See what "Rosenzweig, Phil" is in other dictionaries. Phil Rosenzweig - The halo effect and other misconceptions of every manager... CEOs are more interested in a compelling life story than proper scientific approach

English Phil Rosenzweig. The Halo Effect 2007

Read in 12 minutes, original - 25 minutes

Photograph by Luc Viatour, 1999

There is no scientific explanation for the company's success

Every manager is looking for the Holy Grail - the idea or method that determines the path to success. Attempts to explain what makes a business successful reveal reasons that often depend not on science, but on pseudoscience.

The scientific process determines truth through experience, while pseudoscience relies on cases and data that cannot be proven true or false.

Example. Astrology is a pseudoscience that claims that the future of a person can be predicted from the stars.

But because of the nature of business, it's hard to be rigorously scientific or conduct effective experiments.

Example. If you apply different strategies to two companies, comparing them will tell you little about the reasons for success or failure.

It is difficult to scientifically determine which business strategies lead to success or failure. And when business analysts or journalists try to explain the success of a company, they simply describe its current activities.

Example. The Swiss-Swedish industrial company ABB was at one time considered one of the most successful in Europe. The secret of success, according to the Financial Times, was the progressive organizational structure and corporate strategy of the company. And in 2005, when the company almost went bankrupt, this was explained by the same reasons.

Because the reasons for a company's success are simply records of its current performance, they cannot be taken as accurate indicators of what makes it profitable.

The method of determining the success of a company distorts the "halo effect"

The halo effect is a prejudice that reduces cognitive dissonance.

Example. The teacher considers an obedient student to be smarter and friendlier than the rest of the students in the class.

Cognitive dissonance is a mental state characterized by conflicting thoughts or beliefs. Since people strive for consistency in their beliefs, they try to avoid such dissonance.

It is difficult to analyze several qualities of a person or object at once, so we often combine them.

Example. The teacher suggested that an obedient child should be smart and friendly. We often pick the most salient feature of something and extend our judgment of it to others. So, in interviews, candidates who are more attractive in appearance are often considered more competent, even if their answers do not differ from others. The halo effect forces the HR manager to combine an assessment of the candidate's appearance and his professional competence.

The analysts who determine the reasons for a company's success also suffer from the halo effect. If a company is profitable and performs well, other aspects of the company will also be rated above average.

Example. The Financial Times often reports that successful businesses have great HR or innovative corporate cultures. But often they are no better than those of companies experiencing financial difficulties.

Careful research is needed to evaluate company performance to avoid cognitive biases. But is it possible?

Company research leads to cognitive bias and wrong conclusions

Although business literature is generally useful, much of it is written under the influence of cognitive biases. If even scientists, cautious about their own prejudices, are prone to the halo effect, then the rest should all the more “insure”.

You can avoid the halo effect by making sure that the variables you are studying are independent and measure different factors.

Example. It is necessary to find out whether customer service leads to an increase in the efficiency of operations. But two variables measure the same thing, and you get a halo effect (as with attractiveness and competence).

In addition to independent variables, there are other biases that lead to erroneous conclusions, such as the belief that interdependence equals causation.

Example. Leaders of successful companies are often more mentally strong. But is the enterprise successful because the managers are happy? Or is it really the other way around?

Another common prejudice is the illusion of singular explanations.

Even careful studies that address issues of both causation and the halo effect fall prey to the illusion of single explanations.

Example. A University of Delaware study found that corporate social responsibility (CSR) can account for up to 40% of a company's financial fluctuations. The statement is illogical as it makes one think that CSR is about altruistic rather than commercial aspects of the company. However, CSR is so closely related to other factors that affect financial performance (management, market orientation, etc.) that it is a mistake to consider CSR (or any other factor) the only explanation for a company's financial performance.

Bestsellers often pass off pseudoscientific conclusions as sound advice

Consultants and business analysts have been publishing success guides since the 1970s.

In 1982, In Search of Excellence was published by a pair of consultants from McKinsey Consulting, who identified eight methods of America's most successful companies (some of which soon went bankrupt). This manual became an instant bestseller in the United States. They also came up with a few "fuzzwords" (abstrusely nonsensical words), creating a trend that writers of such books follow to this day.

