So, if one company does well with usual mantra of being consumer-centric, then all companies that follow that maxim should do well. If we could just do what Richard Branson does, we will succeed. That's a delusion.
In brand marketing, as you probably know, a Halo effect is when one perceives positive features of a particular item extending to other products in the portfolio. [1]
If Samsung makes good washing machines, then surely they should make good TV's and computers?
However, in this article we focus on micro-economics (the study of the firm itself) where the Halo effect is described as the tendency to make inferences about specific traits on the basis of a general impression of the firm (this concept is expounded with great elegance by Phil Rosenzweig in his book The Halo Effect, on which this article is based). [2]
Tom Peters (and to a lesser extent his co-author Bob Waterman) became the superstars of finding the holy grail of what makes a company successful. It was a prescription for success. Do this and here's what will happen. However, since In Search of Excellence hit the bookstores in 1982, the formula that they devised by analysing why successful companies do well, has not held up so well.
Ten years later only 13 of the 'excellent' companies outperformed the market, while the remaining 18 didn't even match the market. Most of the companies weren't even average, never mind Excellent [2]. Halo goodbye.
The hockey stick is a graph of profitability that muddles along very much in a straight line, followed by a period of explosive growth. Hence the shape of the graph and the descriptive term. Jim Collins conducted exhaustive research on companies which showed 15 years of average shareholder returns followed by another 15 years of spectacular returns. A hockey stick. These are objective measures; solid research unaffected by opinion. So far so good. For his book Good to Great he then conducted exhaustive research to find out the 'formula' for what made these companies great. However, people tend to describe successful companies in glowing terms, so here's where the research gets a bit wobbly. Phil Rosenzweig points to the Halo effect being ignored in this research:
"If you start by selecting companies based on outcome and then (my emphasis) gather data by conducting retrospective interviews and collecting articles from the business press, you're not likely to discover what led some companies to become Great. You'll mainly catch the glow from the Halo Effect."
All the great companies were focused. So Collins's formula instructs you to be focused. However, maybe the returns were higher for the 'focused' companies, which could also mean there was higher risk and that the possibility of failure was also higher? Maybe it does pay to diversify - perhaps it is less risky and would give you greater returns than if you had just stuck to your knitting. Virgin for example.
The study of business is not a pure science such as physics. If one beaker of water boils at 100ºC, then 100 others will do so as well (at the same altitude or ambient air pressure). In business, this is not the case (although the regularity of waiting for the kettle to boil during tea breaks probably does affect profitability).
The physicist Richard Feynman had a slightly different take on this Halo effect, and came up with the phrase cargo cult science [3]. This is the way he describes it:
"In the South Seas there is a cargo cult of people. During the war they saw airplanes land with lots of good materials, and they want the same thing to happen now. So they've arranged to imitate things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head like headphones and bars of bamboo sticking out like antennas - he's the controller - and they wait for the airplanes to land. They're doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn't work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they're missing something essential, because the planes don't land."
So if you thinking of keeping up with the Joneses or the Wal-Marts of this world by doing what they're doing, think again. Formulas in business, unlike science, aren't formulas at all - they're stories.
References
1. http://en.wikipedia.org/wiki/Halo_effect
2. Phil Rosenzweig. The Halo Effect...and the Eight Other Business Delusions That Deceive Managers. Free Press, a division of Simon and Schuster, 2009.
3. Richard Feynman, Ralph Leighton (contributor), Edward Hutchings (editor). Surely You're Joking, Mr. Feynman!: Adventures of a Curious Character. W W Norton, 1985.
