The Halo Effect (2007) examines the problematic nature of assessing business performance, thanks to the various delusions we hold. Aiming to debunk many of the myths that try answer a pressing question – “What makes a successful company successful?” – the book demonstrates that what we might think are good indicators of success actually have more to do with our own biases than objective reality.
Every manager searches for the business Holy Grail, the one idea or method that reveals and explains, in no uncertain terms, the correct path to success.
However, though much effort is expended on trying to explain what makes a business successful, the reasons given often depend not on science, but pseudoscience.
Whereas a scientific process uses experimentation to determine the truth of a statement or hypothesis, pseudoscience relies on anecdotes, stories and data that cannot be shown to be either true or false.
A good example of a pseudoscience is astrology, which claims that an individual’s future can be read from the positions of the stars.
However, the nature of business makes it difficult to be rigorously scientific or run effective experiments. For example, if you buy two companies and use one management strategy for one and a different strategy for the other, comparing the two will not reveal much about the causes of their success or failure.
For that reason it’s difficult to determine scientifically which business strategy actually leads to a company’s success or downfall.
Moreover, when business analysts or journalists attempt to evaluate and explain a company’s success, they merely describe its current performance. Data too only supports a company’s present condition.
For example, take the Swiss-Swedish industrial company ABB. At one time, ABB was one of the most successful companies in Europe. The reason for its success as cited by the Financial Times was the company’s progressive organizational structure and corporate strategy.
However, when the company almost collapsed in 2005, these very same reasons were given as leading to its downfall!
Since the reasons given for a company’s success are no more than statements of its current performance, they can’t be treated as accurate indicators of what makes a company profitable.