The authors claimed to have selected the best American companies through a "systematic, logical, and objective" process. It included a survey of managers and identification of common features of companies. The research led to eight success principles such as "get close to the customer" and "performance through people." Just two years after it was published, 14 of these "exceptional" companies experienced sharp declines in performance.

Comparing only the most successful companies, McKinsey consultants made a serious mistake: they created the illusion of finding a connection between winning objects.

We usually make a mistake when we base our choice on the desired outcome.

Example. You want to know the cause of high blood pressure. To participate in the study, you choose a group of people suffering from this disease. With such a sample, you will never come to the correct conclusion. Only by comparing subjects with low and high blood pressure will you find the cause of the problem.

Since the publication of In Search of Excellence, many other books have been the "success formula" for doing business. But time after time, each of the authors came to conclusions by the wrong methods.

CEOs are more interested in a compelling story than in the right science

Despite the wrong methodology, business manuals are on the bestseller lists. Business manuals that contain more compelling images, stronger statements, and more powerful metaphors sell better than their counterparts.

Consider a few popular books to understand this situation.

In Search of Excellence and Good to Great by Jim Collins became bestsellers in their time and have much in common. Both contain catchy phrases or references to the strategic styles of hedgehogs and foxes. Similar terms were buzzwords within the industry, describing the intangible aspects of business life.

At the same time, manuals that are almost identical in meaning (for example, "The 4 + 2 Formula for Sustainable Business Success. What (Really) Works" by William Joyce, Nitin Noria and Bruce Roberson) have become mediocre publications.

The latest books lack images. They do not contain as many bright, inspiring stories about business life, and are written in common language, using the terms "structure", "strategy" and "business culture".

That is, pseudoscientific stories inspire people more than pure science. Rigorous scientific research does not have the dramatic connotation of life stories.

Example. A University of Chicago study found that a company that uses a certain management style can increase productivity by up to four percent. This study was scientifically sound, but its result pales in comparison to the 40% promised by the author of Good to Great.

Managers find it boring to study average growth across hundreds of companies. They need ideas that they can easily apply to their own situation.

Example. Managers are more interested in knowing that a universal management style will lead to a 10% increase in profits, and not that 500 managers in 10 years have achieved a 5% reduction in worker accidents.

If so many companies, managers and business gurus are deeply mistaken, is there any advice that really leads to business success?

There is no guarantee of success, but certain approaches will help steer the business in the right direction.

There is no "magic formula" for success - business performance is too unpredictable. And the obsession with finding such a formula distracts us from the key points - strategy and execution - that really affect performance.

Strategy

The choice of a business strategy carries a lot of risk, as one cannot be sure of the results. But a decision needs to be made, because strategy is essential to business performance.

Most business guides only hint at the importance of strategy with the trite advice: "The strategy must be clear and well-articulated."

Since the market and product type play an important role, the clarity of the strategy is not as important as its alignment with the company's purpose.

Example. An expansion strategy in a crowded industry is doomed to failure, even if it is "clearly articulated."

Execution

The way the action plan is executed is a key performance indicator. Unlike strategy, execution is a less risky variable because it includes factors that are under the company's control, such as production time.

CEOs often simply tell their employees that they “should execute strategy better.” Such advice is useless. It's like saying, "Let's just do our job better." It is necessary to specifically determine what they should perform better.

Example. “Reduce delivery time” is a more useful admonition that will help the company achieve its strategic goal of improving the customer experience.

While strategy and execution determine effectiveness, they are not the holy grail of success either.

Running a company involves risk

While business performance is not random, luck often determines a company's success. By recognizing that business performance depends on many things beyond our control, we are freed from illusions such as the illusion of organizational physics.

The illusion of organizational physics is the misconception that business performance is subject to immutable laws similar to the laws of nature. Managers are confident that their actions must have predictable results and a certain approach guarantees success.

The truth is that business is inextricably linked with risk: success requires appropriate circumstances and luck.

You should not choose a strategy, believing that it will certainly lead to success. It is better to choose a strategy that will provide the best set of circumstances for success.

Example. The executives at investment bank Goldman Sachs know that luck will run out one day, but they are taking on huge risks, minimizing the chance that their investments will fail. When a bank fails, the company sees it not as a management error but as a natural component of success.

"Deliberate risks" are a factor in the success of many large companies.

