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The power of virtuous and vicious cycles in business

The power of virtuous and vicious cycles in business

How to accentuate your virtuous cycles and disrupt your vicious cycles

Life, as you know, is a cycle: everything you do or don’t do comes round. So have you heard about the proven concept of virtuous and vicious cycles? Let’s say you have. But have you really given much thought as to how it affects your personal life, career or business? The concepts of virtuous and vicious cycles are critically important for any business, whatever the size, scope or industry. For small business owners and SME investors, a lack of understanding of this concept could mean sickness or even a quick death of their business.

I have often noted in my discussions with small business owners and/or investors, their utter lack of understanding of these concepts and am saddened to see how they are putting their business at risk or how they themselves are limiting the growth of their business, through misinformation or lack of understanding. In fact, even large companies, governments, politicians and others make the classic mistake of not accentuating a virtuous cycle or not disrupting a vicious cycle to their own detriment. All it takes are identifying the key areas and taking a few common sense-based steps. Once you take these steps you will find an immediate difference to your bottom line, no matter how hopeless the business situation may have seemed earlier.

For small business owners, a lack of understanding of the virtuous-vicious cycle concept could lead to a rapid demise of the business.”

john lincoln, author
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The concept of virtuous and vicious cycles can have a critical impact on business. These describe a set of controlled or uncontrolled events that reiterate or reinforce themselves through a feedback loop. A virtuous cycle accentuates and enhances the outcome, while a vicious cycle diminishes or often destroys the outcome. Both cycles have positive or negative feedback loops, in which each reiteration of the cycle reinforces the first outcome. These cycles will continue in their positive (virtuous) or negative (vicious) direction and will build up to a critical mass until it is disrupted by forces or factors that diminishes or reduces the negative or positive outcomes until finally the cycle is broken.

 

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Example of a vicious cycle in action

 

Classic gains of virtuous business cycles

For small business owners and SME investors. in particular, a lack of understanding of this concept could lead to a rapid demise of the business. Without a full appreciation of its power, business executives are putting themselves and their business at risk and are limiting the growth of their business. To their own detriment, many large companies, governments, politicians and others make the classic mistake of not
accentuating a virtuous cycle and/or not disrupting a vicious cycle. [We should ponder a scenario. If Lehman Brothers had been saved, and its toxic subprime assets had been assumed through some US Government guarantees, then would the commercial banks that offer credit to fund large and small businesses have taken
the drastic steps to freeze commercial paper (short term borrowings of companies)?

 

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Example of a virtuous cycle in operation

 

This freezing by the commercial banks resulted in many companies not having sufficient cash flows to fund the capital and operating expenditures required to keep their business afloat. This resulted in many folks being laid off, which in turn eroded public confidence further, which dried up demand, further exacerbating the economic environment!]

So it is vitally important that we appreciate how to intervene to accentuate virtuous cycles in ways that help achieve some business breakthrough – and how to disrupt a vicious cycle to defuse its detrimental consequences.

 

Examples of virtuous and vicious cycles that can affect your business

The best way to demonstrate the impact of virtuous and vicious cycles is through actual examples:

Scenario 1- Hiring and firing

Imagine that your business is expanding and that you need to hire a manager for your business.

Assume that you had put limited or no due diligence on the hiring effort – i.e. no background check, no reference checks and you personally were not involved in the hiring process. Now you have an incompetent manager on board. In the main, incompetent people can be insecure and therefore highly ineffective. Experience shows that incompetent managers don’t hire competent people – they hire weaklings who do not challenge them – it is so because they are insecure. Weak employees don’t strive for excellence – whether in customer care, finance, sales, marketing or any function. This will inevitably result in poor customer service, low sales, low innovation and poor financial management.

 

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An extreme example of a hiring vicious cycle

 

As a consequence of weak marketing, sales, customer care and finance employees, the company will not be able to acquire new business, nor retain its customers, nor effectively manage its cash flow due to low or no new revenue (or leakage of revenue).

All this is further compounded by the fact that the manager and the finance department are incompetent. The incompetent manager will now recommend to the owner that staff will need to be cut so that expenses can be managed to conserve cash. This will result in further erosion of sales, customer care and cash flow. It will obviously result in poor sales and therefore declining revenues, possibly lead to the bank withdrawing
credit facilities. You are now unable to sustain the business and it is forced to close!

As evident from this example, a simple act like not putting enough due diligence on hiring key employees ultimately could bring a business down. What would you have done? How would you disrupt this vicious cycle?

