Halo Effect Case
Misunderstanding the Nature of Company Performance: The HALO EFFECT and other Business Delusions
In February 2005, Dell Computer was ranked #1 among the World’s Most Admired Companies by Fortune magazine. Just two years later, in February 2007, amid slumping performance, Michael Dell removed CEO Kevin Rollins and took over the reins to revive the company.
What had gone wrong? Observers were quick to offer their views. According to Business Week, “Dell succumbed to complacency in the belief that its business model would always keep it far ahead of the pack.” It had been “lulled into a false sense of security.” An unsuccessful acquisition was said to be evi¬dence of “hubris.”1 In Leadership Excellence, a management consultant explained that Dell “got stuck in a rut” and became “reluctant to change.” When rivals had matched Dell’s strategy of customization, managers “fell back on an old practice: they cut costs to maintain market share.” The Financial Times quoted a business school professor at the University of Maryland who opined: “[Dell has] forgotten how to make customers happy. I have to believe the problems with the company are cultural and they begin at the top.”2
Dell’s misfortunes made for an irresistible story—How the mighty have fallen. The reasons that were advanced—complacency, hubris, reluctance to change, and poor leadership—all sounded reasonable. They offered explanations that most readers would find sensible and satisfying. On closer inspection, however, the coverage of Dell illustrates some of the common errors that distort our under¬standing of company performance.
Start with the suggestion that Dell had been “complacent.” It’s easy to infer from Dell’s slowing performance that it must have been “complacent,” but the claim doesn’t stand up to closer scrutiny. In fact, as far back as the late 1990s, Michael Dell and his top managers knew that their dominance wouldn’t last forever. They identified new growth opportunities, seeking to
In February 2005, Dell Computer was ranked #1 among the World’s Most Admired Companies by Fortune magazine. Just two years later, in February 2007, amid slumping performance, Michael Dell removed CEO Kevin Rollins and took over the reins to revive the company.
What had gone wrong? Observers were quick to offer their views. According to Business Week, “Dell succumbed to complacency in the belief that its business model would always keep it far ahead of the pack.” It had been “lulled into a false sense of security.” An unsuccessful acquisition was said to be evi¬dence of “hubris.”1 In Leadership Excellence, a management consultant explained that Dell “got stuck in a rut” and became “reluctant to change.” When rivals had matched Dell’s strategy of customization, managers “fell back on an old practice: they cut costs to maintain market share.” The Financial Times quoted a business school professor at the University of Maryland who opined: “[Dell has] forgotten how to make customers happy. I have to believe the problems with the company are cultural and they begin at the top.”2
Dell’s misfortunes made for an irresistible story—How the mighty have fallen. The reasons that were advanced—complacency, hubris, reluctance to change, and poor leadership—all sounded reasonable. They offered explanations that most readers would find sensible and satisfying. On closer inspection, however, the coverage of Dell illustrates some of the common errors that distort our under¬standing of company performance.
Start with the suggestion that Dell had been “complacent.” It’s easy to infer from Dell’s slowing performance that it must have been “complacent,” but the claim doesn’t stand up to closer scrutiny. In fact, as far back as the late 1990s, Michael Dell and his top managers knew that their dominance wouldn’t last forever. They identified new growth opportunities, seeking to