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? I have often noted in my discussions with small business owners and investors, their 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 lack of understanding of these concepts.
In fact, even large companies, governments and politicians make the classic mistake of not accentuating a virtuous cycle and not disrupting a vicious cycle.
What are virtuous and vicious cycles?
A virtuous cycle or a vicious cycle is a set of events controlled or uncontrolled that reiterates or reinforces itself through a feedback loop.
A virtuous cycle accentuates and enhances the outcome, whereas a vicious cycle diminishes or often destroys the outcome.
We all live in the current global economic environment and I would contend that if Lehman Brothers had 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 led to many people being laid off, which in turn eroded public confidence further and dried up demand, further exacerbating the economic environment.
Virtuous and vicious cycles affecting 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; you did no background check, no reference checks and you were personally not involved in the hiring process. • Now you have an incompetent manager on board; incompetent people are often very insecure and therefore can be rather ineffective.
• Incompetent managers don’t hire competent people; insecurity can lead to hiring less able people who cannot replace them.
• Weak employees don’t strive for excellence; whether in customer care, finance, sales, marketing or any other 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 and retain its customers, nor effectively manage its cash flow due to low revenue or leakage of revenue. All this is further compounded by the fact that the manager and the finance department may be unproductive.
• The incompetent manager will now recommend to the owner that staff needs 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.
• Your bank may then start 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.
In 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 poor decisions.
Imagine how de-motivated your good employees must be, watching less able person getting paid much more than them, to run the business into the ground. In the previous example given, there are many opportunities to disrupt the vicious cycle. Most SMEs are reluctant to do it due to errors 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 food preferences of almost anyone. You need to re-price your menu correctly, as 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 staff that the prices should extract a margin of x% of allocated costs and volume of sales, based on current sales and inappropriately allocated, across all the fine cuisine and drinks that you sell.
Set costing and pricing of menu items
• Costing is done by the ineffectual 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 assumptions. Marketing is unable to address the perceived value of the service and the 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 team’s assumptions.
• Customer demand decreases.
• The 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 inept accountant, can mean the death knell for your business.
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.
Achieve new sales target
• Hire additional sales force, which is carried out with excellence due to your learning curve of having done it in the past.
• Sales increase.
• The customer service team is under a heavy burden to service the increasing demands but the problems are not apparent to you due to your focus on driving increased sales.
• Some of 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 people 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 team responds positively; they are an excellent sales division that will not ignore their customer requests.
• Your sales team is not able to meet its targets as it is spending a lot of their productive time on after sales service issues
Your top performers leave the company due to their disillusionment of the management’s lack of focus on service, resulting in them losing their income.
• Your sales deteriorate.
• You impose cuts; non sales staff are impacted the most.
• Your customer services deteriorate further. Your customer churn increases.
• Your sales continue to drop as your remaining sales team are not able to focus on bringing in the incremental new sales, but rather are 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! In many instances, small business owners and investors ignore those that are not bringing immediate incremental sales or cash flow, much to their own detriment. How would you have disrupted this feedback loop that was destroying this company?
As you would have noticed from the three examples given, your time, attention and dedication to hiring, investing in new propositions to extend your product life cycle and spending on customer service and marketing are of paramount importance.
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 enforce these traits, then you should think twice about whether or not to get into business.
A personal note
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.
By being aware of the potential upside and downside of virtuous and vicious cycles, it can definitely 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.
John Lincoln has over 20 years telecommunications experience in the USA, Japan, Europe, India, Dubai, Malaysia, Latin America and various other countries. He has extensive senior expertise in international telecommunications sales, marketing, business development and customer service delivery. John also has executive experience with general management, marketing, P&L, product development and revenue management responsibilities in both consumer and enterprise segments for both the fixed and mobile sectors. In addition John has an impressive operational and management portfolio of established proven expertise in incremental business value creation and management of large multi-cultural teams in Vodafone Global in the UK, Japan Telecom in Tokyo, AirTouch and Pacific Bell (now AT&T) in San Francisco and Tokyo, Airtel in Delhi and other telecom and technology companies. Additionally he has extensive large scale business development, M&A and operational project experience across the USA, Europe, Asia and Latin America. John has an MBA and MS in Telecommunications from the Golden Gate University in San Francisco, California, USA. You can find John’s personal blog at johnlincoln.blog. com. He can be contacted via: john.lincoln@ gmail.com, Twitter: @lincolnjc.