THE HALO EFFECT

A Book Review


A BRIEF BACKGROUND

Consulting firms have their place in the business world. These organizations abound with brainpower armed with advanced academic degrees. That's wonderful. Most of the time, these firms do a great job of providing insightful answers to problems that bedevil management. When management is too close to the trees to be able to objectively evaluate the challenges confronting them, consultants can be a big help.

What's the connection? Two fairly recent prominent business management books, "Good to Great" and its companion follow-up best-seller, "Built to Last,” were written by consultants.

Mr. Jim Collins, a former McKinsey consultant, authored the first singlehandedly and, for the second, co-authored it with Mr. Porras.

NOW THAT YOU KNOW…

In "The Halo Effect" it’s author, Professor Phil Rosenzweig held "Good to Great" and "Built to Last" as the primary subjects of his argument about the "halo effect."

The good professor points out that both tomes used hindsight to unearth the success factors that made the companies in their respective lists such standouts. The problem with that approach, Rosenzweig points out, is that hindsight—as the saying goes—is 20/20.

Take two boys who grow up in the same village. One becomes the company president while the other never rises beyond the rank of junior manager. From the vantage point of the villagers, could they have foreseen who was going to become what? Maybe but probably not. On the other hand, if that question was tackled by starting from the present and then having their careers retraced back to their youth, the factors that made them into what they are can be easily discovered.

That's the fallacy inherent in basing analysis on hindsight. You'll always come up with answers.

Are they the correct answers? Not necessarily. Assume, for example, that the president rose through the financial ranks of the company. Does the fact that he graduated with an accounting degree constitute a valid success factor? Of course not. If that accounting degree was present in the biographies of 99 other company presidents, does that now make it a valid success factor? I still think not. And yet that's how the authors of both books presented their case. They used an expanded sample population and retraced the path of each company that made it to each book's list. They then isolated the factors that appeared in every company's path. Aha!, they said. These are the common factors that propelled these companies into our list. Now, they stated, we know what works. From that, the authors proceeded to make broad extrapolations about how the reader might use these factors to make their own companies successful.

I did what the professor did. I checked the standing of many of the companies in the first book, “Good to Great.” I came up with a review of mixed results. Using the same measure that the book used, some companies were doing well, most had become average, and a few were lagging.

Take CIRCUIT CITY, for instance.

Back in March 2007, less than five and a half years after it became “great,” Circuit City was in doo-doo. Here’s a quote from The Motley Fool:

Nice going, Circuit City (NYSE: CC). You may have just axed some of your top store associates—and deflated the aspirations of the rest.

The consumer-electronics superstore's move to fire some of its pricier employees makes sense on the surface. The company announced that it was letting go 3,400 unit-level associates who were earning salaries well above the market average. They will be replaced by more nominally salaried hires.

So make a note to call your slacker nephew and let him know that Circuit City is hiring. But am I the only one worried about the implications here? Nobody gets their pay bumped higher because they're incompetent. Whether they're seasoned associates who know the stores inside out, or employees whose hard work has helped them get aggressively promoted, they're paid well for a reason. How many high-def DVD players will you be able to sell with that green associate who doesn't know the difference between Blu-ray and HD-DVD?

If I can make the obvious joke, you're a real firedog, Circuit City. It's not just that you're letting go what may be some of your productive associates. What kind of message does this send to your remaining hires? Don't overachieve. Lay low. Do just enough to stay with the pack.

I'm already dreading my next trip to Circuit City, when I ask for help and everyone runs the other way, as if I just pulled the pin on a grenade.

To be fair, Circuit City isn't just whittling away on the front line. It's also eliminating about 130 corporate jobs by outsourcing its IT infrastructure needs to IBM (NYSE: IBM). Last month, it announced a regional-level realignment that also trimmed some fat.

I get it, C.C. Consumer electronics isn't always a cakewalk. Best Buy (NYSE: BBY) is eating your lunch, and now companies like Wal-Mart (NYSE: WMT) and even Home Depot (NYSE: HD) are making an aggressive push in this niche. You have to keep your cost structure in line.

But do you really know what you're doing? You just handed over 3,401 pink slips at the store level. Yes, I said 3,401. You're canning 3,400 store associates, but you're also handing morale its walking papers.

