Have you heard about the concept of virtuous and vicious cycles? If so, have you ever really given much thought, as to how it affects your personal life, career or business?
The concepts of virtuous and vicious cycles are especially critically important for any business. For small business owners and SME investors, a lack of understanding of this concept could mean a rapid demise 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 their misinformed or lack of understanding of these concepts. In fact, even large companies, governments, politicians and others make the classic mistake of not accentuating a virtuous cycle and or enabling or not disrupting a vicious cycle to their own detriment.
So what are virtuous and a vicious cycles?
A virtuous cycle or a vicious cycle is a set of events controlled or uncontrolled that reiterates or that reinforces itself through a feedback loop.
A virtuous cycle accentuates and enhances the outcome and a vicious cycle diminishes or often destroys the outcome. .
Both cycles have positive feedback loops in which each reiteration of the cycle reinforces the first outcome. These cycles will continues in their positive (virtuous) or negative (vicious) direction and will build up to a critical mass state until it is disrupted by forces or factors that diminishes or reduces the negative or positive outcomes and then the cycle is broken.
As we all now know and live the current drastic global economic environment vis a vis the “subprime crisis” I would contend and ponder as to “ if Lehman Brothers been saved, and its toxic subprime assets been assumed through some US Government guarantees, the commercial banks that offer credit to fund large and small businesses would not have taken the drastic steps to freeze commercial paper (short term borrowings of companies). This freezing by the commercial banks resulted in many companies not having the sufficient cash flow to fund 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.
As you would have noted that I am not writing a discourse on physics and motion. What I am writing here is very relevant for your business. The best way to demonstrate this is through actual examples that I have observed during my career so far. I will not name the businesses nor the people involved as I do not have their permission to do so.
Examples of virtuous and vicious cycles that can affect your business
Scenario 1- Hiring and firing
Imagine that your business is expanding and that you need to hire a manager for your business.
Hire a manager
- Assume that you had put limited or no due diligence on the hiring effort –That is that you did no background check, no reference checks and you personally was not involved in the hiring process (Truth is often stranger than fiction)!
- Now you have an Incompetent manager on board – As you must know, incompetent people are normally very insecure and therefore highly ineffective (I will write a separate article on this)
- Incompetent managers don’t hire competent people – they hire weaklings who cannot replace 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, non innovation and poor financial management.
- Due to your weak marketing, sales, customer care and finance employees, , the business 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.
- This will obviously result in poor sales and therefore declining revenues.
- This will result in your bank withdrawing your credit facilities.
- You are now unable to sustain your business and you close your business!.
What would you have done? How would you disrupt this vicious cycle? As you would have noted from the example above, a simple act of not putting enough due diligence, on hiring key employees could bring your business down. This is not fictional.
Look around many businesses – the wrong people get hired because someone liked their looks, ethnicity or they came in cheap. Imagine the opportunity cost put on the table by these sheer stupid and moronic decisions! Imagine how de- motivated your good employees must be, watching an incompetent idiot getting paid much more than them to destroy your business!
In the example above, there are many opportunities to disrupt the vicious cycle. Most SMEs are reluctant to do it due to some illusory fallacies in their estimation or judgment of the outcomes that could happen.
Scenario 2 – Costing and Pricing
Imagine you have a restaurant offering a multitude of culinary delights that can entice the gastronomical exigencies of any human being. You need to re price your menu correctly. There are many well known restaurants in the area. Your incompetent accountant (perhaps the same person from the previous scenario) had advised you and your marketing guy that the prices should extract a margin of x% based on some idiotic fully allocated costs and volume of sales based on current sales, inappropriately allocated across all the fine cuisine and drinks that you sell.
Set costing and pricing of menu items
- Costing is done by the incompetent accountant, based on fully allocated method and current volumes and not one based on variable costs or potential of increased sales
- Marketing leverage to set pricing correctly is diminished due to fallacious costs assumption. Marketing is unable to address 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 higher. 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 fallacious assumptions.
