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Blinded by the Light

How the "halo effect" distorts our view of company performance.

What leads to high business performance? Consultants and journalists have advanced many answers to this question, both in print and from the lectern. But most of those answers are little more than educated guesses. In fact, most of them are probably bunk.

That, in a nutshell, is the message of a provocative new book, The Halo Effect (Free Press, February 2007). Written by Phil Rosenzweig, the book debunks that staple of the best-seller list, the corporate success story. According to Rosenzweig, popular and even academic studies of successful companies are commonly shaped by one or more of nine “delusions,” which trump the basics of research and logic (see “A Taxonomy of Delusion” at the end of this article).

The master delusion that gives Rosenzweig’s book its title is a well-known cognitive bias. Basically, the halo effect refers to how a general or overall impression of a thing influences the perception of other attributes of the thing, or related things. For example, a job seeker with a top-notch school on his résumé tends to shine a little brighter during interviews. Auto dealers place exotic “halo cars” on the showroom floor, knowing that their luster rubs off on their duller brethren. Analysts hail Apple’s iPod as a “halo product” that draws consumers to the rest of the company’s wares.

In Rosenzweig’s usage, the halo effect refers to the glow that financial performance casts on a company — a glow frequently reflected in business articles, he maintains. Has Standard Widget’s stock price outpaced the S&P 500 for the past few years? Journalists readily assume that it must have a brilliant strategy, or superior leadership. Or terrific execution. Or an intense focus on customers, or happy employees, or a strong corporate culture.

The effect also works in reverse. If a company’s stock is a laggard, depend on business writers to deride its strategy as misguided, its managers as shortsighted, its execution as sloppy, and so on, says Rosenzweig. Or perhaps the company “strayed from its core.”

Rosenzweig devotes a chapter to how the halo effect shaped press coverage of Cisco Systems, positively and negatively. When Cisco was the darling of the New Economy, it could do no wrong. Its strategy was brilliant; its CEO, John Chambers, was a visionary leader; its devotion to its customers was exemplary. But when the Internet bubble burst and Cisco’s stock swooned, the press pounced on the company for its alleged shortcomings in all of the above respects. Had the company really changed so dramatically in a short time, between 2000 and 2001? Or had the overall perception of Cisco changed?

“The story of Cisco is perhaps less an example of intentional journalistic hyperbole than it is of something more basic: the difficulty we have in understanding company performance, even as it unfolds before us,” writes Rosenzweig.

Built to Regress to the Mean

A management professor at the International Institute for Management Development in Lausanne, Switzerland, Rosenzweig sees halos everywhere, notably in best-selling business books such as In Search of Excellence, Built to Last, and Good to Great.

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