In my experience as a strategy consultant, understanding the dynamics of vicious and virtuous cycles in business has always been crucial.

Let me illustrate this through a story.

Let’s say you run a chain of bakeries in a small town called Sweet Delights, which was once bustling with customers and filled with the aroma of freshly baked goods.

But as time passed, the business began to falter.

Sales declined, and the once-vibrant bakery was on the verge of closure.

As you faced dwindling sales, you resorted to cost-cutting measures.

This led to compromises in the quality of ingredients, which in turn drove away loyal customers.

As sales continued to plummet, you were forced to lay off some high-quality bakery production and service staff.

This further affected the product and service quality and further fueled customer churn.

Now, you found yourself trapped in a downward spiral, struggling to keep the business afloat.

A type of vicious cycle has formed.

However, in a stroke of insight, you decided to break free from this cycle.

Instead of focusing solely on cutting costs, you made a bold decision to invest in quality.

You decided to close a few of the non-performing bakery outlets and focus on one single unit.

With the help of this structural-level cost-cutting, you were able to invest in sourcing the finest ingredients and hiring skilled bakers, transforming the bakery’s offerings.

This shift proved to be transformative.

The improved quality attracted new customers and reignited the loyalty of old ones.

With rising sales, you reinvested the profits into further enhancing the bakery’s offerings and opened new outlets.

Sweet Delights blossomed into a thriving business once again.

Yes, you started riding on the virtuous cycle.

Vicious cycles are where one negative event or factor leads to another, creating a loop that reinforces itself and exacerbates the negative outcome.

Vicious cycles can be difficult to break without the structural level change.

Conversely, a virtuous cycle is a positive feedback loop where one desirable event or factor leads to another, resulting in an upward spiral of improvement.

However, sometimes even a virtuous cycle might turn into a vicious cycle.

How can this happen?

Hubris and complacency.

• You ignore a new technology or idea that could provide cheaper services because you invested so heavily in old technology.
• You stop listening to customers.
• You venture into areas where you have no competitive advantage.
• You make the firm more complex and less manageable.
• You start throwing money at initiatives that lack coherence.

As they say, “nothing fails like success.”

So, it’s better to be vigilant even if you are riding a virtuous cycle.