Strategy Fundamentalism: Why You Shouldn't Bet on Halos and Horns

How do you know a good business bet?

It’s easy to tell after the fact. Unfortunately, you place your bets before the fact.

An investment is a bet. A merger or acquisition is a bet. A new product is a bet. A new market is a bet. A startup is a bet. A business strategy is a bet. Taking a job is a bet.

We cannot escape bets. But we can bet better. We can bet better by becoming strategy fundamentalists.

Your good-business list

Make a list of characteristics you believe would distinguish good businesses from bad.

Your good-business list might look like this:

• Focused
• Data-driven
• Strong track record
• Prudent management
• And so on.

Other candidates for the list aren’t so clear.?

• Sheer size. Is it better to be Toyota or Porsche?
• Fame. A company has made Tabasco brand pepper sauce for over 150 years. Do you know the name of the company? Do you care? (footnote 1)
• Youth (of the business). Who moves faster and better, a startup or an incumbent? Are you sure?

As you composed your good-business list, you might have fallen under the halo effect (2) if you thought of iconic businesses and built your list from what you think they did. Steve Jobs was a perfectionist, Apple became a great company, perfectionism belongs on the list. The halo effect causes people to attribute favorable characteristics to a business simply because?the business performs well. Not unlike the way rich people sure are attractive.

Your bad-business list

What’s on your bad-business list?

In my workshops, people nominate the usual suspects:

• Complacent
• In denial
• Bureaucratic
• Resistant to change
• And so on.

But no one sets out to do bad-business things. No one says, “Let’s stifle ourselves with more levels of bureaucracy! After that, let’s never change!”

Re-think the bad-business list from a good-intentions perspective. We’re not complacent; we focus on what we do best. We’re not in denial; look at our track record of success. It’s not bureaucracy; it’s prudent management. We’re not resisting; we just want data and evidence. And so on. Gee, when we put it that way, it sounds like the good-business list.

Good intentions help us believe we’ll succeed. But if we fail, we embrace a negative halo effect, known as the horn effect. (Yes, it’s the devil’s horns versus the angel’s halo.) The horn effect leads us to infer incompetence confidently and righteously. Worse: it leads us to think we found the problem. “I told you it was denial, not success!” And when we think we found the problem, we stop looking. It’s silly to keep looking for something we already found.

Strategy fundamentalism

So what do we do about the halo’s alluring glow and the horn's devilish denial?

It’s not a bad question, and, assuming you have an odd idea of "fun", it’s fun to debate over a nice single malt. But it’s too late. Remember: Our task is to distinguish good and bad bets in advance. It’s pointless to say you shouldn’t have bought that stock that tanked.

Halos and horns tell you to presume that a business must be smart if results are up and must be stupid if results are down (3). That’s just wrong. Tightening spending might boost profits, for example, but when tightening "works" it's easy to proceed to over-tightening. (The tip of the strategic- and critical-thinking icebergs.)

Contrast halos and horns to strategy fundamentals. If a business has superior products and services, for example, it is likely to perform better than an otherwise-similar business with inferior products and services. That’s well-established in theory and with data (4). Superior products and services belongs on the strategy fundamentalist's good-business list.

Of course, a business’ strategy fundamentals can change over time. Changing them (for the better) is the point of competitive strategy … and when the fundamentals change, you should expect the business’ performance to change accordingly (5).

(How much will performance change, and in what direction? How will competitors respond, and how will their responses affect your business? Those are jobs for business war games and strategy simulation.)

Oscar Wilde said, “Every saint has a past, and every sinner has a future.” That’s nice (really). But if you want to bet well, watch out for halos and horns. Listen instead to strategy fundamentalists like Damon Runyon: “The race is not always to the swift, nor the battle to the strong, but that is the way to bet.”

Keywords: #strategy #strategicthinking

(1) McIlhenny Company of Avery Island, Louisiana, USA.

(2) See The Halo Effect, by IMD Professor Phil Rosenzweig.

(3) See chapter 5 (“The Myth that Customers Matter”) and chapter 7 (“Benchmarking: Be Just Like Them, Only Better”) in The NEW Employee Manual: A No-Holds-Barred Look at Corporate Life, by Benjamin Gilad and Mark Chussil (Entrepreneur Press, 2019).

(4) See The PIMS Principles, by HBS Professor Robert D. Buzzell and Bradley T. Gale (The Free Press, 1987). (PIMS, for Profit Impact of Market Strategy, was started by the remarkable Dr. Sidney Schoeffler. I worked at PIMS for 14 years and contributed to that book.) See also HBS Professor Michael Porter’s The Five Competitive Forces That Shape Strategy.

(5) Research on thousands of businesses in the PIMS database shows that profitability tends to approach levels consistent with businesses' strategy fundamentals.