Example. Intel founder Andy Grove took big risks and managed to rebuild the company several times to stay ahead of the competition and remain profitable. Intel started with semiconductors, then moved into microprocessors and now makes various chipsets and software. Grove believes that the company is ready to tempt fate based on justified risks, because this is an integral part of its success. Today, Intel is one of the largest American companies with a profit of $52.7 billion.

Do not forget that business is a risk and you will not be blinded by attractive illusions. You will take calculated risks leading the business to success.

The most important thing

Countless business gurus claim there is a magic formula for success, but their books are full of methodological errors. Coming to attractive conclusions, the authors of these books mislead the reader. There is no "recipe" for success. Only careful strategic planning and precise execution will help you.

To avoid the halo effect, separate variables

If you are researching or analyzing something, separate the variables you want to study.

Example. To find out if the head of the department is doing a good job, analyze his management approach, the feedback of subordinates and colleagues, and the performance of the department.

Then make sure the variables don't affect each other.

Example. If you find that the feedback is positive, this data should not be combined with the poor performance of the department, so as not to affect the analysis.

The "halo effect" causes business illusions. beware of them

We are accustomed to attribute exclusively positive qualities to any company that has achieved success. Belief in these illusions calms the manager, gives justification for decisions already made. Because of this, reality is greatly simplified and the constant demands of changing technologies, markets, and consumers are ignored.

VHaven't taken off your pink glasses for a long time? Then grab this book. The author offers a guide for thinking leaders on separating flies from cutlets. If most business books are the equivalent of a cookbook: if you do this, it will work, then this book changes emphasis:Why is it so difficult to understand the reasons for high results?

What did Rosenzweig do? He dissected the business bestsellers of all times and peoples "", "Built to Last" and "" and supplemented them with statistics for the periods that have passed since the companies were transferred to the category of "great fortunes". Result: after the clock struck twelve, almost two-thirds of the princesses turned into gray mice. The reason is the "halo effect": the high performance of companies at the time of the study played a cruel joke on the researchers. The author teaches managers to be prudent in how they should perceive the conclusions of management gurus.

At the end of the book, the author still tries to answer the question: what leads to high results? He believes that if you leave alone the usual suspects - leadership, culture, focus, etc. - which would be more correct to consider as attributes of results, but not their causes, everything will be reduced to two main criteria: strategy and its implementation. The first is fraught with risks, since it is based on hypotheses, the second with uncertainty, since drugs are good for some, for others they will turn out to be poison. That is why Rosenzweig suggests betting not on the formula for success, but on successful managers, citing the well-known Ani Grove and others as an example.

Metaphors.Bring a couple that I liked. First."Cisco didn't talk about the gold sands of the Internet. They sold shovels and picks to Internet miners, so much so that there was a queue of people who wanted to buy." Second."When explaining failure, it is always easier to claim poor performance than to seriously think about strategy. It's easier to say that we are going in the right direction, we just need to step up. Admitting that we were going in the wrong direction is usually painful and drugs have a side effect."

Outcome.The book is not boring and is read in one breath. You will not find the Philosopher's Stone in it, but after reading it you will be able to take a sober look at your previous search for the Holy Grail. I recommend you read along with her:

Evans F., Wooster T.S. .
Nicholas J. Carr. .

Thanks.Many thanks to Stas Davydov for providing the book

Phil Rosenzweig

Left hemisphere - correct decisions. Thinking and acting: how intuition supports logic

Dedicated to my family team - Laura, Tom and Caroline

Azbuka Business®

Crisis situation on a hot August night

Compared to management, trading is remarkably simple. You place bets and either win or lose.

Michael Lewis. Liar Poker, 1989

This decision cost a billion dollars, plus or minus a few million.

On the night of August 12, 2010, Bill Flemming, president of Skanska USA Building, found himself in a difficult situation: he had to make a choice: the right decision would significantly increase the company's income, and the wrong one would be fraught with disaster.

The story began a year earlier, when the National Security Agency (NSA) announced that it intended to build a repository for classified information received from around the world. The Utah Data Center (UTC) will be completely self-contained, with its own power plants, water supply and anti-terrorism protection. The site chosen for the sprawling complex was an abandoned airfield at Camp Williams, a National Guard base in a canyon south of Salt Lake City. The location is inconvenient, but perfect for the purpose: large space, remote and safe.

