There is no scientific explanation for company success
Each manager seeks the Holy Grail - an idea or method that defines the path to success. Attempts to explain what makes a business successful, identify reasons that often depend not on science, but on pseudoscience.
The scientific process determines the truth through experiments, and pseudoscience relies on cases and data, the truth or falsity of which cannot be proved.
Example. Astrology is pseudoscience, claiming that the future of man can be predicted from the stars.
But due to the nature of the business, it is difficult to be strictly scientific or conduct effective experiments.
Example. If you apply different strategies to two companies, comparing them will say little about the reasons for success or failure.
It is difficult to determine scientifically which business strategies lead to success or collapse. And when business analysts or journalists try to explain the success of the company, they simply describe its current activities.
Example. The Swiss-Swedish industrial company ABB was once considered one of the most successful in Europe. The secret of success, as the Financial Times wrote, was in the progressive organizational structure and corporate strategy of the company. And in 2005, when the company almost went bankrupt, it was explained by the same reasons.
Since the reasons for the success of the company are simply reports on its current activities, they cannot be regarded as accurate indicators of what makes it profitable.
Method for determining company success distorts "halo effect"
The halo effect is a prejudice that reduces cognitive dissonance.
Example. The teacher considers the obedient student smarter and friendlier than the rest of the students in the class.
Cognitive dissonance is a state of mind that is characterized by conflicting thoughts or beliefs. As people strive for logical beliefs, they try to avoid such a dissonance.
It is difficult to analyze several qualities of a person or an object at once, so we often combine them.
Example. The teacher suggested that an obedient child should be smart and friendly. We often choose the most noticeable feature of something and extend our judgment about it to others. Thus, in interviews, candidates who are more attractive in appearance are often considered more competent, even if their answers are not different from others. The halo effect makes the HR manager combine the assessment of the candidate’s appearance and his professional competence.
Analysts who determine the reasons for the success of the company also suffer from the halo effect. If a company is profitable and has good performance, its other aspects will also be rated above average.
Example. The Financial Times often reports that successful businesses have excellent human resources or innovative corporate cultures. But often they are no better than companies experiencing financial difficulties.
Thorough research is needed to evaluate company performance to avoid cognitive bias. But is it possible?
Company research entails cognitive bias and incorrect conclusions
Although business literature is generally useful, much of it is written under the influence of cognitive bias. Even if scientists who are cautious of their own prejudices are prone to the effect of a halo, then the rest should be “safe”.
You can avoid the halo effect by making sure that the studied variables are independent and measure different factors.
Example. You need to find out if customer service leads to increased business performance.But two variables measure the same thing, and the result is a halo effect (as is the case with attractiveness and competence).
In addition to independent variables, there are other prejudices that lead to erroneous conclusions, for example, the opinion that interdependence equals a causal relationship.
Example. The leaders of successful companies are often stronger in spirit. But is the enterprise successful because the managers are happy? Or is it really the other way around?
Another common prejudice is the illusion of single explanations.
Even thorough research examining the problems of both cause-effect relationship and the halo effect fall prey to the illusion of isolated explanations.
Example. A University of Delaware study found that corporate social responsibility (CSR) could account for up to 40% of a company's financial fluctuations. The statement is illogical, as it makes us think that CSR concerns the altruistic, and not commercial, aspects of the company. However, CSR is so closely interconnected with other factors affecting financial performance (management, market orientation
Bestsellers often give out pseudo-scientific conclusions for practical advice.
Consultants and business analysts publish guides to success since the 1970s.
In 1982, the book “In Search of Perfection” was published by a pair of consultants from McKinsey Consulting, who identified eight methods of America’s most successful companies (some of them soon went bankrupt). This manual instantly became a bestseller in the United States. They also came up with a few “buzzwords” (abstrusely meaningless words), creating a tendency that the authors of such books have followed to this day.
The authors claimed to have selected the best American companies through a “systematic, logical, and objective” process. It included a survey of managers and identifying common features of companies. The study led to eight principles of success, such as “being closer to the customer” and “productivity through people.” Just two years after publication, 14 of these “exceptional” companies experienced a sharp drop in productivity.
Comparing only the most successful companies, McKinsey consultants made a serious mistake: they created the illusion of finding a connection between the winning objects.
Usually we are mistaken when we base our choice on the desired result.
Example. You want to know the reason for the increase in blood pressure. To participate in the study, you select a group of people suffering from this ailment. With such a selection, you will never come to the right conclusion. Only by comparing subjects with low and high blood pressure will you find the cause of the problem.
Since the search for excellence, many other books have constituted the "formula for success" in doing business. But time after time, each of the authors came to conclusions by the wrong methods.
Company executives are more interested in an exciting life story than the right scientific approach.
Despite the wrong methodology, business guides are on the bestseller list. Business aids containing more compelling images, louder statements, and brighter metaphors sell better than their counterparts.
