Toyota Motor, the company that the world admires, has been in the news lately for all the wrong reasons. “First of all, I think it’s a very well-run company. So suddenly they were great and now they are rubbish. Neither of those is correct. When they were good they were never as good as we thought. But we were blinded to that because the outcome is so great. And then when they have a stumble, we think everything is rubbish,” says Phil Rosenzweig.
A professor of strategy and international management and the director of the executive MBA programme at the IMD business school in Lausanne, Switzerland, Rosenzweig is also the author of the best-selling book The Halo Effect...and the Eight Other Business Delusions That Deceive Managers. In this interview, he speaks to DNA.
Why is it so difficult to figure out what makes a company so successful?
For starters, because there are so many things going on, both internal and external to the firm, and it is not possible to hold most variables constant and identify the effect of just one.Also because, in business, a firm performance is relative more than absolute, so that even if a company does things well in an absolute sense, it may still fail if rivals do things better.These together make it difficult to identify precise reasons why particular companies perform well at a given time.
Also there is natural tendency to make inferences based on outcomes. That is the halo effect. It is easy to say, “Oh, you know, it is about leadership and customer focus” and so forth, because at a superficial level I infer those things about successful companies and I infer the opposite for the unsuccessful companies. Based on performance, which is seemingly objective and concrete, we often tend to make attributions about other things, such as leadership, culture, execution, and so on.If we are not careful, the things that we claim drive company performance may in fact be attributions based on performance.As an example, consider Starbucks.As long as it is rising in sales and profits, we say that it has a brilliant strategy, a great culture, bold leadership, and is highly innovative.As soon sales begin to slip, we criticise its strategy, claim that the leader became complacent, and assert that it lost its culture.We make attributions based on performance.
You write in your book that lasting business success is largely a delusion. Why do you say that?
It is always possible to select a number of companies that have been successful for many years, then look back and try to offer explanations for that success.Many well-known business books fall into this trap — such as Built to Last by Jim Collins and Jerry Porras.They chose their sample to include companies that had performed well over a long time, and then gathered data, much of which was shaped by the halo effect, to try to explain why.But once the study ended, these companies, picked precisely because of their “enduring performance,” declined sharply — they were no better than the average.Collins and Porras did not explain lasting performance at all.
In fact, if we look over time, the strongest pattern is of temporary success — high performance tends to regress to the industry mean.Very, very few companies avoid this pattern — and just as you think you have found one, wait a few years and you will likely find that it, too, conforms to the pattern of regression.I am not saying that high performance is random, but it is fleeting.
Competition, imitation, sharing of practices, movement of employees, technological innovation - all of these make lasting success unlikely.Yes, we can select some companies that have succeeded for a long time, but that is an artifact of ex-post selection, and therefore a delusion.
What about a company like Toyota, which has suddenly stumbled badly. Is it a good example of the point you have been making about business success being largely a delusion?
First of all, I think it’s a very well-run company. When a company is doing well we exaggerate how good it is and when there is a dip we exaggerate how bad it is. So suddenly they were great and now they are rubbish. Neither of those is correct. When they were good they were never as good as we thought. But we were blinded to that because the outcome is so great. And then when they have a stumble we think everything is rubbish. I write about Dell. Not in my book, but since then. Dell has been a very well-managed company. They have been very good in many ways. But come back to this idea about relative performance. Hewlett-Packard has caught up in some ways.
Apple?
Apple went on a different model but that is strategic choice and has taken certain business away. So as far as Dell’s performance is concerned, are they doing as well? No. Is that an absolute failure or is it a relative failure? It’s a relative failure. And Michael Dell is now scrambling to ask, “How do I get back on top?” It’s not just through better execution. It’s through having to make a strategic choice. But he has to do it under uncertainty.
Can you give us any other example?
Take UBS, the Swiss Bank. Stable. One of the high performers. They have been around longer than Procter & Gamble. Two years ago they had to face a huge loss because of investments made into certain derivatives. So they went from being a profitably run, conservatively managed solid Swiss bank to facing a massive loss.So I was interviewed by Swiss Radio. And they asked, “How do you explain this disaster at UBS?” I said: Be careful. Be careful.98% of the activities at UBS are just as good as they have always been. Retail banking: just the same. Credit cards: just the same. Mortgage banking: just the same. What has happened now is because there has been this enormous catastrophe in treasury, derivatives, financial market meltdown. Now that has created this negative halo when we suddenly think that this whole company is bad. It’s not bad. 98% of this is just the same. Now they jolly well better fix that. And they jolly well shouldn’t have got into that trouble. But let’s not imagine that the whole company has gone from being good to not good.
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