What happened? After all, Publishers Weekly mentioned Circuit City in its editorial review of “Good to Great”:

To find the keys to greatness, Collins's 21-person research team (at his management research firm) read and coded 6,000 articles, generated more than 2,000 pages of interview transcripts and created 384 megabytes of computer data in a five-year project.

That Collins is able to distill the findings into a cogent, well-argued and instructive guide is a testament to his writing skills.

After establishing a definition of a good-to-great transition that involves a 10-year fallow period followed by 15 years of increased profits, Collins's crew combed through every company that has made the Fortune 500 (approximately 1,400) and found 11 that met their criteria, including Walgreens, Kimberly Clark and Circuit City.

At the heart of the findings about these companies' stellar successes is what Collins calls the Hedgehog Concept, a product or service that leads a company to outshine all worldwide competitors, that drives a company's economic engine and that a company is passionate about.

An even easier way to check the validity of these so-called success factors is to compare the list in both books. Surely a company that had transitioned from good to great would stay great enough to ensure that it was built to last. Right?

Wrong.

I have to agree with the professor. There is no success formula embodied in the advice proffered by that book. Those nuggets of advice are misleading. The advice is misleading because their source—the research results—are flawed. The research results are flawed because the research assumption is flawed. What is that assumption? It differs slightly for these two books but it could be roughly stated as such: "Isolate the common factors behind the success of these companies—the ones that made it to our list. Extrapolate the lessons from those few common factors and write a best-seller." Or two.

And that's exactly what he/they did!

So, you might ask, after tearing down those two modern-day bibles of business management, what’s left? What does “The Halo Effect” think of success formulas? What about the objective, that elusive thing called SUCCESS? Well, you have to read that for yourself but the professor did remind me of something that’s overlooked too often and that’s the fact that success is relative.

I've read the two management books (by Collins and Porras) and I'm certain the reader will learn from and enjoy each one. However, after reading "The Halo Effect" (and agreeing with it), I know now that neither "Good to Great" nor "Built to Last" reveal any good, great, or everlasting secrets of business success.

REMEMBER SCHWINN BICYCLES?

How bad management destroyed an American icon.

Our personal accountant was (and, may be, still) married to one of the manufacturing executives of Schwinn Bicycle Co. She was our accountant from 1989 until they moved to Colorado in 1994. She was our accountant for both our business (printing) and personal affairs. We had several good discussions about Schwinn’s decision to outsource practically all of its manufacturing to China.

It began with the decision of two generations of Schwinn family descendant. The first descendant inherited a bureaucratic and complacent company. He decided to stay the course and that must have contributed to Schwinn’s failure to recognize the BMX craze that began in the 70s. This was followed by hybrids (road and off-road models). Schwinn missed that too. Then, the market started looking for more exotic metals (like titanium and much later, carbon fiber) to use for bicycle frames. Schwinn also missed that.

Schwinn lost market share and, worse, visibility among the younger generation. Management decided to look overseas for a solution. They decided to downsize and outsource manufacturing. (Of course, terms like “downsize” and “outsource” did not exist at that time but they accurately describe their activities.) Along the way, they antagonized their suppliers and dealers. Their suppliers entered the U.S. market themselves. Their dealers defected. Good grief, what a mess!

Their moves were all band-aid solutions. Schwinn’s decline continued. At about this time, the second (and final, as it turns out) generation took over.

(FYI: New tabs or windows will open for each hyperlink.)

As this Wikipedia article states, this descendant was a great believer in MBAs. (This degree was in its ascendancy at that point. I recall reading an article questioning whether the management of business could really be taught in schools.)

At any rate, the vicious cycle continued. In addition to quality and supplier problems, engineering and marketing were slow to catch up with trends. I suspect that the centralized decision-making had a lot to do with their lack of nimbleness.

As the Wikipedia article states, the firm declared bankruptcy in 1992 and Zell (the Chicago billionaire who now owns The Tribune Co.) bought it. Zell moved corporate to Colorado and that’s when our accountant relocated with her husband to Colorado.

In 2004, another Schwinn descendant, was featured in an article by the Washington Post.

This last one is a beauty. It features a timeline. Read the entries from 1975 on.

This story has many business management-related lessons. Most of them, in my opinion, stem from fossilized management.

Just in case, those links no longer work, I saved archive copies:

1. The Washington Post article
2. The Wikipedia entry