Have you ever had a thought that the whole world was crazy? That there was something so painfully obvious that you couldn’t believe everyone was missing? For me, it was the idea that all business books had the same plot:
- Let me tell you about this new business theory I have!
- I will prove this new theory about business by showing that it applies to great companies like Wal*Mart, Apple, etc.!
I kept wondering why it was only me. Then I came across the book The Halo Effect (with great summary here) by Phil Rosenzweig.
Rosensweig’s key point is that companies only have one independent variable that can be measured — how good it’s doing financially. Companies that are doing well have all these awesome attributes: great leadership, great culture, etc. And companies that are doing poorly have all these horrible features: poor leadership, poor strategy, etc. He uses the example of Cisco:
As an example, when Cisco Systems was growing rapidly, in the late 1990s, it was widely praised by journalists and researchers for its brilliant strategy, masterful management of acquisitions, and superb customer focus. When the tech bubble burst, many of the same observers were quick to make the opposite attributions. Cisco, the journalists and researchers claimed, now had a flawed strategy, haphazard acquisition management, and poor customer relations. On closer examination, Cisco really had not changed much—a decline in its performance led people to see the company differently. Indeed, Cisco staged a remarkable turnaround and today is still one of the leading tech companies.
This isn’t an exercise in analysis or science — it’s an exercise in storytelling. People look at how well the company did and create a story retrospectively to explain it. Rosenzweig quotes Eliot Aronson who says “people are rationalizing beings rather than rational beings.”
But how can these books be so off when they do so much analysis? They talk about going through tens of thousands of pages of financial reports and business press. But maybe this is just theater to make the findings seem more valid than they really are. The less we know about a topic the more we need to dress it up. I remember when I asked a math professor “Why don’t you see very many well-dressed mathematicians?”
Math is different from other fields in that you don’t have to prove you’re an authority in math. Your math does it for you. You can solve the problems, they can’t. In English and the Humanities, it’s much more subjective, and so you need some extra way of establishing yourself as an authority figure.
The core problem in analyzing great companies is that there isn’t any good data. Criteria like leadership, customer orientation and culture are subjective. And the financial success of the business leads directly to the contagion of the other metrics. Rosenzweig says:
The halo effect is especially damaging because it often compromises the quality of data used in research. Indeed, many studies of business performance—as well as some articles that have appeared in journals such as Harvard Business Review and McKinsey Quarterly and in academic business journals—rely on data contaminated by the halo effect. These studies praise themselves for the vast amount of data they have accrued but overlook the fact that if the data aren’t valid, it really doesn’t matter how much was gathered or how sophisticated the analysis appears to be.
The upshot is that business books are telling you stories about great companies and rationalizing the greatness of those companies. For managers who are looking to improve their companies, these books won’t be helpful. The books are peddling quick fixes and “one size fits all” strategies. But these strategies certainly won’t work for all companies. Managers and leaders need to understand that their role is to be agile and do what’s best in their specific role. They need to look at their company and their environment and determine what strategies will have the best chance of success.