Skanska USA Building is a division of the Swedish company Skanska and a leader in the construction industry in North America. She has extensive experience in the construction of large facilities. So, shortly before the events described, MetLife Stadium in New Jersey was built, a modern miracle, its own Giants and Jets stadium, with a capacity of 82 thousand fans. At that time, the company was working on dozens of projects, from the reconstruction of the UN building on the East Side to the World Trade Center transit hub, underground rail and subway networks.

Flemming was highly attracted to the construction of the DCJ. Here it was possible to turn around - and design, and build. He explained: "Being able to offer the most efficient and functional design and build the object faster than anyone, you will be able to beat other applicants."

However, Skanska was not the only one. The best construction companies in America were going to participate in the competition and fight for the prize.

The first step was to respond to the NSA's request for qualifications, which required proof of relevant experience and availability of resources. Skanska USA Building and its partner, Okland Construction Company, were one of 12 bidders who were asked to submit qualification certificates in February 2010. Two months later, the NSA expelled the seven, and sent the five remaining, including Skanska, an official notice of accepting contract proposals. They were given 60 days.

For weeks, Flemming and his closest assistants worked with a team of subcontractors to prepare the bid. The NSA specified exactly the required structure and quality, as well as certain technical parameters. Although the cost was not named, there were rumors that Congress allocated more than one billion dollars. Bidders understood that it was more important to provide better performance than to negotiate a specific price.

On June 16, Skanska USA Building submitted a $1.475 billion bid to build the DCJ and waited.

In early July, the NSA responded. All five bids priced between $1.4 billion and $1.8 billion, which turned out to be clearly higher than the government's allotment: for the first time, the NSA listed a final price of $1.212 billion. Now the NSA has narrowed the scope of the project, keeping key elements and removing some redundancies.

Technical execution remained equally important, and the schedule did not change. This became the decisive factor. Applications exceeding the specified amount were rejected as non-compliant.

So, the same five companies were asked to submit new bids with the best and final offer by August 13th.

This is where the real game began. At the Skanska USA Building's head office in Parsippany, a large conference room has been bid for the JCU. Only approved personnel were allowed inside, access was restricted by magnetic cards. A team of 25 people studied all parts of the project intently, looking for ways to cut costs. The rejection of some excesses helped, but this was not enough. Everyone focused on one goal: how to reduce cost to 1,212 .

For the next six weeks, during the hottest summer ever recorded in New Jersey, Flemming's team looked for ways to keep costs down. To reduce the cost of procurement, she worked with subcontractors to streamline the process: buy in bulk or work directly with suppliers, eliminating intermediaries. Carefully reviewed the contingency reserve, a standard part of any application. Having concluded that some costs are unlikely to increase in the next three years, she managed to reduce the reserve. I also considered the provision on the management fee, in fact, my earnings. Due to faster and more efficient work, I was able to lower the cost a little more.

By early August, Skanska USA Building's bid price was $1.26 billion, as close as possible to the required $1,212. Can Skanska cut the value further by closing the $48m gap and making a bid low enough to win but high enough to make a profit? Or lower the price at the risk of incurring serious losses?

In contemplating what to do, Flemming kept several factors in mind. The construction of the DCYU will take three years. During this time, additional sources of savings can be found, but it is not known which ones. Skanska had reason to be optimistic. In an industry notorious for cost overruns, Skanska USA Building has often managed to complete a project below budget. They won the MetLife Stadium contract with a $998 million bid, well below the nearest competitor, and found a way to make more profit than expected. The World Trade Center hub was built ahead of schedule and also below cost. This means that additional savings are also possible in the DCJ. Flemming commented, "Years of experience show that you typically find ways to save 3% to 4% more." By subtracting 3% of $1.26 billion, we cut the price to $1.222 billion. But that's still not enough. Achieving 1.212 billion would require a 3.8% reduction in the bid price. Very risky... but not impossible.

The problem is that reaching the specified amount might not be enough. Skanska faced four big, experienced opponents. Although it was unlikely that any of them were going to "take the flyers" (an industry term for reducing the cost of the application in order to win at any cost), there were still good chances that at least one company could bring the price below the threshold. If Skanska doesn't find a way to get things done, they will lose. To win, the price had to be further reduced.

