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A good deal of our business thinking is shaped by delusions, which are shaped by flawed judgments and errors of logic and that distort our understanding of the real reasons for an organisation’s performance.
If you’re up to speed on business books you’ll know that back in 2007, Phil Rosenzweig revealed nine delusions that are commonly found in the corporate world. It’s been over a decade since Phil wrote The Halo Effect, which was republished in 2014 with two new chapters.
The most pervasive of the nine delusions which Phil taught us about is the Halo Effect. This is when a company’s sales and profits are up, people often conclude that it has a brilliant strategy, a visionary leader, capable employees, and a superb corporate culture. When performance falters, they conclude that the strategy was wrong, the leader became arrogant, the people were complacent, and the culture was stagnant. In fact, little may have changed – company performance creates a Halo that shapes the way we perceive strategy, leadership, people, culture, and more.
To illustrate how the Halo Effect is so widespread, Phil explores examples from the likes of IBM, Cisco, and Nokia, and undermines a few well-known business books too.
The Original Nine Delusions that Deceive Managers
Before I take the liberty of appending a 10th delusion to the list, let’s have a quick reminder of the original nine delusions that Phil Rosenzweig wrote about.
#1: The Halo Effect
The tendency to look at a company’s overall performance and make attributions about its culture, leadership, values, and more. In fact, many things we commonly claim drive company performance are simply attributions based on prior performance.
#2: The Delusion of Correlation and Causality
Two things may be correlated, but we may not know which one causes which. Does employee satisfaction lead to high performance? The evidence suggests it’s mainly the other way around — company success has a stronger impact on employee satisfaction.
#3: The Delusion of Single Explanations
Many studies show that a particular factor — strong company culture or customer focus or great leadership — leads to improved performance. But since many of these factors are highly correlated, the effect of each one is usually less than suggested.
#4: The Delusion of Connecting the Winning Dots
If we pick a number of successful companies and search for what they have in common, we’ll never isolate the reasons for their success, because we have no way of comparing them with less successful companies.
#5: The Delusion of Rigorous Research
If the data aren’t of good quality, it doesn’t matter how much we have gathered or how sophisticated our research methods appear to be.
#6: The Delusion of Lasting Success
Almost all high-performing companies regress over time. The promise of a blueprint for lasting success is attractive but not realistic.
#7: The Delusion of Absolute Performance
Company performance is relative, not absolute. A company can improve and fall further behind its rivals at the same time.
#8: The Delusion of the Wrong End of the Stick
It may be true that successful companies often pursued a highly focused strategy, but that doesn’t mean highly focused strategies often lead to success.
#9: The Delusion of Organisational Physics
Company performance doesn’t obey immutable laws of nature and can’t be predicted with the accuracy of science — despite our desire for certainty and order.
New at #10
The Delusion of Digital Transformation
“The tendency to label any project or programme involving digital technology as “Digital Transformation”. Those initiatives that will neither disrupt markets nor protect against disruption often lull firms into a false sense of security when executives are led to believe they are transforming their business. The reality for many is that they are using new technologies to create a slightly better version of the past. A less misleading label for such initiatives would be; “digital change project” or “digital change programme” – because transformation creates a new future, while change facilitates a better version of the past.” – Rob Llewellyn
This is where the post veers away from the published work of Professor Philip Rosenzweig, and leads into what I’ve previously referred to as The Great Digital Illusion and Dangers of the Transformation Illusion.
A New Business Currency with Fashionable Names
When Phil originally wrote his book over a decade ago, most leaders weren’t concerned about how technology can give rise to new business models. But now a new currency has entered the world of business, which can be likened to a two-sided coin. On the one side is tremendous opportunity, while on the other is unprecedented threat.
When used wisely, this new business currency has the ability to convert into new business models that can render established business models antiquated and eventually obsolete. Questions for all leaders to consider include:
- Are we doing what it takes to drive the creation of such business models?
- Are we allowing our firm to become the victim of new business models?
- Are we victims of our own delusion of digital transformation?
In established firms, the nature of initiatives that either create or protect against such business models is described by some as “Digital Transformation”, by others as “Business Transformation” and also as “Digital Business Transformation”. The fact is that the word “Digital” will eventually go out of fashion as it becomes an integral part of every business – leaving us with “Business Transformation”.
But the single word to keep in mind is “Transformation”, along with the questions; “are we really doing it? – or are we simply deceiving ourselves?”
Misinterpretation of the New Currency
Digital transformation delusions occur when companies believe they are undergoing transformation, simply because they are using digital technology to change something in their business. There is a tendency to call these initiatives “Digital Transformation”.
The reality, when you get under the bonnet/hood of many such “Digital Transformation” initiatives, is that they are only making small changes to something that already exists. So the delusion of digital transformation has now proliferated across thousands of companies, which in turn are misleading stakeholders and raising false hopes about which side of the new business currency coin their “digital transformation” is addressing.
For many, their initiatives are neither creating new business models nor protecting against new business models. You might even consider it counterfeit transformation currency.
Fast Caterpillars or Butterflies?
The confusion between transformation and change has been around for a number of years and MIT Professor George Westerman articulated this perfectly when he explained …
“When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong, all you have is a really fast caterpillar.”
Many managers are informing their workforces and stakeholders that they are undergoing innovative digital transformation. This builds moral and excitement about how the firm is “so innovative, digital and transformational” when in reality, to refer back to George Westerman’s analogy, many are simply making faster caterpillars.
When digital initiatives are only capable of creating fast caterpillars, the best an executive team can look forward to is “change” such as reduced costs, increase efficiencies, and other small improvements. While this is good, some teams have convinced themselves that this is transformational. But if digital initiatives are not going to protect against disruption or disrupt, then at best they are digital change initiatives. No butterflies are being created, so responsible managers and leaders should consider whether they want to mislead others into believing otherwise.
Deceived by The 10th Delusion of Business
When managers are deceived by the delusion of digital transformation, their lines of business often become immensely preoccupied with creating fast caterpillars. So preoccupied and consumed by it that no one is leading any legitimate transformation.
As a result, the firm becomes increasingly vulnerable to new and unknown players that will enter the market with new business models and steal customers from under the noses of established firms. And because the incumbent’s digital change projects (labelled digital transformation) were never designed to protect against that kind of threat, they’ll begin to bleed profits.
So in summary, there are now thousands of so-called digital transformation initiatives that are deluding companies into believing their are transforming, when in fact they’re not.
To compound this issue, when firms allocate their limited time, effort and resources to creating fast caterpillars, they have little if any of it left to invest in legitimate transformation of the business.
In an interview with MIT that was documented in this article, Deloitte Center for the Edge co-founder John Hagel succinctly summed up an all too common business behaviour in three short sentences …
“There’s a natural human instinct to stick to what you know. Don’t go out of your comfort zone because things are really scary out there. And so there’s a tendency to just hold on and just squeeze harder on what you’re currently doing.”
Avoiding Digital Deceit
Digital change projects and programmes are vital components in how a company improves upon things. They fix shortcomings, save some money, introduce efficiencies and other improvements.
But when they are not designed to address either side of the new business currency coin, responsible managers and leaders should avoid leading their workforces and stakeholders into believing otherwise. Because no one wants to be deceived by the 10th delusion of business.
More importantly, consider what plans are in place to ensure the firm undertakes legitimate transformation initiatives that will either protect against new business models or better still, introduce them.
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