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Business books are valuable, but only if you know how to read them

Reuters//Giorgio Perottino
The problem with only looking at winners.
Published Last updated This article is more than 2 years old.

To understand success, it’s natural to study successful people and organizations. Thousands of business books are published each year, claiming to have done this very thing, and distilled success into a set of practical principles.

These books almost always contain an empowering message, whether explicitly or implicitly: that anyone can be successful if they just understand what it takes, and follow the key steps. The problem is, this message is highly misleading. Understanding success is much harder than most of these popular accounts suggest. Attempts to demystify high performance may often end up perpetuating a number of harmful misconceptions about what it means to achieve success.

Misconception #1: The best way to understand high performance is to study successful people and organizations

In Search of Excellence, first published in 1982 by Tom Peters and Robert Waterman, is one of the most popular attempts to understand how companies achieve high performance. Peters and Waterman took 43 “excellent” American companies, and, by looking at archival sources, press accounts, and interviews, identified eight practices they all had in common—including a “bias for action,” and “staying close to the customer.” The book did incredibly well—selling 3 million copies in its first four years, and Bloomsbury called it the “greatest business book of all time.”

Does following Peters and Waterman’s eight principles guarantee you business success? Almost certainly not. One big problem with their research was that they only looked at successful companies. Knowing that all successful companies have something in common tells us nothing unless we also know that unsuccessful companies lack those things. We might find that all successful business founders displayed an interest in entrepreneurship from an early age, for example, or that they all brush their teeth in the mornings. These things tell us nothing about what differentiates successful companies from unsuccessful ones, and neither do Peters and Waterman’s eight principles.

Even if Peters and Waterman had compared their “excellent” companies to similar ones that performed less well, we still might not be able to conclude much, because of some serious issues with the data itself.

Phil Rosenzweig, professor of strategy and international management at IMD Business School, argues that one of the most important problems in how we study success stems from the “halo effect.”

“Many of the things we typically think drive company performance are better understood as the result of company performance,” Rosenzweig says. “When a company is doing well, observers naturally assume that it must have a host of positive qualities: good strategy, a visionary leader, a vibrant culture, and so on. But when that same company suffers a decline, observers are quick to conclude that, actually, the strategy was all wrong and its employees had become complacent.”

The halo effect is a widespread human tendency: when we have a generally positive impression of someone or something, we easily assume it has other positive characteristics too. If I really like someone, I’m much more likely to think she’s also attractive and intelligent. Professor Barry Staw, now at UC Berkeley, conducted a clever experiment that demonstrated the halo effect when evaluating performance. Staw found that participants attributed one set of characteristics to groups they believed were high performers—more cohesion and better communication—than to groups they believed were low performers, even though the actual performance of the groups was the same.

Documenting what was said and written about companies after they were successful, as Peters and Waterman did, might make for compelling stories, but it tells us very little about what actually made those companies successful.

Misconception #2: Success is a sign of capability

We might think that as long as we compare successful companies with unsuccessful ones, and ensure our data are uncontaminated by the halo effect, then we can truly uncover the secrets of success. But this relies on a crucial assumption: that success is, in fact, a signal of high capabilities. In other words, we’re assuming companies that succeed do so because they have efficient processes and valuable insights, even if it’s difficult to uncover precisely what those things are.

Jerker Denrell, professor of behavioral science at Warwick Business School, UK, suggests that this assumption is actually much less reasonable than it might seem. In fact, Denrell provides several reasons to think that firms with exceptionally high performance may be less capable than the average company.

Exceptionally high performance is, by definition, a rare event. Firms with low capabilities that take lots of risk can actually be more likely, statistically speaking, to be highly successful than more highly capable firms that play things safe. Denrell argues that high performance tells us much more about a firm’s tendency to take risks than it does about its capabilities. But what about companies that perform consistently well year after year—surely this can’t just be down to luck? Not necessarily. This neglects the fact that luck early on is much more likely to lead to sustained success in business than you might think.

If someone manages to win 10 races in a row, it seems really unlikely they just got lucky—they’ve got to be a pretty decent runner. However, this depends crucially on whether the races are independent or not. If the races are dependent (if winning the first race gives you a big head start in the second, winning that race then puts you ahead in the third, and so on), someone who gets lucky initially could end up winning 10 races without exceptional running ability.

Denrell suggests many industries are like dependent races. A telecommunications company that gets a large market share one year, will probably have a large market share the following year, because most customers are reluctant to change telephone operators often.

Misconception #3: If we look hard enough, we can find a formula for success

There’s a common thread underlying the messages of popular business books that there’s some kind of formula for success that anyone can reliably follow to achieve great things. Though inspiring, this message just isn’t true.

The key reason there’s no formula for success in business is that success is relative, not absolute. To illustrate this point, Rosenzweig cites the example of Kmart, previously a dominant US retailer that went into steep decline during the 1990s and declared bankruptcy in 2002. Yet on several objective measures, Kmart actually improved during the 1990s. It saw a 32% improvement in its inventory turnover—how many times a year it sold its inventory, a key measure of retailing efficiently. Kmart’s problem was that on these same measures, Wal-Mart improved even more rapidly—up 63 % on its inventory turnover, which were higher than Kmart’s to begin with. Kmart’s failure was a relative one, not absolute—and not one that could have been avoided by following a few key principles.

“Ask yourself,” says Rosenzweig, “If everyone in your industry followed the same formula, are they all going to be equally successful? No, because it’s a race. If we think there’s a formula, we kid ourselves—it diverts attention from the fact we need to make calculated choices under uncertainty. It’s making those strategic choices, understanding your competition, that’s crucial to success.”

Though we’re unlikely to ever distill success into a neat formula or set of principles, there is an alternative approach, which might bring more promise. Denrell suggests that rather than trying to demystify success, we should spend more time studying failure, which may come down to much more consistent principles. Understanding what not to do, if based on more solid evidence, could be much more useful than trying to imitate high-performing companies. And there does seem to be a move toward understanding failure, at least in the startup world, where failure is seen as almost inevitable, something to be learned from rather than avoided.

Unfortunately, the study of failure doesn’t make for such an inspiring message. “In Search of Mediocrity” or “Built to Collapse” probably wouldn’t have been best sellers. The real benefit of reading popular business books could be this: they may not provide a path to guaranteed success but they certainly provide inspiration.

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