Flemming also took into account the policies of the parent company. Skanska's headquarters in Stockholm issued a decree known as the Five Zeros. All construction projects must be safe (zero accidents), ethical (no ethical violations), high quality (zero defects) and green (zero environmental incidents). And at the same time, the main thing is profitable (zero losses). It is not for nothing that the construction industry attaches great importance to profit. Even in the best of times, most projects had very small margins, so one failure could wipe out the profits of several successes. Losing money on a big project is unacceptable, and Flemming knew it.

But playing without risk and missing out on a big, highly profitable project is also unthinkable. As president, Flemming was concerned about reputation. What would his business partner think if, after months of hard work, they lost the project because Skanska didn't want to up the ante? Will he continue to work with Skanska? What will competing companies think? What Skanska lost courage? And what about Flemming's staff, the people he works side by side with day in and day out? If he is unwilling to do his best, will they consider him reasonable and wise, or will they think that he is overly cautious and avoids risks? As for the parent company, she would like to avoid losses, but at the same time win a big deal. Successful managers don't turn down money projects, they find ways to win contracts and succeed. However, the ghost of failure also hovered nearby. The worst outcome is to win a contract but lose money.

This book has not been much noticed by our reading community, and quite in vain, because it talks about things that often mislead us (people in general, as well as members of the community who read business literature and reviews on it, in particular) astray.

Reading business literature (especially all sorts of success stories) should start with The Halo Effect. Having read and comprehended this book, I am more than sure of it. Because a lot of the things that business literature talks about are misrepresented. halo effect is when, for example, you look at some successful company and think: “Why are they so successful? Let's see, we'll see... Yeah, everything is clear - they use KPI. They also have a lot of innovation, and at the same time they pay a lot of attention to their employees.” Opa - the business recipe for success is ready - people and innovations are our everything!

The problem is that these “reasons” are nothing more than circles in the water.

A couple of years pass, the market goes down (or something else happens - because something happens all the time!), and we notice that the same company is in the ass - losses, loss of market share, etc. etc. “Ai-yay-yay!”, We exclaim, “What is the problem? Let's see, let's see... Yeah, everything is clear! Innovating, they have moved too far away from their roots, chasing new profits, and the bulk of consumers have turned their backs on them! Voila - another business recipe is ready - we must be who we are and not change our essence!

As you may have guessed, this time we behaved in exactly the same way - the same circles on the water - we still do not see the true reasons. The trees are swaying, the wind is blowing.

The world around us, as well as its narrower segment - the world of business - is a very complex dynamic system with non-linear laws. Applying linear laws to it, we run the risk of hitting the sky with our finger. Not only that, we do it regularly.

My favorite Tom Peters and Robert Waterman hit the sky with their book “In Search of Excellence”. After conducting a financial analysis of the performance of the 35 "perfect" companies in this book, we find that five years after the publication of the book, the total shareholder return (change in the market price of shares plus any reinvested dividends) of 12 of them still exceeded the index Snadard & Poor 500, and 23 was below the S&P 500. Ten years later, 13 companies overtook the market, and 18 lagged behind it. The rate of return also changed. Five years before the Peters and Waterman studies, and five years after, 30 of the 35 "perfect" companies saw their profits decline (compared to the year the studies were conducted). (For those who are interested in the details, the book provides comparative tables for these data.)

The situation is similar with the visionary companies of Collins and Porras from the books Good to Great and Built to Last. And the thing is, notes Phil Rosenzweig, that these studies were carried out statistically incorrectly, and also considered the business system as linear. Data on companies was taken from publications in the media, which work on the principle of "the dog barks, the wind blows" and is also extremely susceptible to halo effect - the ability to judge details by the overall impression.

If a company is successful (at a given time), then all its components are successful - management, strategy, approach to working with personnel, etc. Similarly, if a company suffers losses, then its business components are not successful (at the same time, everyone forgets that these are the same components - nothing has changed :).

