What do the state of the economy, a product, a corporate venture, a leading technology, the four seasons, and living things such as human beings have in common? All evolve and revolve in cycles, in “waves of change”. And as innovation means meaningful change, it often kick-starts a new cycle. Today, let’s understand how cyclicality influences the flow of business and innovation.
What is cyclicality?
Cyclicality can be defined as the property or characteristic of being cyclical or revolving in cycles. Cycles are series of events that are regularly repeated in the same order. Many business and economic developments unfold in a cycle comprising several distinct stages over a certain period of time. Just like a wave flows up and down, a particular economic development moves upwards until it reaches a peak, then falls and ebbs out in a trough.
When tracking a particular cyclical flow in business, we can distinguish between three factors — the type of cycle, its stages and its duration:
- The cycle type captures what kind of business parameters a cycle describes and how it is measured. Think of a product or company life cycle, a business or economic cycle, and long cycles that capture pace-setting technologies.
- A cycle typically unfolds in distinct stages. Many business cycles unfold in four stages that some economists likened these to the four seasons: spring (growth), summer (peak), autumn (decline), and winter (trough).
- Finally, the cycle duration captures how long it takes to complete a full cycle. Some cycles in business are short-lived and complete after a couple of quarters, many take years, and some are long-term and unfold over decades.
What are types of cycles in business?
Let’s look at the four most important cycles in business that leaders and innovators should be aware of:
- The product life cycle captures how a product evolves in the market by tracking its sales and profits over time. Typical stages that the product lifecycle concept distinguishes are development and introduction (spring), growth (summer), maturity (autumn), and decline (winter). The duration varies in different industries: fashion companies think in months, tech ventures in quarters, fast-moving consumer goods companies in years, and energy companies in decades.
- The company life cycle often maps the stages of the product life cycle. A startup creates and launches an innovative product (spring). Then, it evolves into growth- and sales-focused small- and medium-sized enterprise (summer), which later matures into an established large corporation (autumn) that eventually begins its long, steady decline (winter) before it is closed down. A recent World Economic forum study put the average life span of today’s multinational, Fortune 500-size corporation is 40 to 50 years; interestingly, corporate life spans have shortened in recent years.
- The business cycle (or economic cycle) captures upward and downward movements of a country’s economy as measured by the gross domestic product. These GDP fluctuations involve shifts between periods of dynamic economic growth (expansions and booms) and periods of decline and stagnation (recessions and depressions). For example, the US economy passed through 11 business cycles from 1945 to 2009, with the average cycle lasting about 69 months, or a little less than six years. Expansions tend to last longer than contractions (58 months vs. 11 months for the US).
- Long cycles describe major technological shifts that happen in long waves of four to six decades, known as Kondratiev waves for the Russian economist who uncovered these tech-driven long cycles. In the last 235 years, we have passed through five such long cycles, each of which was driven by distinct lead technologies: Water power, textiles and iron led the first wave (1785-1845), followed by steam, railway and steel (1845-1900), electricity, chemicals and automobiles (1900-1950) and petrochemicals, aviation, and electronics (1950-1990). The current fifth wave is driven by digital networks, software, and new media (1990-2020). The sixth wave (2020-2045) is expected to be driven by clean technologies that promote resource efficiency. Interestingly, the duration of the long waves shortens with each new one — and so does the average life span of corporations.
These four major cycle types not only connect to each other, but also influence many other phenomena in business. For example, the stock market tends to move with the business cycle. Industries (and the technologies that get them started) move into a new season with each new long wave. Moreover, each long wave comprises five or more business cycles. Some analysts even suggest that peace and war cycles can be explained with the help of long waves.
Why is it important to track cyclicality in business?
Depending on the season (or cycle phase), a business needs to have a different focus, embrace a different leadership type, and shoot for a different type of creativity:
- In spring, focus on creating new value (a product or technology) and of launching it in the market. This phase requires upfront investment and an agile creative leader who drives fast, meaningful change. Creativity is often technology-driven and pushes for bold, revolutionary ideas.
- In summer, the focus shifts to customers and sales. Here, a people-oriented leader is the best choice to entice customers and motivate the team to reach ambitious growth targets. Creativity is marketing- and customer-driven and targets more evolutionary ideas.
- In autumn, revenue growth flattens but profitability is still high. Now, a business needs to consolidate its growth with stable operations. The ideal leader here is a person focused on operational excellence and getting things done. Creativity focuses on practical improvements and customer service.
- In winter, the emphasis shifts to setting up efficient, well-structured processes and systems that allow for scaling the business. As revenues and profits start to decline, the best leader is someone who enjoys tracking performance and enforcing organizational efficiency and financial discipline. Creativity targets incremental improvements of products and processes following an adaptive approach.
Interested to learn more about this? Contact us to learn more about how to master cyclicality and successfully ride the waves of change in our innovation training course “The C (reative) Class. The Executive Innovation Brief”.
© Dr. Detlef Reis 2017. This article was published in parallel in the Bangkok Post under the same title on 25 July 2017.