However, the assumption is that these choices are independent. For simplicity, in the diagram above, we do not spell out these "absent arrow"theories Virtuous Cycles- The Dynamics of Business Models By now, it should be apparent that our concept of a business model is intrinsically dynamic The relationship between choices and consequences occurs over time. Moreover, some"rigid consequences are stocks(such as an installed base or cumulative experience) that are built over time. An understanding of the functioning and evaluation of business models requires explic consideration of the dynamics between choices and consequences One of the most striking features of business models is that their dynamics often generate feedback loops. This happens when, in addition to choices yielding consequences, consequences enable choices. Feedback loops can be of two types: virtuous cycles and vicious cycles. Since these are symmetric, and the same principles therefore apply to both, we need to study one type of feedback loop and have chosen to focus on virtuous cycles. Virtuous cycles are feedback loops that, with every iteration, strengthen some components of the model at every iteration. For example, Honda historically set low prices for its motorcycles (a choice); the consequences were high volume and high cumulative output which allowed the company to move down the learning curve, and thus result in low cost. Low cost (a consequence), in turn, enabled Honda to profitably set low prices (a choice). As the cycle spun again and again, Honda kept lowering prices because (marginal)cost decreased. Using the representation diagram igure 4 Example of a Virtuous Cycle High Volume Low price cumulative Low cost virtuous cycles are feedback loops that, with every iteration, strengthen the value of the components of the model Once they get going, virtuous cycles take on a life of their own; just as a fast-moving body is hard to stop because it possesses kinetic energy, well-functioning virtuous cycles cannot easily be brought to a halt 4 See Christiansen and Pascale(1983) Kinetic energy is the energy that a body possesses by virtue of its movement8 - IESE Business School-University of Navarra However, the assumption is that these choices are independent. For simplicity, in the diagram above, we do not spell out these “absent arrow” theories. Virtuous Cycles – The Dynamics of Business Models By now, it should be apparent that our concept of a business model is intrinsically dynamic. The relationship between choices and consequences occurs over time. Moreover, some “rigid” consequences are stocks (such as an installed base or cumulative experience) that are built over time. An understanding of the functioning and evaluation of business models requires explicit consideration of the dynamics between choices and consequences. One of the most striking features of business models is that their dynamics often generate feedback loops. This happens when, in addition to choices yielding consequences, consequences enable choices. Feedback loops can be of two types: virtuous cycles and vicious cycles. Since these are symmetric, and the same principles therefore apply to both, we need to study one type of feedback loop and have chosen to focus on virtuous cycles. Virtuous cycles are feedback loops that, with every iteration, strengthen some components of the model at every iteration. For example, Honda historically set low prices for its motorcycles (a choice); the consequences were high volume and high cumulative output which allowed the company to move down the learning curve, and thus result in low cost. Low cost (a consequence), in turn, enabled Honda to profitably set low prices (a choice). As the cycle spun again and again, Honda kept lowering prices because (marginal) cost decreased.4 Using the representation diagram: Figure 4 Example of a Virtuous Cycle Low price High Volume Large cumulative output Low cost Learning economies Virtuous cycles are feedback loops that, with every iteration, strengthen the value of the components of the model. Once they get going, virtuous cycles take on a life of their own; just as a fast-moving body is hard to stop because it possesses kinetic energy,5 well-functioning virtuous cycles cannot easily be brought to a halt. 4 See Christiansen and Pascale (1983). 5 Kinetic energy is the energy that a body possesses by virtue of its movement