On my recent trip to India, I presented the key ideas in The Halo Effect at a gathering of business people. Among the points I discussed is what I call the Delusion of Lasting Success – the mistaken notion that companies can, by following a set of steps, achieve long-term high performance. That was, of course, the main idea behind Collins and Porras’s Built to Last – where they made the claim that there exists a blueprint for lasting performance.
In fact, such a blueprint only appears when one makes mistakes of research design (selecting companies that have been successful for many years) and then makes mistakes of data (gathering data that are tainted by the halo effect.) The result is a mistaken claim that what has been observed led to that performance; in fact, the causality is backwards – companies selected for lasting success tend to be described according to a common set of principles. The facts are rather different: extreme performance in one period is regularly, and almost inevitably, followed by less extreme performance in a next period, a phenomenon known as regression toward the mean.
Why does high performance fade over time? Because of the forces of competition, imitation, sharing of practices, technological innovation, and employee mobility, not to mention changing consumer tastes and preferences.
During the Q&A session, a gentleman raised his hand and asked how I explained Toyota’s success. At one level, it was a simple question about explaining Toyota today – and the answer is to make sure that we do not fall victim to the halo effect, attributing success to such things as leadership or culture or innovation, when these might simply be inferences made on the basis of performance. My guess – having not personally researched Toyota – is that its success comes at least in part from things that are not prone to halos at all, but can be measured independently of performance, namely its manufacturing and quality system.
But other level to the question was about enduring performance. The questioner also meant this: If success is fleeting, how do you explain Toyota’s apparently enduring success? Isn’t Toyota an example of lasting success?
My answer: Yes, it may seem today that Toyota has defied the odds and achieved long-term success. But if you had asked the question a few years ago, you might have asked about Wal*Mart. Or Dell. Or GE. Or Microsoft. Today, every one of those companies has found its top line slowing and its bottom line eroding. What seemed, at one moment, to be a star company that cracked the code of long-term success has now become another example of a strong company that surged, but was unable to keep up its record growth – and for entirely predictable reasons. Markets saturate. Competitors copy. Consultants spread practices. New technologies emerge. Employees move from one company to another.
By the same token, today, in 2007, we admire Toyota, but let’s keep a bit of perspective. In a few years, Toyota’s relative advantage is likely to fade. Sure, in some industries, where technology is stable and brands matter and consumer tastes persist, performance may have a greater tendency to endure, while in other industries success is very short-lived. But no one is immune. It only seems that way when we take a snapshot.
In 2007, we talk about Toyota and Starbucks and Google as exemplars of sustained success. Come back in a few years, and let’s see how they have fared. I know where my bet is.
It's 2011 and I think Toyota is doing great; especially with their Prius. I live in So Cal and it seems like every other vehicle is a Prius. Consumers really appreciate the mileage since gas is so expensive and I think it's the Prius and cars that are similar that will propel Toyota in the future.
Posted by: New Cars Palm Desert | August 01, 2011 at 05:32 PM