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Reflections of performance
The Halo Effect author Phil Rosenzweig on using our powers of discernment.
by Farah Nayeri
Photos by Jérôme Sessini/Magnum Photos
Read more on the topic “Performance”
Fifteen years after his book The Halo Effect was first published, Phil Rosenzweig is still advocating for a more critical approach to performance evaluation.
Some words or expressions effortlessly take up a very special place in the corporate vernacular: "The halo effect" is one of them. The phrase refers to the tendency to assume that because a company has done well in one or two areas, it has done well in others, too. Phil Rosenzweig – who spent six years on the faculty at Harvard Business School, then taught for more than two decades at the IMD Business School in Lausanne, Switzerland – popularized the term in his 2007 book of the same name. He joins Think:Act for a conversation about his book's ongoing relevance – with a particular emphasis on performance.
Was there something in particular that you came across that provoked you to write The Halo Effect?
Teaching in Switzerland for years, I became very aware that a lot of the executives who came to IMD were not very good at critical thinking, and were, in many ways, quite gullible and willing to believe what they were told by people who stood in front of them with a PhD after their name. It was our fault, because we weren't teaching them to know the difference between what's valid and what's not valid. So I began to collect examples of what I saw as bad thinking in the business world, and eventually collected them into what became this book called The Halo Effect.
I wrote it in a deliberately irreverent tone – partly to make it a bit of fun, but partly also to tell the reader that these people who are telling you all this very serious stuff – the thought leaders – they don't know as much as they might claim to. And you can use your critical thinking and take them down a peg.
Could you sum up the message of the book in a few sentences? And what do you feel has remained the most relevant for today's leaders?
The broad message is to exercise your critical thinking when people make claims in the business world, especially about business performance. There are any number of people who try to impress you by saying: "I've spent this many years gathering this much data about these many firms. Therefore, I must know more than you." What I'm trying to tell people is, don't get fooled by that. There are ways that you can use your critical judgment and your powers of discernment.
I talk about a number of what I call delusions. The central one is the halo effect. A lot of the things that we think drive performance are not the drivers of performance: They're the reflections of performance. Show me any company that has been very "successful." Let's say revenues are growing, profit is up, the share price is going through the roof. What do we naturally say about that company? They've got a brilliant strategy, they've got a visionary CEO, they're wonderfully listening to their customers, they're great at execution, etc.
When that same company has a downturn, we then say: That strategy wasn't so good after all, the leader became arrogant, the people became complacent and they ignored the customer. There's a natural tendency to make inferences about a lot of specific things. The halo effect is how the overall impression leads you to make a lot of specific judgments.
It pertains to individual performance as well. Many companies evaluate employees on a host of categories – teamwork, creativity, drive for excellence, customer orientation, etc. The danger is that these ratings may be little more than an inference based on an overall impression, which in turn is based on whether the department or the individual met quantitative targets. When something causes performance to drop, we then make the opposite attributions.
So the halo effect works both ways, leading to more negative as well as more positive perceptions?
Exactly right. Edward Thorndike, the man who coined the phrase the halo effect in his original study – 100 years ago – called it the horn effect, i.e., the devil's horns. Somehow, that expression has fallen by the wayside.
In the past three years, the global economy has been hit by two curveballs: the Covid-19 pandemic and Russia's invasion of Ukraine, with catastrophic consequences. How has that affected company performance?
Covid-19 has obviously been catastrophic for some individuals. A lot of people have died. And anytime there's a major disruption, you'll probably see overall profitability suffer. But the bigger story is that there are differences by industry. At the beginning of Covid-19, if you were in airlines or hotels or lodging, you got hurt. On the other hand, if you were Peloton home equipment, your sales went through the roof. Now, a few years later, it's all turning back.
As for the war in Ukraine, energy prices have gone up. If you consume energy, then it has hurt you and hurt the cost of living. On the other hand, energy companies are recording astronomical profits. To me, the biggest story is that the effects, while overall a bit negative, are uneven across industries.
To go back to the halo effect, doesn't it rise out of a human tendency to look for heroes and villains? For good-versus-evil, straightforward, binary narratives?
I don't disagree with that at all. And we do tend to overshoot in both directions. When you're good, we think you're really good. When you're not good, we think you're really not good.
There are some aspects of performance that are absolute in nature. They speak to what you do, and you alone. And there are others that are fundamentally relative in nature. Many of the most important metrics of company performance have a very important relative dimension: It's not enough to do things – you need to do things better than your rival. I have an example in the book about Kmart, which was a great company for a long time, then fell upon hard times and went out of business. What I showed was that by many absolute measures of performance, they actually got better: better at inventory turnover, at point-of-sale scanning, at a lot of things. The reason they went out of business is because their rivals – companies like Walmart – got even better. Or take the example of major American automakers. Compared with two generations ago, their cars are infinitely better. The failure of the big US auto companies is not an absolute failure: It's a relative failure, because of competition from Asian and European automakers.
Let's say you're the CEO of a company and you want to measure its performance. How do you go about that?
One of the things that I do with companies is ask them the following question: What made it a terrific year? Is it about revenues and profits? Is it about bringing products to market? Is it about customer satisfaction? Some of those are absolute. Some of them are maybe a bit more relative. Then you ask the next question: If those are performance outcomes that we want to have, what are the things we need to do?
We need to position ourselves to have some distinctive difference relative to our rivals – what sometimes is called a unique selling proposition, or USP. If everybody knew what the best USP was, and everybody did it, it wouldn't be unique anymore. So there are certain chances that we have to take to help us achieve those outcomes.
What you're saying is that there is no straight, single answer – that you have to figure out your USP and what works best to deliver it?
Yes. If you have a great year, it's tempting to say, "We did all of these things well." And I'm saying maybe, maybe not. Let's not assume that because the company is doing well, it must be innovative. Let's measure innovation on its own. Let's not assume that because the company is good overall, it must be good at execution. Let's measure that directly. Then we have a variable which could be shown, or not, to have some causal effect on performance.
What are some key variables that can help performance? That totally depends on the industry. I could be in an industry where delivering face-to-face customer service is essential, either in hotels or in lodging. I could be in an industry where customer service has nothing to do with it, but innovation of new products could be really big. What are the components that are most important for how we compete with rivals?
If you were to write your book today, which company or companies would you say are benefiting the most from the halo effect?
On Fortune magazine's World's Most Admired Companies ranking list, Apple has been the most admired company for 16 years running. Apple has done really well. I have Apple products and they're immensely profitable. But not only are they overall admired: They are in the top 10 of all companies in eight of the nine categories in the ranking.
I find it not credible – not believable – that just because they are wonderfully successful from a profit standpoint, they are in the top 10 of eight of those nine categories. Are they really good at all of those? Or does the overall impression let us say: They must be good at this, or at that?
When I wrote the UK edition [of The Halo Effect], they asked me to write a foreword that speaks to the British audience. There was a similar poll in the UK. I found that Marks & Spencer, a long bastion of retailing in the UK, had fallen on hard times. In 2005, they were ranked 124th. Then they brought in a new CEO. Two years later, they were not only the most admired: They were in the top 10 in every one of the nine categories. A couple of years later, when things slipped, they not only fell overall, but they fell in almost all of those categories. The rise in performance led to an improved perception that affected many of these individual judgments. And when things declined, the same thing happened.
When you see that a company that is overall rated is thought to be good at all things, then there's a very strong likelihood that we are seeing a halo effect, where the overall impression bleeds across all of these individual judgments. What we need to do is be skeptical of that.