Strategy Dynamics Briefing 18: Resources drive each others growth, or limit it

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What makes strategy dynamics so POWERFUL?

We can now wrap up the rock-solid theorythat makes strategy dynamics so powerful:

  • Performance at any time of any organization depends on the levels of resources in place at that time
  • Resources fill up and drain away over time – mechanisms that therefore cause performance to change over time
  • The rates at which each resource fills and drains depends on existing levels of resources, which may include actual and potential levels of that resource itself.
[Briefing 16 already mentioned that managerial decisions and external factors also feature in this system.]

This is an example of ‘deep’ theory – a principle that applies very widely – rather than mid-range theory that only applies to a narrow set of circumstances. It describes how a vast variety of systems work, not just businesses and other organizations, nor just social systems, but whole classes of environmental, biological, physical and other systems.

So now we need to look in more detail as how resource flows at any moment depend on already existing levels of relevant resources. Simple cases are pretty obvious – more sales people means we can win new customers faster, more customers drive sales revenue that means we accumulate cash faster, more R&D facilities mean we can launch new products quicker and so on. The special case here concerns cash, which can mostly only drive growth in other resources if it is itself consumed. Here’s a specific example from the Ryanair case we have looked at before, where larger numbers of routes [the company’s product range] have given more choice of places to fly to, and hence won new customers faster than would otherwise have been the case.

Diagram: Routes give access to customers

Resource loss rates too depend on existing resource levels. Too few service staff lead to customers being lost more quickly, too little production capacity leads to product shortages that also drive customer losses, too many customers place pressure on sales and service staff that may cause them to leave more quickly. Here’s an example of this phenomenon for Ryanair.

Diagram: Staff capacity affects customers

It is pretty easy to see how several such mechanisms can work together to determine how the level of just a single resource changes over time, as this example of Ryanair’s customer-base shows.

Diagram: Several mechanisms are important when looking at customers acquisition

Just note how our relentless pursuit of ‘what causes what’ works here, and in general. We have to explain each flow-rate [e.g. customer losses] and if you trace back along the chain of links leading to that flow-rate, you always end up at existing resource levels [aircraft, staff], at people’s decisions or at factors outside the system. It is the first of these that leads to feedback, i.e. interdependence, amongst the resources of a business, which help drive growth or decline.

You will see, by the way, that tracing these links can bring you back to the current level of the same resource itself – the customer loss-rate depends on existing customer numbers – an issue we will say more about next time.

Until next time…

 

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Take care with ‘feedback loops

You may have come across the idea of feedback before, perhaps from Peter Senge’s book ‘The Fifth Discipline’. This describes the two forms of feedback and goes on to lay out a variety of common feedback structures that explain characteristic behaviours, such as ‘limits to growth’, ‘boom and bust’ or ‘tragedy of the commons’.

In ‘reinforcing’ feedback, an increase [or decrease] in factor A causes and increase [decrease] in factor B, which then creates a further increase [decrease] in factor A again. This leads to self-reinforcing change, commonly known as virtuous [or vicious] circles.

In ‘balancing’ feedback, an increase or decrease in factor A causes and increase or decrease in factor B, but that then creates a decrease [increase] in factor A, reversing the original change. This type of feedback gets its name because any deviation from the starting position corrects itself and brings it back into balance. In this case, it is staff capacity that imposes this constraint on customer numbers.

Problem is, it only works in one direction – if customer numbers grow too much, they get pulled down again. The opposite doesn’t work because there is nothing in the loop itself to push customer numbers back up again if they fall. So if customer losses start for some other reason, such as a price change, they can just keep going, dragging the business down to nothing.

Strategic Management Dynamics book coverAn equivalent problem arises with reinforcing feedback, the most commonly understood example of which is word-of-mouth between existing and new customers. The mechanism may well drive growth in demand, but the same feedback loop cannot drive decline, since its only flow-rate is ‘customers won per month’.

This briefing summarises discussion from chapter 4 of Strategic Management Dynamics,
pages 189-192

Read more about the book on our website

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