Organizations and Markets

The Best Business Book I’ve Read This Year

8 September 2007 at 11:41 am Peter G. Klein 5 comments

| Peter Klein |

It’s Phil Rosenzweig’s The Halo Effect (mentioned previously here). Rosenzweig systematically, but politely, demolishes the pretensions of best-selling management books and projects such as In Search of Excellence, Built to Last, Good to Great, and the Evergreen Project. These studies, Rosenzweig patiently explains, engage not in serious research — despite their pseudo-scientific pretensions (what Rosenzweig calls “The Delusion of Rigorous Research”) — but in storytelling.

The most common problems are sampling on the dependent variable (i.e., choosing a sample of high-performing companies and explaining what their managers did, ignoring selection bias) and using independent variables based purely on respondents’ ex post subjective assessments of strategy, corporate culture, leadership, and other “soft” characteristics. The latter is the “Halo Effect” of the book’s title. When a company’s financial or operating performance is strong, managers, consultants, journalists, and management professors tend to rate strategy, culture, and leadership highly, while rating the same strategies, cultures, and leadership poorly when a company’s performance is weak. It’s as if the authors of “guru” books have never taken a first-year graduate course on empirical research design. Or, as Rosenzweig puts it (p. 128): “None of these studies is likely to win a blue ribbon at your local high school science fair.” Ouch.

Rosenzweig writes what many management researchers — particularly those trained in economics — believe, but are afraid to say out loud: namely, that what passes for “research” in the popular management press is typically little more than gobbledy-gook, the stuff skewered by Micklethwait and Wooldridge in The Witch Doctors. How can you not admire a guy who writes:

You wouldn’t appreciate the risky nature of strategic choice if you read most business books. For example, the Evergreen Project advised companies to “devise and maintain a clearly stated, focused strategy.” The exact nature of that strategy wasn’t important. If a company desires to grow, the authors explained, “it doesn’t matter how you achieve this growth. You can do it by organic expansion, mergers and acquisitions, or a combination of both.” They went on: “Whatever your strategy, whether it is low prices or innovative products, it will work if it is sharply defined, clearly communicated, and well understood by employees, customers, partners, and investors.” Which is, of course, sheer nonsense.

The popularity of these studies, Rosenzweig suggests, owes less to their content than their swagger and flair.

Peters and Waterman gave us memorable phrases like a bias for action, sticking to the knitting, managing by wandering around, and loose-tight coupling. Built to Last talked about big hairy audacious goals, clock building, the genius of the “and,” and cultlike cultures. These were memorable phrases that sparked curiosity and stimulated discussion. By contract, [Joyce, Nohria, and Roberson’s] What Really Works relied on conventional terms like strategy, execution, culture, and structure. There was little original or engaging here, no surprising metaphors or captivating images. The fact is, whatever their shortcomings may have been as researchers, Tom Peters and Bob Waterman, and Jim Collins and Jerry Porras, shared one great strength: They were terrific storytellers. Because that’s really what we have here: stories that help managers make sense of their worlds, that direct their actions, and that give them confidence in the future. [Pomo alert!]

My favorite chapter is the last one, about the role of uncertainty (a favorite topic here at O&M). Rosenzweig singles out Robert Rubin, the former US Treasury Secretary who spent most of his career at Goldman Sachs, Intel’s Andy Grove, and Logitech’s Guerrino de Luca as examples of managers with the proper understanding of uncertainty in business decision-making. While the gurus promise results via formula — adopt these ten simple rules for guaranteed success! — wise managers understand that action is fraught with uncertainty, that careful risk management and the exercise of entrepreneurial judgment is critical to management success.

As CEO, Grove continuously scanned the environment to learn of changes in technology and competition and customers, gathering information that could be useful for Intel. He wrote: “Think of the change in your environment as a blip on the radar screen. You can’t tell what the blip represents at first but you keep watching radar scan after radar scan, looking to see if the object is approaching, what its speed is and what shape it takes as it moves closer. Even if it lingers on your periphery, you still keep an eye on it because its speed and course may change.” Groves’s accounts of his years at Intel are full of instances where survival called for choices made under uncertainty. They weren’t guaranteed to succeed — strategic bets never are. But as Robert Rubin said, you try to improve your chances of success by looking clearly and carefully at the odds, at your own capabilities, at the motives and abilities of your rivals, and make the best judgment you can, with the full knowledge that even the best decisions won’t always turn out well, but that failing to take measured risks ensures that in a competitive marketplace you won’t win.

Let me close with my own Halo Effect story. One of my classes a few years ago didn’t go well. That particular group of students and I never quite “clicked.” They performed poorly on the exams and I let them know it. Not surprisingly, my evaluation scores were down that semester. But my ratings were below my historical averages not only in “clarity of explanations,” “fairness in evaluation,” and the like, but across the board — even in “English-language proficiency”! When it rains, it pours.

Entry filed under: - Klein -, Austrian Economics, Management Theory, Methods/Methodology/Theory of Science, Myths and Realities, Strategic Management, Teaching.