Sunday, May 02, 2010

Halo Effect

This book makes a mockery of the Self Help Business Books and one size fits all formula for business success. In particular goes after Built to last and in search of excellence.

Basic premise of the book is that good results from a company creates a Halo effect which causes the managers to attribute many factors for its success after the fact.

It is a chicken and a egg problem. Did the factors cause success or the success created these factors?

Author intelligently argues that a companies success causes the factors to be generated since the these companies regress after sometime.

Success can be caused by multitude of factors-
1. Positive Business Cycle
2. Chance Innovation
3. Being at the Right place at the right time
4. Leadership, employees and HRM

On a well documented statistically significant study- Culture, Leadership, employees and HRM contribute to about 10% of the company's performance.

Here are some of the well documented Delusions-

1. Halo Effect:
tending of analysis of a company to reflect only the overall results
Tendency to look at a company's overall performance and make attributions about its culture, leadership, values, and more.

2. Correlation and Causality:
the lack of proof of causality in many situations
Two things may be correlated, but we may not know which one causes which.

3. Single Explanations:
one factor is unlikely to be the reason for success or failure
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.

4. Connecting the Winning Dots:
problems with only considering "winners"
If we pick a number of successful companies and search for what they have in common, we'll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.

5. Rigorous Research:
mistaking large volumes of data for good data
If the data aren't of good quality, the data size and research methodology don't matter.
6. Lasting Success:
most companies trend to the mean eventually
Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but unrealistic.

7. Absolute Performance:
companies can do well and still fail if a competitor does better
Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.

8. The Wrong End of the Stick:
successful companies may do various things but that does not mean that doing those things will make you successful
It may be true that successful companies often pursued highly focused strategies, but highly focused strategies do not necessarily lead to success.

9. Organizational Physics:
business organizations are just not that predictable
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.

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