Monday Mornings with Madison

The Halo Effect in Business and Brands, Part 1

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Estimated Read Time: 6 min.

How the Halo Effect Impacts Business and Brands

What is the Halo Effect?  Simply put, the Halo Effect is a mental bias people demonstrate that takes one trait of a person and generalizes it to the rest of the person’s characteristics.  First defined by U.S. psychologist Edward Thorndike nearly a century ago (1920), it describes a tendency that people have to reach specific conclusions about a person on the basis of a general impression or unrelated information.  For example, if a person is pleasing (cheerful and good natured), then it is assumed the person’s other attributes — about which is known little or nothing — are also favorable.  A nice person might be assumed to be hard working, loyal and trustworthy.  Politicians capitalize on this predisposition by appearing warm, friendly and likeable in public even though they might say little or nothing about their position on the issues.

Advertising and public relations firms understand the influencing power of the Halo Effect.  That is why reputation management is such a high priority for PR firms who oversee the image of celebrities.  They “get” that if they are able to sway the public’s perception of an icon in one important trait or quality, it is likely to color all other generalizations made about that person.  Case in point.  Because of her prominent role as a Talk Show Host for decades, millions of people recognize, like and trust Oprah Winfrey.  On screen, she came across as genuine… honest, kind and trustworthy.  And, based on just those limited and highly scripted observations –carefully cultivated by the huge team of researchers, writers, and producers of her show – political strategists have floated the idea of Mrs. Winfrey running for President of the U.S.  Political strategists think she can be a contender based on her name recognition and likeability even though she has never run for or held any political position and has no formal training in government.  That is a classic example of the Halo Effect.

But the impact of the Halo Effect doesn’t stop there.  It also influences how managers oversee their direct reports. According to Schneider, Gruman and Coutts in their book on Applied Social Psychology, the Halo Effect has an impact on a manager’s ability to assess the performance of the members of the team.[1] For example, a Director of Sales who highly values people with a positive attitude, will not only favor people with that quality, but any employee who demonstrates that particular trait in abundance is likely to then be judged positively in all other areas of the evaluation.  This is true even if the employee lacks the requisite knowledge or competence.  As long as the employee exemplifies a positive attitude (smiles a lot, is enthusiastic, and always tries to look on the bright side of any situation), the supervisor may very well give him or her a higher performance rating regardless of his lack of knowledge and inability to do the job.

Even more importantly, the Halo Effect has a profound effect in how companies – entire brands — are judged and perceived.   We see it manifested every day in the kinds of inferences that customers and investors make about a company’s leadership, customer service, product quality, corporate culture and more.  Evaluations about a company’s overall management and strategy is decided based on whether the company made money.  If sales rise, the company is seen as having a sound strategy, visionary leader, talented staff, excellent hiring practices, great customer service training, caring corporate culture and much more.  However, if sales fall, then all of those same factors are called into question.  Poor strategy.  Foolish leadership.  Unmotivated employees.  Fractured corporate culture.  Etc.  In fact, very little about the company itself may have affected why sales rose or fell.  There are a multitude of market factors that can affect a company’s sales and profitability that aren’t predicated on what is happening inside the company.  But the Halo Effect invariably causes the media, consumers and investors to make sweeping judgments about a host of variables based on a single data point.

Shutterfly and the Halo Effect

Case in point.  Shutterfly, an American Internet-based social expression and personal publishing company specializing in photo-book publishing, was founded in 1999.  According to Owler, the company went public in 2006 and their IPO raised $87 Million.[2] By 2007, Shutterfly was recognized by Deloitte & Touche as #20 on their “Fast 50 Technology Company” for Silicon Valley and #241 on their “Fast 500 Company” in North America list in 2007.[3] Shutterfly grew 671% during that period.  In 2009, Shutterfly bought Tiny Pictures, a mobile photo-sharing app centered on photo commenting.  In 2011, it acquired two more companies: Tiny Prints and Wedding Paper Divas.  And, in 2013, it acquired two more companies: This Life, a cloud-based solution for organizing and sharing photos and videos, and BorrowLenses, a rental company for high-end photography equipment.  Clearly the company was thriving and on a definite growth trajectory.  So it made sense when Shutterfly hired Christopher North as CEO.[4] Mr. North had been the Amazon UK Managing Director since 2011. Under his leadership, Amazon’s UK revenue had grown rapidly to more than $9 billion a year by 2015.  Amazon UK’s financial success was attributed to North’s leadership skills.   In 2016, Mr. Marineau, Interim CEO and Chairman of the Shutterfly’s Board of Directors said in a press release, “We are very excited to welcome Chris to the Shutterfly team. His outstanding track record at one of the most successful eCommerce companies in the world makes him an incredible asset to this organization.  Our Board and management team are committed to extending Shutterfly’s market-leading position and we are thrilled to have Chris lead the team in this endeavor as we continue to delight our customers, drive stronger operating results and increase shareholder value. We believe this is the beginning of an exciting new chapter for Shutterfly.”  This was a classic example of the Halo Effect.  Amazon UK’s overall success, which was likely a product of a multitude of factors, was generalized to reflect North’s skills.

