevant in the context of management consulting. I call it the Delusion of Absolute Performance, and it helps explain why formulas for business success have never worked, and will never work.
Simply stated, in a competitive market economy, business performance is better understood as relative, not absolute. A company may improve in absolute terms but still fall further behind its rivals.
Phil Rosenzweig is the author of the Halo Effect, which might be the best $10 you ever spent.