- Revenues and customers are in decline.
- Good employees leave due to their inability to generate enough tips.
- The management is advised to curb costs and put in excess control due to the decreased demand.
- The restaurant buys cheaper quality raw materials and retrenches off critical customer facing and kitchen employees.
- Service deteriorates.
- Sales come to a dwindling halt.
- Revenue drops.
- 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 idiotic accountant can mean the death knell for your business. (No, I have nothing against accountants – the owner, the marketer and the accountant were all idiotic in the above example).
I would also encourage you to read my previous articles in this magazine that would give additional insights on pricing and the ramifications of executing a right pricing strategy for your business.
- Know your enemy – scan your environment and know your market structure
- The art of pricing – How to set pricing objectives and develop your pricing strategies and tactics
- The art of war – All war is based on deception! – How to fight a price war?
Scenario 3 – Customer service
Imagine that you are a distributor of office equipment in the region. You have recently won the sole distributorship rights in a country for a major well known Original Equipment Manufacturer (OEM). Your sole distributorship rights include computers, printers and copiers. 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.
(I would also recommend that you read my previous article on “What is the art of delivering customer experience? – The experience is the proposition” to know more about customer experience and customer service.
Achieve new sales target
- Hire additional sales force – done with excellence due to your learning curve of having done it in the past
- Sales increases
- The Customer Service Team are under heavy burden to service the increasing demands – the problems are not apparent to you due to your focus on driving increased sales.
- Some your past loyal customers complain of poor service.
- You are not unduly worried as you are bringing in a lot of new customers.
- The unsatisfied customers start to desert your business.
- Your sales folks are burdened with calls for support from your disatisfied 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.
- Your sales team is not able to meet their targets as they are spending a lot of their productive time on after sales service issues.
- Your top performers leave the company due to their disillusionment of the managements’ lack of focus on service resulting in them losing their income.
- Your sales deteriorate.
- You impose cuts – Non sales folks are impacted the most.
- Your customer services deteriorate further.
- Your customer churn increases.
- Your sales continue to drop as your remaining sales folks are not able to focus on bring 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 history!
I assume that you can see where this is heading! Many a times, small business owners and investors ignore those that are not bringing immediate incremental sales or cash flow to their own detriment. How would you have disrupted this feedback loop that was destroying this company?
As you would have noticed from the 3 examples above, your time, attention and dedication to hiring, investing in new propositions to extend your product life cycle, spending on customer service and marketing and not to be fooled by tunnel vision bean counters can all determine whether you sustain or not. (PS. This is not a Mutually Exclusive and Completely Exhaustive (MECE) list.
Pay attention and disrupt your vicious cycles whilst accentuating the positive feedback loops. As a small business investor or SME owner, you will need courage, vision and understanding to take your business to the next level. If you cannot, don’t get into business. The folks who do are the successful ones that make it, and the folks who don’t are the ones that perish!
A personal note
As for me, I not only apply and try to be cognizant of the virtuous and vicious cycle in business, but also try to remember this in the context and conduct of my personal life, relationships with family, friend and colleagues. Yes goodness and S&**t happens. Life is unpredictable. It is in your power to disrupt that reinforcing feedback loops, positively or negatively. As a mere mortal, I do occasionally miss the beat but often come right back with something disruptive to mitigate or enhance a vicious or virtuous cycle situation.
If I have a misunderstanding or a verbal altercation with one of my peers, I will be the first to apologize or try to dilute the unpleasant situation. You never know what a simple, often non deliberate act can lead to in your professional or personal life. I do believe that 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. Unless you have disrupted or reinforced it, often it could mean the outcome of your relationship, career or business! Remember that this precious life unto itself is a vicious or virtuous cycle. Know it, sense it and act upon it!
virtuous circle can transform into a vicious circle if eventual negative feedback is ignored