Under North’s leadership, Shutterfly continued to grow, acquiring privately-held Lifetouch, the largest national photography company in an $825 million all-cash deal in 2018.[5] In the latest quarter of 2018, Shutterfly posted net income of $177 million, up from $112 million year-over-year, and its revenue was almost $950 million, up from $594 million in the corresponding quarter in 2017.  On the surface, it would seem that the assumption about North’s leadership abilities — based primarily on Amazon UK’s profits and growth – was correct.

Yet, shares of Shutterfly stock suddenly halted trading on NASDAQ this month when news that Shutterfly’s CEO, Christopher North, would be stepping down from the helm, in large part because the company’s fourth-quarter results fell short of Wall Street’s consensus revenue estimate of $960.83 million.  Although sales were up substantially, revenue fell slightly short of the mark which was enough to cause the Board to rethink North’s qualifications to lead the company.  Had North suddenly become less qualified?  No.  The Halo Effect was gone and the Pitchfork Effect kicked in, in which all of North’s abilities were swayed by the company’s failure to hit or exceed market expectations.  What seems to have most impacted quarterly sales was a shift in consumer taste toward seasonal items that were higher quality and more detailed and the typical holiday cards Shutterfly typically offered.  It was shift in market demand that would have been difficult, if not impossible, to predict.

In an article published in McKinsey Quarterly, Phil Rosensweig summarized this problem best. “The fact is that many everyday concepts in business—including leadership, corporate culture, core competencies, and customer orientation—are ambiguous and difficult to define. We often infer perceptions of them from something else, which appears to be more concrete and tangible: namely, financial performance. As a result, many of the things that we commonly believe are contributions to company performance are in fact attributions. In other words, outcomes can be mistaken for inputs.” [6]
In the article, Rosensweig goes on to cite similar examples like leading technology titan Cisco Systems and Swedish engineering giant ABB in the 1990s.   The same happened to Steve Jobs at Apple, leading to his dismissal from the company he created, and then his eventual return.  These are classic examples of the Halo Effect in action.  It is especially damaging because it leads to decisions that are contaminated by loosely co-related anecdotal data and observations rather than strictly on cause-effect, empirical data.  This is what is meant by “jumping to conclusions” without a solid review of the facts.  And it is something that savvy leaders should work hard to combat by basing decisions solely on facts.

While it appears that the Halo Effect can definitely hurt evaluations and judgments made by people about either people or companies, it is also something that companies can use to their advantage as well.  Next week, we will look at how to use the Halo Effect to help sway brand reputation.  Stay tuned!

 

Quote of the Week

“If people are failing, they look inept. If people are succeeding, they look strong and good and competent. That’s the ‘halo effect.’ Your first impression of a thing sets up your subsequent beliefs. If the company looks inept to you, you may assume everything else they do is inept.” Daniel Kahneman


[1] Schneider, F.W., Gruman, J. A., & Coutts, L. M., Applied Social Psychology:  Understanding and Addressing Social and Practical Problems, Sage, 2005.

[2] Shutterfly Company Profile, Owler, https://www.owler.com/company/shutterfly

[3] Shutterfly Offers Remote Work, Flexjobs, https://www.flexjobs.com/jobs/telecommuting-jobs-at-shutterfly

[5] February 5, 2019, Shutterfly announces CEO exit and strategic review along with 4Q results, Proactive Investors, Newswires, https://www.proactiveinvestors.com/companies/news/214032/shutterfly-announces-ceo-exit-and-strategic-review-along-with-4q-results-214032.html

[6] February, 2007, Rosensweig, Phil, The Halo Effect and Other Managerial Delusions, The McKinsey Quarterly, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-halo-effect-and-other-managerial-delusions

 

© 2019, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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