The halo effect is an easily observed psychological illusion. In addition to it, the author describes eight more illusions that business is subject to:

halo effect- the ability to judge the details by the overall impression.
Correlation and causality— is not the same thing.
The fragmentation of single explanations- the systems are non-linear.
The illusion of solid victories- everything is changing.
The illusion of painstaking research- tons of processed information are presented as proof of the scientific nature of the study (even if this information is taken from the media :).
The illusion of continued success- it is impossible.
Illusion of absolute result- consider the company's activities outside the context of the market (a company can show profit growth and, nevertheless, be in a deep ass, because other companies in this market show growth many times greater).
Illusion of Misunderstanding- an explanation that is true for a certain set of options is presented as universal, for example - the top ten companies are highly customer-oriented, therefore, in order to become the best, a company must be customer-oriented.
The organizational physics fallacy— there are no permanent laws, or they are difficult to formalize — there are no universal laws and rules in business.

To one degree or another, many business bestsellers fall prey to one or more of these illusions.

Conclusions? Business is too complex a system to try to apply linear laws to it - if we want to get a really meaningful result, we must consider business as a dynamic system with complex relationships - like a fractal, and not like a figure from Euclidean geometry, the laws of quantum physics, not Newtonian.

In general, to perceive the world linearly is a big mistake not only for business gurus, but also for many modern scientists from other fields of knowledge (which is, for example, the treatment of diseases with pills, when a symptom is treated with drugs, but multiple side effects come out), politicians, parents, teachers and other people. As far as I know, there are attempts to describe the world with more complex than linear models, for example, The Theory of Everything, but it is not yet possible to use them in practice. So, it remains only to rely on common sense.

The book not only contains extremely important and useful information for all of us, makes you think, but is also very easy and interesting to read, written in good language, contains many (sometimes funny) practical examples.

Phil Rosenzweig, "The Halo Effect...and Eight Other Illusions That Mislead Managers", 2008, BestBusinessBooks, ISBN 978-5-91171-009-5.

P.S. Many thanks to the BestBusinessBooks publishing house and personally to Margarita Adayeva-Datskaya for the provided book.

Column "new book sales" newspaper "Vedomosti".
The column leader is Andrey Kuzmichev, Doctor of Historical Sciences, Professor of the State Higher School of Economics.

Phil Rosenzweig "The halo effect...and eight other illusions that mislead managers"
St. Petersburg: BESTBUSINESSBOOKS, 2008. 250 p.

Every day, top managers discuss numerous "variations on the most burning question of all time: what actions lead to high results?". "This is the quintessence of questions in the business world," says Professor Phil Rosenzweig dryly and furiously, with knowledge of the matter, smashes those who, under the guise of serious research, promote themselves and customers.

Among them were such luminaries of management as Tom Peters, Bob Waterman, Jim Crollins and Jerry Porras (a detailed analysis of their mistakes is contained in the appendix to the book). Michael Porter and Anita McGahan also got credit for a study where they "set out to determine the extent to which a company's profitability depends on the industry in which it operates, the corporation to which it belongs, and the methods it uses."

Rosenzweig notes that the researchers labeled the latter category as "segment specific impact", which included consumer orientation, culture, HR management, social responsibility, etc. As a result, "the authors found that 32% of company results can be attributed to" specificity ". But after all, its authors did not understand inside, and in fact, as Rosenzweig writes, as a result, the observed "effects were superimposed on each other, explaining the same 32%".

Why do thousands of researchers build the Tower of Babel out of pseudo-labor and try, sometimes quite successfully, to trade their ideas? The reason for this, according to Rosenzweig, is the halo effect - our desire to "create an idea about a subject that is too far from you, often simply inaccessible to direct judgment, in order to bring it closer and evaluate", the human tendency "to grasp at information that is at first glance significant, concrete, which gives the impression of being objective, and projecting it onto objects that are abstract and ambiguous."

In the world of books, there is the same ambiguity. Rosenzweig cites Stanford University's James March and Robert Sutton as saying that "organizational research exists in two very different worlds." “The first one is addressed to practicing managers and is full of reflections on how to improve results,” the professors say. “Here we find research whose goal is to inspire and reassure. The second requires following strict criteria for knowledge and encourages it. Here the supremacy of science, not history ".

Why among the bestsellers are mostly books from the first world, explains illusion number 9: "the fallacy of organizational physics." Its essence is that for most researchers, all companies are "made of the same atoms." As a result, many "like to think that some higher order rules the world of business according to strict rules, making it infallible and predictable."

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