Business Cycles

Taking a break from the economy for a minute, let’s think about something else typically on people’s minds this time of year, getting in shape. As it’s the start of the New Year, most people have walked by the mirror, looked at the scale, and/or some other form self-admonishment that has led them to, at least think about increasing their activity level. Let’s say that you count as one, but unlike the vast majority, you follow-through on the resolution, the first of which might consist of eating healthier. After eating better for a little while, you will start to feel better; by feeling better, that makes it easier for you to take the next step towards, going to the gym, and exercising will end up impacting you by making you look better. The good thing about the fitness loop, you can start with any of them, not just eating right. If you start by exercising that could lead to feeling better, or it could lead to looking better, either of which might have someone eating better because they want to maintain what they’ve started. It’s one thing leading to another, but in this case, they don’t just lead to another, they reinforce each other. Drawing it out, we might have something like this –

Let’s say though, you end up in a loop that looks like the following:

Here too we have a series of events that reinforce one another, but unlike the first diagram, these do so in a negative way. Now, if you have an MBA among your senior management you have probably heard the term "Virtuous Cycle" bandied about if not having seen it in a company presentation. That describes our first example where the sequence of events builds in a positive fashion with better and better results. It’s the classic positive feedback loop, which for whatever reason doesn’t sound quite as impressive and urgent to implement as virtuous cycle. No surprise then that our second example, in which each occurrence also triggers the next in a continuous fashion, goes by negative feedback loop or vicious cycle. While easy to write off either as a tool for consultants to sound smarter and justify their existence by informing you of concepts that you already innately understood, the timing now makes it appropriate to play consultant ourselves and bring them to light. The difference between a virtuous cycle and vicious one is not very large, and often it has nothing to do internally, i.e. an external factor, such as a Google change, sets it off. Ringtones provides the perfect example. After the word "free" could no longer be used and especially with the recent Google compliance issues, many encountered a situation paralleling the below.

Once you enter a vicious cycle, you can struggle to exit it. Take a step back, think about a company in our space that once did very well and now represents only a shadow of their former self. During the good days, their business probably looked like this.

Whether a competitor came in and disrupted a portion of the flow, new regulations came into play, or any number of game virtuous to vicious factors became injected, their business could quickly go from what we just saw to:

The cycle could have three, four, five to almost n number of pieces. And, despite how it might seem, we didn’t provide so many examples to prove our lack of PowerPoint drawing skills or induce some sort of visual dizziness. The barrier between virtuous and vicious is diminishing. When times are good, it takes a rather big disruption in order for a virtuous cycle to become a vicious one. The housing market is a good example. It spent years on a virtuous cycle, and it weathered plenty of doubt and more than a few hiccups. But now, it has entered the beginning of a long vicious cycle, and barring a miracle, such as a dramatic change in policy, the housing market will have to weather the storm until the cycle runs out of fuel, hitting zero. It’s that type of situation that we want those in our space to avoid, and the difference between those companies that didn’t continue their growth, and those that have, comes down to whether they created a version of the housing market internally. Did they grow without proper planning? Did they consider what might happen without reinvesting in the company, or by relying too heavily on one area?

As times get tougher, and regardless of the outlooks that suggest amazing growth in online they will get tough, or perhaps better said, before times get too tough, evaluate now the pillars of your current success and look to understand what factors could impact that. Will those factors have a minor impact, or would they send things very negative, and what can you do to prevent it / strengthen your current position? Perhaps you can lock up longer term relationships with advertisers or publishers. Perhaps you can add diversity into the mix – different traffic, offers – improve your technology, and so on. The point isn’t to define the virtuous cycle or vicious one but to have you analyze your business to understand what has contributed to each in your history and again to get us all thinking about how to insulate ourselves so that, worst case, our virtuous cycle simply slows down, instead of turning into a vicious one.