Week 2 Readings: Halo Effect

Lego case (2004)

The COO was fired after major losses; media and leadership explained failure as Lego “straying from its core,” showing how post-hoc narratives dominate business explanations.

“Straying from the core” narrative

A common explanation for failure: the firm deviated from what it supposedly does best; the passage argues this is often an after-the-fact story rather than a proven cause.

Core business problem

The “core” is hard to define in advance; it can mean different products, customers, channels, geographies, or value-chain steps—so labeling something “outside the core” is often hindsight.

Hindsight bias in strategy

After outcomes are known, decisions that failed seem obviously wrong and decisions that worked seem obviously right, even if they were reasonable at the time.

Counterfactual explanation trap

If Lego diversified and failed, critics say “lost its roots”; if it stayed with blocks and stagnated, critics would say “timid/complacent.” Opposite lessons can be drawn from different imagined scenarios.

Loaded verb framing (“stray”)

Words like “stray” imply deviation, error, and being lost; they smuggle judgment into what looks like reporting.

Loaded verb framing (“drift”)

“Drift” suggests aimlessness and lack of control; using it frames diversification as irresponsible even when it may have been strategic.

Neutral verb framing (“expand”)

When success/failure is uncertain, writers often use neutral verbs like “expand”; if the move later fails, the verb can switch to “stray/drift.”

Media explanation pattern

Business journalism often prefers a simple cause (“lost focus”) over messy multi-causal reality (currency, competitors, demand shifts), because readers want coherent explanations.

Adjacent expansion dilemma

Firms often must change because markets shift; the challenge is deciding which “adjacent” moves build on capabilities versus which truly overreach—hard to know in advance.

Lego’s market shift context

Traditional toys matured and kids shifted earlier to electronic games; Lego faced pressure to innovate or risk stagnation.

“Inside the core” ambiguity

Harry Potter tie-ins seem close to Lego’s block-based toys; if that counts as “outside the core,” then the core may be too narrow to allow growth.

GE finance example

GE moved far beyond its traditional industrial base into financial services; it succeeded, so the move is celebrated rather than condemned as “straying.”

Outcome-driven labeling

Same kind of diversification is praised when it works and criticized as misguided when it fails; evaluation depends heavily on results.

Expert advice problem (unfalsifiable)

Experts often say “focus on heritage AND be innovative,” which can’t be tested or proven wrong; they can claim credit either way.

Ted Williams analogy

The only useful advice is to choose a clear tradeoff (pitch to strike vs intentionally walk); “do both” advice is comforting but not actionable.

Industry-wide headwinds

Context matters: other toy firms struggled too; focusing only on one firm’s “mistake” can ignore broader market forces.

Mattel contrast

Mattel responded to Barbie decline with new spin-offs, showing that the “focus on the core” lesson is not universally accepted or clearly correct.

WH Smith “drifting” example

The press described WH Smith’s product additions as “drifting from the core,” demonstrating how word choice frames a strategy as aimless.

Format expansion explanation

WH Smith’s situation may be about responding to larger retailers expanding their formats; adding adjacent fast-moving goods can be a rational defense, not “drift.”

Nokia “expanding” example

Nokia moved beyond handsets into gaming/music/systems to escape commoditization; it’s framed neutrally as “expansion” because outcomes weren’t yet known.

Double-bind for firms

If Nokia diversified and failed, it would be blamed for straying; if it stayed with handsets and declined, it would be blamed for complacency.

Mother of all business questions

The central business puzzle is what drives high performance and why some firms soar while others stagnate or fail; the passage emphasizes this is hard to answer confidently.

Rationalizing vs rational

Eliot Aronson’s point: people aren’t purely rational; they are “rationalizing”—we strongly prefer explanations that make events feel understandable.

Stock market narrative habit

Market movements are often noisy, but commentators still provide confident causal stories because “randomness” is unsatisfying to audiences.

Science (Feynman definition)

Science asks: “If I do this, what will happen?”—a practical, cause-and-effect approach focused on prediction and testing.

“Try it and see” method

Scientific progress comes from running tests/experiments, collecting evidence, and refining conclusions based on repeated trials.

Business experiments (when possible)

Some business questions allow experiments (e.g., pricing, product placement, promotions) by running trials across stores or settings and comparing results.

Wal-Mart scientific merchandising example

One explanation for Wal-Mart’s success is applying rigorous measurement to customer behavior, logistics, and store layout—learning from data and repeated trials.

Internet A/B testing logic

Companies like Amazon/eBay can test changes by tracking clicks and choices at scale, enabling rapid “try it and see” learning.

Harrah’s example (data + experiments)

Harrah’s used loyalty-card data to run experiments on offers and casino layout, improving customer retention and performance.

One-shot strategic initiatives

Some major decisions cannot be experimentally tested beforehand (mergers, acquisitions, big product launches), because you only get one real attempt.

Examples of one-shot moves

New Coke, Daimler–Chrysler, AOL–Time Warner illustrate high-stakes decisions where controlled experimentation is nearly impossible.

Quasi-experimentation (social science)

When experiments aren’t possible, researchers study real-world cases, compare patterns, control variables statistically, and infer likely causal relationships.

Why managers dislike careful research

Careful social science often yields modest, probabilistic effects and discusses methodology; managers prefer bold, simple, action-guiding stories.

Reports vs stories

A report prioritizes factual accuracy without interpretive spin; a story prioritizes a satisfying explanation and a clear “lesson.”

Problem with “stray/drift” in reports

If accounts claim to be reports, loaded words like “stray” and “drift” are misleading because they insert judgment and imply causality without proof.

Pseudoscience in business

Explanations that look rigorous but lack valid causal testing; they often provide confident prescriptions without reliable predictive power.

Cargo Cult Science (Feynman)

Imitating the outward forms of science (methods, jargon, “rigor”) while missing what makes science work (real testing and correction), like building runways without planes landing.

Coconut headsets metaphor

Cargo cult practices may feel meaningful and hopeful, but they don’t predict outcomes; business “science” can be similar if it’s mostly story dressed as research.

Main lesson of the passage

Be skeptical of simple post-hoc explanations