Look around many businesses and it soon becomes apparent that this is not fiction: the wrong people get hired because someone liked their looks, ethnicity or that they came in cheap. Imagine the opportunity cost put on the table by these stupid and short-sighted decisions! Imagine how de-motivated the good, high-performing employees must be, watching an incompetent getting paid more than them while they slowly destroy the business.

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Scenario 2 – Costing and Pricing

Imagine a restaurant offering a menu that can entice the gastronomical exigencies of any passing customer. It is vital that the menu is priced correctly. It has to be competitive: there are many well-known restaurants in the area. The incompetent company accountant (perhaps the same person from the previous scenario) advises you that the menu has to be priced to produce a margin of X% based on some idiotic fully-allocated costs and volume of sales based on current trading levels, inappropriately allocated across all the fine cuisine and drinks that are listed on the menu. Costing is done by the incompetent accountant, based on the fully-allocated method and current volumes and not one based on variable costs, or one priced to drive increased sales.

Marketing leverage to set pricing correctly is diminished due to these fallacious cost assumptions. Marketing is unable to address the perceived value of the service and food proposition to its customers. Due to low volume assumptions and the need to generate a reasonable margin, price is set relatively high. Marketing is neither assertive nor competent enough to challenge the finance teams’ assumptions. Customer demand decreases. Price is again reset, based on decreased demand and more fallacious assumptions. Revenues and customers are in decline. Good employees leave due to their inability to generate enough tips. The management is advised by the accountant to curb costs and put in excess control due to the decreased demand. The restaurant buys cheaper quality raw materials and downgrades or downsizes critical customer-facing and kitchen employees. Service deteriorates, sales dwindle to a halt. Revenue drops and the restaurant is hardly able to survive. The rest is history!

By now you would have noted that an important decision in pricing (which is the purse string of any company), left to an accountant and/or a management team that fail to really understand the business, can mean the death knell for any enterprise.

 

Scenario 3 – Customer Service and Sales Targeting

Imagine you are a distributor of office equipment in the region who has recently won the sole distributorship rights in a country for a major well known Original Equipment Manufacturer (OEM). You won this right for sole distributorship due to your excellent sales record. You have just been given a new sales and revenue target by your principal (the OEM). Your goal is to reach a certain sales target in the current fiscal
year.

The company hires additional sales people – an operation that went well due to experience of having successfully done it in the past, and sales increase. The customer service team is under a heavy burden to service the increasing demands, however – these problems are not apparent to you, due to focus on driving increased sales.

Some past loyal customers begin to complain of poor service. The company is not unduly worried as it is bringing in a lot of new customers. The unsatisfied customers start to desert the business. Your sales folks are burdened with calls for support from your dissatisfied customers, as they are not getting the requisite service from your customer service and after-sales service departments. Your sales folks respond positively – they are excellent sales folks that will not ignore their customer requests.

The sales team is not able to meet their targets as they are spending a lot of their productive time on after-sales service issues. The company’s top performers leave the company due to their disillusionment of the management’s lack of focus on service, resulting in them losing their income.

Sales deteriorate. The company imposes cuts – non-sales folks are impacted the most. Customer service deteriorates further and customer churn increases. Sales continue to drop as your remaining sales folks are unable to focus on bringing in the incremental new sales but are rather compelled to attend to customer service issues. Your principal withdraws your sole distributorship rights. Your competitors smell blood! You are in history!

 

Understanding the true power of V cycles

Many a times, small business owners and investors ignore to their own detriment issues that are not bringing immediate incremental sales or cash flow. How would youhave disrupted the feedback loops that were destroying these companies?

The point to the three examples are that management time, attention and dedication is needed across the business – from hiring, to investing in new propositions to extend your product life cycle, and spending on customer service and marketing.

These all will determine whether the business is able to sustain, prosper and win. Do not be fooled by the tunnel vision of bean counters. Pay attention and disrupt your vicious cycles whilst accentuating the positive feedback loops. You will need courage, vision and understanding to take your business to the next level.

Life is unpredictable but it really is in your power to disrupt any reinforcing feedback loop, positively or negatively. By being aware of the potential upside and downside of virtuous and vicious cycles, it definitely can make a difference on how we conduct our personal, professional or entrepreneurial life – know it, sense it and act upon it… a virtuous circle can eventually transform into a vicious circle if negative feedback is ignored!


JohnLincoln.oneThe business growth hacker

 

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