Why Success Formulas Will Never Work…but Consulting Can Add Real Value
By Phil Rosenzweig
A key challenge for any management consultant is to set a client’s expectations realistically—to explain what advisory services can bring and how they can be valuable, while also dispelling unrealistic dreams and wishes.
That task is more difficult today, with so many books claiming to offer simple solutions and breakthrough advice. In the last few years, business best-sellers have claimed to offer the way to go from good to great, or strategies to make the competition irrelevant, or the formula to achieve lasting success, or the way to devise failsafe strategies.
Some of these books can easily be dismissed as hyperbole, but many others have the ring of authority. They are written by professors at leading institutes or by well-known management gurus, and are based on vast quantities of data, apparently rigorously analyzed. The average manager can be forgiven for thinking they may offer the path to success. And by extension, managers may question the value of a consultant who proposes a study that may be detailed, time consuming, and expensive.
But the basic flaws that undermine leading business books, including some of the biggest best-sellers of recent years, have generated much of the poor thinking that pervades the business world. And consultants’ efforts to demonstrate the value of advisory services are frequently undercut by unrealistic expectations, which are often the result of simplistic thinking.
The most basic problem that I identify is an example of what is known as the Halo Effect. When a company is doing well—when its revenues and profits are up, and its share price is strong—it’s natural to infer that the company has a good strategy, an effective leader, excellent customer focus, and a vibrant corporate culture. When that same company falters, it’s easy to say that the strategy was misguided, the leader became ineffective, the culture became complacent, and the customer was neglected.
In fact, very often the company did not change much at all. Rather, people made different attributions based on its changing performance. Unfortunately, so much that we read about companies—in the business press, case studies, and even large sample research studies—is based on data that are undermined by the Halo Effect. These studies appear to have described the factors that lead to high performance, but are more correctly understood as identifying the ways that high performing companies tend to be described.
Relying on data that are undermined by the Halo Effect leads to several further errors of thinking, one of which is particularly relevant in the context of management consulting.
I call it the Delusion of Absolute Performance, and it helps explain why formulas for business success have never worked, and will never work.
Simply stated, in a competitive market economy, business performance is better understood as relative, not absolute. A company may improve in absolute terms but still fall further behind its rivals.
A good example is Kmart. By many objective standards—inventory turnover, central purchasing, point-of-sale information, and efficient logistics—Kmart was a much better company in 2000 than it was in 1990. So why did it experience such a sharp decline? Because rivals like Wal-Mart and Target improved even faster in those same categories. Kmart’s decline must be understood in relative, not absolute terms.
Once we recognize that business performance is inherently about competition and therefore relative rather than absolute, we have to face the fact that companies succeed by making choices that differentiate them from their rivals. That may mean offering a different set of products, or entering a new market, or performing a different set of activities, or occupying a different position in the market. Yet all of these choices involve uncertainty, because it’s impossible to know, in advance, exactly how successful a choice will be.
There are no guarantees in a competitive market setting—despite what some management gurus would have us believe. A company cannot simply choose to be great, apply a handful of basic principles—such as focus, discipline, and persistence—and expect that success will follow.
So much depends on what other companies do, as well as many other factors outside our control—technology, customer preferences, currency effect, and more. Confidence and positive thinking have their place, but choosing to be great is not sufficient for high performance. Formulas for success may be appealing, but they are not accurate.
Faced with the basic uncertainties of strategic competition, wise managers think in terms of probabilities. They know better than to seek the keys to guaranteed success, but strive to improve their odds for success through a thoughtful consideration of factors. Some of these factors are outside the company—including industry forces, customer trends, and the motivations of competitors. Others are inside—capabilities, resources, and risk preferences. On the basis of that analysis, the role of the business strategist is to make decisions that improve a company’s probabilities of success.
What are the implications for management consulting? As long as managers labor under the sorts of delusions described above, they may be tempted by the promise of easy answers, of a simple formula that claims to lead to success. They may be less receptive to the hard choices, inevitably involving risk, that are needed to bring about competitive differentiation.
There are, no doubt, some consultants who engage in the same over-hyped promises we commonly find in business best-sellers. Many others, however, provide a valuable service that can improve a company’s chances of success. They will be more effective, and their clients more likely to recognize and act upon high quality consulting services, if the simplistic delusions that pervade so much of the conversation in the business world can be dispelled.
The task of strategic management is to evaluate the external competitive environment, as well as company resources and capabilities, and make decisions that improve the probabilities of success in any choice. Consultants can provide significant value by offering expertise about many elements of strategic decisions—but only when their clients are able to discard simplistic thinking and adopt reasonable expectations.
A more accurate understanding of the drivers of success and failure in business—neither shaped by the Halo Effect, nor warped by mistaken views about competition—may result in a less appealing message, but is a better way for consultants to go. Such a clear-eyed approach is likely to bring about a more satisfying consulting relationship, and can provide superior value for clients.
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Phil Rosenzweig is Professor at the International Institute for Management Development in Lausanne, Switzerland, where he helps leading businesses address issues of strategy and organization. He’s the author of the forthcoming book, The Halo Effect...and the Eight Other Delusions that Deceive Managers, which will be available February 2007. Find out more at www.the-halo-effect.com.
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