Consider several popular books to understand this situation.
“In Search of Perfection” and Jim Collins’s book, From Good to Great, at one time became bestsellers and have much in common. Both contain catchy phrases or mentions of the strategic styles of “hedgehogs” and “foxes”. Similar terms were heard throughout the industry, describing the intangible aspects of business life.
At the same time, benefits are almost identical in meaning (for example, “The formula for sustainable business success 4 + 2.What (really) works ”by William Joyce, Nitin Noria and Bruce Roberson) became mediocre publications.
The latest books lack images. They do not contain so many bright, inspiring stories about business life, and are written in a common language that uses the terms “structure”, “strategy” and “business culture”.
That is, pseudoscientific stories inspire people more than pure science. Scrupulous research does not have a dramatic connotation of life stories.
Example. A study by the University of Chicago found that in a company that uses a certain management style, productivity can increase by four percent. This study was scientifically substantiated, but its result fades in comparison with the 40% promised by the author of "From Good to Great."
For managers, research on average growth among hundreds of companies is boring. They need ideas that they can easily apply to their own situation.
Example. Managers are more interested to know that a universal management style will lead to a 10% increase in profits, and not that 500 managers in 10 years have achieved a 5% reduction in staff accidents.
If so many companies, managers and business gurus are deeply mistaken, are there any tips that really lead to business success?
There is no guarantee of success, but certain approaches will help direct the business in the right direction.
There is no “magic formula" for success — business performance is too unpredictable. And the obsession with finding such a formula distracts us from key points - strategy and execution - that really affect performance.
Strategy
Choosing a business strategy carries a big risk, since you can not be sure of the results. But a decision needs to be made, since strategy is critical to business performance.
Most business directories only hint at the importance of the strategy with banal advice: "The strategy should be clear and clearly articulated."
Since the market and type of product play an important role, clarity of the strategy is not as important as its relevance to the company's goal.
Example. An expansion strategy in a supersaturated industry will doom the company to failure, even if it is “clearly articulated.”
Execution
The way an action plan is implemented is a key performance indicator. Unlike strategy, execution is a less risky variable because it includes factors controlled by the company, such as production time.
Company executives often simply tell subordinates that they "must better execute the strategy." Such advice is useless. It’s like saying: “Let's just do our job better.” It is necessary to specifically determine what they should perform better.
Example. “Reduce delivery time” is a more useful instruction that will help the company achieve its strategic goal of improving the quality of customer service.
Although strategy and execution determine effectiveness, they are also not the Holy Grail of success.
Managing a company involves risk
Although business metrics are not random, luck often determines the success of a company. Recognizing that business performance depends on many things beyond our control, we free ourselves from such illusions as the illusion of organizational physics.
The illusion of organizational physics is a misconception that business performance is subject to immutable laws similar to the laws of nature. Managers are sure that their actions should have predictable results and a certain approach guarantees success.
The truth is that business is inextricably linked to risk: success requires appropriate circumstances and good luck.
You should not choose a strategy, considering that it will certainly lead to success. It is better to choose a strategy that will provide the best combination of circumstances for success.
Example.Goldman Sachs Investment Bank executives know that luck will one day be turned away, but they take on huge risks, minimizing the likelihood that their investments will not bring results. When a bank fails, the company considers this not a management error, but a natural component of success.
Deliberate risks are a success factor for many large companies.
Example. Intel founder Andy Grove took a big risk and managed to rebuild the company several times to get ahead of the competition and maintain profitability. Intel started with the production of semiconductors, then took up microprocessors and now produce various chipsets and software. Grove believes that the company is ready to test fate, based on justified risks, because it is an integral part of its success. Today Intel is one of the largest American companies with a profit of $ 52.7 billion.
Do not forget that business is a risk, and you will not be blinded by attractive illusions. You will take deliberate risks leading the business to success.
The most important thing
Countless business gurus claim to have a magic formula that guarantees success, but their books are full of methodological errors. Coming to attractive conclusions, the authors of these books mislead the reader. There is no “recipe” for success. Only careful strategic planning and accurate execution will help you.
Separate Variables To Avoid Halo Effect
If you are researching or analyzing something, separate the variables you want to study.
Example. To find out whether the head of the department is doing well, analyze his approach to management, feedback from subordinates and colleagues, and the productivity of the department.
Then make sure that the variables do not affect each other.
Example. If you find that the reviews are positive, this data should not be combined with the low productivity of the department, so as not to affect the analysis.
The “halo effect" evokes business illusions. Beware of them
We are accustomed to attribute exclusively positive qualities to any company that has achieved success. Belief in these illusions reassures the manager, justifies the decisions already made. Because of this, reality is greatly simplified and the constant demands of changing technologies, markets, and consumers are ignored.
